Old battle lines were being redrawn last week over natural gas research, development and demonstration (RD&D) funding. The Independent Petroleum Association of America (IPAA), which represents the nation’s independent gas producers, came out strongly against a proposal by the Gas Technology Institute (GTI) to reinstate interstate pipeline surcharges on transported gas for the purpose of funding RD&D. However, the American Gas Association, which represents gas utilities, told FERC it favors such an approach.

IPAA also said other associations representing major producers and large gas consumers were preparing to file comments with FERC in opposition to GTI’s funding proposal.

GTI filed the plan with the Commission last month (see NGI, July 5). It would replace the current Gas Research Institute (GRI) surcharges, which are being phased out starting this month because of a settlement agreement the industry signed in 1998. GTI is requesting that a 0.56-cent/Dth surcharge be added to interstate pipeline tariffs and levied on gas transportation starting in January. It amounts to about one-third of the GRI annual RD&D funding requirements from 2002-2004.

However, the IPAA said the surcharges eat in to producer netbacks and are far too much to pay for such a little amount of research for the upstream industry. “Natural gas producers recognize the need for research and development, but IPAA believes it can be accomplished through alternatives other than GTI,” said IPAA Vice Chairman Mike Linn, president of Pittsburgh-based Linn Energy.

“Natural gas producers and major natural gas consumers agree — the GTI is not needed and has become a drain on the natural gas segment’s resources at a critical time,” he said.

Linn also said IPAA believes GTI is planning to direct too much of the funds it will collect toward non-E&P related research “despite the consequences to the natural gas market that supply insufficiency can cause.”

Out of its $48 million in proposed annual funding for 2005, GTI intends to set aside only $7 million for gas supply RD&D, while spending $11 million for gas transmission, $19 million for gas distribution, $7 million for gas utilization and $4 million for program management and administration.

IPAA said voluntary and private RD&D funding, as well as federal RD&D funding, already is playing a “critical and worthwhile role” in the natural gas industry. “These contributions should be expanded, but GTI’s funding should not,” said Linn.

Gas distribution companies, which will reap the bulk of the RD&D benefits from GTI, came out strongly in favor of the GTI plan. “There is a manifest need for a broadly based and funded RD&D program to benefit the nation’s natural gas consumers,” AGA said. “Eight years of variegated efforts by industry stakeholders have simply fallen short of meeting the demonstrated need. Individual company programs, while important, have not produced the scale of research needed.”

This research funding mechanism has been debated for years. In 1998, a settlement among stakeholders led to the phase out of the GRI program over an eight year period, during which GRI’s RD&D results would be critically evaluated. In 2000, GRI and the Institute of Gas Technology merged, forming GTI.

“The 1998 settlement was designed to allow time for the GRI/GTI operation to demonstrate that its research program provided the value and results that warranted private funding,” said Linn. “GTI was not able to demonstrate its value and should not try to reopen the funding approach it agreed to terminate.”

AGA had a complete opposite view, stating that the GTI proposal is the “only program that can meet the RD&D needs of the natural gas industry in the short and medium terms,” AGA said.

“The need for broad-based RD&D is clear and compelling, AGA said. “It is in the national interest that the nation’s growing demand for natural gas — America’s most environmentally desirable fuel — is met at the lowest possible cost to consumers. Research can pave the way to that result.”

The deep divisions in the industry apparently will come as a surprise to GTI, which was under the impression that it had broad industry support for mandated charges to fund RD&D. In announcing the proposal, GTI President John F. Riordan said the organization “found strong gas industry and stakeholder support for a collaborative approach to research and technology development and demonstration. We think the proposed surcharge mechanism addresses the RD&D funding issue in a fair and equitable way.”

In the executive summary of its FERC application, GTI also said the industry “stands essentially united in acknowledging the need to use the advance approval process to fund this proposed program.”

However, IPAA said the Natural Gas Supply Association (NGSA), which represents major gas producers, and the Process Gas Consumers Group, which represents large gas consumers, also oppose new surcharges. “Some major natural gas producers will be using outside counsel to file strong comments in opposition,” IPAA said.

Aug. 9 is the deadline for filing comments and interventions at FERC on the GTI proposal.

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