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FERC's Kelly: Without Storage Surplus Northeast Could Face Gas Rationing

The surplus of gas in storage this winter will serve as a significant safety net for gas markets if there are colder-than-normal temperatures. Without the surplus, gas rationing might be required in the Northeast during a cold snap, according to FERC Commissioner Suedeen Kelly.

"It's no secret that if the last winter had been a cold winter there is a very high likelihood that there would have been rationing of gas in the Northeast. [The elimination of] a lot of production in the Gulf after [Hurricanes Rita and] Katrina left us in a very precarious situation," Kelly noted during a conference with the media Friday sponsored by the Center for Liquefied Natural Gas (CLNG).

Bill Cooper, executive director for CLNG, said the industry has tried to do its part to increase natural gas infrastructure, but opposition from the states, local landowners and environmental groups has stymied multiple pipeline and liquefied natural gas (LNG) projects. He noted that KeySpan and Duke Energy's Islander East pipeline project, which would serve demand on Long Island, has "been on the board now for at least five or six years" but still lacks a single water permit from the state of Connecticut in order to proceed to construction (see Daily GPI, Oct. 9).

"The Millennium [pipeline] project...that was supposed to cross the Hudson River has been proposed for at least that same time period as well," he noted. A scaled-down version that does not cross the Hudson River has been proposed in its place (see Daily GPI, Oct. 16). There also are several LNG projects that could have started construction had there not been something standing in the way. The Weaver's Cove LNG project in Fall River, MA, was approved by FERC in June 2005 but has been blocked by a federal law preventing the demolition of a bridge. KeySpan's LNG import terminal planned for Providence, RI, was rejected by FERC for safety reasons.

Meanwhile, two offshore Boston LNG terminals are awaiting Coast Guard approval, and several other LNG projects in Maine, in Long Island Sound and in Logan Township, NJ, are making their way through the regulatory or legal process.

"There's a laundry list of projects that the industry is trying to advance, all to meet the growing demand of the consumer base...," said Cooper. "But we have had trouble working through the regulatory process, not necessarily at the federal level but more so at the state level. We need to get the local communities to understand and appreciate why they need the infrastructure to get the products that they want."

Kelly said a lot of people simply don't understand the underlying tight supply-demand situation and how precarious it will continue to be. "In the winter of 2004 we came very close to having to ration gas," she said. "There was a situation where there was a question about whether the gas should go into the heating or the electricity [market in New England].

"I don't know that people are truly aware of how tight the situation [still] is, and of how that lack of supply in response to increasing demand also impacts the price," she said. "The price increases have been huge. Right now because of the gas in storage we are lucky to see a reprieve from those high gas prices, but unless the supply continues, like it is now, to be in excess of demand -- once that storage is drawn down -- it is quite likely that we will see those high prices again and the volatility of prices increase."

The problem is mainly with the availability of supply, said Kelly. In the long run the only way the country is going to boost supply is through more LNG imports. Cooper noted earlier in the conference that the Energy Information Administration projects a 21% gap between domestic gas production in United States in 2030 and U.S. demand for natural gas. With Canadian production flat to declining over the long term as well, LNG is the only answer, the panelists said.

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