The natural gas producing segment will lose $200 millionannually for every penny increase in transportation costs that’srealized from the lighter handed regulatory initiatives – such asnegotiated terms and conditions and capacity auctioning – proposedby FERC, an official with a leading independent producer groupprojected.
The $200 million estimate is extrapolated from a one-centincrease for each Mcf of transportation multiplied by a 20 Tcfmarket, according to David M. Sweet, vice president of natural gasfor the Independent Petroleum Association of America (IPAA).Conceivably, he says a per-Mcf increase of five to 10 cents intransportation costs “is not unlikely” for producers in the eventthe FERC initiatives are enacted, which would amount to an overallhike of about $1 billion to $2 billion annually.
These figures, of course, depend on the “final product” of theinitiatives in the notice of proposal rulemaking and notice ofinquiry (NOI) the Commission issued last July, Sweet told NGI.
Independents are not big proponents of the key NOPR initiatives.On negotiated terms and conditions, “we’ve got a lot of concernsabout it…We don’t think it’s needed,” he said. Specifically, theyare opposed to pipelines being given a free reign to negotiateoutside of their tariffs. “Pipelines can get as creative as Picasso[in negotiating terms and conditions] for all I care, so long asthey put it in the tariff,” Sweet remarked. Independents also arecautious on the issue of capacity auctions. “…[I]f you’re goingto have something that’s going to require a huge investment insoftware, hardware and staffing up to have auctions, then it’sgoing to drive independents out.”
Speaking to producers in Houston, TX, recently, Sweet likenedthe goals of the Commission’s NOPR to an “episode of Seinfeld,which was described as [a] show about nothing.” When examinedclosely, the NOPR says that “the current regulatory approach ‘may’not be the best approach; ‘may’ not provide the best protectionagainst the exercise of market power; ‘may’ come at the expense ofa more efficient capacity market; [and] the short-term market ‘may’not be fully competitive. That’s a lot of ‘mays’ to justify massivesurgery.”
He thinks “a lot of people are happy with Order 636” as it is.And while “it’s okay to do a little fine-tuning and have anindustry dialogue,” the Commission should leave well enough alone.”No amount of fine-tuning will turn a Ford into a Ferrari. Andsometimes too much fine-tuning leads to sputtering and a stall,”Sweet told producers.
While the industry is “abuzz” with the prospect of 30 Tcf demandmarket, he said indicators suggest that 30 Tcf of supply may not beas “readily forthcoming” at least not without additional incentivesto the wellhead, improved access to public lands, and sensiblepolicies and regulations. In the immediate short term, given thedownturn in crude oil prices and revenues, “it is difficult tothink that producers will drill more wells next year, and in fact,are likely to drill fewer wells and wells that are less productivethan in the past.”
He said his “previous pessimism” about gas demand growth hassubsided due to an explosion in the electric industry’s interest ingas turbines for generation following this summer’s price spikes.
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