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Exposure to Turned-Back Capacity High, EIA Says

Exposure to Turned-Back Capacity High, EIA Says

Some of the "most pronounced" turnback activity for long-term firm capacity can be expected to occur this year, next year and in 2004, according to an analysis of the pipeline transportation market issued by the Energy Information Administration (EIA) last week.

Although contract expirations will average 5% or less of total reserved capacity for most years through 2025, the EIA says 1999 and 2000 will be "particularly active" as 12% of the 97 trillion Btu/d of capacity that was under contract as of mid-1998 will expire in each year. Even more startling, it estimates contracts accounting for more than half (54%) of all reserved firm transportation capacity will expire or come up for renegotiation in the near term (1998-2003), significantly increasing the industry's exposure to capacity turnbacks.

Against this backdrop, the EIA projects that nationwide 8 TBtu/d of capacity, or 9% of long-term contracted capacity, could be turned back to pipeline companies between 1998-2003; 6 TBtu/d in 2004-2008; and 3.8 TBtu/d in 2009-2005. All told, 17.8 TBtu/d of firm transportation capacity will likely be returned to pipelines over the next 25 years, it said.

That's about one-fifth of the 97 TBtu/d of firm capacity that was contracted in July 1998 on 64 pipelines, which were examined in the EIA analysis. The analysis, "Contracting Shifts in the Pipeline Transportation Market," is part of a biennial EIA report - "Natural Gas 1998: Issues and Trends" - that's due to be released in hard copy around May 26th. Until then, the analysis is available through the agency's Internet site at www.eia.doe.gov/.

All the regions in the United States - with the exception of the West and Southeast - will see a high percentage of their currently contracted capacity expire during the 1999-2003 period, according to the EIA analysis. From a volume standpoint, the most significant capacity turnbacks are expected in the Northeast (2.7 TBtu/d), the Midwest (1.4 TBtu/d) and the Central region (1.4 TBtu/d) during the four-year period. This represents more than 8% of the 32 TBtu/d of capacity under contract in the Northeast as of mid-1998; about 6-7% of the 20.8 TBtu/d of contracted capacity in the Midwest; and 11% of the 12.6 TBtu/d of committed capacity in the Central region.

Interestingly, high volumes of turned-backed capacity also are anticipated for the Northeast in the ensuing 2004-2008 and 2009-2025 periods covered by the EIA analysis. The EIA projects 1.9 TBtu/d and 2.1 TBtu/d in the periods, respectively. The future turnback volumes for the Northeast could be high in comparison to other regions simply because it has the greatest amount of contracted capacity (32 TBtu/d) in the U.S. Or the numbers could suggest the need to scale back major pipeline projects bound for the Northeast. Although not specifically referring to the Northeast, the EIA said turned-back capacity "could reduce the need to build additional pipeline capacity, which is expected to be needed to meet the projected increased demand for natural gas during the next 20 years."

The EIA's projections for turned-back capacity did not take into account the anticipated growth in demand for natural gas over the next decade, infrastructure expansion or other market changes that will affect the remarketing of pipeline capacity and possibly mitigate the overall impact of capacity turnbacks.

On a more positive note, the EIA reported the total amount of interstate capacity reserved under firm transportation contracts has remained "relatively stable" since April 1996, averaging about 95 to 105 TBtu/d in each quarter. Pipeline utilization rates between 1996 and 1997 dropped only slightly, to 72% from 75%, it said. The highest utilization rates were experienced on pipelines bringing gas from Canada into the Midwest and on pipelines moving gas through the Southeast.

The EIA further concluded shippers still prefer long-term contracts over short-term contracts. It pointed out that while long-term contracts for 12.8 TBtu/d of capacity expired during the 12 months ended July 1998, shippers responded by signing new contracts for 15.9 TBtu/d of long-term capacity. "...[N]ew contracts for long-term transportation service exceeded expired contracts by 24%. From a shipper perspective, marketers accounted for the largest change in long-term contracted capacity."

However, the agency said pipeline customers are demanding long-term contracts of shorter duration. "On average, long-term contracts written during the first six months of 1998 covered a period 16% shorter (measured in days) than those written in 1996. The trend toward shorter contracts [was] even more evident in those contracts of three years or more. The average length of those contracts declined by 36%, from 10.9 to 7 years between 1994 and 1998."

Not surprisingly, holders of large, long-term contracts initiated fewer new contracts, for less capacity and for shorter contract periods between April 1996 and March 1998 in response to turnback problems, according to the EIA. Based on a sampling of 54 shipper-pipeline company contract pairings, large holders of long-term capacity turned back a total of 2.4 TBtu/d of capacity under long-term firm contracts during the period, which accounted for 37% of their 6.4 TBtu/d of expiring capacity. Volume-wise, the most significant capacity turnbacks were seen in the West, Midwest and Northeast regions.

The EIA said pipeline customer profiles are changing - but gradually. The slow pace of retail gas unbundling has kept LDCs in the role as dominant holders of pipe capacity. Although LDC contracts representing 8.9 TBtu/d of long-term capacity commitments expired in July 1998, distributors had to enter into new contracts for almost a like amount - 8.6 TBtu/d - to continue to serve as "supplier of last resort" and to supply end-users who have chosen to stay with their current provider. The 8.9 TBtu/d, which expired in mid-1998, represented 17% of LDCs' average long-term capacity commitments then. Overall, LDCs held more than half (53%) of the firm capacity on interstate pipelines, or 53.8 TBtu/d, while marketers held 24%, or 22.9 TBtu/d, according to the EIA.

On the demand front, the EIA sees natural gas consumption this year surpassing the the 1972 record level of 22.1 Tcf, and doubling by the year 2020 in large part in response to the needs of electric generators. Gas demand by the electric sector has risen 22% since 1994, it said. The EIA cautioned, however, that there are some signs the rate of growth in gas demand may be slowed in the short term due to the impact of depressed crude oil prices on gas production levels.

Susan Parker

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