Shale gas: price signals don’t issue permits [update2]

As America's shale gas bonanza rides on, can the pipeline system keep up?

Last month, Electric Light & Power Editor Teresa Hansen posted an article discussing the plusses and minuses of shale gas vis-à-vis the US utility industry. The piece covered a lot of ground, and it was balanced—definitely not just a cheerleading exercise on behalf of the gas industry.

Still, what it didn’t include got me thinking.  Specifically, I was reminded of something that NYISO president Steve Whitley said two years ago at a conference of American utility executives hosted by ABB. (You can read my account of the session here.)

Speaking in the context of a roundtable with other top industry figures, Whitley noted that the pipeline infrastructure did not evolve with the same focus on planning and system-wide reliability that the power grid did. It was constructed strictly according to market forces.

That may have been fine for the gas industry of pre-2012, but the shale boom is redrawing maps faster than the fall of the Soviet Union.

The EL&P article quotes MISO manager of regulatory studies Jameson Smith as saying “MISO is going to become a destination for gas from all directions because of the shift from coal to natural gas. Before, it was just a place where gas flowed through the area’s pipelines.”

So gas flows are changing simply on the basis of increased use within the power industry, but what about all the other sectors licking their chops over cheap gas? Chemical plants are coming back to the US while gas companies are looking to export LNG. There’s also that other killer app for gas: home heating.

American Natural Gas Association (ANGA) senior director of power generation Michelle Bloodworth told EL&P that utilities shouldn’t worry about supply, and indeed they shouldn’t. They should worry about demand.  In particular, they might consider that gas suppliers are obligated to serve consumers first and power plants second, should such a choice become necessary.

And then there’s regulation. Restrictions on coal have made gas the it-fuel, but the flip side of that coin is the regulation of the infrastructure needed to move gas from shale plays to end markets.

Gas pipelines have not faced the kind of opposition that oil pipelines have recently (Keystone XL, anyone?) but it seems a foregone conclusion that we will need to start building more of them.  Even in the best case scenario, though, it will be many years before the gas transmission system catches up with the new world energy order.

Fracking operations themselves, of course, face ongoing criticism from environmental groups, though it’s unclear whether such opposition will translate into a curtailment on drilling over the long term.

All of these factors, from environmental issues to pipeline siting to rapidly rising demand influence the price of natural gas. ANGA says US gas prices will remain in a comfortable range between $4 and $6 per Mcf for the foreseeable future, but if history is any guide the only thing for sure about gas prices is that they will rise as demand increases and supply is constrained.

Indeed, perhaps the real threat lies not in supply per se but in delivery. We may find that a build-out of the pipeline network encounters obstacles that are immune to price signals (e.g., siting permits, regulation, sabotage). For now, the shale gas revolution continues to bestow its benefits on everyone, but we would be wise to remember that boom times don’t last forever.

[Update 3/24/14] TransmissionHub reports that the US Federal Energy Regulatory Commission (FERC) is considering a rulemaking to harmonize gas pipeline schedules with power markets. The full story is behind a paywall, but here’s a snippet:

This NOPR [notice of proposed rulemaking] is designed to deal principally with the revision of the operating day and scheduling practices used by interstate pipelines to schedule natural gas transportation service, FERC said….

In a separate order, FERC is instituting a proceeding… to coordinate the day-ahead scheduling of ISOs [independent system operators] and RTOs [regional transmission organizations] with the revised interstate natural gas pipeline schedule.

This is mainly a logistical issue, but it further illustrates how the gas and power sectors are becoming more interdependent.

[Update 3/27/14] Bloomberg’s Naureen S. Malik writing at FuelFix reports that US gas prices reached record highs this winter. While it’s being viewed as mainly weather-driven, the story also points out that pipeline bottlenecks played a role:

The biggest gas price gains were in the Northeast, though pipeline bottlenecks contributed to supply shortages at power plants along the East Coast and in the Midwest, Texas and California, according to regional grid operators.

And then there’s this:

About 46 percent of New England’s power came from gas plants last year, up from 30 percent in 2001, according to ISO New England Inc., which manages the state’s grid. No new major gas pipelines have been added to New England in the past 40 years.

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Bob Fesmire

Bob Fesmire is a Content Manager at ABB, based in Cary, North Carolina. He has written more than 150 articles and white papers on a variety of topics including energy efficiency, industrial automation and big data. In addition to his work at ABB, Bob is also the co-author of Energy Explained, a non-technical introduction to all aspects of the energy industry.
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