Natural Gas Storage Operators Bracing for Regulatory Impact

Jan 10, 2018 9:00 AM ET

Natural Gas Storage Operators Bracing for Regulatory Impact

Storage solutions continue to drive natural gas’s prominence as part of a balanced power portfolio. Results from the 2017 Strategic Directions: Natural Gas Industry Report survey signal that in order to realize natural gas storage potential, industry organizations will first need to manage the array of associated federal and state regulations. Final rules to be issued by the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA), for instance, will require up-front planning and may pose compliance challenges for storage facility operators.

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Issued last year to address public concerns stemming from earlier incidents and culminating in the 2015 Aliso Canyon methane leak in Southern California, a PHMSA interim final rule (IFR) aims to mandate “critical safety standards” to address aging infrastructure and reliability, and enhance the safety of underground facilities to prevent future incidents. The rule incorporates American Petroleum Institute-recommended practices and contains guidance for operators of underground gas storage facilities. The standards include policies on inspection, enforcement, training and certification.

Several industry groups have spoken out against the IFR, and PHMSA announced in June that it will conduct a review of petitions, further postponing enforcement of the final rule. The partial stay issued this summer stated that a final rule would be issued by January 2018, with a one-year compliance grace period.

Planning for New Mandates

Regardless of uncertainties around when compliance deadlines will be imposed, some storage facility operators already are taking a proactive approach and are preparing for stricter mandates and related investments. Given the complexities of interim rules, most are seeking solutions that go beyond expected compliance requirements.

When asked how PHMSA rules could affect their business, 44 percent indicated that it would make business more difficult and increase costs for customers.

The cost of compliance, particularly for smaller independent operators, often gets passed on to customers. Smaller operators typically employ business models with modest profit margins; therefore, their only option is to increase rates to recover the costs of upgrading assets, and new documentation and reporting requirements to fit compliance standards. In some cases, PHMSA regulation requirements could have a significant impact on an entire business model.

Cost of Compliance

One of the larger expenses that operators incur is the required geotechnical assessment of each storage facility. It is common for operators to hire an outside firm to perform these inspections since they typically would not have this capability in-house.

Addressing aging infrastructure is another big-ticket expense, especially because many storage facilities are merely refurbished former oil facilities. Upgrading this older equipment could equate to hefty investments for operations managers. Some structures also may lack proper background documentation to perform full integrity assessments that will be included in the new PHMSA rules.

Compliance readiness, as a whole, varies between respondents because of size, budgets and facility age. The ambiguous nature of the regulation’s timing leaves room for interpretation as to when compliance efforts should begin and when bottom lines will be affected.

Forty-one percent of survey respondents believe PHMSA’s rules will begin to affect their business planning within the next two years while almost one-third (29 percent) anticipate effects within three to five years.

Minimizing Disruption on Operations

When the rule finally drops, operators will have options to consider for determining the most effective approach to meet inspection criteria. For some facilities, nondestructive downhole inspection methodologies, similar to in-line inspections, allow for minimal overall impact on operations. Various ultrasonic methods also can be done on-site and prevent the need to remove piping and other hardware. While both methods can be costly, operators benefit from fewer service disruptions.

Another approach to compliance is the participation in regional consortiums where storage operators partner to alleviate administrative costs. In this approach, the group pools their respective compliance budgets and delegates specific tasks to each member company. This collaborative strategy carries cost savings as well as benefits to both the operations and maintenance side.

For example, instead of each operator spending time and money developing its own updated operating and maintenance manuals, a consortium would enable a more efficient process where one universal manual is produced that every participating business agrees upon and can then tweak for its own facility. In the end, it’s ultimately less time-consuming and taxing on an individual plant.

The regional approach also can be applied to rule interpretation and compliance and can yield benefits during audits and inspections.

On the mechanical side of the operation, a consortium also can help offset some of the expensive geotechnical assessment and testing that is required. In this scenario, member companies pool resources and hire a geological testing firm as a group instead of individually. This method can leverage the economies of scale to help reduce the cost for individual operators.

Ultimately, whenever PHMSA’s final rule is issued, regulatory compliance requirements will be unavoidable. Waiting to address the possible changes could become more costly in the long run for operators that do not begin strategic business planning proactively. At the very least, facility owners should start exploring their compliance options and plan now to prepare for the coming impact.