Developing new natural gas pipeline infrastructure has become more difficult, in part due to basis compression, and the problem is not likely to end any time soon, said an economist with ICF International Thursday. In addition, the number of groups seeking to block gas pipeline projects has been steadily growing.
Traditionally, the price signal to build infrastructure has been when the basis differential is larger than the cost of the incremental capacity, but it’s not so cut and dried anymore, said Bruce Henning, ICF vice president of energy regulatory and market analysis, at the Energy Bar Association Mid-Year conference in Washington, DC. “Many more pipelines are receiving gas at multiple points on the system that’s flowing in different directions, so the price signals are a little more difficult, and people have a lot harder time interpreting when a project is economic.”
Basis compression, which is the difference between the market price for gas when it is put into a pipeline and the market price for gas when it is withdrawn from the pipeline, is most prevalent in the Midwest and Rockies, Henning said. The problem does not exist in all regions, such as the Marcellus Shale basin where producers are underwriting the projects.
“It’s a fairly complicated problem. I don’t see a solution to it in the near term,” he said.
Other challenges facing gas pipelines are getting shippers to sign up for firm transportation contracts to support capital expenditures to construct new facilities, said Sheila Tweed, vice president and deputy general counsel for Kinder Morgan Energy Partners. She said that in the power sector, not all of the regions are provided clear incentives to commit to firm transportation.
Tweed said she expects there to be “some challenges” in New England this winter with respect to the coordination of natural gas pipelines and power generators.
She expressed concern about the increasing number of rehearing requests, appeals, and stay requests by landowners and environmental groups trying to stop pipeline and liquefied natural gas facilities at the Federal Energy Regulatory Commission (FERC).
“I see [this] as a changing point for interstate pipelines and their views and their approach to certificating projects,” Tweed said. “Definitely there are interests that need to be considered beyond construction. It’s a challenge that we have to deal with and address. The playing field is changing. It’s going to require innovation in protecting the environment” on behalf of the pipelines.
FERC Commissioner Tony Clark emphasized the need to base new infrastructure on “true economic signals” rather than “political signals.” At FERC, “we regulators must resist the temptation to pick favorites.”
The Commission should make decisions “on a record and promote due process,” and “to the greatest degree possible, promote certainty and avoid surprises. Uncertainty is the bane of investment,” Clark said. “When all else fails, make a timely decision.”
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