Despite the desperate need for natural gas currently, long-haulpipeline construction is headed for a temporary lull over the nextfive years, according to Thomas Howard, director of strategicproducts at PIRA Energy Group, a New York City-based energyconsulting firm.

Furthermore, when long-haul pipeline construction does resume,it likely will be supply driven rather than demand driven, he saidin announcing PIRA’s new study, “Price of Reliability: The Valueand Strategy of Gas Transportation.” The study is aregion-by-region analysis of natural gas infrastructure acrossNorth America.

Thirty trillion cubic feet of gas may seem like a lot of demandto serve by 2015, and power generation growth has been acaptivating topic of late, but what will be even more amazing overthe next decade are the supply changes required to meet thatmarket, said Howard. “Demand tends to be more predictable; it tendsto be in the same place as it was last year. But supply is changingdramatically and the geographic pattern is changing dramatically.Our forecasts have that continuing in the next decade just as theactual changes in the past decade have been by supply side changes.

“After a quiet period [for pipe construction], the biggestchange will be Alaska; it just sticks out like a sore thumb,” saidHoward. There will be some demand-side pipeline expansions over thenext decade. “It’s just that they will be in the minority. The bestexamples are in the South Atlantic where they are going to Floridaor up Sonat or Transco. Except for the South Atlantic, almosteverything else going on is supply driven.”

There will be a temporary lull in major pipeline construction,however, he said. “It looks like to balance supply and demand in2005 won’t take very much pipeline that isn’t already in place [nowthat] Alliance is up and running. After Alliance there aren’t manyreasons to build many 500-mile pipelines.”

Many of the minor expansions will serve the West Coast, and forgood reason. The West probably will get at least three minorexpansions in the next five years on Kern River, Northwest Pipelineand PG&E Gas Transmission Northwest, he said. But surprisinglyfew market participants are stepping up to the plate to cureCalifornia’s gas supply woes. One example is El Paso’s recentlypurchased All-America Pipeline. “It’s a lot of pipe all the way toCalifornia but they plan to integrate that system without adding acubic foot of capacity. Why? I don’t think there’s anybody signingup for it in spite of the price run-ups and the rather dramaticbasis shifts this year,” he said.

Howard claims there has been a disconnect in the gas marketbetween the need for service and the service being provided. Therisks apparently have been too great and have deterred theinvestment required to serve the market. The only other expansioncurrently planned to California is another oil conversion pipe,Questar’s Southern Trails project. Kern River may add to itsexpansion plans, said Howard, because the value of Rocky Mountainsupply is becoming more apparent. “I think that is a route thatwill be very popular.”

The fallout from the current California market crisis also couldlead to some regulatory changes that may prompt long-haul pipelinerecontracting, he said. “They could affect the terms of service onthe two major utilities. I think they might unbundle SoCalGas inthe way that PG&E was unbundled. Years ago the CPUC believed inspot markets and they believed that the players inside Californiashould get out of the interstate transportation business. PG&Eand SoCalGas have been decontracting their longhaul pipelinecapacity ever since. I think there may be some pressure to reversethat, but not on the basis of price – on the basis of reliability.”

PIRA’s latest report, however, focuses on gas transportation inthe producing area. PIRA concludes that pipeline congestion fromSouth Texas to East Texas will increase, while pipeline congestionfrom the Gulf Coast to the Northeast U.S. will decrease. Pipelineexpansions from the Gulf Coast to South Atlantic states will beneeded, despite growing supplies from alternative sources (LNG).Along each of these routes, changes in throughput can significantlyaffect the value of gas transportation. For more information onthis study or PIRA Energy Group, please call Jeff Steele at (212)686-6808 (jsteele@pira.com).

Rocco Canonica

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