Building more greenfield natural gas pipelines to the Northeastis not the answer. In fact, massive switching from distillate oilto natural gas will not protect the region’s energy customers froma repeat of the heating oil price shocks that they experiencedearlier this year. If anything, it could aggravate prices not onlyfor distillate oil but for gas, the Energy InformationAdministration (EIA) said in a report issued yesterday.

The report, which was commissioned by President Clintonfollowing severe price spikes in the Northeast heating oil marketin mid-January, concluded that it “may not be economical” for theregion’s industrial customers and electric generators withdual-fuel capability to switch to “firm year-round” natural gasservice. Nor, it added, would it be in the best financial interestof LDCs.

First, these industrial customers would have to pick up thecosts for any new incremental pipeline and storage capacity to meetan increased gas load. “Otherwise, costs to existing firm gascustomers (usually residential and small commercial customers) willincrease,” said the EIA report, “The Northeast Heating Fuel Market:Assessment and Options.”

Second, existing firm gas customers “would no longer benefit”from the interruptible gas purchases of the Northeast industrialswith dual-fuel capability, it noted. “Further, pipeline operatorswould be faced with more unused off-peak capacity to auction off,with a very limited base of seasonal users, thereby reducing thevalue of the interruptible capacity.”

In short, fuel switching by Northeast distillate customers might”reduce the potential for distillate fuel oil price spikes in theshort term because of the overcapacity [that will be] created,” butit “cannot eliminate their possibility in the longer term, and itcould increase the volatility of natural gas prices,” theDepartment of Energy (DOE) agency said.

Even if switching to natural gas were economical for Northeastcustomers, the EIA estimated that just-completed and proposedpipeline projects to the region would provide more than double theamount of new capacity that would be needed in the short term. Theagency projected that 839 MMcf/d of additional capacity would berequired to meet any increase in gas demand resulting fromfuel-switching, and that the figure could grow to 2.24 Bcf/d by2005.” It pegged existing pipe capacity to the Northeast at 12.5Bcf/d.

However, the proposed Northeast projects — such as Millennium,Independence and associated expansions — “represent about 2 Bcf/dof potential additional capacity, well in excess of the additionalcapacity that would be needed on a peak day (839 MMcf/d) to addressthe new demand resulting from switching out of distillate, andnearly enough for additional 2005 demand,” the report noted. If thecompleted Sable Island expansion were factored into the equation,it would reduce the demand for additional Northeast pipelinecapacity to 506 MMcf/d to support potential conversions through2005, according to the DOE agency.

The gas needs of the “switchable market” can likely beaccommodated with completed pipeline projects and expansions until2002, the EIA report said. But even if proposed expansions — suchas Transcontinental Gas Pipe Line’s MarketLink project — arebuilt, “at least 250 MMcf/d of additional capacity would benecessary to…..serve the new potential conversion customers in2005.”

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