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As Time Goes By - The long Gestation for Gas Pipeline Projects

The gestation period from concept to in-service for a new natural gas pipeline can take at least 3-4 years. A significant number of these projects are underway today in the Northeast US in response to dramatic increases in local production. Today we continue our series on changes in the Northeast with a look at the process required to develop pipeline infrastructure.

In our previous posting we talked about the dramatic changes in strategies, infrastructure and operations in the Northeast resulting from the successful development and growth of Marcellus natural gas production.  Some of these investments by pipelines, and shipper commitments for transportation agreements, are quite sizable and can cause a high degree of angst.  One of the factors that makes this so difficult for everyone is that the timeline for an interstate pipeline to place new capacity into service can typically take three to four years from conception to in-service.  That’s a long time in a dynamic industry and as we have seen, significant changes can take place in that long a period. Before we drill down to the strategic and 'operational aspects, it would be helpful to understand why it takes so long and what is involved in the development process to bring new pipeline capacity on stream.  

First, the need for capacity must be recognized and potential shippers identified.   Historically (when supplies were more distant i.e. U.S. Gulf Coast or Rockies ) gas buyers, primarily Local Distribution Companies (LDCs) held pipeline capacity to secure their access to gas supplies. The capacity path usually began in the production area or a downstream hub location where gas can be bought or sold on a regular basis (known as a “liquid” pricing point).  Nowadays the growth of production and an oversupplied market in the Northeast have driven gas producers to secure access to pipeline capacity enabling them to reach liquid points and city gates (interconnects with LDCs).   In other words, producers are signing up for capacity that ties into capacity held by buyers.  Securing access to capacity paths held by buyers allows producers to enhance their marketing capability. This was the case with Rockies Express (REX) pipeline and Rockies producers, and it is certainly the case in several of  the more recent projects in the Marcellus. 

Here’s where some of that pain comes in.    Producers can’t commit to a pipeline too early in its development process because they may not know how much gas will be produced or where to sell it to get the best price.  Once confidence is built that the gas will be there, the producer must evaluate alternatives for transportation and potential customers to be able to produce and flow the gas on an ongoing and reliable basis.  The wells can start producing before the pipeline capacity is built; so alternate, less optimum outlets must be managed until the pipeline is in service. 

At the other end of the pipe, the gas buyers have to make the decision as to where they want to buy their gas supplies.  They typically like to control the path to their market area so they can buy from a larger number of suppliers and promote competition.  They prefer to secure transportation back to a liquid point.  The decision as to who will commit to the capacity and the required demand charges paid to the pipeline to reserve the pipeline capacity becomes a poker game between buyers and sellers.  The pipelines can’t go forward without commitments since they need to demonstrate to regulators that the capacity is truly needed.  The pipelines also go out on a limb and feel some pain because in most cases they bear the risk of development costs and ultimately building the project in a cost efficient and timely manner.  This takes some sorting out.  So how does all this come together and result in usable infrastructure?  This development process in a regulated industry takes a lot of time, hard work and poses risks for all parties. Let’s look at this process. The chart below is a very simplified depiction of the pipeline development steps and there are many subsets of tasks, some of which will be discussed below.

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