Gas storage is an important infrastructural component in the natural gas market that ensures security of supply to heat homes on the coldest days in the winter and provide natural gas generated electricity on the hottest days in the summer. The gas storage market has changed dramatically since Tribute first considered development of these assets in the early 2000’s. Ontario has approximately 260 billion cubic feet of storage developed, most of which was vital to the operation of the Ontario gas market place and utility delivery systems. One of the fundamental changes has been the reversal of the gas flows exported from Ontario to gas flowing into Ontario from the bordering United States regions which produce shale gas. As a result, subject to normal weather conditions, Ontario does not require the same quantity of gas storage as it once did, and this is reflected in lower prices for storage facilities and operations. The 2013-2014 heating season was an exception to this market trend due to a much colder weather pattern across North America, with prices for gas and storage substantially increased over forecast levels. This shortage of winter storage may mitigate against lower prices for gas and storage in future years, given that utilities were scrambling to purchase spot supplies and have applied to increase commodity costs by between 28 and 40%.
The development of natural gas storage is extremely capital intensive with lengthy development time- lines and stringent regulatory requirements. The first stage in the development of storage is to evaluate projects for suitability by reviewing the geology, conducting 3D seismic programs, verifying land positions, conducting environmental studies, re-completing or abandoning existing wells, and designing facilities and pipelines. When a project is determined to be economically feasible and geologically suitable, an application is filed with the OEB for designation as a natural gas storage reservoir. Applications are also filed for permission to construct pipelines and inject natural gas into the pools.
In early 2009, Tribute completed the construction and commissioning of its first natural gas storage pool, the Tipperary Pool. Tribute retains a 25% interest in this pool after having sold 75% to Union Gas. Tribute was responsible for the development and construction of the storage facilities and Union Gas operates the pool. Tipperary is one of the first non-utility competitive storage facilities to be connected to the Union lateral transmission system, which connects to the Dawn trading hub. The pool does not appear to be profitable at this time and may not be profitable in the next five years. Tribute is examining its options to achieve returns from this asset.
Tribute owns a number of pools and prospects in Lambton, Huron and Kent Counties which are believed to be suitable for development and possible conversion to natural gas storage. Tribute plans to develop these pools when storage prices improve. The developmental structure would follow the Tipperary model and be operated through currently wholly owned subsidiaries, Bayfield Pipeline Corp. and Bayfield Resources Inc.. In December of 2012, Tribute received approvals from the Ontario Energy Board (“OEB”) to designate the first two pools in Huron County, Bayfield and Stanley as natural gas storage reservoirs. Approvals were also received to inject and withdraw natural gas and for a leave to construct the pipeline to connect these pools to market.
For additional information on Tribute’s Natural Gas Storage, please see the most recent Management’s Discussion and Analysis from the Investor Relations tab of the website.