At the end of 2016, Lakeland, CO-based BTU Analytics LLC published a fourth-quarter natural gas outlook for the Northeast that was dour in the picture it painted of a region crying out for new and enhanced pipeline projects.
Production growth from the Marcellus and Utica shale plays was closely tied to what the North American energy research and consulting firm noted are the eventual completion of major incremental pipeline takeaway projects since capacity in the region is constrained. One of BTU Analytic’s observations was that federal approvals for projects of late don’t guarantee that critical projects get built.
“The recent reality of pipeline project development has been one of regulatory and legal delays,” the quarterly report noted, citing many of the obstacles as coming from “well-organized, grassroots environmental activist groups that aim to keep fossil fuels in the ground. Historically, when a project received a Certificate of Public Convenience and Necessity from the Federal Energy Regulatory Commission [FERC], it was a greenlight for the project, essentially eliminating the risk [it] would not be completed.”
Today, all that appears to be changed, and even with the advent of the Trump administration, pipeline infrastructure projects will not be a slam dunk, according to BTU Analytics and other industry observers. What BTU analysts call “material risk” for project delays at the state level remains. “If anything, with the election of Mr. Trump, there may be more concerted effort on the part of the grassroots opposition to impede the process.”
Shortly after the new year, the Natural Resources Defense Council (NRDC), essentially declared it was prepared to go to war against the administration’s long-stated goal of rolling back regulations across the board. Noting that Trump supporters have promised “an assault” on environmental regulations, NRDC President Rhea Suh told news media that “it is time to stand up and fight,” given the new administration’s priority goals.
The irony is thick here, given the fact that expectations nationally for an infrastructure building spree were at record-high levels, regardless of who won the presidential election. Both candidates touted big buildout plans, and coupled with Trump’s commitment to roll back federal regulations, appetites for getting more pipelines in the ground have been satiated.
BTU Analytics examined a half-dozen pipeline projects for moving vast new Utica and Marcellus Shale gas supplies – which are projected to be the dominant U.S. production areas for several decades – to expanded markets, assuming that only one of them will get built from each of three regions: Midwest, Northeast and Atlantic Seaboard. All six projects have projected in-service dates between mid-2017 and late 2019, but the analysis only assumed three successes – two starting in November 2018 and a third in late 2020.
Given the collective multibillions of dollars involved in the projects – Rover, Nexus, Atlantic Coast, Mountain Valley, Atlantic Sunrise and PennEast – the research and consulting firm’s scenario is decidedly more pessimistic than the outlook for the oil and natural gas sector presented earlier this year as Trump took office.
With the new administration and Congress, American Petroleum Institute (API) CEO Jack Gerard said the nation has a chance to “change the conversation when it comes to energy policy.” In a speech, Gerard called it a “once-in-a-generation” opportunity to find solutions for most of today’s pressing issues, and building new pipeline infrastructure can be part of that, creating more middle-class jobs and ensuring affordable, sustainable energy for consumers, while enhancing national security.
Rover Pipeline LLC and Nexus Gas Transmission are Midwest projects for bringing Marcellus and Utica supplies to markets in Michigan, Eastern Canada and other areas where Western Canadian supplies are drying up. At an estimated $4.2 billion, Rover bids to carry up to 3.25 Bcf/d from processing plants in West Virginia, eastern Ohio and western Pennsylvania, about two-thirds of the supplies moving to a Midwest hub in Ohio and the other third headed to Michigan markets. The 255-mile, 1.5 Bcf/d capacity Nexus project is targeting similar supplies in Ohio, Michigan, Chicago and Ontario, Canada, stretching from far eastern Ohio to an interconnection between Ann Arbor and Detroit.
The other projects are similar, being regional in scope, but national in their economic ramifications. They represent joint ventures among leading national energy companies – Energy Transfer Partners (ETP) and others are sponsoring Rover; Spectra Energy (now part of Enbridge) and DTE Energy support Nexus; units of Dominion Resources, Duke Energy, Piedmont Natural Gas and Southern Company Gas are backing Atlantic Coast Pipeline; for Mountain Valley, a joint venture of EQT Midstream Partners, LP, NextEra US Gas Assets LLC, Con Edison Gas Midstream LLC, WGL Midstream, and RGC Midstream LLC is sponsoring the project in which EQT Midstream will operate the pipeline and own a significant interest in the joint venture; Williams Companies’ Transco pipeline company is sponsoring Atlantic Sunrise; and for PennEast there are five companies, including units of Spectra (Enbridge), Southern Company and UGI Corp.
“The low price of natural gas has fueled growth in the industrial sector, attracting petrochemical manufacturing and jobs back to our shores and reducing the price of goods,” said Kathryn Clay, vice president for policy at the American Gas Association (AGA). “At the distribution level, state and local governments are working to bring the benefits of natural gas to their constituents and 39 states have adopted or considered innovative expansion proposals for natural gas distribution pipeline systems.”
The four AGA member companies with a stake in the Atlantic Coast Pipeline (ACP) project contend they are responding to a need for additional gas infrastructure “to better serve existing and growing customer demand, improve service reliability and allow for customer growth and economic development.” The ACP project would also improve gas supply for mid-Atlantic markets, thereby promoting price stability and enhancing economic opportunity, the companies have argued before FERC.
Like its counterparts on the drawing board, this project will provide a new supply of natural gas for electric generation (to Duke Energy’s plants) and will serve growing customer needs of other distributors (Piedmont Natural Gas and Virginia Natural Gas), along with helping meet regional air emissions requirements.
Generally, Navigant Consulting’s Paul Moran offers an outlook for pipeline projects that is not bullish, even with the administration’s commitment to cutting back regulation, promoting U.S. energy independence and “making America great” again. An associate director based in Houston, Moran points to the realities of state and local rules, and pushback; the prospect for heavy litigation by environmental groups to attempts to significantly roll back regulations; and the ever-present dampened global economic landscape, generally, and the depressed global energy prices.
As a major researcher and consultant in the energy space, Navigant is preparing for more of the same in the Trump administration: More merger/acquisition (M&A) activity; more investment community interest for pipeline and other energy sector infrastructure projects; more interest in streamlining LNG export projects, but correspondingly, a continued dampened global energy market as driven by China’s slower growth rate, which has been cut in half.
The Northeast is an important microcosm of Moran’s views. Many gas pipeline projects have been delayed or canceled amid state and local opposition that centers on electric utilities being unable to recover in rates long-term pipeline capacity commitments that the pipelines need to have viable projects.
One of the proposed new interstate pipes to tap more of the vast supply of natural gas from Marcellus and Utica shale plays, the Mountain Valley Pipeline (MVP) is expected to provide up to 2 million dth/d of firm transmission capacity to markets in the Mid- and South-Atlantic regions.
As planned, the pipeline will be up to 42 inches in diameter requiring an approximate 50-foot permanent easement (with a 125-foot temporary easement during construction). The project will require three compressor stations in West Virginia.
“Continued development of the Marcellus and Utica plays in the East is the main driver of growth in total U.S. shale production and the main source of total U.S. dry natural gas production,” the Energy Information Administration (EIA) has reported.
Last year in the Northeast, developers suspended or canceled pipeline projects due to what Moran called “the heavy-duty level of opposition at both the regulatory and court levels. Even with an ambitious new administration focused on infrastructure development, local issues will play out more than we have ever seen them and it will be difficult for the federal level to change it because of the state-level conflicts.”
Moran cited electric industry restructuring as a primary barrier to new energy pipeline infrastructure getting built. In the deregulated power market, gas-fired generators can’t pass through the cost of securing firm capacity on interstate supply pipelines; it makes them uncompetitive to other sources of power.
“This is especially true for gas-fired peaking plants,” Moran said. Federal-level action is needed to resolve this situation and Moran does not see that necessarily coming from Congress, even with President Trump. Several approvals will be required from various state agencies as well as FERC for the $1.1 billion, 120-mile PennEast Pipeline from northeastern Pennsylvania to Mercer County in central New Jersey. Backers in early 2017 were expecting to begin construction in 2018 and take about seven months to complete it.
While the combination of Trump’s emphasis on infrastructure and the vast new oil and gas supplies unlocked by the shale revolution bode well for the pipeline sector, the head of the Interstate Natural Gas Association of America (INGAA) warns that active opposition to fossil fuel development remains a real cause for concern in the months and years ahead.
INGAA CEO Don Santa said he thinks that at the federal level the environment is likely to be “a more constructive climate in terms of getting the permits and authorizations needed to build energy infrastructure.” However, many of the issues slowing down infrastructure projects have not been centered as much on federal regulators as they have been the result of increasingly active opposition groups.
“I would anticipate those groups will remain just as committed and active as they have been,” Santa said. “We should not kid ourselves that the opposition is going to go away, even with a more favorable climate at the federal level.”
There are key differences between liquid and gaseous fuel pipelines in terms of the potential stumbling blocks at state and local levels, Santa noted, adding that there has been some fairly robust infrastructure buildout spurred by the shale revolution.
“The fact that natural gas is being produced in many places that historically have not been sources of production has required a lot of re-plumbing of the pipeline infrastructure to make it more suitable to increased production,” he said, and as a result, existing infrastructure has been redirected with new infrastructure built.
“The level of opposition and protests to pipelines has slowed new development somewhat, so if anything is pent-up, it is the fact that some projects contemplated for building in 2016-17 are now being looked on as 2017-18 projects, and a more favorable regulatory environment at the federal level can contribute to those projects now [eventually] getting built,” Santa said.
Earlier this year, the Industrial Energy Consumers of America (IECA) intervened in support of eight stalled gas pipeline projects at FERC, urging the regulators to “accelerate and streamline” their approvals. The IECA, representing the largest U.S. energy users in all the major industries, noted that billions of dollars are at stake.
At the same time, FERC staff released a long-awaited final environmental impact statement (FEIS) for Williams Partners’ Atlantic Sunrise project, which aims to add compression and looping of the Transco Leidy pipeline in Pennsylvania along with a greenfield pipeline segment, referred to as the Central Penn Line, connecting the northeastern Marcellus-producing region to the Transco mainline near Station 195 in southeastern Pennsylvania. It also intends to enhance and modify existing Transco facilities to allow gas to flow bi-directionally.
Houston-based Cabot Oil & Gas Corp. had previously committed to move 850,000 MMBtu/d on the project in support of previously announced gas sales agreements, but with the release of the FEIS, Cabot increased its capacity commitment to 1 Bcf/d, based on an added 150,000 MMBtu/d in support of another sales agreement. The level of confidence among producers and the investment community is underscored in these long-term contractual agreements, according to Santa and others.
At the start of the year, it was estimated that Atlantic Sunrise could be in full service by mid-2018, given approval in the first half of 2017. Backers indicated construction could begin in mid-2017 with partial in-service during the second half of the year, but they urged quick final action by FERC to keep the project and its 100% capacity commitments on track.
Moran indicated that another area in which pipeline infrastructure will be expanding is the Midcontinent region, particularly to support various Gulf Coast LNG projects that provide takeaway capacity from the SCOOP and STACK shale plays in Oklahoma. In this region, the issues are all focused on the more traditional FERC pipeline approval processes, rather than state and local impediments.
“It is just a matter of demonstrating market support for a project, and producers’ willingness to enter into long-term contracts,” he said. “The key here is demonstrating adequate market support for given pipelines. If the government fast-tracks approvals for LNG facilities, that might help propel infrastructure development to serve those facilities. That is one area where infrastructure could be enabled.
“Another key is minimizing legislation that favors coal over gas or renewables for power-generation development. Scaling back of coal is already underway, and even with turning back environmental regulation, this doesn’t mean a turnaround for coal. Power companies are taking steps to develop alternative sources.”
The financial community and institutional investors are well-versed on regulatory and market developments in the energy sector, and they keep up with the potential this creates for infrastructure generally and for pipeline construction projects in particular. The $3.8 billion, 1,200-mile Dakota Access Pipeline LLC had no trouble lining up financing and building 99.9% of the project in the second half of 2016, only to be sidetracked by the Obama administration’s 11th-hour political delay over a water crossing opposed by a nearby Sioux tribe in south-central North Dakota.
Could the last-minute political interference have a wider spread chilling effect? Santa notes as a liquids pipeline, Dakota Access goes through a different process than do gas pipelines at FERC.
“Political intervention in its process at the very last minute is disturbing,” he said. “The real question is whether Dakota Access is a one-off, or does it signal a trend. I would certainly think President Trump with his interest in infrastructure and advancing domestic energy resources means that DAPL probably will be a one-off, with the caveat that the activist groups will still be very active [in the streets and courts].”
Litigation by environmental and other activist groups will remain a part of the infrastructure project landscape, Santa indicated.
“Without a friendly regulatory environment in Washington, the way for the opposition groups to stay active will be to protest and litigate,” he said. Santa and Moran think the investment community remains bullish on pipeline projects.
“The pipeline sector is a very attractive place for investors to place their capital,” Moran said. “It has assets with long lives, supported by long-term, 15- and 20-year contracts. That is a solid investment. Financing is not really an issue; the pipeline space is where capital is ready to be deployed.”
Concurring, Santa believes the investment community sees pipelines as a “pretty attractive sector,” typically backed by sets of long-term contracts providing a very steady flow of income. “I think the investment community was somewhat apprehensive about the delays caused by protests and litigation, but the shift to a more favorable regulatory climate at the federal level might give them more confidence, and overall pipeline infrastructure has been seen as pretty positive.”
API’s Gerard sees big money investments ultimately at stake. “The United States is now the world’s leading producer of oil, natural gas and refined products, but we have to be able to move that product efficiently,” he said. “Recent studies have shown that there is a real potential $1.1 trillion in private sector investments just building new energy infrastructure in the U.S. during the next dozen years. To put that in perspective, it is three times larger than the highway bill passed by Congress in 2015.
“If you add the energy infrastructure to other infrastructure investments, which is all private sector dollars, the U.S. has a huge opportunity to do what the American people (voters) told us they wanted. Infrastructure is a priority, and I think President Trump is already focused on it. I am hopeful he will turn his attention very quickly to those projects and immediately put to work thousands of people.”
Richard Nemec is P&GJ’s correspondent based in Los Angeles. He can be reached at email@example.com.