Some of the “most pronounced” turnback activity for long-termfirm capacity can be expected to occur this year, next year and in2004, according to an analysis of the pipeline transportationmarket issued by the Energy Information Administration (EIA) lastweek.

Although contract expirations will average 5% or less of totalreserved capacity for most years through 2025, the EIA says 1999and 2000 will be “particularly active” as 12% of the 97 trillionBtu/d of capacity that was under contract as of mid-1998 willexpire in each year. Even more startling, it estimates contractsaccounting for more than half (54%) of all reserved firmtransportation capacity will expire or come up for renegotiation inthe near term (1998-2003), significantly increasing the industry’sexposure to capacity turnbacks.

Against this backdrop, the EIA projects that nationwide 8 TBtu/dof capacity, or 9% of long-term contracted capacity, could beturned back to pipeline companies between 1998-2003; 6 TBtu/d in2004-2008; and 3.8 TBtu/d in 2009-2005. All told, 17.8 TBtu/d offirm transportation capacity will likely be returned to pipelinesover the next 25 years, it said.

That’s about one-fifth of the 97 TBtu/d of firm capacity thatwas contracted in July 1998 on 64 pipelines, which were examined inthe EIA analysis. The analysis, “Contracting Shifts in the PipelineTransportation Market,” is part of a biennial EIA report – “NaturalGas 1998: Issues and Trends” – that’s due to be released in hardcopy around May 26th. Until then, the analysis is available throughthe agency’s Internet site at www.eia.doe.gov/.

All the regions in the United States – with the exception of theWest and Southeast – will see a high percentage of their currentlycontracted capacity expire during the 1999-2003 period, accordingto the EIA analysis. From a volume standpoint, the most significantcapacity turnbacks are expected in the Northeast (2.7 TBtu/d), theMidwest (1.4 TBtu/d) and the Central region (1.4 TBtu/d) during thefour-year period. This represents more than 8% of the 32 TBtu/d ofcapacity 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 areanticipated for the Northeast in the ensuing 2004-2008 and2009-2025 periods covered by the EIA analysis. The EIA projects 1.9TBtu/d and 2.1 TBtu/d in the periods, respectively. The futureturnback volumes for the Northeast could be high in comparison toother regions simply because it has the greatest amount ofcontracted capacity (32 TBtu/d) in the U.S. Or the numbers couldsuggest the need to scale back major pipeline projects bound forthe Northeast. Although not specifically referring to theNortheast, the EIA said turned-back capacity “could reduce the needto build additional pipeline capacity, which is expected to beneeded to meet the projected increased demand for natural gasduring the next 20 years.”

The EIA’s projections for turned-back capacity did not take intoaccount the anticipated growth in demand for natural gas over thenext decade, infrastructure expansion or other market changes thatwill affect the remarketing of pipeline capacity and possiblymitigate the overall impact of capacity turnbacks.

On a more positive note, the EIA reported the total amount ofinterstate capacity reserved under firm transportation contractshas remained “relatively stable” since April 1996, averaging about95 to 105 TBtu/d in each quarter. Pipeline utilization ratesbetween 1996 and 1997 dropped only slightly, to 72% from 75%, itsaid. The highest utilization rates were experienced on pipelinesbringing gas from Canada into the Midwest and on pipelines movinggas through the Southeast.

The EIA further concluded shippers still prefer long-termcontracts over short-term contracts. It pointed out that whilelong-term contracts for 12.8 TBtu/d of capacity expired during the12 months ended July 1998, shippers responded by signing newcontracts for 15.9 TBtu/d of long-term capacity. “…[N]ewcontracts for long-term transportation service exceeded expiredcontracts by 24%. From a shipper perspective, marketers accountedfor the largest change in long-term contracted capacity.”

However, the agency said pipeline customers are demandinglong-term contracts of shorter duration. “On average, long-termcontracts written during the first six months of 1998 covered aperiod 16% shorter (measured in days) than those written in 1996.The trend toward shorter contracts [was] even more evident in thosecontracts of three years or more. The average length of thosecontracts declined by 36%, from 10.9 to 7 years between 1994 and1998.”

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

The EIA said pipeline customer profiles are changing – butgradually. The slow pace of retail gas unbundling has kept LDCs inthe role as dominant holders of pipe capacity. Although LDCcontracts representing 8.9 TBtu/d of long-term capacity commitmentsexpired in July 1998, distributors had to enter into new contractsfor almost a like amount – 8.6 TBtu/d – to continue to serve as”supplier of last resort” and to supply end-users who have chosento stay with their current provider. The 8.9 TBtu/d, which expiredin mid-1998, represented 17% of LDCs’ average long-term capacitycommitments then. Overall, LDCs held more than half (53%) of thefirm capacity on interstate pipelines, or 53.8 TBtu/d, whilemarketers held 24%, or 22.9 TBtu/d, according to the EIA.

On the demand front, the EIA sees natural gas consumption thisyear surpassing the the 1972 record level of 22.1 Tcf, and doublingby the year 2020 in large part in response to the needs of electricgenerators. Gas demand by the electric sector has risen 22% since1994, it said. The EIA cautioned, however, that there are somesigns the rate of growth in gas demand may be slowed in the shortterm due to the impact of depressed crude oil prices on gasproduction levels.

Susan Parker

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