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2019 Strategic Directions:Natural Gas Report

Market Strives to Deliver Over Pipeline Challenges

As if the persistent low-price environment wasn’t enough, rampant natural gas production in the Appalachian and Permian Basins is ramping up concern that pipeline take-away capacity can’t keep up. This comes as the United States natural gas industry prepares to enter one of its strongest growth periods to date, driven by increasing global demand for low cost natural gas supplies and growing domestic demand for cleaner energy sources.

Unfortunately, this rising demand comes during a slowdown in interstate pipeline development. Projects have been delayed for various reasons tied to the approvals process and local opposition. Recently, the Atlantic Coast Pipeline and the Mountain Valley Pipeline lost their construction permits for a month due to a faulty right-of-way through national park land. Both pipelines are expected to be completed by the end of 2019, providing 900 miles of new pipeline to transport natural gas throughout the Southeast. Delays in the development of transportation have trickle-down impacts on the availability of gas production and the price consumers pay around the globe.

A Market in Need, Without Recourse

The New England market, where supply remains heavily constrained on peak winter days, is most in need of incremental pipeline capacity over the next five years, according to Black & Veatch’s 2019 Strategic Directions: Natural Gas Report survey. The Mid-Atlantic region ranked second, with the Southeast region coming in third, marking a strong need to build additional infrastructure (Figure 1).​

FIGURE 1

Ironically, the nearest source of natural gas — the Appalachian Basin, home to the Marcellus and Utica shale plays — is far and away the most abundant in the U.S. According to the EIA, natural gas production in the Appalachian region has grown from 7.9 billion cubic feet per day (Bcf/d) in 2012 to 26.9 Bcf/d in 2018, based on EIA data through August 2018.

But delivering large volumes of natural gas to New England will require miles and miles of interstate pipeline, and to this point, most attempts to build capacity into New England have stalled due to a complicated blend of local opposition, interstate compliance issues and state regulatory approvals.

It’s no secret that producers need to expand their processing and transportation capacity throughout this region. By 2025, industry leaders say up to 5 Bcf/d in additional incremental pipeline capacity would be required to transport natural gas out of the Appalachian Basin.

Increasing Regulations, Costs

The next tranche of pipeline capacity is certain to be more expensive than any other development done to date, and this will become apparent over time in both brownfield and greenfield expansions. According to survey results, local and environmental opposition and the Federal Energy Regulatory Commission (FERC)/state approval process are the two most important issues concerning pipeline development, with market support and rising costs a closely entwined third (Figure 2).

FIGURE 2

Public opposition and environmental concerns have the potential to not only disrupt but halt pipeline development work. The Atlantic Coast Pipeline and Mountain Valley Pipeline projects continue to be fiercely contested, and the actions of protestors have garnered headlines throughout the U.S. Both projects have faced numerous court challenges after questioning whether the project’s impacts had been adequately considered.

FERC is taking a harder look at how to address the procedures to approve interstate pipelines at the federal level. In 2018, the federal agency announced it was launching a Notice of Inquiry “seeking information and stakeholder perspectives to help the commission explore whether, and if so, how, to revise existing policies regarding its review and authorization of interstate natural gas transportation facilities under section 7 of the Natural Gas Act.” It is difficult to say how the agency will rule, but either way, there will be challenges ahead to build new pipeline capacity.

Market support ranks a distant third. Local distribution companies (LDCs) have traditionally supported incremental pipeline capacity to serve peak day needs; however, there are several pilot programs across the country aimed at managing peak day needs through demand response of residential and commercial customers. With rising pipeline costs, potential shippers and regulators are challenging the need for pipeline capacity and evaluating alternative options, given the long-term commitment needed for pipeline capacity.

In general, there is a certain rising cost associated with new projects going forward. Construction costs, which continue to rise in response to higher prices for labor and materials, spiked recently in response to the administration’s tariffs on foreign supplies. Foreign steel plays a major role in oil and gas pipeline construction, and the tariffs threaten to slow development.

Investigating Possible Solutions

Unsurprisingly, the industry sees interstate pipeline mainline expansions, LDC systems and interstate pipeline laterals (the smaller lines that connect off the main) playing critical roles when it comes to building out incremental infrastructure (Figure 3).

FIGURE 3

The survey also indicates a growing need for LDCs to either reinforce or expand the local distribution systems. Many facilities/end users rely upon the LDCs to make the last mile of delivery, and there is a need to expand and reinforce those systems to move gas safely from the interstate pipeline right to the burner tip.

The lesser support for greenfield pipeline additions reflects the general sense in the industry that greenfield pipelines are going to remain more difficult to build. Greenfield expansions are particularly more challenging because companies must secure new rights-of-way. This means obtaining the necessary approvals, working with land owners, and obtaining federal- and state-level approvals after court challenges by opposition groups.

Planning for the Future

Educating the public and key stakeholders will remain critical to assuage opposition going forward. Land owners, energy consumers, and state and federal regulators need to understand the benefits of natural gas and pipelines, in general, and how they support the local and state economy by providing low cost reliable energy while also supporting green economy initiatives.

North American gas demand growth is seemingly inevitable over the next decade; however, gas pipeline capacity could be the critical link for gas production to keep pace and allow low cost gas supplies to reach local and global end use markets.

 

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