Monday, November 16, 2015
While the propane industry’s fuel supply situation looks amazing headed into the heating season, proposed subsidized natural gas expansions backed by deep-pocketed political donors are causing headaches in some states. The National Propane Gas Association (NPGA) Board of Directors, meeting in New Orleans Oct. 4-6, received confirmation of what is already widely known, that primary U.S. propane stocks are sky high, and also that they’re expected to remain so well into 2016. At the same time, NPGA is working with state associations under its State Engagement Initiative to combat natural gas expanding into so called unserved or underserved areas using ratepayer funds. 
In a presentation to the association’s Supply & Logistics Committee, Debnil Chowdhury, director and manager of North American natural gas liquids at IHS, noted that mid-continent, or PADD 2, propane stocks, which fell dangerously low during winter 2013-2014, kicking off supply, transportation, and price-spike woes, are expected to remain high. The Energy Information Administration (EIA) reported Oct. 21 that as of the week ended Oct. 16 inventories in the region stood at nearly 28 MMbbl, slightly above the year-ago total.
However, there is the potential stocks could be drawn down based on drivers on the Gulf Coast, PADD 3. Among them: ramped-up exports and petrochemical cracking, which could pull on Midwest supplies. For now, however, Midwest propane inventories are near the average range. Going forward, PADD 2 production growth is forecast to be lower in 2016 due to lower crude prices, but even with that potential slowdown production is at twice the level of 2008.
Meanwhile, Gulf Coast propane stocks, at just over 62 MMbbl as of mid-October, according to EIA, remain extremely high, and IHS expects another year of those elevated levels before a return to normal. That forecast assumes high export volumes due to the Enterprise Products export terminal expansion and the Phillips 66 export facility startup. But if the terminals are not strongly utilized due to tempered demand in Asia and Europe, Chowdhury commented, stocks will likely follow a higher trajectory similar to 2015 in 2016. He added that the Enterprise expansion will be in operation several months before winter 2016-2017, and that data IHS obtains from its IHS Waterborne service will allow more accurate gauging of the inventory situation this summer.
East Coast, PADD 1, propane stocks have fluctuated wildly throughout the year, but should remain on the high side of the historical range, the IHS director said. Although inventory levels are depressed this year, propane production from gas processing continues at high levels as Marcellus and Utica shale production continues to grow. It is expected that the pace of production growth will be strong and lead to higher stock levels in 2016. EIA pegged mid-October stock levels at nearly 6.8 MMbbl.
In other good news on the inventory front, Rockies and West Coast, PADDs 4 and 5, propane stocks are the highest of all regions on a percentage basis. Volumes in the Rocky Mountain region are expected to remain high, while West Coast supplies are forecast to remain above average. For the week ended Oct. 16, EIA had combined Rocky Mountain/West Coast volumes at almost 4.7 MMbbl, some 1 MMbbl above last year. Chowdhury detailed that about 80% of West Coast propane supply is sourced from crude oil refining, and that no propane-based petrochemical crackers are located in PADD 5, making cracking economics and chemical demand in the region irrelevant.
Overall, U.S. propane stocks, already at record levels, will remain high well into 2016. Further, Chowdhury recounted that primary propane stocks in every region of the U.S. have spiked and plunged over the past three years: record high inventories in winter 2012-2013, record low volumes in winter 2013-2014, and new higher record supplies in 2014-2015. “These fluctuations are the result of both new dynamics and short-term anomalies—weather and supply outages—in the U.S. market,” he said. He added that rapid increases in propane supplies from gas processing due to shale gas production and reduced use of propane as a feedstock to ethylene plants during the first half of 2014 worked to boost inventories, while simultaneously strengthening the case for exporting surplus propane and for building new export infrastructure.
“Natural gas plant propane has increased substantially, while refinery propane has remained little changed despite high refinery utilization,” Chowdhury said. “Propane production is not as high as crude runs would indicate. It’s widely recognized that operators are burning propane in refinery operations, up to 20,000 to 30,000 bbld that isn’t showing on DOE [Department of Energy] reports.”
He outlined that the current domestic propane supply environment is characterized by high production of natural gas along with correspondingly low prices, and that recent attractive gas processing margins have declined. A plunge in rig counts will slow U.S. natural gas production growth, but only temporarily, because a backlog of drilled but uncompleted wells in 2015 will enable gas production growth in 2016-2017 as infrastructure comes online and power and industrial demand rises.
At the same time, operators are drilling the most productive acreage, and productivity is improving as completion times decline. Completion costs are down 15% to 20% from the 2014 first quarter to the first quarter of this year. Service cost deflation reduces breakeven costs, enabling more gas production at lower prices. In addition, LNG liquefaction capacity is scheduled to climb from 1.2 Bcfd in 2016 to 7.4 Bcfd in 2020. Lower 48 propane production growth from natural gas sources will be strong, but slower in pace. On the crude oil side, production is projected to decline, but propane is also supported by non-associated gas.
“Today the crude market is in drastic decline, and oil and gas rig counts are both falling,” Chowdhury said. “But even as gas rig counts fall, we haven’t seen a dry gas production cut. Productivity is improving and production costs are down. We’re definitely seeing the effects of lower crude prices in the $40/bbl range, not $60/bbl.” In the ongoing low-price energy commodity environment, propane production growth, while continuing to rise, will be slower than in the last five years.
On the demand side, Chowdhury said the residential and commercial markets will experience their normal ramp-up this winter, but won’t be as strong. Not much growth is seen in those sectors. Weather forecasters are calling for a warmer winter in 2015-2016, therefore the expectation is for slightly lower residential/commercial demand. “We expect agricultural propane demand to be slightly higher than last year due to high precipitation,” he added, while noting that many crop farmers had filled up with cheap propane over the summer, which will blunt some fall harvest season orders.
On the petrochemical side, IHS sees increasing demand for propane dehydrogenation (PDH) plants of 25,000 bbld. Chowdhury highlighted that the U.S. is also one of the cheapest sources of ethylene in the world, third after the Middle East and western Canada, and that U.S. ethylene plants are running at high rates. “Over the past few years, ethane has generally been a much cheaper feedstock, and this cheap ethane has been displacing some propane use as a cracker feedstock,” he said.
He expanded that “high prices for propylene occasionally increases cracker demand for propane, and lower crude prices and its effects on propane prices led cracker operators to change their feed slates. Propane demand increased due to the narrowing of cash costs.” The NGL service manager recalled that propane cracking rates were increasing after the Great Recession, but plummeted in 2014.
Exports
Echoing what is widely recognized, Chowdhury observed that U.S. propane exports have set new record highs every year since 2008, and waterborne exports will continue to increase as supply rises and inventory remains high. And while a large amount of additional LPG export terminal capacity has been proposed, some will not be built. Nonetheless, the U.S. will remain the world’s largest LPG exporting country.
“There is too much production in the U.S.,” he asserted, “despite exports, use in refinery operations, and autogas. And there hasn’t been a strong push in the U.S. for autogas. Most money continues to be spent on promoting hybrids and electrics.” He added that exports were not a topic of discussion five years ago, but with 615,000 bbld expected to leave U.S. shores by the end of this year, they certainly are now. “Most exports are tied to propane, however, butane has a similar story with 200,000 bbld in exports,” Chowdhury said. “But propane remains favored in the spot market.”
He commented that while not all proposed new terminals will be constructed, the majority will. “This ability to export has changed the entire world market. The U.S. is now the largest exporter of LPG mix, and India and China prefer mix. The key point is that we have gone from not being a player to being the largest exporter. This in turn has made world prices much more important. An outage in the U.S. will affect the world price. March/April flooding in Houston and resulting problems with brine ponds, and a collision in the Houston Ship Channel both interrupted exports.”
Where are exports going? “Initially to Latin America, a mature market, where U.S. barrels pushed out West African barrels,” Chowdhury explained. “The future is directed at Asia.” He added that most nations’ import needs have not changed, but that sourcing has moved to the U.S. and away from the Middle East. Meanwhile, more Middle East LPG is moving to India. Furthermore, any reduction in U.S. LPG export growth over the long term will most directly impact Asia and Europe. Japan, China, Taiwan, and South Korea have been getting more of their LPG outside the Middle East, and more Middle East volumes have been consumed in South Asia and Southeast Asia.
The IHS Waterborne subscription service shows an 18% year-on-year increase in U.S. LPG liftings last year. Bolstering those waterborne liftings, very large gas carrier (VLGC) fleet capacity is being added rapidly over the next two to three years, despite some scrapping. In addition, 2017-2018 freight rates will decline with the buildout of ships. Another pillar for exports are U.S. propane prices, which are discounted, moreover disconnected, from world prices. Although prices are drawing closer, they nonetheless remain discounted, and must remain so in order to clear exports. Finally, lower prices depend on high surplus propane inventories in the U.S., well above and beyond domestic demand.
IHS sees the crude-to-gas price ratio becoming more favorable for crude-related feedstocks such as propane. The price ratio between crude and natural gas has declined, but is expected to recover. Therefore, propane prices should recover over the next two years. The consultancy is calling for crude prices to rise in 2016, and especially in 2017, buoyed by demand growth in China and India. Crude growth of 1 MMbbld is forecast over the period for China alone.
Concluding, Chowdhury said the IHS propane forecast could be affected by crude oil prices. Higher or lower crude prices would affect global LPG prices. Substantially higher or lower oil prices would also affect propane production. In addition, propane inventories in the U.S. need to be well stocked. If volumes fall too low, propane prices would ultimately rise and deter exports. Another player is the global petrochemical market. Propane and butane are used internationally as feedstocks for ethylene production. A weak petrochemical market would put downward pressure on LPG prices, whereas a strong market would conversely support prices. Ultimately, a weak or strong global economy will have the final say, with the results being the same.
Natural Gas Expansion
Since the beginning of this year, NPGA has been identifying key issues in states that have the potential to adversely affect industry operations. Front and center, and the most significant threat identified, are subsidized natural gas expansions in the residential market. Working with state executives, NPGA has been helping states fight damaging legislation. The association’s Executive Committee has allocated up to $500,000 for proposals from state associations in this and other areas under the State Engagement Initiative, which supplements state efforts to influence the outcome of legislative and regulatory battles.
The first program under the initiative was opposition to H.B. 4303 in Michigan, which would allow ratepayer funds to be used for natural gas expansion projects. Another such effort was launched in Minnesota in August. The Michigan Propane Gas Association (MPGA) launched a grass roots and social media effort to educate legislators and the public on propane benefits. Using a new website, migasoptions.com, the propane industry addressed misconceptions and generated more than 150 messages to legislators. The grass roots program also included an e-newsletter that encouraged communication with elected officials. A social media campaign on Twitter, Facebook, and LinkedIn also shared the propane message.
Derek Dalling, MPGA executive director, said at press time that the H.B. 4303 sponsor, a Republican energy committee chairman, had 10 votes lined up in the committee to advance the subsidized natural gas expansion legislation. Thirteen are needed. But those three additional aye votes, for now, appear beyond his reach this legislative session. Testimony was heard in June, and since then the bill has languished in committee.
Dalling notes the same legislation was also introduced last year, signaling supporters have dug in for the long haul. “The energy committee chairman has also passed off the bill to a freshman house member for sponsorship, so for the next six years this is not going to go away,” Dalling said. “We expect amendments—a lot of insider baseball. The utilities, DTE and Consumers Energy, are throwing a ton of money around.” He added that a new natural gas coalition supported by eight firms and armed with a huge war chest has been formed. “We know we are going to be outspent and outgunned,” said Dalling. “We have to get all our propane colleagues onboard and take this issue seriously. It has to become a nationwide fight.”
Jeff Petrash, NPGA vice president and general counsel, reports there are natural gas expansion plans afoot in 30 states. “It’s not so much a situation as one size fits all because the proposals are different,” he said. “What they have in common is that the legislation would allow existing ratepayers to subsidize uneconomic expansions. The fact is, utilities can’t make an economic case for expanding natural gas lines without their anchor customers. Otherwise costs would skyrocket and they wouldn’t be interested anymore.”
Petrash added that population density, the traditional trigger for natural gas utility interest in expanding service to new regions, is not in play. Further, utility investors and oversight agencies would quickly seize on any decision to expand at $1 million a mile, the going rate absent subsidies from existing ratepayers.
Interest in natural gas expansion at the federal and state level is being driven by the growth in resources and stable prices, Petrash observed. “The resource base has grown and prices are low, so let’s hook everybody up seems to be the thinking. But the big issue is the high cost of delivery to sparse populations. Introducing a model where existing ratepayers and government subsidies pay for residential service expansion is seen by state legislators as a solution to the cost barrier.”
NPGA reports that while attention is certainly focused on the Lower 48 states, a major battle is being waged in Alaska over the future of propane. The state legislature has considered bills in the house and senate that would allow the Alaska Industrial Development and Export Authority to issue bonds to finance the purchase of Pentex Alaska Natural Gas Co. LLC and its assets, including Fairbanks Natural Gas, for $52.5 million. The purchase would put the state into the natural gas business, with the intention to expand pipelines into interior Alaska.
The Pacific Propane Gas Association has retained legislative counsel to promote propane’s immediate viability. There is also local support for propane, including an editorial from a University of Alaska professor who underscored how propane could be an excellent alternative for interior Alaskans. Alaska Gov. Bill Walker has run into opposition with some legislative leaders over how to proceed with natural gas pipeline expansion. At stake are tens of billions of dollars of development money, including some taxpayer funds.
At the federal level, Federal Energy Regulatory Commission Chairman Tony Clark Oct. 6 called for more natural gas transmission pipeline infrastructure, citing the shale boom’s transformative effect on the U.S. Speaking at the North American Gas Forum, he emphasized that shale gas and the midstream sector have significantly contributed to lower gas prices. He pointed out that even in a scenario where there was heavy reliance on energy sources such as solar and wind for electrical generation, efficient natural gas plants and infrastructure would remain a major energy source to support the inherently intermittent nature of renewables. —John Needham
In a presentation to the association’s Supply & Logistics Committee, Debnil Chowdhury, director and manager of North American natural gas liquids at IHS, noted that mid-continent, or PADD 2, propane stocks, which fell dangerously low during winter 2013-2014, kicking off supply, transportation, and price-spike woes, are expected to remain high. The Energy Information Administration (EIA) reported Oct. 21 that as of the week ended Oct. 16 inventories in the region stood at nearly 28 MMbbl, slightly above the year-ago total.
However, there is the potential stocks could be drawn down based on drivers on the Gulf Coast, PADD 3. Among them: ramped-up exports and petrochemical cracking, which could pull on Midwest supplies. For now, however, Midwest propane inventories are near the average range. Going forward, PADD 2 production growth is forecast to be lower in 2016 due to lower crude prices, but even with that potential slowdown production is at twice the level of 2008.
Meanwhile, Gulf Coast propane stocks, at just over 62 MMbbl as of mid-October, according to EIA, remain extremely high, and IHS expects another year of those elevated levels before a return to normal. That forecast assumes high export volumes due to the Enterprise Products export terminal expansion and the Phillips 66 export facility startup. But if the terminals are not strongly utilized due to tempered demand in Asia and Europe, Chowdhury commented, stocks will likely follow a higher trajectory similar to 2015 in 2016. He added that the Enterprise expansion will be in operation several months before winter 2016-2017, and that data IHS obtains from its IHS Waterborne service will allow more accurate gauging of the inventory situation this summer.
East Coast, PADD 1, propane stocks have fluctuated wildly throughout the year, but should remain on the high side of the historical range, the IHS director said. Although inventory levels are depressed this year, propane production from gas processing continues at high levels as Marcellus and Utica shale production continues to grow. It is expected that the pace of production growth will be strong and lead to higher stock levels in 2016. EIA pegged mid-October stock levels at nearly 6.8 MMbbl.
In other good news on the inventory front, Rockies and West Coast, PADDs 4 and 5, propane stocks are the highest of all regions on a percentage basis. Volumes in the Rocky Mountain region are expected to remain high, while West Coast supplies are forecast to remain above average. For the week ended Oct. 16, EIA had combined Rocky Mountain/West Coast volumes at almost 4.7 MMbbl, some 1 MMbbl above last year. Chowdhury detailed that about 80% of West Coast propane supply is sourced from crude oil refining, and that no propane-based petrochemical crackers are located in PADD 5, making cracking economics and chemical demand in the region irrelevant.
Overall, U.S. propane stocks, already at record levels, will remain high well into 2016. Further, Chowdhury recounted that primary propane stocks in every region of the U.S. have spiked and plunged over the past three years: record high inventories in winter 2012-2013, record low volumes in winter 2013-2014, and new higher record supplies in 2014-2015. “These fluctuations are the result of both new dynamics and short-term anomalies—weather and supply outages—in the U.S. market,” he said. He added that rapid increases in propane supplies from gas processing due to shale gas production and reduced use of propane as a feedstock to ethylene plants during the first half of 2014 worked to boost inventories, while simultaneously strengthening the case for exporting surplus propane and for building new export infrastructure.
“Natural gas plant propane has increased substantially, while refinery propane has remained little changed despite high refinery utilization,” Chowdhury said. “Propane production is not as high as crude runs would indicate. It’s widely recognized that operators are burning propane in refinery operations, up to 20,000 to 30,000 bbld that isn’t showing on DOE [Department of Energy] reports.”
He outlined that the current domestic propane supply environment is characterized by high production of natural gas along with correspondingly low prices, and that recent attractive gas processing margins have declined. A plunge in rig counts will slow U.S. natural gas production growth, but only temporarily, because a backlog of drilled but uncompleted wells in 2015 will enable gas production growth in 2016-2017 as infrastructure comes online and power and industrial demand rises.
At the same time, operators are drilling the most productive acreage, and productivity is improving as completion times decline. Completion costs are down 15% to 20% from the 2014 first quarter to the first quarter of this year. Service cost deflation reduces breakeven costs, enabling more gas production at lower prices. In addition, LNG liquefaction capacity is scheduled to climb from 1.2 Bcfd in 2016 to 7.4 Bcfd in 2020. Lower 48 propane production growth from natural gas sources will be strong, but slower in pace. On the crude oil side, production is projected to decline, but propane is also supported by non-associated gas.
“Today the crude market is in drastic decline, and oil and gas rig counts are both falling,” Chowdhury said. “But even as gas rig counts fall, we haven’t seen a dry gas production cut. Productivity is improving and production costs are down. We’re definitely seeing the effects of lower crude prices in the $40/bbl range, not $60/bbl.” In the ongoing low-price energy commodity environment, propane production growth, while continuing to rise, will be slower than in the last five years.
On the demand side, Chowdhury said the residential and commercial markets will experience their normal ramp-up this winter, but won’t be as strong. Not much growth is seen in those sectors. Weather forecasters are calling for a warmer winter in 2015-2016, therefore the expectation is for slightly lower residential/commercial demand. “We expect agricultural propane demand to be slightly higher than last year due to high precipitation,” he added, while noting that many crop farmers had filled up with cheap propane over the summer, which will blunt some fall harvest season orders.
On the petrochemical side, IHS sees increasing demand for propane dehydrogenation (PDH) plants of 25,000 bbld. Chowdhury highlighted that the U.S. is also one of the cheapest sources of ethylene in the world, third after the Middle East and western Canada, and that U.S. ethylene plants are running at high rates. “Over the past few years, ethane has generally been a much cheaper feedstock, and this cheap ethane has been displacing some propane use as a cracker feedstock,” he said.
He expanded that “high prices for propylene occasionally increases cracker demand for propane, and lower crude prices and its effects on propane prices led cracker operators to change their feed slates. Propane demand increased due to the narrowing of cash costs.” The NGL service manager recalled that propane cracking rates were increasing after the Great Recession, but plummeted in 2014.
Exports
Echoing what is widely recognized, Chowdhury observed that U.S. propane exports have set new record highs every year since 2008, and waterborne exports will continue to increase as supply rises and inventory remains high. And while a large amount of additional LPG export terminal capacity has been proposed, some will not be built. Nonetheless, the U.S. will remain the world’s largest LPG exporting country.
“There is too much production in the U.S.,” he asserted, “despite exports, use in refinery operations, and autogas. And there hasn’t been a strong push in the U.S. for autogas. Most money continues to be spent on promoting hybrids and electrics.” He added that exports were not a topic of discussion five years ago, but with 615,000 bbld expected to leave U.S. shores by the end of this year, they certainly are now. “Most exports are tied to propane, however, butane has a similar story with 200,000 bbld in exports,” Chowdhury said. “But propane remains favored in the spot market.”
He commented that while not all proposed new terminals will be constructed, the majority will. “This ability to export has changed the entire world market. The U.S. is now the largest exporter of LPG mix, and India and China prefer mix. The key point is that we have gone from not being a player to being the largest exporter. This in turn has made world prices much more important. An outage in the U.S. will affect the world price. March/April flooding in Houston and resulting problems with brine ponds, and a collision in the Houston Ship Channel both interrupted exports.”
Where are exports going? “Initially to Latin America, a mature market, where U.S. barrels pushed out West African barrels,” Chowdhury explained. “The future is directed at Asia.” He added that most nations’ import needs have not changed, but that sourcing has moved to the U.S. and away from the Middle East. Meanwhile, more Middle East LPG is moving to India. Furthermore, any reduction in U.S. LPG export growth over the long term will most directly impact Asia and Europe. Japan, China, Taiwan, and South Korea have been getting more of their LPG outside the Middle East, and more Middle East volumes have been consumed in South Asia and Southeast Asia.
The IHS Waterborne subscription service shows an 18% year-on-year increase in U.S. LPG liftings last year. Bolstering those waterborne liftings, very large gas carrier (VLGC) fleet capacity is being added rapidly over the next two to three years, despite some scrapping. In addition, 2017-2018 freight rates will decline with the buildout of ships. Another pillar for exports are U.S. propane prices, which are discounted, moreover disconnected, from world prices. Although prices are drawing closer, they nonetheless remain discounted, and must remain so in order to clear exports. Finally, lower prices depend on high surplus propane inventories in the U.S., well above and beyond domestic demand.
IHS sees the crude-to-gas price ratio becoming more favorable for crude-related feedstocks such as propane. The price ratio between crude and natural gas has declined, but is expected to recover. Therefore, propane prices should recover over the next two years. The consultancy is calling for crude prices to rise in 2016, and especially in 2017, buoyed by demand growth in China and India. Crude growth of 1 MMbbld is forecast over the period for China alone.
Concluding, Chowdhury said the IHS propane forecast could be affected by crude oil prices. Higher or lower crude prices would affect global LPG prices. Substantially higher or lower oil prices would also affect propane production. In addition, propane inventories in the U.S. need to be well stocked. If volumes fall too low, propane prices would ultimately rise and deter exports. Another player is the global petrochemical market. Propane and butane are used internationally as feedstocks for ethylene production. A weak petrochemical market would put downward pressure on LPG prices, whereas a strong market would conversely support prices. Ultimately, a weak or strong global economy will have the final say, with the results being the same.
Natural Gas Expansion
Since the beginning of this year, NPGA has been identifying key issues in states that have the potential to adversely affect industry operations. Front and center, and the most significant threat identified, are subsidized natural gas expansions in the residential market. Working with state executives, NPGA has been helping states fight damaging legislation. The association’s Executive Committee has allocated up to $500,000 for proposals from state associations in this and other areas under the State Engagement Initiative, which supplements state efforts to influence the outcome of legislative and regulatory battles.
The first program under the initiative was opposition to H.B. 4303 in Michigan, which would allow ratepayer funds to be used for natural gas expansion projects. Another such effort was launched in Minnesota in August. The Michigan Propane Gas Association (MPGA) launched a grass roots and social media effort to educate legislators and the public on propane benefits. Using a new website, migasoptions.com, the propane industry addressed misconceptions and generated more than 150 messages to legislators. The grass roots program also included an e-newsletter that encouraged communication with elected officials. A social media campaign on Twitter, Facebook, and LinkedIn also shared the propane message.
Derek Dalling, MPGA executive director, said at press time that the H.B. 4303 sponsor, a Republican energy committee chairman, had 10 votes lined up in the committee to advance the subsidized natural gas expansion legislation. Thirteen are needed. But those three additional aye votes, for now, appear beyond his reach this legislative session. Testimony was heard in June, and since then the bill has languished in committee.
Dalling notes the same legislation was also introduced last year, signaling supporters have dug in for the long haul. “The energy committee chairman has also passed off the bill to a freshman house member for sponsorship, so for the next six years this is not going to go away,” Dalling said. “We expect amendments—a lot of insider baseball. The utilities, DTE and Consumers Energy, are throwing a ton of money around.” He added that a new natural gas coalition supported by eight firms and armed with a huge war chest has been formed. “We know we are going to be outspent and outgunned,” said Dalling. “We have to get all our propane colleagues onboard and take this issue seriously. It has to become a nationwide fight.”
Jeff Petrash, NPGA vice president and general counsel, reports there are natural gas expansion plans afoot in 30 states. “It’s not so much a situation as one size fits all because the proposals are different,” he said. “What they have in common is that the legislation would allow existing ratepayers to subsidize uneconomic expansions. The fact is, utilities can’t make an economic case for expanding natural gas lines without their anchor customers. Otherwise costs would skyrocket and they wouldn’t be interested anymore.”
Petrash added that population density, the traditional trigger for natural gas utility interest in expanding service to new regions, is not in play. Further, utility investors and oversight agencies would quickly seize on any decision to expand at $1 million a mile, the going rate absent subsidies from existing ratepayers.
Interest in natural gas expansion at the federal and state level is being driven by the growth in resources and stable prices, Petrash observed. “The resource base has grown and prices are low, so let’s hook everybody up seems to be the thinking. But the big issue is the high cost of delivery to sparse populations. Introducing a model where existing ratepayers and government subsidies pay for residential service expansion is seen by state legislators as a solution to the cost barrier.”
NPGA reports that while attention is certainly focused on the Lower 48 states, a major battle is being waged in Alaska over the future of propane. The state legislature has considered bills in the house and senate that would allow the Alaska Industrial Development and Export Authority to issue bonds to finance the purchase of Pentex Alaska Natural Gas Co. LLC and its assets, including Fairbanks Natural Gas, for $52.5 million. The purchase would put the state into the natural gas business, with the intention to expand pipelines into interior Alaska.
The Pacific Propane Gas Association has retained legislative counsel to promote propane’s immediate viability. There is also local support for propane, including an editorial from a University of Alaska professor who underscored how propane could be an excellent alternative for interior Alaskans. Alaska Gov. Bill Walker has run into opposition with some legislative leaders over how to proceed with natural gas pipeline expansion. At stake are tens of billions of dollars of development money, including some taxpayer funds.
At the federal level, Federal Energy Regulatory Commission Chairman Tony Clark Oct. 6 called for more natural gas transmission pipeline infrastructure, citing the shale boom’s transformative effect on the U.S. Speaking at the North American Gas Forum, he emphasized that shale gas and the midstream sector have significantly contributed to lower gas prices. He pointed out that even in a scenario where there was heavy reliance on energy sources such as solar and wind for electrical generation, efficient natural gas plants and infrastructure would remain a major energy source to support the inherently intermittent nature of renewables. —John Needham
