Posts from Rick Smead

Thursday, 05/17/2018

Two months ago, the Federal Energy Regulatory Commission shook up master limited partnerships (MLPs) and their investors by deciding that income taxes would no longer be factored into the cost-based tariff rates of MLP-owned pipelines. We said then that there was no need to panic — that all this will take time to play out, and that the end results may not be as widespread or dire as some feared. Today, we provide an update, dig into FERC’s other actions on changes in income taxes, and discuss the phenomenon known as “FERC Time.”

Sunday, 03/18/2018

The aftershocks are still being felt from last Thursday’s decision by the Federal Energy Regulatory Commission (FERC) that interstate gas and liquids pipelines’ cost-based tariff rates can’t include anything for income taxes if the pipelines are owned by master limited partnerships (MLPs) — and most are. Many investors did freak out — no other phrase sums it up better — when they heard that news. Share prices for midstream companies plummeted in midday trading, and we imagine that many angry calls were made by investors to their financial advisers. “Why didn’t we know about this?!” In fact, although this proceeding had been simmering for a while, FERC’s action was harsher than expected by most experts. But the impact of the change is likely to be less far-reaching than the Wall Street frenzy would have you believe, at least for most MLPs. And, by the way, the issue at hand — whether and how to factor in taxes in calculating MLPs’ cost-of-service-based rates for interstate pipelines –– has been around for decades. Today, we discuss FERC’s new policy statement on the treatment of income taxes and what it means for natural gas, crude oil, natural gas liquid (NGL) and refined product pipeline rates; and for investors in MLPs that own and operate the systems.

Sunday, 09/10/2017

A federal appellate court decision has set back the approval of a newly completed set of natural gas pipelines in the U.S. Southeast, and raised the possibility that all gas pipeline projects will need to clear a new — and potentially challenging — hurdle before they can secure a final OK from the Federal Energy Regulatory Commission (FERC). In its late-August ruling in Sierra Club, et al vs. FERC, the U.S. Court of Appeals for the District of Columbia Circuit said FERC’s environmental impact statement for the Southeast Market Pipelines Project, which includes the 1.1-Bcf/d Sabal Trail pipeline from west-central Alabama to central Florida, should have considered greenhouse gas emissions from gas-fired power plants the new pipelines will serve. Today, we explore the potentially far-reaching effect of the decision on midstream companies and the utilities that depend on them.

Monday, 08/21/2017

On August 4, the U.S. Senate confirmed two new commissioners for the Federal Energy Regulatory Commission (FERC), restoring the three-member quorum legally required for FERC to vote. The Senate action ended a six-month dry spell during which FERC could not issue any orders, and thus could not approve any of the many pipeline projects pending there. What does it mean that FERC can act again to approve new projects? And does that mean the industry can move forward at the pace it needs? Today we explore these questions and assess what it will take to get some key gas infrastructure projects back on track.

Sunday, 07/30/2017

The U.S. and Australia have been ramping up their LNG exports — Australia already is the world’s second-largest LNG exporter after Qatar and the U.S. will soon rank third. Two recent events highlight the difference between the two countries and their natural gas markets. First, in June the Australian prime minister acted to curtail LNG exports next year because of gas-supply shortages affecting domestic consumers. Second, on July 19, the Potential Gas Committee released its biennial analysis of recoverable gas resources in the U.S.; its findings support the view that U.S. LNG exports can continue growing without causing domestic supply constraints. Today we review the PGC report and the Australian LNG/supply situation, then compare the two markets.

Thursday, 05/11/2017

Only a few years ago, pretty much all the natural gas flowing through pipelines in the southeastern U.S. was headed north to serve demand in the Northeast and the Midwest. But that’s all been changing — and fast. Gas production in the Marcellus/Utica has soared and now meets the needs of the Northeast and more. And, as LNG exports from the Gulf Coast ramp up and Southeast gas demand for power generation rises, more and more Marcellus/Utica gas is flowing south, raising the question of whether pipes in the Southeast can handle it all over the long term. Today, we discuss the findings of RBN’s work in preparing a study for the American Petroleum Institute (API) on the adequacy of regional gas pipeline infrastructure.   RBN’s work discussed here is the current analysis being used to inform and develop stakeholder briefings.  We anticipate API will release the final version in report form, after its completion.

Wednesday, 02/15/2017

As it builds out the nation’s oil and natural gas pipeline networks to keep pace with ever-changing needs, the midstream sector has faced a number of challenges, perhaps chief among them regulatory delays exacerbated by organized environmental opposition. An oft-repeated priority of the new administration has been to make it easier to advance the development of new energy infrastructure development. That raises a few questions. How much difference will this apparent change in attitude make? Should we expect a huge surge in new pipeline projects to be approved and move forward? Today we examine major projects that have faced drawn-out approval processes and evaluate the degree to which a new administration can grease the skids for new pipelines.

Monday, 10/17/2016

Many factors are weighed before a midstream company commits to building, or a shipper commits to shipping on, a major crude oil pipeline. Where is incremental pipeline capacity needed? What would be the logical origin and terminus for the pipeline? What should the project’s capacity be, and what would be the capital cost of building the project? Where the economic rubber really meets the road is the question of what unit cost––or rate per barrel––would the pipeline developer need to charge to recover its costs and earn a reasonable rate of return on its investment.  A really important aspect of that is what the developer will be allowed to charge, once regulators get into it.   Today we continue our review of crude oil pipeline economics with an overview of who regulates oil pipelines, how they do it, and what it means for rates.

In Part 1 of this series we discussed the fact that new pipeline development is driven by either need or opportunity, and more often than not, a combination of the two. The key question that pipeline developers and their customers (the shippers) have to consider before committing to build new capacity, we said, is whether it will “pay” to flow crude on the pipeline once it’s built––not just the first year or the first three, but for years if not decades to come. To answer this question, pipeline developers and shippers have to consider both current and future economics. There are three fundamental factors that drive pipeline economics: 1) future supply dynamics (and the resulting price impact) at the origination point (Point A); 2) future demand (and price) at the destination point (Point B); and 3) the transportation cost to flow crude from Point A to Point B.  

Tuesday, 09/27/2016

Many factors are weighed before a midstream company commits to building, or a shipper commits to shipping on, a major crude oil pipeline. Where is incremental pipeline capacity needed? What would be the logical origin and terminus for the pipeline? What should the project’s capacity be, and what would be the capital cost of building the project? Where the economic rubber really meets the road is the question of what unit cost––or rate per barrel––would the pipeline developer need to charge to recover its costs and earn a reasonable rate of return on its investment. Today we continue our review of crude oil pipeline economics with a look at the rules-of-thumb for determining what pipeline transportation rates would be.

Thursday, 09/15/2016

Despite the doom and gloom that many see in the global LNG market –– too much supply, weak demand growth, and low LNG prices –– the possibility remains that the sector may offer the opportunity for low-cost, highly responsive market participants to do quite well, and even thrive. How can that be? After all, we’ve just seen another year of low crude oil prices resulting in very low oil/natural gas margins, and the expectation of high oil/gas margins were critical in supporting the development of many U.S. liquefaction/LNG export projects. But a combination of responsive demand, low cost infrastructure development and the possibility that number of exporting countries could run out of gas at or near the end of their existing contracts could change the outlook for ongoing LNG export development. Today, we look at the LNG market in the context of themes discussed at the North American Gas Forum (NAGF).  Warning: this blog includes a plug for this year’s NAGF conference.

Monday, 09/05/2016

The Shale Revolution sparked a multibillion-dollar re-plumbing of the U.S. crude oil pipeline network that continues to this day, two years after oil prices started falling and one year after oil production volumes followed suit. While the pace of development has at times seemed hectic, the individual decisions to build new pipelines involve a lot of studying, vetting and number crunching. After all, pipelines don’t come cheap, and their success depends to a considerable degree on their long-term usefulness to the market. One of the most important factors in determining whether a crude oil pipeline project makes sense is its capital cost and, with that, the cost of moving oil through it. Today, we continue our look at crude pipeline economics with a discussion of the basics of estimating pipe size and cost, and figuring the optimal capacity of a given pipeline project.

Monday, 08/22/2016

Eight years into the Shale Revolution –– and two years into a crude oil price slump that put the brakes on production growth –– midstream companies continue to develop new pipelines to move crude to market. As always, the aims of these investments in new takeaway capacity may include reducing or eliminating delivery constraints, shrinking the price differentials that hurt producers in takeaway-constrained areas, or giving producers access to new markets or refineries access to new sources of supply. Whatever the economic rationale for developing new pipeline capacity, midstreamers and potential crude oil shippers need to examine–– early on –– the likely capital cost of possible projects, if only to help them determine which projects are worth pursuing, and which aren’t. Today, we begin a series on how midstream companies and potential shippers evaluate (and continually reassess) the rationale for new crude pipeline capacity in today’s topsy-turvy markets.

Tuesday, 06/28/2016

It’s no secret that a long list of pipeline projects have been proposed to help move natural gas out of the Northeast production areas. But if you were a Marcellus or Utica producer, how would you decide whether you were interested in new capacity that hadn’t been proposed or built yet? Of course, pipeline companies have armies of engineers, cost estimators, and market analysts to bring one of these monster projects to fruition. But for anyone else, particularly in the early stages, how do you even know it’s a reasonable idea? For anyone testing a concept, you need a way to ballpark some scenarios for a new pipe. We’ve been running a blog series on our RBN Pipeline Economics Estimation Model, a quick, rule-of-thumb “sanity test” for new capacity. Today, we wrap up our walk-through of the model, with a real-world example to gauge the accuracy of the model, and then with a discussion on how the model can be used to measure economies of scale in picking the minimum volume you probably need for a new pipeline.

Thursday, 06/16/2016

New and expansion natural gas pipeline projects have been part and parcel of the shale production boom in the U.S. Northeast. In fact, Northeast gas production could not have reached anywhere near its current level and become a major natural gas supplier to the U.S. without the substantial addition of takeaway capacity out of the Marcellus/Utica shale areas. At the same time, the competition among pipeline developers jockeying to be in the right place at the right time has been fierce. And now, low natural gas prices and uncertainty about future production growth have only increased the competition---not all projects will make it to in-service. The risks are higher for big pipeline projects, but so are the stakes. These days, the overall risk tolerance among shippers and investors is low, especially among producers. So if you’re a producer, how can you make sure you don’t end up on the wrong side of a transportation deal? In today’s blog, we continue our walk-through of the RBN Pipeline Economics Estimation Model.  We’ll follow up in a later installment with a real-world test and other ways to use the model.

Wednesday, 06/08/2016

We’ve spent a lot of time here in the RBN blogosphere discussing the trials and tribulations of natural gas producers in the Marcellus and Utica shales who are “trapped behind the pipe,” unable to get sufficient takeaway capacity to move supply to market (both within and outside the U.S. Northeast region) where they could get a higher price for their gas. Pipeline companies have ponied up billions of dollars to build lots of pipe to alleviate these constraints and much more investment is planned. Of course, those pipelines and their committed shippers hope that the investment will pay off long-term – that the economics for building the pipe will justify the cost.   The pipeline will have scores of engineers, lawyers and accountants to figure that out.  But what if you just want to make a quick-and-dirty estimate of the economics?  Well, there is a way. In today’s blog, we walk through the factors you need to consider when your boss runs in and asks, “Hey—what would it cost to move gas there in a new pipe?”