What Natural Gas Customers Need to Know About Curtailment

Knowing how the supply and cost of natural gas will affect a company’s operations is key to planning and weathering curtailment.
By Joe Cooney | May 19, 2014

This winter hit the U.S. hard, with record-low temperatures affecting major cities everywhere east of the Rockies.  During the intense cold snaps, many natural gas customers, whose service is classified as interruptible, experienced curtailment, or the reduction of gas delivery due to a shortage of supply or because the demand for service exceeded a pipeline's capacity. With the cold so widespread geographically, natural gas demand was extremely high. Houses, hospitals and schools needed extra natural gas just to keep indoor temperatures and systems running properly. Interruptible customers were curtailed for hours, even days at a time, in the Midwest. Some were prepared, with emergency plans in place and access to alternative fuels; others were not.

Climatologists say the more volatile, severe weather experienced this winter is likely to continue. With the increase in severe cold comes an increase in the potential for curtailment. It’s hard to plan when extreme cold will hit, the level of severity and how long the cold snap will last, so forecasting curtailments and the duration of these natural gas reductions proves difficult. Plants and facilities relying upon natural gas need to prepare for curtailment and know the necessary steps to take should one occur, rather than be caught off guard when curtailment happens.

In typical years, the excess natural gas collected and stored during warmer months is depleted during the winter. Normally, there are chances to increase this local inventory as the country experiences warmer days over the course of the winter season. This winter, however, was especially bad due to the duration of each cold snap and the large geographic area it affected. There was never an opportune time to refill storage, resulting in higher probability of curtailment.

When facing the potential for curtailment, plants have to consider more than simply losing their natural gas supply—they must also consider the cost of natural gas. Extreme cold snaps can cause the demand for natural gas to increase significantly, resulting in prices of natural gas sky rocketing alongside demand before a curtailment event happens. Knowing how the supply and cost of natural gas will affect a company’s operations is key to planning and weathering curtailment. Curtailment periods can upset a company’s operations and ultimately the bottom line for both firm and interruptible customers. For maximum peace of mind and minimum economic loss, companies should consider the following key points:

• Remember that curtailment can happen, even if it has never happened before, whether for a couple  of hours or for days at a time. Rare force majeure (act of God) events can occur. Events such as the Trans-Canada pipeline rupture can affect even firm natural gas customers.

• Having access to accurate and clear weather forecasts, including how long a cold snap is predicted to last and the severity of the weather event, will allow a company to make decisions before curtailment hits.

• Curtailment can be expensive but, if a company chooses to continue operations during curtailment, fines can be extremely high. Make sure to weigh the costs of stopping or halting operations against continuing operations with a penalty. This means conferring with the pipeline, utility or energy management services provider to fully understand whether continuing to run is even possible, and if so, at what cost. Figuring out how much it will cost to shut down operations completely or rely on an alternative fuel source due to curtailment will allow a company to make informed decisions based on cost-benefit analysis.

• Many ethanol producers lean toward buying natural gas monthly or daily to take advantage of price fluctuations, weighing the cost-benefit analysis of hedging a portion of their natural gas needs for next winter as opportunities are presented. Since volatile weather, and numerous other factors, can raise natural gas prices significantly, hedging both basis and the underlying commodity should be considered.

• Ensuring that any alternative fuel system is ready to perform is part of a good back-up plan; for example, will the operational system that brings the back-up fuel run without access to natural gas? Is the back-up fuel source still usable or has it become too viscous in the years it’s been sitting in the tank? Testing back-up fuel storage is crucial, and so is knowing it can be relied on if, and when, needed. Testing should happen at the beginning of each winter, or more often, to ensure back-up fuel sources are ready to perform.

• If a company faced curtailment last winter, it should determine if it makes more sense financially to sign up for firm services for at least part of, or possibly the entire, year. The pipeline, of course, must have available capacity. Although companies will pay more per unit, firm service gives a company the same legal rights as schools, hospitals, government centers and homes when curtailment happens. Another option is to contract service with a natural gas supplier that can supply a company’s firm services for a portion or all of the year.

• When probable curtailment is imminent, communication is key. Make sure to communicate with the pipeline, an energy management service provider and/or the utility to remain informed at all times. Knowing how long a curtailment is projected to last, the fees/penalties associated with the curtailment and knowing when the curtailment is over will keep any company from paying excessive fees.

If a company examines previous experiences with volatile weather and projects how the geographical region will be affected by upcoming severe weather, they will have a better understanding whether curtailment can happen to them. Ultimately, curtailment is always a possibility with a force majeure. With this knowledge, companies can make decisions that best affect the bottom line with minimal operational disruption should curtailment happens.

Author: Joe Cooney
Account Manager, U.S. Energy Services