Shale's market eruption and regulatory responses to recent safety breaches have combined to put some strain on the U.S. natural gas pipeline industry's usually staid credit ratings, according to a report released Tuesday by Standard & Poor's Ratings Services (S&P).
Pipelines' historic recontracting risk has become a bigger issue, according to S&P analyst William Ferara's report, "US. Natural Gas Pipelines Are Coming Under Some Credit Pressure." The report said "changing natural gas supply dynamics" driven by the rapid run-up in shale gas production is what is adding to this risk.
Laying out the prospect that some pipelines could become "stranded assets," S&P's report said that most of the nation's large interstate pipelines are connected to conventional supply sources -- the Gulf of Mexico coast, Midcontinent region and Western Canada. However, shale gas is moving to change all of that.
"Because shale production is generally more economical than conventional gas supply sources, the dependency and corresponding transportation rates on other transportation routes and their intrinsic worth is beginning to suffer," S&P said. "In short, some pipelines could become 'stranded' assets."
The continuing low wholesale gas prices and narrowing basis spreads make the situation for pipelines that much more problematic, according to the rating agency's report. "Shale gas production is increasingly displacing higher-cost traditional gas production.
"Shale production is increasing from various basins, most notably the Haynesville, Eagle Ford, Marcellus, Fayetteville and Woodford basins, and have notably lower break-even cost structures than traditional gas supply regions ($3-4/MMBtu, compared to $5/MMBtu in traditional supply basins)."
The report also acknowledged that recent gas pipeline accidents, some deadly as in the case of the Pacific Gas and Electric Co. line through San Bruno, CA, have "caused nationwide concern" about operational failures in the usually forgotten, buried infrastructure. As a result, S&P said it is expecting greater federal and state oversight of the pipelines. There also will be an increase of integrity maintenance expenditures, S&P said, but it does not think they will go beyond "moderate" additions.
S&P said it continues to see the gas pipeline sector from a favorable credit perspective due to its stable cash flows. "However, changing natural gas supply dynamics are placing certain pipelines at competitive disadvantages that could lead to lower recontracted rates," S&P said. "If Marcellus becomes as large as many are predicting, there will be far less demand for long-haul transportation to the Northeast," the report cited as an example.
The pipelines in the sector are being divided between those S&P called "supply-push" lines and ones that are "demand-pull." The rating agency sees the demand-pull pipelines as being in a better position for the future than the supply-push lines, which could be at greater risk.
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