Houston-based Falcon – and its subsidiaries and affiliated companies – is one of the largest developers and operators of HDMC natural gas storage capacity in the United States.

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Falcon Gas Storage Co. “went from a standing start to two projects with more than $300 million in aggregate capital expenditures in less than a year,” President and CEO John Hopper explains. “That type of growth is not unheard of, but it’s definitely in the top 1 percent.”

Falcon Gas Storage was founded in 2000 to capitalize on demand for high-deliverability, multi-cycle (HDMC) storage services, the company says. At that time, it explains, “natural gas had emerged as the fuel of choice for space heating and electric power generation, and North American gas production was lagging behind the burgeoning demand.”

Houston-based Falcon – and its subsidiaries and affiliated companies – is one of the largest developers and operators of HDMC natural gas storage capacity in the United States. The company’s NorTex Gas Storage subsidiary owns and operates more than 30 billion cubic feet per day (bcf) of gas storage capacity and 750,000 million cubic feet per day (mcfd) of deliverability at its Hill-Lake and Worsham-Steed gas storage facilities, as well as 450,000 mcfd of gas transportation capacity, serving Dallas/Ft. Worth and the Waha and Carthage Market Hubs in Texas.

Through its MoBay Storage Hub LLC affiliate, Falcon also is developing a a more than 50 bcf HDMC gas storage project in southern Alabama with 1.0 bcfd of injection and withdrawal capacity.

In addition, Falcon subsidiaries also are involved in crude oil production, including enhanced oil recovery, natural gas processing and liquids production, and gas, crude oil and natural gas liquids (NGL) trading.

‘Far Up on the List’
Hopper says Falcon aims to continue building gas storage capacity and eventually become the largest independently owned gas storage company in the United States.

“We’re already the second-largest gas storage company in north Texas and fourth largest in all of Texas,” he states. “As we expand into Alabama, New Mexico and other major U.S. markets, we’re aiming to get to at least 100 bcf of working gas storage capacity, which would put us pretty far up there on the list.”

The company’s rapid growth is due to its ability to mobilize quickly. “We were fully operational pretty much from the get-go,” Hopper explains. “We acquired two existing highly underutilized facilities in north Texas within a year after founding Falcon that had pretty much been ‘orphaned’ by the prior owner, a gas and electric utility, and we were able to mobilize our people very quickly to start expanding one of the facilities for HDMC service right after we acquired it. We’re pretty fast on our feet.”

Employing “highly motivated, very talented” people is part of Falcon Gas’ recipe for success, Hopper says. “We’re a very entrepreneurial culture. And, every employee owns stock options, which encourages them to literally take ownership in the company and its growth.”

Falcon Gas also benefits from an experienced management team. Hopper has significant experience in all facets of the energy business. Prior to founding Falcon, he was president and CEO of Inventory Management and Distribution Co. Inc. from 1994 to 2000. The company, which he co-founded, pioneered the commercial optimization of gas storage and pipeline transportation assets for local distribution companies during the early phases of pipeline unbundling.            

Previously, Hopper had held various executive positions with Tejas Power Corp. from 1989 to 1994, including oversight of business development, regulatory affairs, marketing and storage development. He also served as Tejas general counsel and was a member of the management committee.

Prior to joining Tejas, Hopper was a member of the Butler & Binion law firm, specializing in oil and gas transactions as well as regulatory matters. As an energy lawyer, he was involved with a case that was instrumental in the FERC order that required natural gas pipelines to fully unbundle their services and led to a competitive market for natural gas in the United States.

He earned a Juris Doctorate degree with honors from South Texas College of Law in 1980 and a Bachelor of Business Administration degree from the University of Texas in 1976.

Project Forecast
Industry-wide, Hopper says, cost inflation – in areas such as operating and project development personnel, materials and supplies – is one of the biggest challenges in today’s energy industry.

“We just finished two projects in north Texas with an aggregate cost of $300 million, and we were happy to be within 8 percent of our original budget,” Hopper says. “In this environment, it’s challenging to contain costs. I think that’s true for those in the energy businesses across the board.”

Hopper says Falcon Gas is able to contain costs and stay within budget because it acts as its own general contractor and acquires equipment, material, supplies and subcontract labor without using an EPC general contractor.

“All of our suppliers and subcontractors have established relationships with us and they know what we expect,” he stresses. “We stay closely on top of the project development and construction process. That helps keep our costs down.”

Having access to a large fleet of equipment also helps to stick with a tight production schedule. For example, Hopper says, when the company was constructing 60 miles of pipeline at its Worsham-Steed storage facility, it required much horizontal drilling under rivers, cerekbeds, highways and the like.

“We had a bunch of horizontal drillers and three spreads working on that pipeline all at the same time,” he says. “It’s unusual to have that many on a pipeline of that length, but we did it to expedite the process.”

Strong Operations
Falcon Gas Storage says its “solution-oriented approach helps customers fully utilize the flexibility of our facilities and realize maximum value from the wide range of services and contract options we offer.”    

The company explains that its business model is to provide HDMC storage services at “competitive, market-based rates from strategic points on the natural gas pipeline grid.”

As an independent storage operator, Falcon strives to deliver “customized, market-driven storage solutions for a growing list of regulated and unregulated customers that understand the value of having secure supplies of natural gas to serve uncertain load demands in an ever-changing market,” it continues.

By constructing a network of strategically located HDMC facilities, Falcon can provide cost-effective, highly responsive storage and load management solutions. “Unlike single-cycle storage, which still represents the vast majority of the nation’s existing gas storage capacity, our HDMC facilities are designed to sustain maximum deliverability for longer periods and to accept injections of gas into storage at higher rates,” the company explains.

“That means we can cycle inventories every 60 to 90 days, allowing for four to six complete inventory turns per year. This added flexibility makes gas storage a valuable risk management and operational tool for a wider range of both regulated and unregulated energy businesses.”

Looking Back
Falcon’s roots trace back to October 2000, when Energy Spectrum Partners capitalized the company with a $5 million convertible note. Its first month in business, Falcon acquired its first storage facility, the Worsham-Steed storage field, 50 miles northwest of Fort Worth.

Hill-Lake, located in Eastland County, Texas, operated as a producing oil field until the mid-1960s when Lone Star Pipeline Co. converted it into a single-cycle gas storage facility with 5 bcf of working gas capacity and 50,000 mcfd of withdrawal capability.

In April 2001, Falcon acquired the Hill-Lake storage facility, and began Phase I of an expansion project connecting Hill-Lake to two 36-inch pipelines.

A few months later, the company entered into a joint venture with Greyhawk Gas Storage Co., a Canadian utility company, to develop HDMC storage reservoirs in New York, Wykoff Gas Storage and Worsham-Steed.

When Phase I of the Hill-Lake expansion project was completed in February 2002, Falcon was able to start providing high deliverability multi-cycle storage services and capacity was fully subscribed by the end of the year. Also by the end of the year, Falcon completed its acquisition of the MoBay Storage Hub project in Alabama, which, when completed, will be one of the largest, most southeasterly-located HDMC gas storage facilities in the United States, the company notes.

Falcon sold its Greyhawk in early 2005 in order to focus on the continued expansion of its Hill-Lake facility. After investing a total of $35 million in Falcon over a five-year period, in July 2005 Energy Spectrum sold its ownership stake in Falcon to Arcapita Bank, B.S.C., a Bahrain-based private equity company with a range of worldwide investments totaling in excess of $17 billion. Since then, Arcapita has invested more than $150 million in Falcon and its various gas storage projects in north Texas, Alabama and New Mexico.

Additional funding for Falcon’s north Texas projects came from a $335 million bank loan package. According to a company statement, the financing consists of a $280 million construction and term loan facility and a $55 million revolver that has been used to complete the Phase II and Phase III expansions of the company’s Hill-Lake Gas Storage Facility in Eastland County, as well as the Phase I and Phase II expansions of the company’s Worsham-Steed Gas Storage Facility in Jack County. The company expects to access similar bank financing arrangements for its MoBay storage project in Alabama and its Desert Southwest storage project in New Mexico.

“Customer response for gas storage capacity in the north Texas market has been tremendous,” CEO Jeff Foutch said in a statement. “We have firm multi-year contracts covering over 80 percent of our working gas storage capacity at Worsham-Steed, which has provided the means to underwrite and build a large-volume, high-pressure gas pipeline.

“Our new pipeline has been designed to give our storage customers significant additional take-away capacity and to provide new transportation alternatives to gas producers and other shippers in the Barnett Shale.”

Falcon’s 60-mile Worsham-Steed Pipeline traverses the western portion of the prolific Barnett Shale gas play and runs southward from the Worsham-Steed storage facility through Jack, Parker and Hood counties, where it interconnects with the two major 36-inch gas transmission pipelines that serve north Texas.

“The market liquidity in this area will continue to improve as more of these large-diameter pipelines are built,” Foutch added. “Our Worsham-Steed Pipeline will benefit not only our gas storage customers and gas consumers in the Dallas/ Fort Worth market region, but it also will provide new transportation options and capacity for Barnett Shale gas producers, gas processors and other prospective shippers located in proximity to our pipeline. Everybody benefits from more pipeline interconnectivity and transportation choices.”

In addition to the expansion of Falcon’s two NorTex gas storage projects, the construction and term loan also is being used to finance the fabrication and installation of two 60,000 mcfd cryogenic gas processing plants designed to recover up to an aggregate total of 240,000 gallons per day of natural gas liquids (NGLs) from both gas storage reservoirs; the expansion of crude oil production operations at both facilities, including an enhanced oil recovery (EOR) project at Worsham-Steed; and the recovery of crude oil produced in association with gas storage operations at both locations.

The remaining $55 million in financing consists of a working capital facility that will be used to purchase, hedge and trade working gas storage inventory as well as for additional capital expenditures and for general corporate purposes, the company states.

“The bank financing represented the next big step for us in implementing our business strategy,” Hopper said in a statement. “We’ve been involved for over six years in gas storage development and operations activity in north Texas. The financing has allowed NorTex to complete the full-phase expansions at both Hill-Lake and Worsham-Steed, as well as construction of a new 450,000 mcfd take-away pipeline in the Barnett Shale, in order to meet the growing demand for HDMC gas storage services and gas transportation services in the rapidly expanding north Texas energy market.

“It also has enabled NorTex to fully exploit the extraordinary economic potential of the Hill-Lake and Worsham-Steed storage reservoirs by expanding the gas processing, natural gas liquids and crude oil production activities NorTex conducts in association with its gas storage operations in north Texas.”

In January last year, Falcon also announced that its MoBay Storage Hub project in southern Alabama received a Certificate of Public Convenience and Necessity under Section 7 of the Natural Gas Act from the Federal Energy Regulatory Commission (FERC). This certificate authorizes MoBay to develop and operate the project.

According to a company statement, the MoBay Storage Hub will provide 50 bcf of working gas and 1.0 bcfd of injection and withdrawal capacity at Coden, Ala. The MoBay header system will provide direct, bi-directional receipt and delivery points with the Florida Gas Transmission (FGT) pipeline, Gulfstream pipeline, Gulf South pipeline and Transco pipeline. Via backhaul or displacement, MoBay shippers will be able to access the expanded Destin pipeline system.

“MoBay will offer firm and uninterruptible storage, balancing, wheeling, parking and loaning services at market-based rates,” the company says. “Future receipt points may include the four gas processing plants at Coden (1.3 bcfd) and the proposed 1.14 bcfd Southeast Supply Header project planned to connect with the Gulfstream, FGT, Gulf South, Southern Natural Gas Company, Columbia Gulf Transmission, Centerpoint Energy Gas Transmission, Texas Eastern Transmission and Tennessee Gas pipelines.”

Major Hub
Falcon says the MoBay storage hub is expected to create a major new market center for natural gas in the Gulf Coast and is designed to provide secure natural gas supplies during extreme weather events and other deepwater supply disruptions. Specifically, the FERC order authorizes MoBay to construct and operate a natural gas storage hub and associated pipeline facilities consisting of:

• Three underground substantially depleted natural gas storage reservoirs located offshore in Alabama state waters

• Up to 30 new injection and withdrawal wells supported by 10 offshore caissons and approximately seven miles of offshore distribution pipeline connecting the injection and withdrawal wells to two existing offshore platforms

• An onshore compressor station with 37,880 horsepower (HP) of compression

• Three metering stations and approximately three-and-a-half miles of 24-inch diameter pipelines, creating a header system connecting the onshore facilities to four nearby interstate natural gas pipelines

• Two 8,500 HP compressor units located offshore on a platform owned by MoBay

• Thirty six-inch diameter pipeline, about 15.5 miles, connecting the storage reservoirs to the onshore compressor station

Edmund Knolle, MoBay CEO, said in a recent statement that: “By 2010, natural gas demand in the Southeastern United States is expected to increase 16 percent over 2004 demand.

“Gas demand in Alabama alone is expected to increase by 50 percent during the same period. MoBay will significantly enhance energy security and reliability in this growing region, providing utilities, producers, LNG importers, gas marketers and industrials with a strategically located, highly liquid trading hub downstream of major pipeline bottlenecks.”

MoBay has executed precedent agreements for 30 bcf of working gas capacity and 0.575 bcfd of daily withdrawal capability. Shippers include electric utilities, producers, marketers and municipal gas districts. MoBay plans to hold a non-binding open season later this year for the remaining capacity.

MoBay says it expects to finalize remaining state permitting requirements shortly and start construction in April 2008. The target in-service date will be Oct. 1, 2009.