The end of March saw two natural gas pipelines authorized to commence service by the Federal Energy Regulatory Commission (FERC), demonstrating that despite the lack of quorum, some projects continue to progress. American Midstream’s Natchez Pipeline Project and Energy Transfer’s Presidio Border Crossing Project, both fully subscribed, are now authorized to begin service. Why begin service at the end of the heating season? And while these projects, uncharacteristically, did not provide estimated in-service dates, many projects, to the surprise of some, are put into service early.
Given the unique characteristics of these two projects, it is not surprising that the in-service dates are in the spring, when heating load is at its lowest, because these projects aren’t designed to serve heating load. Natural gas pipeline projects are generally constructed with the intent to take advantage of the heating season, when demand is greatest. In fact, of the projects filed since 2008 and now in-service, 43% targeted being in-service by October 31 or November 1. The second, third and fourth most commonly targeted in-service dates were September 1, October 1, and December 1, respectively. Commencing service during these months is attractive to the power generators and natural gas distributors that have grown to rely heavily on interstate natural gas pipelines. Are these latest projects at a disadvantage as a result?
Neither American Midstream nor Trans-Pecos Pipeline provided an estimated in-service date for their projects. But perhaps more importantly, unlike most other projects, each of these projects is subject to novel market conditions, when compared to the Northeast takeaway projects. While the Natchez Project involved the replacement of an existing system, the Presidio Border Crossing Project is a pipeline intended to export natural gas to Mexico. Unlike other natural gas pipeline developers, Trans-Pecos and American Midstream have identified a way to grow revenue by serving the growing number of power generators and natural gas distribution companies that rely on natural gas outside of the typical window.
American Midstream’s Natchez customers include natural gas distributors and industrials. The Natchez Pipeline Project open season presented existing customers as well as new customers with three options in an effort to replace the current service it provided on its system, which needed repair. The open season provided “(1) a ‘Replication’ option, which is geared towards being able to reproduce existing services to existing customers; (2) a ‘Natchez Line’ option, which is geared towards optimizing economics by reducing the length of pipe to be reconstructed and doing so in a manner that recognizes current customer‐consumption patterns; and (3) a ‘Natchez‐Plus Line’ option, which would ‘upsize’ the Natchez Line in a manner that would allow for industrial development to grow throughput and ultimately lower rates.”
Natural gas pipeline operators execute precedent agreements with shippers in an effort to ensure that available capacity, and as a result, revenue, is maximized. But in the case where a pipeline is able to begin service earlier than expected, what is to happen to all of that available service? Precedent agreements often also include terms that provide shippers with the right of first refusal in such scenarios. That means that if a pipeline can provide service earlier, it is obligated to initially provide that service as interim firm service to its existing shippers, commonly at “rates not to exceed 100 percent load factor equivalent of the rate.” And shippers, especially producers that may have gas readily available, benefit from the typically lower interim firm service rates. Power generator shippers, on the other hand, likely don’t need to employ service earlier than expected. But with the increasingly complicated regulatory hurdles pipeline developers face is there really much to be said about early in-service dates?
Approximately half of pipeline projects are in-service earlier than initially estimated by the pipeline company of the projects filed since 2008. And as a result, many pipeline companies may be collecting additional revenue. Yet another factor to consider in evaluating the strength of operating assets.