Natural gas storage

Natural gas storage service

Volumes of regasified LNG and number of tanker loadsThe natural gas storage business in Italy is done under a concession regime and it serves to offset the various demands of gas consumption and supply. In fact, procurement has had a basically constant profile throughout the year, while gas demand has been characterised by high seasonal variability with winter demand significantly higher than summer. Essentially, there are two distinct phases in storage: (i) injection phase, generally concentrated between April and October, consisting of injecting into storage the natural gas deriving from the national transport network; (ii) the extraction phase, usually concentrated between November and March of the following year, when the natural gas is extracted from the deposit, treated, and redelivered to users by the transport network. The storage business is carried out by making use of an integrated whole of infrastructures comprised of deposits, gas treatment plants, compression stations, and the operational dispatching system.

Stogit, the Group company which handles natural gas storage business, is now the largest Italian operator and one of the leading European operators in the sector, using eight storage operations fields located in Lombardy (four), Emilia Romagna (three) and Abruzzo (one). By adhering to technical efficiency and economy criteria, the Company makes its storage capacity available using an integrated system that is able to provide the required modulation services in a manner compatible with the available storage capacities.

Introduction

As indicated previously, the results for 2009 include the economic effects of consolidating Stogit in the second half of 2009, as these were included in the group’s consolidated financial statements from 30 June of that year, the date when the acquisition of Stogit from Eni was completed. In order to fully assess operating performance, the results of the natural gas storage business segment are analysed in comparison to those for the whole of 2009.

Key performance indicators (€ million) 2009 2010Change Change %
Core business revenue (*) 344 355 11 3.2
- of which, natural gas storage revenue 341 349 8 2.3
Operating costs (*) 64 63 (1) (1.6)
EBIT 214 218 4 1.9
Investments 282 252 (30) (10.6)
Net invested capital at 31 December 2,093 2,258 165 7.9
Concessions (number) 10 10
- of which operational 8 8
Natural gas moved through the storage system (billions of cubic metres) 16.52 15.59 (0.93) (5.6)
- of which injected 7.81 8.00 0.19 2.4
- of which withdrawn 8.71 7.59 (1.12) (12.9)
Available storage capacity (billions of cubic metres) (**) 8.9 9.2 0.3 3.4
Employees in service at 31 December (number) 301 279 (22) (7.3)

(*) Before consolidation adjustments.
(**) Working gas capacity for modulation, mining and balancing services. The value shown represents the maximum available capacity and may not correspond to the maximum replenishment carried out.

Financial results

Natural gas storage revenues totalled €349 million, up by €8 million, or 2.3%, compared with 2009. This increase was due to tariff changes relating to the return on investments made in the second regulatory period (+€6 million) and to higher variable payments for movement of natural gas (+€2 million).

Storage revenues refer to modulation storage (€282 million; +3.3%) and strategic storage (€67 million; 1.5%).

EBIT totalled €218 million in 2010, up by €4 million, or 1.9%, compared with 2009. This was due to the increase in storage revenues (+€8 million) and higher income from the sale of natural gas no longer necessary for plant operation (+€2 million, net of the costs of gas sold). These factors were partially offset by greater amortisation and depreciation (-€6 million), mainly as a result of revised estimates for abandonment costs.

Operating review (€ million)2009 2010 Change Change %
Development of new fields 221 144 (77) (34.8)
Investments with an incentive of 4% over 16 years 221 144 (77) (34.8)
Capacity upgrades 36 74 38
Investments with an incentive of 4% over 8 years 36 74 38
Maintenance and other 25 34 9 36.0
282 252 (30) (10.6)

Investments

Share of investments by incentive (% of total investments): 2009 - 78% Development of new fields; 13% Upgrading of capacity; 9% Maintenance and other and 2010 - 57% Development of new fields; 29% Upgrading of capacity; 14% Maintenance and other.Investments totalled €252 million in 2010, down by €30 million, or 10.6%, year-on-year. This reduction was due largely to the development activities in progress in the Fiume Treste storage fields drawing to an end.

Pursuant to Resolution no. 50/06 of the Electricity and Gas Authority, relating to the second regulatory period (1 April 2006 – 31 March 201011), incentivising investments means applying a rate of return that is four percentage points higher than the base rate, over eight years for upgrades of existing capacity and over 16 years for the development of new fields. Pursuant to Resolution ARG/gas 119/10 of the Electricity and Gas Authority, this incentive system will also apply to the third regulatory period (1 January 2011 – 31 December 2014).

Investments with a 4% incentive over 16 years (€144 million) relate mainly to the development activities in progress in the Fiume Treste storage fields, as well as the Bordolano storage field project to develop the cushion gas injection programme.

Investments with a 4% incentive over eight years (€74 million) mainly concern projects to increase pressure.

Around 86% of these investments are expected to benefit from incentive-based returns. The breakdown of investments in 2010 by category will be submitted to the Authority when the tariffs are approved for 2012.

Natural gas moved through the storage system

The volumes of gas moved through the storage system in 2010 totalled 15.59 billion cubic metres, down 0.93 billion cubic metres, or 5.6%, compared with 2009. This decrease was due mainly to the exceptional fall in supplies in January 2009 caused by the Russia- Ukraine crisis of 6-20 January, during which 2.2 billion standard cubic metres were supplied, which was partially offset by increased reconstitution of the capacity for shippers.

Total storage capacity as at 31 December 2010 was 14.2 billion cubic metres, a year-on-year increase of 0.3 billion cubic metres, due mainly to development investments made at the Settala concession plants.

Regulation

Natural gas moved in/out of the storage system (billions of m³): 2009 - 8.71 Withdrawal; 7.81 Injection; 16.52 Total and 2010 - 7.59 Withdrawal; 8.00 Injection; 15.59 TotalResolution ARG/gas 50/06 – “Calculation criteria for storage tariffs and modifications and supplements for Resolution 119/05 of the Electricity and Gas Authority of 21 June 2005 and for Resolution 166/05 of the Electricity and Gas Authority of 29 July 2005” and Resolution ARG/gas 38/09 – “Approval of company payments and calculation of single payments for storage relating to thermal year 2009-2010, implementing Resolution 50/06 of the Electricity and Gas Authority of 3 March 2006”.

With Resolution 50/06 of March 2006, the Electricity and Gas Authority established the calculation criteria for the storage tariffs for the second regulatory period, expiring 31 March 2010, providing for a mixed mechanism of revenue allowed (in terms of capacity) and a price cap (on gas moved – commodity), also establishing a single tariff on a national level.

With Resolution 38/09, published on 30 March 2009, the Authority approved the storage tariffs for thermal year 2009-2010, established on the basis of the RAB at 31 December 2008 equivalent to €2.8 billion.

Resolution ARG/gas 165/09 - “Urgent operations for adapting the balancing regimen and regulation of natural gas storage services under Legislative Decree No. 78 of 1 July 2009”.

With this resolution, published on 3 November 2009, the Electricity and Gas Authority, applying Legislative Decree No. 78/09 which provided measures for reducing the cost of energy for businesses by providing for, among other things attributed to the Regulator, the promotion of storage and point services for end industrial and thermoelectric customers, has defined criteria to permit storage companies to offer additional flexible services to users of the transport system on a monthly basis, enabling the company to withhold a share of the revenue deriving from eventual allocations of the services offered. For this purpose Stogit has prepared a proposal for updating its Storage Code, approved by Resolution ARG/gas 178/09, which defines the offering of the so-called Users Balancing Service.

Resolution ARG/gas 21/10 - “Extension of validity of natural gas storage tariffs”.

With this resolution, published on 24 February 2010, the Electricity and Gas Authority extended, for the period 1 April 2010 – 31 December 2010, the validity of the tariff proposals for natural gas storage service approved by Resolution ARG/gas 38/09, extending for that period the revenue guarantee criteria referred to in Article 10 of Resolution 50/06 as well as the equalisation regime referred to in Article 9 of that resolution.

Resolution ARG/gas 119/10 - “Consolidated act on the regulation of the quality and tariffs for natural gas storage services for the 2011-2014 period (TUSG): approval of part II, “Regulation of natural gas storage service tariffs for the regulatory period 2011-2014 (RTSG)”, measures on the transitory payment for the gas transportation metering service for 2011”.

With this resolution, published on 5 August 2010, the Electricity and Gas Authority established the calculation criteria for the storage tariffs for the third regulatory period, expiring 31 December 2014, providing for a mixed mechanism of revenue allowed (in terms of capacity) and a price cap (on gas moved – commodity), also establishing a single tariff on a national level.

Resolution no. ARG/gas 202/10 “Approval of the company payments and calculation of single payments for storage service and calculation of the transitory payment for the gas transport measurement metering service for 2011, implementing Resolution ARG/gas 119/10 of the Electricity and Gas Authority of 3 August 2010”.

With this resolution, published on 24 November 2010, the Electricity and Gas Authority approved the storage tariffs and the transitory metering payments for 2011, established on the basis of a RAB at 31 December 2009 equivalent to €3.0 billion.

Legislative Decree no. 130/10 – New storage capacity programme

Legislative Decree no. 130, “Legislative Decree bearing measures for greater competition in the natural gas market and the transfer of resulting benefits to end customers, pursuant to Article 30, paragraphs 6 and 7, of Law no. 99 of 23 July 2009”, came into force on 19 August 2010.

Among other things, the Decree obliges entities which inject natural gas into the national network to disclose their wholesale market share on an annual basis. The maximum market share has been set at 40% of the total volume of gas injected, although this can be increased to 55% if an entity commits to building new natural gas storage infrastructures (or upgrading existing ones) in order to free up 4 billion cubic metres of new storage capacity over a five-year period. This commitment can be made by stipulating appropriate agreements with storage subsidiaries.

Consequently, the ultimate parent, Eni, informed Stogit of its intention to build new storage capacity by asking its storage subsidiary to prepare and submit a draft proposal. Stogit carried out this request and the ultimate parent, Eni, then submitted Stogit’s proposal to the Ministry of Economic Development with a view to increasing the aforementioned maximum market share.

The proposal was approved by the ministry, upon consultation with the Electricity and Gas Authority, by a decree of 31 January 2011. Consequently, it is binding for Stogit, in terms of efficiency and timeframe, and must be completed within five years of 1 September 2010. More specifically, Stogit must ensure punctual completion of the proposal’s infrastructure capacities. This activity will be carried out in compliance with the obligations of functional separation established by Resolution no. 11/07 of the Electricity and Gas Authority.

(11) The Electricity and Gas Authority’s resolution ARG/gas 21/10, published on 24 February 2010, extended for the period 1 April 2010 - 31 December 2010 the validity of natural gas storage tariffs approved for the thermal year 1 April 2009 - 31 March 2010 with Resolution ARG/gas 38/09