Gas quality, interchangeability issues await policy

May 16, 2005
Eighteen months of natural gas industry discussions culminate with the US Federal Energy Regulatory Commission’s technical conference on gas interchangeability on May 17.

Eighteen months of natural gas industry discussions culminate with the US Federal Energy Regulatory Commission’s technical conference on gas interchangeability on May 17. The next step will be to develop policies that address gas quality concerns without limiting potential supply sources, industry representatives agree.

Interchangeability questions emerged with recognition of the increasing US need for LNG. If they’re resolved while FERC is processing terminal applications, said Jane Lewis, vice-president of regulatory affairs at the American Gas Association, “the system can be in place to add supplies in the near term.”

FERC initially raised the interchangeability issue at a November 2003 conference after a National Petroleum Council study a month earlier recommended that guidelines be developed.

AGA and the three other members of the Natural Gas Council-the Independent Petroleum Association of America, the Interstate Natural Gas Association of America (INGAA), and the Natural Gas Supply Association (NGSA)-agreed. They asked FERC to let the industry address the issue.

“We saw it was an alligator we needed to wrestle to the ground,” Lewis said.

Gas-consuming industries, LNG terminal developers, and other stakeholders joined the discussions, which began on a technical basis. Two working groups held 40 meetings and conference calls as the “Natural Gas Council-Plus.”

The first group addressed interchangeability and noncombustion end-use. The second concentrated on a related issue, liquid hydrocarbon drop-out in domestic gas infrastructure. Each submitted a white paper to FERC for comments on Feb. 28. Groups and end-users have been submitting comments since then.

“On the 17th, we hope we’ll be able to go beyond the reports and make recommendations on how to implement standards and policies,” Lewis said. At that time, she indicated, Richard Dobson, manager of gas hub services at Peoples Energy Corp. in Chicago and chairman of AGA’s regulatory committee, will ask FERC to initiate a rulemaking.

Essentially, said Lewis, AGA would like pipelines to update their tariffs to address both the interchangeability and hydrocarbon drop-out issues consistent with the technical groups’ work.

Controlling makeup

Pipelines need the ability to control the makeup of what goes into their systems, said INGAA Pres. Donald F. Santa Jr.

“It’s a technical issue. To FERC’s credit, it asked the industry to take some time to solve it, and the industry responded well. But the bottom line is who will pay,” he said.

“For the longest time, we effectively had a self-contained market, complete with a petrochemical industry to consume gas liquids and appliances and machines tuned to certain natural gas specifications.

“Unlike gasoline, which can be blended at refineries or terminals, natural gas needs to be homogenous. That’s the crux of the issue. On one hand, gas is needed from many markets. On the other, local distribution companies want what they’ve always had.”

Mike Novak, assistant general manager for National Fuel Gas Corp.’s distribution division in Buffalo, NY, and a member of the North American Energy Standards Board’s (NAESB) executive committee, agreed.

“The biggest interest in the retail sector has been being able to continue to use gas supplies as we have in the past,” he said. “We hope that gas quality can remain in ranges where we’re comfortable operating.”

Interchangeability and gas quality also concern electricity generators, whose turbines have grown in sophistication, said Joe Stepanovich, a consultant with the Florida Reliability Coordinating Council and vice-chairman of NAESB’s wholesale gas quadrant.

“It’s the change of quality, at any moment in time,” he explained. “If the newer machines do not have previous information that a change in gas quality is coming, there can be harm done to the machine.”

For that reason, NAESB Executive Rae McQuade said, the organization developed reporting standards that it adopted in September 2004 and submitted to FERC, which approved them on May 4. “They explain the reporting, where to find in each pipeline’s tariff specific gas quality requirements, and how to report gas quality measured at representative points along the pipeline,” she said.

Quality issues

Gas industry segments already were facing quality issues before interchangeability entered the vocabulary in November 2003.

“It’s been an issue for years,” said Jennifer Deegan, energy markets director at the NGSA. “There’s been language involving gas quality in pipeline tariffs for years.

“Gas varies geographically. It has different molecular structures in different regions. Some of it is wet and rich. Some of it is dry and lean. The introduction of LNG brought us to interchangeability-the issue of combustibility from an end-user perspective.”

Keeping the system flexible is a top priority, industry representatives agree.

“Right now, natural gas is safely consumed in this country,” Deegan said. “We need to maintain that by setting parameters to reduce risk while staying flexible to maintain supply choices. How do you come up with a policy to establish marketplace certainty while continuing the flexibility we have?”

Addressing the hydrocarbon drop-out question is an important part of the process, she continued. NGSA supports creation of a national dew point floor of 15°.

“Based on the research that’s taken place the last year, we believe that’s conservative. We hope that becomes the national floor, with flexibility above that,” Deegan said.

One benefit from preparing the white papers for FERC, she maintained, is that “everyone knows what ‘CHDP’ is now.” At the cricondotherm hydrocarbon dew point, liquids begin to form from gas. “Everyone spoke a different language before. Now, everyone uses the same terms,” said Deegan.

INGAA’s Santa said the Natural Gas Council-Plus developed “pretty good methods” for specifying deliverability and preventing drop-out.

“But there are still questions,” he said. “How do you resolve when 15° satisfies 95% of the distributors, but 5% need it colder? In some cases, LDCs dealt with this either with multistage systems or heaters. But who pays for retrofits in other cases?”

Investment questions

For LNG import terminals, the interchangeability issue raises investment questions, he noted.

“Settlements have been made and deals cut for some LNG that’s coming in,” Santa said. “The parties may believe they should be grandfathered and not subjected to a new set of specifications.”

AGA’s Lewis said, “The economics of LNG are such that if processing is needed to be added at the terminal, it could be done for less than 20¢/Mcf.” She added that LNG is competitive with the gas price at $3.50/Mcf.

“We would argue that it’s a cost of doing business,” she said. “LNG terminal operators need to bring gas in that consumers can use.”

But Santa warned against requiring all LNG terminals to strip liquids out before considering where those liquids would go. “There’s a ready market on the Gulf Coast, but not on the East Coast,” he said.

He expects various groups to present their recommendations to federal gas regulators soon. “Then the ball will be in FERC’s court,” Santa said.

With technical work done, said Deegan, it’s time for FERC to make progress on policy.

“We’ve spent the last 18 months studying this and speak the same language across the industry,” she said. “Now is the time to create the certainty for the industry to continue the flexibility it has on a nondiscriminatory basis.”