Changes in the Pipeline Transportation Market
April 1, 1999
Natural gas must be competitively priced in order to be a viable energy choice for consumers. The cost of the natural gas commodity, set by market conditions, represented about half of total gas service costs paid by consumers in 1997. The remaining costs were associated with moving the gas from the field to the customer’s point of consumption. These delivery costs are regulated under Federal (interstate transportation) and State (intrastate transportation and distribution) laws and regulations.
The terms and costs of transporting natural gas along the interstate pipeline grid are specified in contracts between pipeline companies and shippers. Many of the firm service contracts have been in place for several years and may no longer reflect current market conditions. Consequently, some shippers are choosing not to renew these contracts when they expire and instead are “turning back” some or all of the capacity to the pipeline companies. In fact, recent experience (based on a representative sample of 54 unique shipper-pipeline pairings) indicates that 19 percent (excluding a turnback of 1.2 trillion Btu per day to El Paso Natural Gas Company in 1997) of firm service capacity under expiring long-term contracts was turned back between April 1, 1996, and March 31, 1998. Some of this capacity has been remarketed to other shippers but generally at much lower rates.
Changes in capacity contracting are related to a larger transition in the natural gas transportation market. Shippers appear to be using capacity on different pipelines to access competing natural gas supply sources. Also, marketers, who are increasingly taking over LDC service functions, are writing more contracts for firm transportation service. Marketers increased their market share by 3 percentage points between April 1996 and July 1998, from 21 to 24 percent of total U.S. contracted capacity.
This analysis assesses the amount of capacity that may be turned back to pipeline companies, based on shippers’ actions over the past several years and the profile of contracts in place as of July 1, 1998. It also examines changes in the characteristics of contracts between shippers and pipeline companies. The analysis does not factor in the projected growth in demand for natural gas, infrastructure growth, or other market changes; these factors would tend to mitigate the overall impact of capacity turnback.
- Between 1998 and 2003, about 8.0 trillion Btu per day, or 8 percent of currently committed capacity, is likely to be turned back to interstate pipeline companies. Some or all of this turned back capacity may be remarketed, but potentially at lower rates, which could lead to stranded facilities costs if the revenue does not cover the capital investment.
- Overall, the total amount of interstate capacity that is reserved under firm transportation contracts has remained fairly steady during the past 2 years (July 1996 through July 1998), at about 95 to 105 trillion Btu per day. This is due mainly to two factors: (1) the new contracts for recently completed pipeline capacity and (2) the remarketing of some turned back capacity.
The turnback of pipeline capacity appears to be a transitional issue for the natural gas industry—perhaps the last wave of fallout from the industry restructuring under Federal Energy Regulatory Commission (FERC) Order 636. There are parallels to take-or-pay costs in the 1980s, when wellhead contracts did not reflect market conditions and purchasers were unable to use the supplies they had under contract.