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Producer Share of Offshore Capacity Grows, Study Says

Producer Share of Offshore Capacity Grows, Study Says

Producer-owned pipeline capacity in the Gulf of Mexico has grown sharply over the past decade while the traditional interstate pipeline's share of the offshore market is poised for a downturn, according to a pipeline-commissioned study released last week. Producers bristled at the study because it inferred, they said, that greater rate and tariff flexibility from FERC was the only reason for their success in the offshore.

The study, which was conducted by Foster Associates for the INGAA Foundation, found that the producer-owned share of new pipeline construction more than doubled in the Gulf during the past eight years, to 76% of 4,000 new miles of pipe built since 1990 compared to a previous share of 32%. In contrast, traditional pipelines, which the study says have been "handicapped" by inflexible rates and tariffs set in earlier rate cases, built 13% of the new offshore capacity since 1990 compared to 64% prior to that.

INGAA President Jerald Halvorsen blamed an unfavorable offshore regulatory policy at FERC, as opposed to pipeline economics, for driving much of the current development in the Gulf, resulting in traditional pipelines getting a "shrinking piece of the capacity pie" on the Outer Continental Shelf (OCS).

Interstate pipelines and producers presently own about an equal share of the existing 14,112-mile offshore pipeline network, 48% and 45% respectively. But the balance of ownership is expected to tilt in favor of producers in the future, according to the study. Of the 1,512 miles of new offshore pipeline planned, major oil/gas producers and independent producers will own 70% while traditional interstate pipelines are expected to own only 22%, it noted.

Moreover, INGAA projected the natural gas industry will require the construction of an additional 7,400 miles of pipeline capacity at an estimated $7 billion over the next 15 years to meet growing production in the Gulf. This is in addition to the 4,000 miles ($3.5 billion) of new offshore pipe built since 1990, and the 1,512 miles ($1.6 billion) of offshore project proposals currently pending at FERC.

"It's true that the traditional certificated pipeline company is losing its piece of the [offshore] pie, but it's not losing it because it isn't able to apply for the same types of certificates that producers can apply for," countered Nick Bush, president of the Natural Gas Supply Association (NGSA). The key reason is that producers "can build [these pipelines] more economically and run them more efficiently" than the traditional pipelines, he contends.

"Clearly, producers are building more transmission systems in the offshore Gulf today because they feel they can do it at a lower cost than the traditional certificated pipeline company can," Bush told NGI. "The contention that producer-built pipelines somehow have advantages unable to be obtained by traditional certificated [pipelines] is simply wrong." Any pipeline being proposed, regardless of who will build it, "has the same ability to get the same types of conditions that have been issued recently to some of the producer pipeline," he said.

"Producers have a lot of expertise in the Gulf," responded Anne Roland, a spokeswoman for the INGAA Foundation. "We're not in any way implying that producers aren't doing a [good] job. The issue is whether the current regulatory regime is appropriate."

Bush believes INGAA will use the study as an "advocacy piece" to convince FERC to forego regulating the offshore under the Natural Gas Act (NGA) in favor of a lighter handed approach under the Outer Continental Shelf Lands Act (OCSLA), a move which the producers oppose. "We think that the current regulatory structure [the NGA] is more than adequate, and we think our actions demonstrate it," he said.

Susan Parker

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