Rapid Shifts Occurring in U.S. Gas Pipeline Construction
New natural gas pipeline construction is progressing in portions of the U.S. – such as the Texas Eastern Appalachia project, the Columbia Gas Transmission West Side Expansion, and the Rockies Express Seneca Lateral Reversal project – and it demonstrates the difference in the industry’s outlook from just a year ago.
“Pipeline owners have experienced a nearly 180-degree turnaround from one year ago when capacity was underutilized, capital was underperforming and convergence was undefined,” said Rick Porter, who leads the Natural Gas Pipeline Regulatory Advisory services in Black & Veatch’s management consulting business. “Today, demand for pipeline capacity out of the Marcellus and Utica shale plays has completely reversed the natural gas transportation paradigm.”
Source: Black & Veatch
Respondents were asked to indicate what they saw as the three most significant issues facing the natural gas pipeline industry during the next 3 to 5 years.
According to Black & Veatch’s Strategic Directions: U.S. Natural Gas Industry report, the pipeline community now envisions a customer base where there is significant growth in non-traditional markets. In the report, electric generators and LNG exports were the top projected growth markets for the industry in the short term. Much less growth is expected from the local distribution company (LDC) sector. Porter said there is little reason for this view of new markets to change soon.
This reversal of fortune – considering some pipelines were recently viewed as possible candidates for retirement or conversion to oil or natural gas liquids transport – now finds large amounts of natural gas supply chasing limited pipeline capacity, Porter noted. This promotes higher pipeline usage, better rates and higher operating margins.
“However, pipelines will need to manage future construction of new capacity to prevent overbuilding,” Porter said. “It will be important for the entire sector to avoid recreating the capacity supply and demand imbalances that embroiled this industry for the last decade.”
Assuming regulators allow adequate returns and pipelines are able to negotiate full or nearly full cost of service rates, pipelines provide a significant opportunity for capital investment, opening the door for long-term satisfactory and sustained returns, he said.
“One challenge will be for pipelines to work with regulators to ensure approval of service rates – including returns on equity – that meet investor expectations,” Porter said. “In essence, the Federal Energy Regulatory Commission (FERC) has to validate the risk that the investment community perceives to exist on these pipeline projects.”
Obstacles from Opposition Groups
Concerns remain about traditional issues such as delays to project development that decrease project certainty and increase financial risk. Pipeline owners expend significant resources planning and engaging stakeholders prior to filing at FERC for construction authorization to reduce this project uncertainty. Yet even as some uncertainty is squeezed out, respondents say they see delays from opposition groups as the most significant barrier to the construction of new pipeline capacity.
Source: Black & Veatch
Respondents were asked to identify from a list two items that are the most significant barriers of expansion associated with the construction of new pipeline capacity.
“Pipeline developers should be mindful that opposition groups are highly organized and have learned to utilize the regulatory process to maximize the review time required by the regulatory agency,” Porter said. “Inattention to these groups and their issues can lead to slowdowns in project development and take a project to a point where it becomes unfeasible to implement.”
Infrastructure Requires Market Commitments
Additionally, nearly one-half of respondents still see insufficient firm subscriptions as a barrier to the construction of new pipelines. For example, the electric generation market, which is pegged as a top growth opportunity for natural gas, has not historically favored long-term firm pipeline commitments. Since firm commitments provide required revenue surety and financing flexibility to infrastructure projects, shippers must commit to capacity on proposed projects if the projects are to succeed.
“The pipeline industry is cautiously optimistic that there will be sustained growth for natural gas and that the anticipated demand will translate into pipeline capacity subscriptions,” Porter said. “But even with so much gas supply available, the industry’s long past breeds an air of caution toward future planning.”
Regulatory Uncertainty Prevails
Regulatory uncertainty remains a significant issue and may manifest itself as delays in approval processes or less-than-satisfactory returns on equity capital. Similarly, there is often uncertainty surrounding the ability to recover large one-time costs. Thus, it is not surprising that more than 75 percent of respondents indicated that streamlining procedures required for authorization to construct pipeline projects would be the most helpful regulatory practice to promote pipeline growth.
Currently, pipeline developers may elect to limit the scope of new projects to reduce the regulatory timeline and manage regulatory uncertainty, Porter said. Often this will shift the regulatory review to a shorter state-managed process from one at a corresponding federal agency.
There is pending federal legislation to establish shorter, mandatory limits on the time allowed for FERC to process these types of applications. However, common to both the state and federal processes are the numerous environmental issues that must be vetted.
“In reality, neither the pending legislation nor the shifting of projects to state jurisdiction can eliminate the time associated with the environmental review portion of the process,” Porter noted.
Convergence with the Electric Markets
Porter said it is also important to note that convergence, or the synchronization of the natural gas and electric markets, is still a work in progress. To date, the combined industries have not been able to arrive at a comprehensive solution to the tasks posed to them by FERC.
In fact, only 6 percent of the survey respondents consider the coordination of the gas and electric business day to be helpful toward promoting infrastructure growth and pipeline earnings. This particular feature has been touted as a critical part of the convergence effort – so broad pipeline participation will ultimately be required.
“As the issues surrounding convergence continue to unfold, pipelines cannot be lulled into a false sense of security that additional pipeline capacity alone will cure the identified issues,” Porter said. He said pipelines must stay engaged in the process, realizing that the proposed changes to pipeline operations could have ripple effects upstream and downstream in the industry.
“Pipelines must be prepared to step up with new solutions that provide opportunities for the non-traditional shippers on their systems to access the reliability that the traditional shippers value so highly,” he said.
Overall, the future looks positive for the pipeline industry, Porter said. Those pipelines that propose market responsive options will be rewarded.