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Resource Alignments for Natural Gas Pipelines

Resource Alignments for Natural Gas Pipelines

Resource Alignments for Pipelines
Could Challenge Power Generators

Converting natural gas pipelines to crude oil services seems to be in high fashion right now.

Canada is holding an open season from April 15 to June 17 to obtain firm long-term commitments for the Energy East Pipeline Project – a gas to oil conversion of the TransCanada mainline running from Alberta to New Brunswick.

Conversion of the Pony Express Pipeline will be completed in third quarter 2014, from Guernsey, Wyo., to Ponca City, Okla.

And, Trunkline’s proposed conversion of one of two lines in a 770-mile segment to oil service recently passed environmental review, bringing it one step closer to obtain Federal Energy Regulatory Commission (FERC) approval.

These three projects will reduce traditional established natural gas transportation arteries in different geographic areas of North America -- Western Canada to the U.S. Northeast, Rockies to Midwest, and the Gulf of Mexico to the Midwest.

Under the current market environment for natural gas and crude oil, this trend makes intuitive sense. Rapid growth in production from the Marcellus Shale will gradually transform the U.S. Northeast from one of the largest natural gas consumption markets to a large production region. Natural gas infrastructure established to serve the Northeast market from traditional production basins is and will continue to be underutilized.

On the other hand, oil production continues to grow from U.S. oil shales, such as the Bakken Shale in North Dakota and the Eagle Ford Shale and Permian basins in Texas, where incremental infrastructure for shipping production is much-needed.

The conversion of natural gas pipelines to oil services is a winning proposal to all the parties involved:

  • Pipeline owners, operators and their investors will see a steady cash flow stream instead of declining revenue from declining pipeline utilization;
  • Existing firm gas shippers on the natural gas pipeline will be guaranteed to find alternative transportation and could receive some rate reduction benefit from the conversion;
  • Crude oil producers will certainly be encouraged to have incremental outlets for their production.

Will anyone be negatively affected by these natural gas pipeline to crude oil conversions? Electric generators who are not at the table now could feel the effects. The Black & Veatch Energy Market Perspective (EMP) expects that natural gas-fired generation will increase to 52 percent of total generation in 2037 from 25 percent of U.S. generation in 20131. In the Midwest U.S., 10,000 megawatts of coal-fired capacity have been officially announced as retirements by 2020, most of which will be replaced by gas-fired facilities.

As a sector, however, power generation does not contract for a significant amount of firm pipeline capacity. Natural gas prices have a volatile history and the capacity factor for natural gas-fired generators can substantially fluctuate. The fixed demand charges associated with firm natural gas capacity put generators with firm contracts at an economic disadvantage for competitive power dispatch. 

In most parts of the U.S., existing natural gas infrastructure was able to handle the 5 billion cubic feet per day demand growth from the electric sector from 2011 to 2012 without incidents. However, the system has never been tested at the level of demand growth being projected. As illustrated in the map below, in the next 10 years, Black & Veatch projects that gas flows into the Midwest market will increase to meet demand growth from the electric generation sector, as indicated by the green and blue arrows to the Midwest market.

Figure 1 – Projected Pipeline Flow Changes in North America 2012 – 2022

Source: Black & Veatch Energy Market Perspective Analysis

As Rockies and Midcontinent oil production continues to grow, the electric generators could find themselves competing on two fronts for the natural gas pipeline capacity serving this region -- with the traditional gas users of the pipeline systems, as well as the possible conversion of entire segments to oil service since once a pipeline is converted to carry oil, it is not likely that it will go back to gas.

Story by Dr. Hua Fang, Black & Veatch’s Management Consulting Division

June 2013 Issue

   Subject Matter Expert:

Dr. Hua Fang
   Principal Consultant
   Natural Gas and Power Fuels Group
   Black & Veatch’s Management Consulting Division

Archives of Energy Strategies Report.
1 Black & Veatch EMP Year-End 2012.