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Gas Pipeline Development Facing Host of Challenges

Developing new natural gas pipeline infrastructure has become more difficult, in part due to basis compression, and the problem is not likely to end any time soon, according to an ICF International economist. In addition, the number of groups seeking to block gas pipeline projects has been steadily growing, and are likely to get more radical in the years ahead.

Traditionally, the price signal to build infrastructure has been when the basis differential is larger than the cost of the incremental capacity, but it's not as cut and dried anymore, said ICF's Bruce Henning, vice president of energy regulatory and market analysis. He spoke at the Energy Bar Association Mid-Year conference on Thursday in Washington, DC.

"Many more pipelines are receiving gas at multiple points on the system that's flowing in different directions, so the price signals are a little more difficult, and people have a lot harder time interpreting when a project is economic."

Basis compression, which is the difference between the market price for gas when it is put into a pipeline and the market price for gas when it is withdrawn from the pipeline, is most prevalent in the Midwest and Rockies, Henning said. The problem does not exist in regions where producers are underwriting new pipeline projects, such as the Marcellus Shale basin.

"It's a fairly complicated problem. I don't see a solution to it in the near term," he said.

Other challenges facing gas pipelines are getting shippers to sign up for firm transportation contracts to justify the capital expenditure outlay to construct new facilities, said Sheila Tweed, vice president and deputy general counsel for Kinder Morgan Energy Partners. She said that in the power sector, not all of the regions are provided clear incentives to commit to firm transportation.

Tweed said she expects there to be "some challenges" in New England this winter with respect to the coordination of natural gas pipelines and power generators.

She expressed concern about the increasing number of rehearing requests, appeals, and stay requests in the courts or in the Federal Energy Regulatory Commission (FERC) by landowners and environmental groups trying to stop pipeline and liquefied natural gas (LNG) facilities.

"I see [this] as a changing point for interstate pipelines and their views and their approach to certificating projects," Tweed said. "Definitely there are interests that need to be considered beyond construction. It's a challenge that we have to deal with and address. The playing field is changing. It's going to require innovation in protecting the environment" by pipelines.

"I think that the environmental community as a whole with the increased level of extreme weather and [other] things that are happening is going to get more radical" in opposing energy projects, warned Dave Hamilton, director of clean energy for the Sierra Club.

"We've been very strong and very vocal about the Keystone Pipeline...We've been opposing LNG export terminals because we don't have the answers about what they will do," he said. Earlier this year, Sierra asked FERC to consider the "indirect effects" of increased shale gas development on the environment that may occur as a result of a new export liquefaction facility. The Commission rejected the environmental group's plea (see NGI, July 30).

Sierra's position is "until we can come up with a plan that will address future environmental risks...we're probably going to stand in the way" of fossil energy projects.

FERC Commissioner Tony Clark emphasized the need to base new infrastructure on "true economic signals" rather than "political signals." At FERC, "we regulators must resist the temptation to pick favorites."

The Commission should make decisions "on a record and promote due process," and "to the greatest degree possible, promote certainty and avoid surprises. Uncertainty is the bane of investment," Clark said. "When all else fails, make a timely decision."

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