Get Your Pipe­line Out of My Yard

Home­own­ers, en­vi­ron­men­tal­ists, and the chang­ing eco­nom­ics of nat­u­ral gas are get­ting in the way of an in­dus­try’s big dreams

Bloomberg Businessweek (Europe) - - OPENING REMARKS - By Matthew Philips With Dave Mer­rill

Thanks to the shale drilling rev­o­lu­tion, the U.S. has gone in less than a decade from be­ing woe­fully short of nat­u­ral gas to hav­ing al­most a cen­tury’s worth of sup­plies. But the pipe­lines that were go­ing to trans­form Amer­i­can en­ergy use are get­ting harder to build. To take full ad­van­tage of the wind­fall, the coun­try must fun­da­men­tally change the way nat­u­ral gas flows through the U.S. Yet what used to be seen as a rub­ber-stamp ap­proval process has turned into a slow-mo­tion headache for pipe­line com­pa­nies, brought on by eco­log­i­cal con­cerns and the

chang­ing

eco­nom­ics of nat­u­ral gas.

Take the case of the Holler­ans. The first time they heard about the Con­sti­tu­tion pipe­line was in 2012, when men started show­ing up on their land to do sur­vey work. Their 23-acre home­stead in north­east­ern Penn­syl­va­nia was in the path of the $875 mil­lion pipe­line, which would stretch 124 miles from the Mar­cel­lus Shale fields of Penn­syl­va­nia into New York state, where it would con­nect with ex­ist­ing pipe­lines to de­liver cheap nat­u­ral gas to cities in the North­east.

As other landown­ers around them made deals with the pipe­line’s owner, Tulsa-based Wil­liams Cos., the Holler­ans held out. For two years they tried to get Wil­liams to make al­ter­ations to the route, which ini­tially ran through the mid­dle of their house. Wil­liams di­verted the pipe­line away from the house, but not from the grove of ma­ture maple trees that sup­ply the fam­ily’s bur­geon­ing syrup busi­ness. Wil­liams of­fered com­pen­sa­tion, but noth­ing that ap­proached what the Holler­ans con­sid­ered to be the value of their land. So they re­fused to sign.

In De­cem­ber 2014, Wil­liams se­cured fed­eral ap­proval for Con­sti­tu­tion, which gave it the right to en­force em­i­nent do­main on the Holler­ans and seize their prop­erty in the name of the public good. Over three days in early March 2016, chain saw crews cleared 3.5 acres of the Holler­ans’ land, in­clud­ing hun­dreds of trees and 90 per­cent of their maples. State po­lice blocked off nearby roads. U.S. mar­shals with bul­let­proof vests and as­sault ri­fles stood guard.

Then, seven weeks later, on Earth Day, New York state de­nied Con­sti­tu­tion wa­ter qual­ity per­mits, claim­ing that Wil­liams hadn’t pro­vided ad­e­quate de­tails on its plans to bury the pipe be­neath some 250 streams. Wil­liams dis­putes this and is su­ing the New York State Depart­ment of En­vi­ron­men­tal Con­ser­va­tion. Tech­ni­cally, the pipe­line isn’t dead, but it’s ef­fec­tively on life sup­port. To Megan Holleran, the vic­tory is bit­ter­sweet. “Those trees will never grow back in my life­time,” she says. “We’ll never be able to pro­duce syrup on that land again.” That same week in April, Texas en­ergy gi­ant Kin­der Mor­gan can­celed its $3 bil­lion North­east En­ergy Di­rect project, a 420-mile nat­u­ral gas pipe­line planned to run roughly par­al­lel with Con­sti­tu­tion. To­gether, the two pipe­lines were go­ing to form a sort of en­ergy su­per­high­way, de­liv­er­ing a com­bined 2.8 bil­lion cu­bic feet of gas a day from Penn­syl­va­nia, enough to serve 14 mil­lion homes. But un­like Con­sti­tu­tion, Kin­der’s pipe­line wasn’t killed by pol­i­tics or lo­cal op­po­si­tion or even a de­nied per­mit; it was doomed by ba­sic eco­nom­ics. The com­pany couldn’t per­suade power plants and fac­to­ries in the North­east to sign long-term con­tracts to buy the gas it would de­liver.

As the in­dus­try presses for even more ca­pac­ity, it’s time to con­sider whether there is both a need for more pipe­lines and enough po­lit­i­cal and pop­u­lar will to go on build­ing them. Since 2009 fed­eral au­thor­i­ties have ap­proved some 5,000 miles of nat­u­ral gas pipe­lines. Com­pa­nies are seek­ing ap­proval for an ad­di­tional 3,500 miles, rep­re­sent­ing an in­vest­ment of about $35 bil­lion. But en­vi­ron­men­tal and prop­erty-rights ac­tivists have formed a con­sid­er­able front against the in­dus­try. Em­bold­ened by their win against the Key­stone XL crude pipe­line, ac­tivists have mounted

en­vi­ron­men­tal chal­lenges that have slowed or led to the with­drawal of 8 out of 14 ma­jor pipe­lines pro­posed to take gas out of the Mar­cel­lus Shale re­gion. The av­er­age time for a pipe­line to get ap­proved and built has grown from three years to four, ac­cord­ing to the In­ter­state Nat­u­ral Gas As­so­ci­a­tion

of Amer­ica (INGAA). For an in­dus­try sit­ting on $35 bil­lion in in­vest­ments, those de­lays add up to bil­lions in lost prof­its.

Gas pipe­lines have also be­come a fo­cal point in the big­ger public de­bate over cli­mate change and frack­ing, which re­cently has turned against the in­dus­try. A March Gallup poll showed 51 per­cent of Amer­i­cans op­pose frack­ing—the tech­nique for re­leas­ing oil and gas from rock that’s made the U.S. what even Pres­i­dent Obama de­scribes as the “Saudi Ara­bia of nat­u­ral gas.” That’s up from 40 per­cent op­po­si­tion in 2015. The big­gest loss of sup­port came among Repub­li­cans, 55 per­cent of whom say they fa­vor frack­ing, down from 66 per­cent in 2015.

More wor­ry­ing for the pipe­line in­dus­try, and the nat­u­ral gas pro­duc­ers they serve, is that the eco­nom­ics of pipe­lines are be­com­ing less fa­vor­able. Build­ing a pipe­line re­quires cus­tomers to sign long-term con­tracts that lock them into buy­ing gas some­times for as long as 20 years. With wind and so­lar get­ting cheaper by the day, those com­mit­ments no longer make as much sense as they once did. Nat­u­ral gas pipe­line com­pa­nies, in tes­ti­mony to fed­eral elec­tric­ity reg­u­la­tors, have ac­knowl­edged as much and that the trend to­ward re­new­able en­ergy lim­its the eco­nomic vi­a­bil­ity of their pipe­lines. “Re­new­ables are cer­tainly com­pe­ti­tion,” says Don­ald Santa, pres­i­dent of INGAA.

This year, for the first time, nat­u­ral gas is ex­pected to pass coal as the top source of elec­tric­ity gen­er­a­tion in the U.S. That’s mainly be­cause nat­u­ral gas is so cheap—but low prices are a dou­ble-edged sword for pipe­line com­pa­nies. As drillers strug­gle to make money, some are look­ing to break longterm con­tracts they’ve signed with pipe­line com­pa­nies.

Once seen as a hot in­vest­ment, and a way to get in on the U.S. shale rev­o­lu­tion, the pipe­line busi­ness has turned sour for some ma­jor play­ers. Wil­liams and Kin­der Mor­gan have lost bil­lions in stock mar­ket value. Share prices for both com­pa­nies have fallen more than 50 per­cent in the past year. Wil­liams is in talks to merge with ri­val En­ergy Trans­fer Eq­uity, whose stock price has also fallen by half since last sum­mer. With both com­pa­nies strug­gling, that deal is now in ques­tion. While the in­dus­try still claims the U.S. is des­per­ately short of nat­u­ral gas pipe­lines and needs hun­dreds of bil­lions of dol­lars in new projects, there’s a grow­ing case to be made that we may be on the verge of build­ing too many in some re­gions. In a June 7 re­port, en­ergy an­a­lyst Rusty Bra­ziel sug­gests that by next year there will be enough new ca­pac­ity to meet grow­ing gas pro­duc­tion in the Mar­cel­lus and Utica shale re­gions of Penn­syl­va­nia, West Vir­ginia, and Ohio. If all 24 pipe­line projects that are pro­posed for those re­gions get built, Bra­ziel’s anal­y­sis sug­gests, by 2019 new pipe­line ca­pac­ity will be three times greater than new gas pro­duc­tion. “I’m not say­ing that’s def­i­nitely go­ing to hap­pen, but it’s a dis­tinct pos­si­bil­ity that no one seems to be think­ing about,” he says. Even the Depart­ment of En­ergy says the coun­try’s ex­ist­ing 1.5 mil­lion miles of nat­u­ral gas pipe­lines can be more ef­fi­ciently used.

One of the strong­est ar­gu­ments for more pipe­lines is that the lack of in­fra­struc­ture is keep­ing en­ergy prices high in some re­gions. That was cer­tainly true dur­ing the po­lar vor­tex of Jan­uary 2014, which brought record cold tem­per­a­tures to much of the U.S. and

record nat­u­ral gas prices to New Eng­land. The re­gion re­lies

on nat­u­ral gas for about 47 per­cent of its elec­tric­ity gen­er­a­tion, up from

28 per­cent

in 2001. In Jan­uary 2014, New Eng­land’s gov­er­nors called for an elec­tric­ity tar­iff to pay for added nat­u­ral gas pipe­lines. In line with that re­quest, last Oc­to­ber, the public util­ity com­mis­sion of Mas­sachusetts gave the state’s util­i­ties the abil­ity to sign long-term con­tracts with pipe­line com­pa­nies and pass on the costs to their rate pay­ers, in ef­fect shift­ing the cost bur­den of a new pipe­line away from util­i­ties and pipe­line com­pa­nies and onto the backs of con­sumers. A few weeks later, the state’s at­tor­ney gen­eral, Maura Healey, is­sued a de­tailed re­port sug­gest­ing New Eng­land is un­likely to face re­li­a­bil­ity is­sues in its power sec­tor over the next 15 years and that build­ing pipe­lines would be among the most costly ap­proaches to the re­gion’s en­ergy needs. The in­dus­try ar­gues it has to build to ac­com­mo­date pe­ri­ods of peak de­mand, even if that’s only a few days a year.

On June 14, the U.S. Se­nate Com­mit­tee on En­ergy and Nat­u­ral Re­sources held a hear­ing on the dif­fi­culty of build­ing pipe­lines. Alaska’s

Repub­li­can sen­a­tor and chair of the en­ergy com­mit­tee, Lisa Murkowski, es­sen­tially asked the most im­por­tant ques­tion: “If the ben­e­fits are so ap­par­ent … why is there this dis­con­nect? What are we not do­ing right in con­vey­ing to the Amer­i­can public, the con­sumer, that there is a clear ben­e­fit here?”

She might want to ask Megan

Holleran. “I’m not against nat­u­ral gas, and I’m not anti-pipe­lines,” says Holleran. “I’m a cap­i­tal­ist. But when you try and steam­roll and bully peo­ple, and refuse to share the ben­e­fits of what you’re do­ing, then of course peo­ple are go­ing to line up against you.”

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