Its Business as Usual for the Nation's Gas Pipeline Industry

Abstract: Capacity additions to the nation's interstate natural gas grid reached record levels last year. It will be a difficult feat to duplicate.

Analysis: The United States witnessed the addition of 3,600 miles of new natural gas pipeline transportation capacity last year.

It represented a $4.4 billion investment and added 12.8 Bcf/d in natural gas transportation capacity to the nation's system, one of the largest expansions in the last decade for a system that literally connects every natural gas consumer in the U.S. to production that originates from more than 300,000 gas wells scattered nationwide.

But last year's success may not be easy to duplicate.

More than 85 companies comprise the U.S. interstate transportation network. These companies operate 212,000 miles of pipeline with a capacity of 133 Bcf/d of gas. The challenge to natural gas, of course, is lack of fungibility. Unlike oil, which can be transported in barrels virtually anywhere in the world and converted to energy, natural gas is invariably tethered to a pipeline grid.

That means that the consumer's bridge to the future still rests to a large extent on the efforts of those companies who build and operate the gas pipeline transportation network. Last year the oil and gas industry completed 54 natural gas pipeline projects, about two-thirds of which were extensions to existing systems. These extensions, or expansions, represented an increase in capacity of nearly 7 Bcf/d while new pipeline or lateral construction of pipelines totaled nearly 6 Bcf/d.

The numbers are contained in an Energy Information Administration report, published in May 2003, on Expansion and Change on the U.S. Natural Gas Pipeline Network for 2002, which can be accessed through the agency's website or by inputting the following URL: The report is an example of an initially obscure--but ultimately practical--study of yet another facet to the oil and gas industry.

It is significant because the pipeline industry reflects trends in the greater natural gas market. The industry can produce more natural gas than it can deliver to the consumer. Bottlenecks exist in pipeline capacity, gas transmission, or from the simple fact that new production often jumps ahead of the infrastructure necessary to get that new gas to market. While pipelines may follow rigs, there is substantial lead time and enormous investment necessary to do so.

In the ten-year period ending in 2001, the nation added 60 Bcf/d in interstate natural gas pipeline capacity to the lower 48 states. The business has survived both deregulation and the collapse of Enron. An early stimulant was Federal Energy Regulatory Commission (FERC) Order 636, which required interstate pipeline companies to provide open access for transportation and storage of natural gas while separating sales from transportation. With subsequent FERC orders in 1998, the pipeline industry essentially completed the transition from a tightly regulated, integrated industry into an era of unbundled services.

FERC Order 636 became the gateway through which the natural gas industry underwent massive transformation. In the early 1990s, E&P firms still spoke of the "oil and gas" industry. By the late 1990s, those discussions had evolved into a "gas and oil" business.

FERC 636 opened the door for the rise of the gas marketing companies in the late 1990s when natural gas became the clean-burning, environmentally friendly alternative to coal for electrical power generation.

Additionally, the electric power companies, intent on building new gas-fired electrical generation plants to fuel a growing economy, began acquiring natural gas pipeline systems in the late 1990s as a hedge to insure supply. The electric companies found willing sellers on the E&P side who were shedding pipeline assets as they moved towards pure-play ties to natural gas production.

By 2000, things couldn't get any better for the merchant traders, electric utilities, and the natural gas industry.

Then came Enron. The event marked the beginning of another transformative cycle for the pipeline industry. Many of the merchant traders who acquired pipelines in the late 1990s began selling the assets to cover financial exposure as stock prices dropped and credit ratings plummeted. The Williams Companies sold regional systems in Wyoming and the Midcontinent last year. The company even sold its Cove Point LNG facility to Dominion Resources, Inc. Cove Point is one of four LNG facilities in the United States and will be reactivated this summer.

Similarly, Dynegy sold its Northern Natural Gas Pipeline last year, the very same asset it had acquired from Enron when that company's troubles made headlines in late 2001.

Essentially, the forces unleashed through FERC 636 are now entering a maturation phase. Several large energy firms have had balance sheet challenges that have constricted their ability to move forward with pipeline expansion. The collapse of the large energy merchant trading system in the wake of Enron means less capacity is needed than previously expected. Meanwhile, construction has been postponed on many new gas-fired generating facilities and this will lessen the need for additional pipeline expansion over the next two or three years.

Capacity additions had moved from an annual average of 5 Bcf/d in the 1990s to 10 Bcf/d in 2001. That compares to the 12.8 Bcf/d in capacity additions last year. There have been a couple of major drivers in capacity additions over the last three years. The first was growing demand for natural gas in the Southeast.

The second was a response to the California energy crisis in 2001. Pipeline capacity to California at the interstate level has grown by 10 percent since then, with many of those projects completed last year.

What's on tap? There are more than 100 expansion projects in development for the Lower 48 over the next two years, with more than half expected to come to fruition in 2003. Planned expansion calls for 12 Bcf/d in capacity to be added this year followed by an increase of nearly 18 Bcf/d in 2004-05.

It will be tough to meet those projections. As of first quarter this year, only two-thirds had been approved by regulatory agencies. The EIA report found that ten major pipeline projects were cancelled last year, representing 1,450 miles of pipeline and 4.8 Bcf/d in capacity over the next two years.

Changing expectations in the gas pipeline network are one more example of how rapidly things can change in the energy business.