Growing Gas Demand, Regulatory Changes Drive LDC Spending

December 2011, Vol. 238 No. 12

Rita Tubb, Managing Editor

The nation’s natural gas distribution industry delivers gas to the homes or places of business of more than 70 million customers every day. These customers consumed approximately 24.1 Tcf of gas in 2010. Some 2.4 million miles of pipeline of varying sizes and pressures are used to transport natural gas annually from the wellhead to customers throughout the U.S.

In 2010, 88% of the natural gas consumed in the U.S. was produced domestically, the remaining supply came from Canada (10.5%) with 1.5% imported as LNG. Approximately 23% of the natural gas used in the U.S. is delivered to residential customers for heating, cooking and other domestic needs.

Natural Gas Outlook
According to the Energy Information Administration’s Annual Energy Outlook, the U.S. possesses 2,543 Tcf of potential natural gas resources. Natural gas from shale resources, considered uneconomical just a few years ago, accounts for 862 Tcf of this resource estimate, more than double the estimate published last year. At the 2010 rate of U.S. consumption (about 24.1 Tcf per year), 2,543 Tcf of natural gas is enough to supply the U.S. for more than 100 years. The Outlook reports that shale gas resource and production estimates increased significantly between the 2010 and 2011 and are likely to increase in the future.

The EIA expects marketed natural gas production to average 66 Bcf/d in 2011, a 4.2 Bcf/d (6.7%) increase over 2010. The entirety of this growth is coming from increases in onshore production in the lower 48 states which will more than offset a steep year-over-year decline of over 0.9 Bcf/d (15%) in the Gulf of Mexico (GOM) and a small decline in Alaska. EIA predicts that overall production will continue to grow in 2012, but at a slower pace, increasing 1.4 Bcf/d (2.1%) to an average of 67.4 Bcf/d.

The EIA Outlook notes that growing domestic natural gas production has reduced reliance on natural gas imports and contributed to increased exports. EIA expects that pipeline gross imports of natural gas will fall by 4.8% to 8.6 Bcf/d during 2011 and by another 3.1% to 8.4 Bcf/d in 2012. Projected imports of LNG fall from 1.2 Bcf/d in 2010 to 0.9 Bcf/d in 2011 and to 0.7 Bcf/d in 2012. Pipeline gross exports to Mexico and Canada are expected to average 4.1 Bcf/d in 2011 and 4.2 Bcf/d in 2012, compared with 3.1 Bcf/d in 2010.

The report points out that the Henry Hub spot price averaged $3.90 per MMBtu in September 2011, 15 cents lower than the August 2011 average. EIA projected Henry Hub spot prices to fall further in October before rising above $4 per MMBtu in December.

EIA expects the average Henry Hub price in 2012 to be $4.32 per MMBtu.

As of Feb. 12, 2010, LDCs were required to establish a Distribution Integrity Management Program (DIMP). Local distribution companies had until Aug. 2, 2011 to write and implement their program.

The DIMP regulation requires all jurisdictional gas distribution pipeline operators (i.e., local gas companies) to develop, write, and implement a natural gas distribution system integrity management program that demonstrates the following elements:
• Knowledge of the pipeline system
• Identification of system threats and the risk associated with those threats
• Evaluation and ranking of risks
• Identification and implementation of measures to address risks
• Provisions for plan measurement and performance, monitoring of results, and evaluation of effectiveness
• Provisions for program improvement
• Provisions for program reporting
Also under Federal Pipeline Safety Regulations 49 CFR 192.383, LDCs are required to install an Excess Flow Valve on all new and renewed service lines that serve only one single-family residence.

Spending Trends
Strong demand, regulatory and legislative changes are seen as drivers for near-term LDC spending. For this reason, Pipeline & Gas Journal’s latest survey figures indicate gas utility spending to serve new customers, and rehabilitate, repair and replace the nation’s 1,221,070 miles of distribution mains and 65,580,489 services, meters, valve, regulators, cathodic protection, SCADA networks and peak-shaving facilities will total approximately $12,493,537,440 in 2012, compared to $12,129,648,000 this year.

Distribution Mains And Service Lines
Natural gas distribution mains and service lines are comprised of several different pipe materials as systems were constructed during the 19th and 20th centuries. As of Dec. 31, 2009 plastic and steel pipe made up approximately 97% of the mileage of natural gas distribution pipelines. The remaining 3% is primarily iron pipe, either cast iron or ductile iron.
According to the Pipeline and Hazardous Materials Safety Administration (PHMSA):
• At the end of 2004, 41,501 miles of cast iron main were remaining in natural gas distribution service compared to 35,624 miles of cast iron main as of the end of 2009. The mileage of cast iron mains was reduced by 5,877 miles (14.2%) over the five year period.
• At the end of 2009 cast iron distribution pipelines were operated in 30 states.
• Fifty percent of the mileage resides in four states: New Jersey, New York, Massachusetts and Pennsylvania.
• Eighty percent of the mileage resides in ten states: New Jersey, New York, Massachusetts and Pennsylvania, Michigan, Illinois, Alabama, Connecticut, Maryland and Missouri.
• The National Association of Pipeline Safety Representatives (NAPSR) reported (as of 46 responses on 2/13/2011) that 22 of the 32 states with cast iron mains have cast iron main replacement programs. Of the 10 states that contain 80% of the cast iron main mileage (as described above), Maryland is the only states that does not have a cast iron replacement program. Seven of the eight states (Massachusetts has no projection for completing cast iron replacement) with replacement programs have reported that their work should be completed by projected dates as follows: New Jersey – 2035; New York – 2090; Pennsylvania – 2111; Michigan – 2040; Illinois – 2031; Alabama – 2040; Connecticut – 2080; Missouri – 2059.

Some state pipeline safety authorities have mandated operators replace all or parts of their cast iron systems. Atlanta (15-year replacement of all cast iron and bare steel, to be completed in 2013) and the District of Columbia (10- year replacement of the 8-inch and 12-inch cast iron pipes, completed in 2004) are two examples. When state authorities mandate the pipe replacement program, operators are generally assured that they will recover their costs through their rate base. If the program is voluntary, the operator does not know if the cost is recoverable until they file a rate case.

Survey Response
Once again, P&GJ surveyed LDC managers for comments on several subjects including pipe replacement programs and the cost of finding and repairing leaky mains. The cost figures and comments from industry participants on these and other topics follow:

Main Costs
Figures provided by survey participates on main costs indicate that 2- and 4-inch mains remain widely used in the gas utility industry, accounting for 95-98% of new main installations in developed areas.

LDCs reported wide use of plastic mains and provide the following as typical per foot installation costs: $6.80-24.50 for 2-inch; $13–29 for 3-inch; $15-33 for 4-inch; and $40-54 for 6-inch.

While most recipients indicated they no longer used steel mains for new installations, others provided the following as costs for protected steel main installations: 2-inch, $5.75-21; 3-inch, $16-26; 4-inch, $19.50-23; and 6-inch, $15.80-66.

Steel, Cast Iron Replacement
Survey figures indicate that 67% of participants have replacement programs in progress to remove unprotected steel and cast iron in existing system. Although 15% of survey respondents reported no cast iron or unprotected steel, those reporting cast iron or unprotected steel in existing systems said they traditionally relied on leak history, location and pipe maintenance and repair history to select mains and service lines for replacement.

Only 3% of survey recipients indicated they had not yet started a long-term program to replace bare steel and cast iron.

Xcel Energy has had an Accelerated Main Replacement Program (AMRP) in place since 2008. According to the Xcel website, under the AMRP, 684 miles of cast iron, bare steel and PVC distribution mains will be removed from the system.

In 2012, the company plans to replace 25,000 feet of PVC mains, 104,000 feet of cast iron, and 14,000 feet of bare steel.

Columbus Gas of Ohio has a $2 billion, 25-year program under way to replace bare steel and cast iron distribution pipe in its system. According to the company website, $120 million a year is spent replacing main lines and service lines and another $34 million a year operating and maintaining these lines.

Integrity Management
A significant number of survey respondents said they had committed a considerable resources to implement and meet the Distribution Integrity Management Program (DIMP) requirements. The following were the most cited as contributing to the cost for the LDC: Additional reporting and tracking burdens, damage recording by type and increased construction supervision and labor. Several LDCs also included the cost of DIMP plan development tools.

Finding/Repair Costs
Once again, the respondents consistently cited leak location – street vs. lawn – as driving the finding and repairing cost of leaky mains. And 52% of survey respondents gave location as a major cost factor. Those giving finding and repair costs per occurrence, regardless of size, placed costs between $395 and $3,100.

A utility in South Dakota with 300,000 gas customers gave $1,000 as its average cost for and repairing leaky mains, while a California-based utility serving 1,010,000 customers provided the following as its average cost for finding and repairing leaky mains: 2- to 8-inch, $390 and 12- to 24-inch, $1,125.

Pipeline Incidents
With the vast majority of the network underground, pipelines are vulnerable to dig-ins by third-party excavators. Though excavator damage is easily preventable, it remains a major cause of pipeline incidents involving facilities and injuries. Excavation damage was the most cited cause of damage likely to affect gas pipeline integrity by the LDCs surveyed.

According to PHMSA, one-third of all distribution failures are caused by excavation damage and it is a leading cause of pipeline incidents involving fatalities and injuries.

Work By Contractors
A sizeable number of recipients said they continue to rely on contractors to provide a major portion of new distribution construction to install gas utilities. While about 10% indicated they do not rely on contractors at all, 80% reported relying on contactors to carry out 85-100% of all new construction on projects. The remainder, relying on contractors, said they performed 25- 75% of this work.

Editor’s Note:
PHMSA Cast Iron Pipe Regulations:
Gas – 49 CFR Part 192 – 192.275, 192.369, 192.373, 192.487, 192.489, 192.557, 192,753, and 192.755; Liquid – 49 CFR Part 195 – not allowed.

Cast iron main data was obtained from PHMSA database and NAPSR survey.

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