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Pipeline Investments Dogged by Changing Regulations, On-and-off Tariffs, Protesters and Fear of Redundancy

Developers and marketers of natural gas, crude oil and natural gas liquids pipeline projects face a unique set of factors that directly affect the issue of investment risk, including the fear of building a late project that ultimately proves to be unprofitable.

Orlando Alvarez, CEO of BP Energy Co., told attendees of the Energy Bar Association's annual meeting and conference in Washington, DC, on Monday that he believes the Dodd-Frank Wall Street Reform and Consumer Protection Act is the top factor facing pipeline project backers because of the uncertainty the law creates for pipelines and their customers.

"A lot of banks have exited the business, and other players have as well," Alvarez said. "That creates higher costs for those that remain. There's also a plethora of rules in which you always want to be compliant. There are still things working within Dodd-Frank, change that's in the works today. That uncertainty continues to create higher costs."

Alvarez said another factor affecting investment risk involve "recent requests of the federal government to change the rules of the game when it comes to competitive power markets." Case in point, the Department of Energy's notice of proposed rulemaking -- aka the DOE NOPR, submitted last September -- which proposed changing the nation's grid reliability and resilience policies.

"Whether it is the DOE NOPR or subsidies to coal and nuclear power...that would change the way the market works," Alvarez said. "We want competitive markets [and] fuel neutrality so that the market will work."

Rockies Express Pipeline LLC President Crystal Heter said tax law and new tariffs on steel and aluminum imports were two factors directly affecting investment risk in interstate natural gas pipeline projects.

"Both are moving very quickly, and perhaps too quickly at this point, to allow the well-reasoned decision-making that is required, and for assessment of the differences in how that's treated amongst different entities," Heter said.

Andrew Black, CEO of the Association of Oil Pipe Lines (AOPL), said pipeline marketers and developers suffered "two significant losses" at the hands of FERC. The first occurred in December 2015 when the Federal Energy Regulatory Commission changed the methodology behind its rate index process.

"FERC made two changes to its methodology that really changed the index," Black said. "Steel costs are going up and pipeline safety costs are going up. But you have an index that is only half of what we believe the cost change experience in oil pipelines allows it."

Meanwhile, Black said the second "loss" took place two months ago, when the Commission ruled it would no longer allow master limited partnership (MLP) interstate natural gas and oil pipelines to recover income tax allowances in cost of service rates.

"Any shipper in pipeline has to recognize now that the permitting process can take longer and it's going to be uncertain," Black said. "We talk about steel tariffs, but nobody in this room can have any idea whether there will be a tariff or a quota on steel."

Black cited recent surveying of the pipeline industry by RBN Energy LLC. The head of AOPL said RBN analysts had found that pipelines were not only "competing with each other and other modes for delivering fuels now, [they are also] competing for expansion projects.

"RBN has profiled that the fear from the Permian Basin is that you build the pipeline that becomes one pipeline too many," Black said. If that were to happen, a pipeline's "long-term contracts really aren't long-term any more, and maybe [they] shouldn't have made that decision [to build]. They're worried about overbuilding, and they have to factor that into their prices."

Horror Stories on Steel Tariffs

Despite last week's announcement that negotiations over the Trump administration's proposal to levy a 25% tariff on steel imports had been extended for another 30 days, Black said the issue "is really affecting the decisions that pipeline operators and shippers have to make about projects.

"We're hearing anecdotes about foreign pipe makers unwilling to bid in response to requests by American companies for pipeline projects. We're hearing about pipeline operators not knowing what the price of their steel in going to be. We've had a couple of exemptions for certain countries for, what, two months? That helps reduce Wall Street volatility, but that does nothing to help a pipeline operator or a shipper considering signing up for pipeline capacity...

"We have specialty steel products in our pipeline process that aren't made in the United States. We have a lot of American [pipe] makers that have exited the pipeline steel market for other steel products that are more consistent and have better returns. Pipeline steel is a niche market. It's high-cost, it's cyclical, and a lot of American firms have abandoned that to move to those other markets. So now anybody who goes forward on a pipeline project has to factor in a lot more risk."

A 'Well-Funded Minority'

Black added that, when given the chance to work, the existing federal and state permitting process for pipelines provides a balance between infrastructure expansion and environmental protection.

"Pipelines, liquid and gas, can generally meet the environmental standards that are a part of these reviews," Black said. "Our great poster child of a long-delayed pipeline, Keystone XL, satisfied the environmental reviews, even conducted by President Obama's State Department. The EIS showed that compared to alternatives, pipelines had fewer incidents, releases and carbon emissions."

Pipeline developers and marketers want a permitting process that is "fair, timely and has decisions made on the merits," according to Black.

"There are improvements that are possible in regulatory reform. We've asked for a consistent application of the rules, for the review to stay within scope and for agencies to coordinate with each other. There have been some improvements, including at the State Department, which has cross-border [authority].

"Right now, we don't need major changes. We just need government policymakers to be able withstand the pressure from that well-funded, well-organized minority that is trying to stop people from using fossil fuels in their daily lives, and trying to stop pipelines from being approved. If they can stick to what they're asked to look at in these reviews of pipelines, even amidst pressure, we will be able to deliver what Americans need."

But Heter countered that organized opposition to pipelines isn't going away.

"It will always be there, even when we're allowed to follow the policies and requirements as they're laid forth," Heter said. "The more that pipeline operators perform well, execute properly, create partnerships with their community, start with early outreach and prove that the construction can be handled appropriately -- that may alleviate some of the pressure."

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