Underground Oil & Gas Storage Facilities Q&A with Bart Hill
Why are oil and gas underground storage facilities noteworthy?
Underground oil and gas storage is a critical piece of America’s energy infrastructure, especially during a global pandemic. COVID-19 brought oil storage into the spotlight in March 2020 when pandemic-related lockdowns reduced the global demand for oil. The U.S. government took advantage of low oil prices and made agreements to purchase about 77 million barrels of oil to store in the U.S. Strategic Petroleum Reserve, the largest emergency supply of petroleum in the world. In April 2020, U.S. oil producers—running out of space for oil storage elsewhere—made contracts with the U.S. Energy Department to rent over 30 million barrels of capacity in the SPR.
Large volumes of natural gas are also purchased and stored under pressure in underground natural gas storage reservoirs for future use.
Bart Hill, our oil and gas facilities leader, explains the use of oil and gas underground storage in the U.S. , how underground storage facilities are regulated and how owner/operators have brought system safety to the forefront.
Q. To better understand how the pandemic has affected oil and gas underground storage facilities, let’s start with the basics. How do underground storage facilities work?
A. Three main types of underground storage facilities exist. The most commonly used underground storage sites in the U.S. are depleted natural gas or oil fields that utilize existing wells, gathering systems and pipeline connections. Second, natural gas storage reservoirs also have been created from natural aquifers which lie under an impermeable cap rock that retains the gas under pressure. Finally, underground salt dome caverns are also used for underground oil and gas storage.
Underground salt dome caverns are dry and geologically stable, which is ideal for storing large quantities of natural gas, crude oil or other unrefined petroleum products such as ethylene or propylene. Salt cavern storage facilities are developed by drilling into the dome and injecting water to dissolve the salt until the needed volume or space is reached within the cavern. To make room for product in the cavern, the existing high-density saltwater or brine is pumped to reusable constructed storage ponds. When needed, stored product is extracted from the salt caverns by pumping brine into the cavern. Because of its high density, the brine solution sinks without mixing with the stored product and forces the stored product out of the cavern.
Q. Who owns underground storage reservoirs?
A. In addition to the U.S. government, oil and gas underground storage facilities are owned and operated by interstate and intrastate natural gas pipeline companies, local distribution companies or independent storage service providers. The U.S. Energy Information Administration indicates that approximately 120 entities currently operate the nearly 400 active underground storage facilities in the lower 48 U.S. states.
Q. How is underground storage for natural gas impacted by the recent slump in oil demand?
A. The economics of natural gas storage in underground reservoirs follows the simple principle of buy low and sell high. Natural gas companies and investors buy when the prices are low and inject the natural gas into storage reservoirs, then sell when increases in demand lead to higher prices, such as in winter when more fuel is needed to keep us warm. Additionally, some utilities use underground storage assets during winter to supplement the volume of natural gas they’d otherwise be required to purchase from the open market of midstream providers. By filling reservoirs at low prices in summer, utilities leverage storage fields during winter to save significant costs for their customers.
A look back at 2019 can show us how lower oil prices are affecting natural gas underground storage now. Both crude oil extraction and natural gas production were at historic highs in 2019. A portion of the gas produced was a bi-product of the oil extraction process. Increases in natural gas supply, including a regular supply of new gas into the system throughout peak gas demand periods (due to continuous oil production), generally resulted in lower natural gas prices. This created less of an incentive to purchase and store natural gas for resale. However, with an unprecedented global slump in demand for oil, oil futures prices have resulted in the shutting in of existing oil wells and the termination of drilling contracts for construction of new oil wells. With the reduction of oil withdrawal, the production of natural gas is anticipated to sharply decline because most natural gas production is closely tied to the oil extraction process.
A reduction in supply may increase the price of natural gas during the typical winter demand. This would make it more attractive to purchase and use natural gas stored underground. Under that scenario, you could expect underground storage facilities to be more heavily utilized for storing natural gas under pressure.
Q. How are underground storage reservoirs regulated?
A. The regulations are important – they act as checks and balances to help keep the public, operating personnel and the environment safe. Underground storage facilities are regulated at many levels to focus on safety. They are often state regulated, and the Federal Energy Regulatory Commission has jurisdiction over natural gas storage facilities used for interstate commerce. The components that transfer commodities into and out of underground storage facilities, like pipelines, are regulated under the U.S. Department of Transportation Pipeline Hazardous Materials Safety Administration.
On January 18, 2018, PHMSA enacted the Storage Well Integrity Management Program. The rule required owner/operators of natural gas storage fields to develop a storage integrity management program and comply with recommended practices of the American Petroleum Institute that address safe operations of underground storage facilities. The Final Rule incorporated by reference two API Recommended Practices: API RP 1170, “Design and Operation of Solution-Mined Salt Caverns Used for Natural Gas Storage” and API RP 1171, “Functional Integrity of Natural Gas Storage in Depleted Hydrocarbon Reservoirs and Aquifer Reservoirs.” These new RPs established pipeline safety standards for several types of underground facilities and provide a minimum federal standard for inspection, enforcement and training.
Q. How do companies address these regulations?
A. Owners and operators of gas storage fields have worked hard to comply with PHMSA requirements and maintain the integrity of piping and controls associated with their underground storage systems. Pipeline operators are implementing new practices and expanding integrity management principals to examine their systems for corrosion, chemical damage, mechanical damage or other material deficiencies that could cause facility leaks and failures if not managed properly. As part of this process, they review the location and operations of shut-off and isolation systems, and review and update emergency plans as necessary.
As an example, one of our clients asked for assistance with PHMSA compliance for seven gas storage fields across three states. Our team reviewed items like plan sets, as-built drawings, hysteresis, well diagrams, drilling logs and work-over plans. The records review indicated the client’s piping and instrumentation diagram drawings were insufficient at some facilities and lacked a comprehensive integrity management plan. We developed the necessary piping and instrumentation diagrams and a SIMP in accordance with API recommendations. In addition, we developed a risk assessment tool that evaluated potential hazards and threats, the likelihood of occurrence, and associated preventative and mitigation measures. To help our client continue safe practices, our team also developed emergency response cards and a strategy for periodic reassessment of the SIMP.
All underground storage operators must adhere to the new federal guidelines. Our experience with operations, maintenance and integrity management, and our understanding of threats and risks to an operator’s assets are keys to helping our clients maintain safe, reliable storage systems for future needs.
Q. What do you see for the future?
A. As more regulations for underground storage assets have been introduced, operators and owners must invest even greater capital and operating expense to safely maintain their assets and remain in compliance. Operators are also looking to capitalize on these assets for future energy requirements through the supply of oil and gas during times of demand. Finally, within the industry there’s growing awareness of a likely demand for greener fuels in the upcoming decades, and many are beginning to consider converting these underground storage fields for hydrogen storage. It’s possible that a hydrogen economy will spur the repurposing of many of today’s pipelines and infrastructure.