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Bentek: Shifting Supply to Spark 'Several' Pipe Rate Cases

As natural gas pipelines serving traditional long-line routes to market in North America have begun filing for new rate hikes in an attempt to make up for the load lost to locally delivered shale gas, fundamental market changes associated with the rate increases could affect basis differentials going forward, according to a new report from Evergreen, CO-based Bentek Energy.

In its new report, "Running on Empty," Bentek said rate hikes of 30-60% and tariff restructuring proposed by Tennessee Gas, Columbia Gulf and TransCanada all signal a trend among long-haul pipes facing competition and supply changes. As U.S. production continues to rapidly grow, shifting supply locations and more than 70 planned pipeline expansions "will intensify the competition" between new and traditional pipeline systems," the research and analysis firm noted.

"The big shift in U.S. natural gas supply to new onshore unconventional production areas and the large number of new pipelines built over the last few years have led to lower U.S. gas prices, collapsing price spreads across the country and major changes in pipeline capacity utilization on older, long-haul natural gas pipelines," Bentek said in the report. "Some older pipeline systems are struggling to keep pace with these market changes, and a few have proposed major rate increases and tariff rate restructurings in an effort to stem revenue declines."

Since 2005, unconventional onshore production, which includes the Eagle Ford, Haynesville, Fort Worth, East Texas, Fayetteville and Appalachia plays, has risen from 9 Bcf/d to 24 Bcf/d, according to Bentek figures.

Tennessee Gas filed its request, Bentek said, because it has been experiencing a "significant" reduction in gas flows on the Southwestern portions of its line because not as much gas flows from that area to feed the Northeast, which now has locally grown Marcellus Shale gas and supplies from the Rockies Express pipeline.

The recent pipeline rate hike proposals have faced stiff opposition from the likes of the Process Gas Consumers Group (PGC) and other shippers (see Daily GPI, May 18). The industrials group and other shippers' organizations will be able to more easily intervene to fight the rate hikes thanks to a significant ruling that PGC won recently in a Federal Energy Regulatory Commission (FERC) rate case filed by the offshore Stingray Pipeline, which is seeking an across-the-board increase of up to 500%. Stingray operates in the Gulf of Mexico and comes ashore in Louisiana, where it interconnects with several downstream pipelines -- ANR Pipeline, Natural Gas Pipeline Co. of America and Tennessee Gas Pipeline.

FERC granted a PGC motion to intervene in the Stingray Pipeline Co. LLC rate case (RP11-1957) without ordering PGC to identify its members with interest, as Stingray had requested. FERC simultaneously granted a similar motion by the American Forest & Paper Association (AF&PA).

Speaking at GasMart 2011 in Chicago last month, Berne Mosley, FERC's deputy director for energy projects, said pipelines have several remedies available to them to adjust to the shifting marketplace, including constructing new facilities, abandoning underutilized ones or making modifications to existing infrastructure, such as bidirectional pipelines and performing backhauls, some pipes -- including Tennessee and Columbia Gulf -- have found that entering into rate proceedings is necessary (see Shale Daily, May 13).

With regards to TransCanada's proposed rate hikes, irate shippers are trying to light a fire under a forthcoming review of its eastbound mainline (TCPL) from Alberta, calling for accelerated work on a restructuring of the sharply increased tolls (see Daily GPI, May 23). The driver of the TransCanada rate increase continues to be shrinking traffic that spreads costs thicker on mainline shipments. The reduced flows are attributed to declining Western Canadian production, rising industrial consumption by thermal oilsands projects in northern Alberta, competition from 11-year-old rival Alliance Pipeline, and growth in U.S. shale gas supplies that are closer to markets in central Canada as well as the U.S. Midwest and Atlantic Seaboard.

"Recent rate cases filed by Tennessee, Columbia Gulf and TransCanada are responding to intense competitive pressures in the natural gas pipeline business," said Bentek Vice President Rusty Braziel. "All three filings increase rates to make up for declining throughput, and the U.S. pipelines are making rate design changes that will impact the marginal cost of transporting gas. These marginal cost shifts will impact both basis and natural gas flow patterns in the regions served by these pipes."

Bentek noted that rate cases are often prompted by a multitude of financial, operational and regulatory compliance issues, but in these three recent rate cases, "market fundamentals have been a driving force" as supply and demand trends have dramatically altered pipeline utilization patterns, leading to higher revenue risk, contracting risk concerns and other adverse impacts.

The results for direct customers of pipelines -- the shippers -- are significant rate increases and rate design alterations, which will impact the cost of moving gas, Bentek said. "Similarly, the basis market will experience major shifts as changes in the allocation of costs between fixed and variable rate components work their way through marginal gas transportation economics."

According to the report, the cost of transporting gas from South Texas to New England on Tennessee will increase 30%, but its reservation rates will increase more than 100% while variable charges are reduced. In Columbia Gulf's case, proposed rates from onshore Louisiana receipt points to its interconnection with sister company Columbia Gas in Leach, KY, are up 43%. TransCanada's most recent long-haul rate increase to an interconnection with Iroquois Gas Transmission at Waddington, NY, from the Alberta-Saskatchewan border is up 34%.

The report notes that a number of other pipelines also are facing underutilization, increasing contract risk and lower returns than their regulated rates were designed to produce, which likely means "several additional rate cases" with rate increases and rate design changes will be filed in the coming months.

For more information on Bentek's report, visit www.bentekenergy.com.

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