The permitting process for oil and gas pipelines is getting longer, which could harm other sectors of the economy, such as manufacturing, according to testimony before the Senate Committee on Energy and Natural Resources on Tuesday.

Meanwhile, an official with an environmental organization said he believes the natural gas market needs to evolve and would be better served by having pipeline contracts based on deliverability, rather than firm transportation capacity.

Pipeline approvals taking longer

Hours after the Senate passed S 2276, also known as the SAFE PIPES Act of 2016, and sent it to President Obama for his signature (see related story), Andrew Black, president of the Association of Oil Pipe Lines, testified that the permitting process for liquids pipelines has gradually become longer, often taking a period of several years. Despite this, more than 20,000 miles of new pipelines have been built within the last decade.

"Liquid pipelines are sited under state laws, and state processes have been lengthened years beyond what they should," Black said. "For federal issues, we need to go through federal land agencies if we pass federal lands or if we need construction-related environmental permits.

"In many cases we are able to get through those processes, but it's taking longer. That process adds to the cost of the projects, and those costs can be passed on to the consuming public."

But Black lauded the passage of S 2276 and said one of the most important aspects of the bill to the pipeline industry was the provision requiring quicker inspection results from the Department of Transportation's (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA).

"Pipeline operators want to hear, for the purpose of improving safety, if a PHMSA inspector finds something on his or her visit," Black said. "Unfortunately, sometimes we had periods of one or two years for a safety inspector to tell the pipeline operator about those concerns. We're in the business of learning from each other and continually improving our pipeline safety programs, and we want that input quickly."

Jobs, manufacturers being hurt

Sean McGarvey, president of North America's Building Trades Unions, said the environmental activism that successfully blocked the controversial Keystone XL oil pipeline and has so far impeded progress of the Constitution Pipeline in New York State is short-sighted and harms jobs (see Shale DailyMay 16Jan. 7).

"These pipelines are the most technologically advanced, safest pipelines in the history of the world," McGarvey said. "In the case of the Constitution Pipeline, it got bogged down by local politics. There are very strong, anti-pipeline activist groups in New York. The bottom line is, when it comes to our natural resources...manufacturing comes about once we get [oil and gas] pipeline systems in place."

Although lawmakers on the Senate panel praised last week's announcement by Royal Dutch Shell plc that it will build an ethane cracker northwest of Pittsburgh (see Daily GPIJune 7), McGarvey said New York State shouldn't get too excited.

"They won't be able to take advantage of any of that," McGarvey said of the Empire State. "They don't have the infrastructure in place to transport oil and gas. On top of that, the skilled professionals that I represent -- men and women who've gone through three to five years of worth of training and 6,000-10,000 hours to be the safest, most productive work force in the world -- aren't getting the opportunity to ply their skills."

He added that the Department of Energy's Quadrennial Energy Review, which was released last year, reported the average median wage for a solar panel installer in the U.S. is about $16.01/hour, a figure much lower than those working in the oil and gas or petrochemical sectors (see Daily GPIApril 21, 2015).

"[Our workers] are being told that the green energy future is where we're going to need their skills," McGarvey said, adding that construction workers and their families are having a hard time "maintaining their place in the middle class. It has a devastating impact on them when they don't have the opportunity to go to work, and in some cases have to travel from their homes to places where work is available.

"[We need] a reasonable, rational policy in New York State and throughout the U.S. on energy, settling most of these differences and continuing the arguments where we need to have them."

Ross Eisenberg, vice president for energy and resources policy at the National Association of Manufacturers, said manufacturers' demand for oil and gas will increase substantially over the next 10 years. The demand for gas alone is expected to increase by 40% during that time frame, double the growth rate of the last decade.

"When pipeline access is not available, manufacturers suffer," Eisenberg said in written testimony. Conversely, "manufacturers benefit from pipeline construction and maintenance. As our pipeline network grows, so does manufacturing opportunity. For this reason, it is imperative that the oil and gas pipeline system keep pace with supply and demand growth."

Paul Parfomak, specialist in energy and infrastructure policy for the Congressional Research Service at the Library of Congress, testified that the public's perception over pipeline development is likely to continue, especially if the Constitution and Keystone XL pipelines are any indicator.

"Public perception of pipeline infrastructure has long been a consideration in pipeline development, but its importance seems to have intensified over the last several years," Parfomak said in his written remarks to the Senate panel. "Public concern about pipeline safety has prevented new pipeline siting in certain localities and increased development time and costs in others...Even where there is federal siting authority, state and community stakeholders retain many statutory and regulatory avenues to affect siting decisions."

EDF: Compensation scheme for pipelines needs to change

Jonathan Peress, air policy director for natural gas at the Environmental Defense Fund (EDF), said the natural gas market is currently completely based on bilateral contracts between pipelines and their customers for capacity. But he said capacity does not necessarily equal deliverability.

"What customers need is to get fuel delivered to them," Peress said. "And because that deliverability is not priced, and because pipelines are totally compensated based on capacity, we see inefficiencies within the way that the pipelines are operated."

Peress said EDF believes pipelines should earn premiums for providing enhanced deliverability and flexibility services, not just for capacity. Under that arrangement, "the market calls forth the right types and amounts of resources for customers to get gas when they need it.

"Customers don't need capacity; they need gas. There's a difference."

Peress said the current setup came about in the early- to mid-1990s, when FERC "prudently decided that they were going turn both the interstate transmission companies on the electric side and the interstate pipelines into common carriers and take them out of the supply business.

"Part of the deal that they struck was to come up with a compensation scheme that would keep them interested, engaged and investing capital. And that compensation scheme was based on the value of capacity. By and large, that compensation scheme and market design has been highly successful."

But according to Peress, that model doesn't work anymore. "At this point in time there's a need for that compensation scheme to evolve. Virtually every company currently has arrangements to buy firm capacity off of a pipeline. If they wanted to buy more firm capacity, they can invest their money and get more firm capacity. But they don't want to do that. What they want to do is enhance deliverability.

"Paying for capacity is not a cost-effective investment, because you're paying for that capacity every day of the year, 24/7, over the term of that contract, whether or not you use it. There needs to be a shift in the rate design so that as pipelines are incented to provide more flexible delivery services, they can earn and garner revenues from those services, which are actually the services that customers need. Capacity does not equal deliverability, and [the Federal Energy Regulatory Commission] understands this."