Will Additional Scrutiny of Storage Fields Increase Risk of Market Interruptions for Gulf Coast Storage?
Last month the Government Accountability Office (GAO) issued a report on the effort by the Pipeline and Hazardous Materials Safety Administration (PHMSA) to inspect all of the approximately 400 underground natural gas storage sites within five years, beginning in 2018. The GAO conclusion was that PHMSA may not be able to complete its goal. This goal was set after PHMSA issued an interim final rule (IFR) in 2016 that, for the first time, established federal safety standards for the wells used at underground storage fields across the country, including both intrastate and interstate storage fields. PHMSA has agreed as part of litigation to suspend for now any enforcement of certain aspects of the IFR, but not its effort to complete an initial inspection of all facilities by 2023.
Today we look at how the current state of the rule and its enforcement may impact the storage fields located along the Gulf Coast in Texas and Louisiana. Our view is that there should be no near-term impact on the operations of those fields. But once the rule becomes final and PHMSA begins to enforce it, we will reassess the risk to the operations of fields across the country. We expect those risks to be greater for older fields that are using a depleted reservoir for storage services.
Gulf Coast Storage is Different From the Rest of the Country
Before we dive into the rules and how they may or may not impact the storage fields in the Gulf region, it is helpful to understand how that region’s storage fields are different from those in the rest of the country. The impetus for the issuance of safety regulations was the failure of a well at the Aliso Canyon storage field in 2015. It is important to know two things about the Aliso Canyon field. First, there are two distinct types of storage fields in the country, one type, like Aliso Canyon, uses a depleted reservoir, typically a hydrocarbon reservoir to store the gas. The second type uses a salt cavern as the storage container. Second, the well that failed at Aliso Canyon was originally a production well that had been drilled in 1953 and converted to natural gas storage in 1972, in preparation for Aliso Canyon going into service in 1973. Many of these reservoir fields are even older than Aliso Canyon. For instance, the fields in the three states of New York, Pennsylvania and West Virginia went into service, on average, in 1958 and all but one of the 113 storage fields in those states use a depleted reservoir rather than a salt cavern.
The graphics below show how the storage fields in Texas and Louisiana compare with the rest of the country in two key areas: first, with respect to the year the fields were first placed into service, and, second, the percentage of storage fields that are depleted reservoirs as opposed to salt caverns.
PHMSA Inspections
Even before the Aliso Canyon well failure, the American Petroleum Institute (API) had issued two Recommended Practices (RP): API RP 1170 for salt caverns used for natural gas storage and API RP 1171 for natural gas storage in depleted hydrocarbon reservoirs and aquifer reservoirs. Both RPs recommended that operators of underground natural gas storage facilities implement a wide range of recommended practices, including construction, maintenance, risk management, and integrity-management procedures.
In January of 2016, following the failure of the well at Aliso Canyon, the Interstate Natural Gas Association of America (INGAA) urged PHMSA to incorporate the RPs into its regulations to establish a baseline of standards. Then in June of 2016, the ‘‘Protecting our Infrastructure of Pipelines and Enhancing Safety Act of 2016’’ (the PIPES Act) was enacted. The PIPES Act required PHMSA to issue regulations within two years from enactment that would consider consensus standards for the operation, environmental protection, and integrity management of underground natural gas storage facilities. To satisfy this requirement, PHMSA issued the IFR in December 2016 which incorporated the RPs into its regulations, but made the “recommendations” in the RPs mandatory. This change from “recommendations” to enforceable regulations did not sit well with the industry, and with at least one major state regulator, the Texas Railroad Commission (TRRC). The interim final rule was challenged in both the DC Circuit by INGAA and in the Fifth Circuit by the TRRC.
The challenge in the DC Circuit was dismissed as premature, but the one in the Fifth Circuit has simply been put on hold while PHMSA considers a petition that INGAA and other trade associations filed asking it to reconsider the IFR. In response to both the petition and legal challenges, PHMSA agreed that it would not enforce the non-mandatory provisions in the original RPs until at least one year following publication of the final rule. PHMSA did still require the operators to develop policies and procedures by January 18, 2018 to implement those sections of the RPs that are identified as mandatory in the actual RPs. It is compliance with this requirement that PHMSA is essentially auditing.
Still No Final Rule
PHMSA originally indicated that it would issue the final rule by January 1, 2018. That deadline was missed and PHMSA began updating the Fifth Circuit, beginning on January 12, 2018 and every sixty days thereafter about the status of the final rule. The most recent status filed in October 2019 indicated, as with the previous status reports, that PHMSA was moving “with all deliberate speed” toward issuing a final rule.
This deliberateness with which PHMSA is moving appears suspect given it has been almost two years since the original proposed issue date. This essentially means there are no real enforceable standards regarding the wells such as those that failed at Aliso Canyon.
Risk of Well Leaks in Depleted Reservoirs Appears Greater than for Salt Caverns
When it issued the IFR, PHMSA noted that many of the existing underground natural gas storage facilities across the country have wells with characteristics similar to the well that failed at Aliso Canyon. In particular, many of these wells are over 50 years old and were originally designed for petroleum production, where the flow of crude oil from underground depths actually reduced the pressure on the casing pipe as it flowed toward the ground surface. According to PHMSA’s experts, however, natural gas, in contrast, often has a much lower pressure drop when flowing to the ground surface. This problem is unique to storage fields using depleted production fields as the storage method and is not present in salt cavern storage fields.
Risk Seems Less in the Gulf Region -- At Least For Now
Our assessment of the risk to the storage fields in the Gulf region from the continuing audits by PHMSA leads us to believe that the near-term risk of any service disruptions is minimal for three main reasons. First, the current IFR has limited provisions that are enforceable. Second, the Gulf region has newer fields than the rest of the country. Third, the Gulf region has a higher percentage of salt caverns which do not face the same risks as depleted reservoirs such as Aliso Canyon.
However, as noted in PHMSA’s statement when it issued the IFR, preventing similar well failure incidents is not only a matter of public safety, but is also a key part of ensuring the reliable transportation of the nation’s energy supplies. If a storage facility operator needs to rapidly draw down its gas in storage to reduce the leak rate at a failed well, or else experience complete interruptions of operations, the public may suffer serious natural gas supply outages. That is why we will continue to monitor the issuance of the final rule and revisit the risk to natural gas supplies once that rule is issued and PHMSA begins enforcement.
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