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Piecemeal Is the Peaceful Way to Gas Interchangeability

Jacob Dweck, a lawyer and principal with the LNG Solutions Group, would rather not describe gas quality/interchangeability issues as a "hurdle" for liquefied natural gas (LNG) developers, utilities and end-users, but rather as an opportunity.

Beyond the safety concerns related to gas interchangeability, at the heart of the matter is "who pays what costs and to meet what governmental requirements," Dweck told attendees at Platts second annual Gas Interchangeability and Quality Forum in Houston Monday. Unlike the battles over LNG regasification terminal sitings, some of which continue to rage, gas quality/interchangeability standards is a debate confined to the industry and its commercial constituents. Landowners and citizens at large are generally not involved, so the industry should be able to work its problems out on its own.

"This is unlike siting of terminals...This offers the opportunity for intra-industry discussion," said Dweck. If not, he cautioned, regulatory uncertainty and litigation at state regulatory commissions and at the FERC will prevail, along with the costs and chaos that these entail.

Ed Murrell, FERC deputy director of policy and rulemaking in the office of energy markets and reliability, concurred. "If you bring it to FERC, the pain and suffering will probably continue for some time," he said of gas quality and interchangeability standards development. As things stand now, the industry should let FERC's June policy statement on quality/interchangeability (see Daily GPI, June 16) be its guide, Murrell said.

The policy statement contains five principles for addressing gas quality/interchangeability disputes. In their development FERC was conscious of the need for operational flexibility to allow as much gas to come into the market as possible. There are still concerns about safety and reliability winding their way through FERC, Murrell said, and the Commission is conscious of the fact that each pipeline tariff is unique and has its own set of operating circumstances.

One area for concern is is the interconnectedness of the pipeline grid and the need for interconnecting pipelines' gas quality standards to not be dramatically out of the range of each other. Such an instance would serve to fragment the gas market, causing some customers to pay artificially high prices, Murrell said. However, interconnection agreements between pipelines are not the place to articulate and impose quality/interchangeability standards, he said.

Interconnection agreements are not filed at FERC and, hence, are not part of the public record. This gets at the heart of why FERC said for its first policy statement principle that only quality/interchangeability specifications contained in Commission-approved tariffs can be enforced.

Murrell said that one of the questions he's asked most often about FERC's policy statement is why it does not prescribe a national standard for quality/interchangeability. He said this is because historically, different regions of the country have relied on different basins for their gas supply, with production from each basin having its own particular characteristics. While this is no longer true to the extent it once was, regional transportation and end-use infrastructure has developed over the years around the expectation of gas of a certain quality. Murrell said that while FERC's case-by-case approach to resolving quality/interchangeability disputes is more costly and time consuming than a blanket rule would be, the process provides for "factual decisions" in a one-size-does-not-fit-all environment.

Further, he cautioned that the industry and regulators need to be conscious of the fact that the United States competes in a global market for LNG and can't afford to be too picky when European markets have proven they're willing to outbid the U.S., and Japan is capable of accepting much "hotter" cargoes than the States, for instance.

But mandating wholesale downstream modifications and retrofits to facilitate quality/interchangeability flexibility for the sake of LNG isn't the answer either, Murrell said. High-cost infrastructure modifications to be paid by commercial/industrial end-users or higher commodity prices stemming from modifications or processing mandates will spur demand destruction and drive some commercial and industrial users overseas to cheaper markets. And that's even worse for the industry than hashing out its quality/interchangeability differences case by case.

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