Future Pipeline Changes Defy Common Perceptions

Despite the desperate need for natural gas currently, long-haul pipeline construction is headed for a temporary lull over the next five years, according to Thomas Howard, director of strategic products at PIRA Energy Group, a New York City-based energy consulting firm.

Furthermore, when long-haul pipeline construction does resume, it likely will be supply driven rather than demand driven, he said in announcing PIRA's new study, "Price of Reliability: The Value and Strategy of Gas Transportation." The study is a region-by-region analysis of natural gas infrastructure across North America.

Thirty trillion cubic feet of gas may seem like a lot of demand to serve by 2015, and power generation growth has been a captivating topic of late, but what will be even more amazing over the next decade are the supply changes required to meet that market, said Howard. "Demand tends to be more predictable; it tends to be in the same place as it was last year. But supply is changing dramatically and the geographic pattern is changing dramatically. Our forecasts have that continuing in the next decade just as the actual changes in the past decade have been by supply side changes.

"After a quiet period [for pipe construction], the biggest change will be Alaska; it just sticks out like a sore thumb," said Howard. There will be some demand-side pipeline expansions over the next decade. "It's just that they will be in the minority. The best examples are in the South Atlantic where they are going to Florida or up Sonat or Transco. Except for the South Atlantic, almost everything else going on is supply driven."

There will be a temporary lull in major pipeline construction, however, he said. "It looks like to balance supply and demand in 2005 won't take very much pipeline that isn't already in place [now that] Alliance is up and running. After Alliance there aren't many reasons to build many 500-mile pipelines."

Many of the minor expansions will serve the West Coast, and for good reason. The West probably will get at least three minor expansions in the next five years on Kern River, Northwest Pipeline and PG&E Gas Transmission Northwest, he said. But surprisingly few market participants are stepping up to the plate to cure California's gas supply woes. One example is El Paso's recently purchased All-America Pipeline. "It's a lot of pipe all the way to California but they plan to integrate that system without adding a cubic foot of capacity. Why? I don't think there's anybody signing up for it in spite of the price run-ups and the rather dramatic basis shifts this year," he said.

Howard claims there has been a disconnect in the gas market between the need for service and the service being provided. The risks apparently have been too great and have deterred the investment required to serve the market. The only other expansion currently planned to California is another oil conversion pipe, Questar's Southern Trails project. Kern River may add to its expansion plans, said Howard, because the value of Rocky Mountain supply is becoming more apparent. "I think that is a route that will be very popular."

The fallout from the current California market crisis also could lead to some regulatory changes that may prompt long-haul pipeline recontracting, he said. "They could affect the terms of service on the two major utilities. I think they might unbundle SoCalGas in the way that PG&E was unbundled. Years ago the CPUC believed in spot markets and they believed that the players inside California should get out of the interstate transportation business. PG&E and SoCalGas have been decontracting their longhaul pipeline capacity ever since. I think there may be some pressure to reverse that, but not on the basis of price - on the basis of reliability."

PIRA's latest report, however, focuses on gas transportation in the producing area. PIRA concludes that pipeline congestion from South Texas to East Texas will increase, while pipeline congestion from the Gulf Coast to the Northeast U.S. will decrease. Pipeline expansions from the Gulf Coast to South Atlantic states will be needed, despite growing supplies from alternative sources (LNG). Along each of these routes, changes in throughput can significantly affect the value of gas transportation. For more information on this study or PIRA Energy Group, please call Jeff Steele at (212) 686-6808 (jsteele@pira.com).

Rocco Canonica

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