By Dan Hagan and Jane Rueger
The United States is in the midst of an energy revolution fueled by a massive influx of gas and oil extracted from shale deposits. Yet demand remains locked, largely because the country lacks sufficient pipelines to deliver all its available gas and oil. To unlock demand, the United States must make it more attractive for investors to finance pipeline expansion. In this article, we highlight some of the barriers investors face and four opportunities to reduce them. Indeed, the United States will only capture the full potential of its shale revolution when it is attractive for investors to finance pipeline expansions.
Barriers to Building
Despite demand, a number of factors have made it difficult to build momentum for pipeline investments, particularly for natural gas. Prices for gas are low and volatile, and investors are unwilling to finance pipelines with traditional approaches that lock in gas prices for the long-term. Crude oil and natural gas liquids (NGLs) command higher prices than gas, which makes it difficult to attract investors to finance construction of dry-gas pipelines. And a lack of coordination between the gas and power sectors has hampered demand for long-term capacity from gas-fired electric generators, an important source of financing for a new natural gas pipeline.
Permitting issues have also posed challenges to investors. Increasing opportunities for the export of liquefied natural gas could change the investment climate, but the U.S. Department of Energy has been cautious about issuing permits for exporting liquefied natural gas (LNG). State and federal authorities have also been slow to issue pipeline permits.
As a result, a large share of U.S. oil and NGLs is shipped by rail and truck, which is much more expensive than transporting by pipeline. This adds billions of dollars in opportunity costs for producers, which are ultimately borne by customers. And a significant portion of dry natural gas is flared because there is no pipeline capacity to transport it to users. The Interstate Natural Gas Association of America (INGAA) estimates that the United States and Canada need to invest about $641 billion USD to build infrastructure for transporting dry natural gas, crude oil and NGLs.
Preparing the Ground for Pipeline Expansion
Only through fresh thinking and closer cooperation among stakeholders will the United States develop the energy infrastructure necessary to unlock demand for shale gas. Here we offer four opportunities that would enable pipeline expansion.
One way to make pipeline investment and financing more attractive is to add revenue streams from pipeline systems. The Master Limited Partnership Parity Act, currently before Congress, would do that by extending the benefits of MLPs to infrastructure firms and renewable energy concerns. The law would offer favorable tax options to pipeline operators. In turn, the operators would use their knowledge of siting and permitting to install renewable capacity, such as solar panels, to reduce costs. The electricity generated from solar panels would offset the cost of purchasing fuel or power to run compressors. Many operators could generate revenues from surplus electricity and renewable energy incentive programs that are available in 19 states.
Another emerging model brings together pipeline builders, gas producers, gas purchasers and sellers as equity owners in pipeline projects. An example of this is the Central Penn Line that Transco is developing, a 177-mile spur to transport gas from the Zick area of the Marcellus producing region in Pennsylvania. WGL Midstream has agreed to invest $410 million for a majority ownership in the entity that will own the Central Penn line. Cabot Oil and Gas Corp., a large gas producer, has agreed to buy 500,000 dekatherms of natural gas per day for 15 years. Cabot aims to sell the gas to WGL. Part of the $410 million investment will be made to buy the gas, at a price set according to a regional gas price index.
2. Aligning Electricity and Gas Markets
New projects could facilitate closer partnerships between gas and electricity markets, thus enabling pipeline expansion. The New England States Committee on Electricy (NESCOE), which represents Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont, will use cheap and plentiful natural gas from the nearby Marcellus shale formation to reduce electricity prices and thus fund pipeline investments. The plan, which the local utilities support, would increase the supply of inexpensive natural gas from subsidized pipelines.
The plan calls for ISO New England to develop tariff provisions that would enable utilities to recover the cost of investing in regional pipeline expansion. This would involve passing costs onto electricity ratepayers through ISO New England tariffs.
3. Breaking the LNG Bottleneck
Tapping into world demand for LNG is critical to spurring U.S. investment in pipeline infrastructure. The recent outbreak of tensions involving Russia, Ukraine and Crimea adds urgency to the need to increase LNG exports to countries that must diversify their gas supplies. Both Ukraine and Crimea are heavily dependent on Russia for natural gas. Several new bills also surfaced in Congress that would promote LNG exports to U.S. allies.
In parallel, several treaty negotiations that are currently underway could change the authorization process. For
example, the Trans-Pacific Partnership Agreement (TPP) would trigger automatic approval by the DOE for LNG exports to Japan.
4.Boosting Industry-Regulatory Ties
The United States also needs a national energy strategy to kickstart an ambitious program to expand the country’s pipeline infrastructure. To that end, President Obama ordered publication of a Quadrennial Energy Review in January. The first report, due in January 2015, will focus on the country’s infrastructure needs, assess legislation and recommend steps to promote infrastructure investment.
The shale gas revolution has really just begun. But to capture its full potential, the United States must consider fresh solutions. By doing so, it can prepare the ground for the next wave of growth — in the industry and across the country.
Dan Hagan is a partner and Jane Rueger is a counsel in the Washington, D.C., office of the global law firm White & Case.