When temperatures plummeted across the Northeast last winter, spot natural gas prices along the Eastern Seaboard spiked to eye-popping levels causing many to call for additional pipeline capacity. However, as is often the case with energy issues, the situation is more complex than it may first appear and constructing expensive long-term pipeline capacity may not be the best way to address the issue.
Breaking Energy recently spoke with Guy Braden, Senior Vice President of Commercial Operations for GDF Suez Gas North America, a subsidiary of GDF Suez North America ahead of his upcoming remarks at the North American Gas Forum taking place in Washington DC September 28-30.
The GDF Suez subsidiary owns and operates the Everett LNG terminal in Massachusetts that serves Boston and the surrounding region. The terminal is equipped with 2 LNG storage tanks with a combined capacity of 3.4 billion cubic feet, or 42 million gallons. Gas is delivered via interconnecting facilities of 2 interstate natural gas pipelines – Algonquin Gas Transmission and Tennessee Gas Pipeline Company – which in turn connect to local distribution networks.
Addressing a Peaking Problem with Baseload Capacity
The problem in New England is the market is well supplied throughout most of the year and average annual pipeline capacity usage is on the low side, explained Braden. The supply situation disincentives large consumers like power generators to enter long-term contractual agreements – that would essentially require them to take long-term bets on natural gas prices – and rather source gas from the spot market, thus paying the going rate which has been historically low in recent years. However, when extremely cold weather moves in and heating demand spikes, gas consumers converge on the spot market driving up demand and prices.
“There is sufficient capacity to meet the needs of the market…so we generally think this talk of building massive pipeline infrastructure is using a baseload solution to address a peaking problem,” Braden told Breaking Energy. He contends better planning can help alleviate the problem. “The folks who really need gas are the power generators and they have no cost-recovery mechanism to secure LNG or pipeline capacity in advance” Braden said.
The weather-related risk is considerable and compounds the problem from an economic standpoint. “It’s a risky proposition because if we line up several [LNG] cargoes to bring into the market and have a warm winter and prices fall apart then have problem.”
“There is a lot of storage between the two regional LNG terminals and we work with LDCs [local distribution companies] to supply storage. We can bring more ships in but that’s somewhat risky because it’s such a thin market and there are stronger markets elsewhere. …There’s an inability with people who need that peak supply to secure it,” he added.
Talks are underway with power generators and the independent system operator about sharing the risk associated with securing supply that can be used during periods of extreme demand. Companies pay a premium for the option to access supply during cold snaps so they are not beholden to spot market volatility. The ISO is working on a program to help equitably share the cost of those option premiums.
But work must still be done to iron out the details. “The idea is to compensate holders of LNG contracts that go unused at end of winter. This leaves a lot of risk on the generators that has made them reluctant to enter into the program,” said Braden. If these issues can be worked out, however, using LNG and existing infrastructure could be an easier, more cost-effective solution than constructing new pipeline capacity, he contends.
Braden will discuss this issue in detail during his NAGF presentation. “I’m going to talk about how LNG is still relevant in the New England market. We think it’s the right solution for the winter peaking issue. The real problem in New England ironically is caused by low-priced gas – low prices drain the pond for non-gas fired generation. My presentation will show that a solution is there.”
Other Important Industry Trends
Natural gas prices and overall volatility have been historically low for the past several years amid booming production and fairly stable demand. Industry observers and analysts are now questioning how longer-term supply/demand dynamics will impact gas prices.
“We’ve been in such an abundant supply mode and producers are saying we need markets so we can get the price back up. The question is how will demand respond? We’ve seen petrochemical and manufacturing coming back based on low-cost gas. Will we see a transportation market?” Braden asked.
There is a case to be made for natural gas vehicles for which there is growing support, but there are challenges to building out that market as well – massive infrastructural investment and long-term price uncertainty among them. On the other hand, the marine market is of particular interest and a space Braden said he watches closely.
The degree to which the US will export LNG is another issue receiving lots of attention. In fact, the Department of Energy just greenlit two more export projects this week.
“There’s lots of export talk and I think there will be limited volumes of exports from the US. I tend to side with the projections of about 6bcf/d. Probably not much more than what’s under construction right now,” said Braden. “There’s a lot of LNG that will be produced and it is not evident global demand will be there. You just need to look at the spot price. In Asia it’s $10 right now which is a far cry from where it was, though some of that’s weather related.”
The greatest risk with regard to US LNG exports is that investors spend billions of dollars on liquefaction infrastructure only to find themselves without markets. Long-term contracts are usually a prerequisite for building these projects, which is meant to limit that risk, but global supply/demand and price vagaries will always exist.
“If you’re in this industry long enough you see these cycles. The energy business has gone from boom to bust many times.”
The North American Gas Forum, happening September 28-30 in Washington D.C. will focus on supply-demand dynamics in the North American and global gas markets and address many of the key issues that are a priority for leaders in the industry. A first-class speaker line-up with 45+ speakers and 7 US Congressmen are some of the highlights of the forum. For more information please visit http://energy-dialogues.com/nagf or contact the organizer.
Breaking Energy is a North American Gas Forum media partner.
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