WASHINGTON, DC, Oct. 18 -- Natural gas pipelines are moving aggressively to expand transmission and storage capacity, but new approaches to aggregate production for capacity commitments will be necessary if more significant additions are to be made, Kinder Morgan Inc.'s top gas pipeline official told a Federal Energy Regulatory Commission conference in Washington, DC.
"Large infrastructure projects are needed not just to address the growing needs of the market but to meet a fundamental shift of supply growth within the United States," Scott Parker, KMI's president of natural gas pipelines, said in comments submitted to FERC's State of the Natural Gas Infrastructure Conference on Oct. 12.
Growing Rocky Mountain production and LNG imports will provide some of the biggest near-term supply additions, but KMI believes the current pipeline grid may not be adequate to move the extra gas to markets, he continued.
"We need to not only connect that supply, but to build pipeline projects that alleviate the bottlenecks and not just move the bottlenecks from, for example, the Rockies to the Midcontinent," Parker said.
He noted that Kinder Morgan Energy Partners recently announced an open season on a $490 million, 137-mile LNG pipeline in Louisiana and that it has obtained conditional agreements from several shippers for the project's 3.4 bcfd of initial capacity.
KMP and Sempra Energy's gas pipeline and storage subsidiary also are collaborating on a proposed 42-in. pipeline that will move as much as 2 bcfd of gas from the Rockies to the eastern US, according to Parker (OGJ, Aug. 22, 2005, Newsletter). The $3 billion project would begin at the Wamsutter Hub in Wyoming and extend 1,500 miles to eastern Ohio. El Paso Corp. also recently proposed a long gas line from the US West to eastern destinations (OGJ, Oct. 17, 2005, Newsletter).
"Pipeline developers need long-term contracts to support an investment of $500 million to $3 billion," he pointed out. "At the same time, these pipeline projects are supply-driven and need to be flexible enough to accommodate the underpinning economic assumptions of the supply developers who are also making a significant investment in the basin or upstream of the LNG terminal."
Large gas infrastructure projects typically have a few large shippers that commit themselves to a project early, usually before open season, and provide the financial underpinnings, Parker said. Such "foundation shippers" share the early development risks with the pipeline and typically hold a major portion of the project's capacity, he explained.
"The current open season and negotiated rate policies are appropriate for more conventional projects of a smaller scale not requiring the same capital commitments and therefore typically supported by multiple shippers with shorter-term contracts and smaller increments of capacity commitments," he said.
Urging FERC to be flexible as producers and pipelines develop larger projects, Parker conceded that regulators must make certain that undue discrimination does not occur. However, he also said that a variation from current policies should be considered as a reasonable accommodation if it moves the project forward without creating discrimination.
He said that such variations might include:
-- Being able to assure foundation shippers that they will be awarded a minimum capacity level. "This may require the pipeline to construct a larger project to meet the open season requests and/or allow the foundation shippers prior to any prorating to match other bids that occurred after their preopen-season bids," said Parker. "In some situations, based on the benefits a foundation shipper brings to a large project, the open season may simply provide that the foundation shippers will not be prorated."
-- Allowing foundation shippers in the future to have the ability to trigger an economic expansion of the pipeline system and potentially have an option on that capacity.
-- Being able to differentiate between shippers based on their level of capacity commitment to the project.
-- Giving foundation shippers the right to reduce their capacity commitments if a project achieves its minimum subscription. While pipeline developers need minimum volumes from shippers early in the process to financially justify preliminary engineering and environmental expenditures, Parker said, a shipper may not have wanted to make the full commitment but did so to move the project along. Allowing such shippers to "step down" if additional shippers come aboard later will make the initial decision easier, although pipelines would have to make the same right available to the shippers who sign on later, he said.
-- Continuing to let pipelines use their flexible negotiated rate authority.
"We believe that new ideas will be needed to insure that the large pipeline infrastructure gets built," Parker said, adding that what KMI calls its "aggregator proposal" might be one such idea.
Essentially, the company began negotiating with the Wyoming Natural Gas Pipeline Authority (WNGPA), an entity formed by the state legislature to facilitate production and transportation of Wyoming gas, to enter contracts for up to 200 MMcfd of firm capacity on its project out of the Rockies.
KMI and the WNGPA also are exploring use of the authority's $1 billion of bonding authority to provide debt financing for the project and providing support for extending it to the Opal Hub, Parker said.
"Small producers do not typically commit over the long term to pipeline capacity due to their need to invest in drilling and their limited credit capabilities," said Parker. "As part of this project, we intend to develop and propose a new supply aggregator concept which would allow entities like the WNGPA to assist small producers who would not typically take capacity on a large pipeline project."
The state also is working with the WNGPA to determine whether they can aggregate royalty-in-kind gas with the production from small producers into one pool or commitment, he added.
An aggregator would not necessarily buy the gas or hold title to it, according to Parker. Instead, it would electronically post on its bulletin board the identities of the participating small producers and their volumes after the fact as a public disclosure, he said.
"We believe this aggregator concept will help provide the support to get the large pipeline projects built," Parker said.
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