FERC Focuses On Issues Affecting LNG

FERC Focuses On Issues Affecting LNG

February 01, 2004

The Federal Energy Regulatory Commission took two actions that could affect the market in the United States for liquefied natural gas, or “LNG.”

The agency ruled in December and repeated in January that changes cannot be made to quality standards for gas carried in interstate pipelines without first getting approval in a tariff filing from FERC. The agency also announced in January that it will hold a public conference on gas interchangeability issues. These actions promise to ignite a vigorous debate among various segments of the energy industry — LNG project developers, interstate natural gas pipelines, local distribution companies and end-users — as to how LNG will be accommodated as an increasingly significant percentage of the nation’s gas supply.

LNG: Fuel du Jour

LNG is natural gas that is stored and transported in liquid form at atmospheric pressure at a temperature of -260 degrees Fahrenheit. LNG is transported in double-hulled ships to a receiving terminal and then is sent to a regasifying terminal that turns the liquid back into a gas for transportation via pipelines.

Historically, LNG has played a small role in US energy supplies. The US Energy Information Administration, or “EIA,” expects that in 2003, US LNG imports will be more than double the 2002 number and will represent about 2% of US natural gas consumption. EIA further projects that in 2010, US LNG imports will increase to about 8% of US natural gas consumption. These increasing imports are the result of higher natural gas prices, declining LNG liquefaction and shipping costs, rising gas import demand in the US, and the desire of gas-producing companies and gas-producing countries to monetize their gas reserves. Indeed, EIA projects that by 2015, LNG will become the largest source of net US gas imports as US imports of Canadian natural gas decline.

While Algeria and, more recently, Trinidad and Tobago are the largest suppliers of LNG to the US, the US also has purchased LNG from Australia, Brunei Darussalam, Malaysia, Nigeria, Oman and Qatar. Countries that are potential future suppliers of LNG to the US include Angola, Indonesia, Russia, Peru, Saudi Arabia and Venezuela. Indeed, interest in increasing US LNG demand is such that, in December 2003, the US Department of Energy hosted an LNG ministerial summit in Washington that brought together senior officials from both current and potential LNG importing and exporting countries to discuss planned and potential LNG projects and trade.

Currently, the continental US has four LNG import terminals: Cove Point, Maryland, Elba Island, Georgia, Everett, Massachusetts and Lake Charles, Louisiana. However, there are numerous proposals to construct new LNG terminals in North America to serve US markets.

Pipeline Btu Limits

The Federal Energy Regulatory Commission issued two orders in December that make clear that pipeline companies cannot change their gas quality standards without making formal tariff filings. These rulings addressing the issue of “natural gas interchangeability” may have a significant impact on LNG imports because, unlike domestically-produced natural gas or natural gas imported from Canada, most imported LNG has a Btu content higher than the Btu limits that several pipelines want to set. In order to meet these Btu limits, most LNG would have to be treated before being introduced into the pipeline system. The cost of this treatment may well have to be borne by the LNG shipper.

The issue of “natural gas interchangeability” involves the extent to which one type or quality of gas can replace another gas normally used by a customer without harming pipeline or end-use equipment, such as power generating turbines. This issue was raised recently at FERC by gas producers who, as a result of increasing natural gas prices, are not removing from the gas stream that they transport over interstate pipelines liquefiable hydrocarbons, such as propane and butane, for separate sale as natural gas liquids. Allowing these liquefiable hydrocarbons to remain in the gas stream raises the heat content, or Btu level, of the gas. Liquefiable hydrocarbons also become liquid at a specific “dewpoint” temperature, and may corrode or obstruct pipelines. Consequently, pipelines have established gas quality standards or Btu limits for the gas that they will accept for transportation over their systems. Recently, FERC has addressed complaints as to how pipelines should establish such standards and limits.

In late 2003, FERC ordered two pipelines, Trunkline Gas Company, LLC and ANR Pipeline Company, to stop using operational flow orders, or “OFOs,” and critical notices posted on their websites to establish new, permanent gas quality limitations. OFOs are used by pipelines, typically in emergency situations, to control the flow of gas and maintain correct pressures in the pipeline in order to sustain the reliability of deliveries. A critical notice provides an advance warning that a pipeline may need to issue an OFO.

In its Trunkline order, FERC found that gas quality standards must be included in pipeline tariffs that must be on file with FERC. The agency noted that both ANR and Trunkline currently have gas quality standards in their filed tariffs that allow shippers to deliver gas with a Btu content of 1200 Btu per cubic foot, and neither tariff permits the pipeline to reduce gas Btu content below the level established in the tariff. FERC concluded that from January 2001 through December 2003, both ANR and Trunkline posted notices on their websites reducing from 1200 Btu/cf to 1050 Btu/cf the permissible Btu content for gas delivered to their systems. FERC held that, because section 4(d) of the “Natural Gas Act” requires pipelines to file proposed tariff changes, ANR and Trunkline violated the law by using OFOs and critical notices to change the gas quality standards established in their tariffs.

FERC required both Trunkline and ANR to stop using operational flow orders and critical notices to reduce the gas quality standards on their pipelines. However, it left the door open for both companies to change their current gas quality standards by submitting a formal request to do so with FERC. FERC gave ANR a transition period, through January 31, 2004, to meet with interested parties concerning gas quality standards that will prevail on the ANR system, and required ANR to file a proposal concerning gas quality standards on its system as soon as possible.

Building on its ruling in Trunkline, FERC ordered two other pipelines — in a separate action in late January — to file changes to their tariffs restricting the pipelines’ discretion to change their gas quality standards. The January order was directed at Columbia Gulf Transmission and Tennessee Gas Pipeline Company.

In its Columbia Gulf order, FERC recognized that gas quality standards included in pipeline tariffs must provide sufficient flexibility for pipelines to act in a timely manner to protect their operational integrity and minimize potential damage to equipment. However, the FERC expressed its concern about tariff provisions that give pipelines too much discretion to vary gas quality standards with inadequate notice and explanation to customers. The agency ruled that if pipelines want flexibility to vary Btu limits, they must include in their tariffs specific mechanisms for doing so that provide protections for shippers. Specifically, pipelines must provide a specified amount of notice to shippers before changing a Btu limit, and further must provide shippers with information concerning how pipelines will calculate Btu and dewpoint at receipt points.

Implications

While the gas interchangeability issue has arisen in the context of natural gas producers allowing liquefiable hydrocarbons to remain in the natural gas stream, FERC’s decisions with respect to gas interchangeability have significant implications for developers of projects to import LNG into the US.

Most imported LNG has a Btu content that exceeds maximum Btu gas quality standards in many US pipeline tariffs, including the 1050 Btu/cf limit that Trunkline, ANR and Columbia Gulf attempted to impose on their systems. At present, only Trinidad consistently produces LNG with a Btu content that meets existing US pipeline standards without treatment. In contrast, the Btu content of LNG produced in Brunei, Oman, Abu Dhabi and Libya typically exceeds 1150 Btu/cf, while the Btu content of LNG produced in Indonesia, Australia, Qatar and Nigeria typically exceeds 1100 Btu/cf (with LNG from Qatar and Nigeria typically approaching 1150 Btu/cf).

If pipelines reduce their gas quality standards below the Btu content of LNG, most LNG brought to the US would have to be treated before it could be delivered to interstate pipelines.

The issue is who will bear the costs of such treatment and whether these additional treatment costs could make LNG less competitive. Revaporized LNG does not contain the heavier hydrocarbons — which are removed when the LNG is liquefied — that could lead to some of the condensation and corrosion concerns expressed by pipelines and end-users in connection with untreated, high Btu pipeline gas coming in from the Gulf of Mexico. Another issue is whether the FERC should permit different Btu limits among the interstate pipelines.

The FERC Conference

While it has specifically declined to address the issue of industry-wide gas quality standards in its orders, FERC will convene a public conference on February 18, 2004 to discuss policy issues arising from natural gas interchangeability.

Information presented at this conference could inform FERC policy (as set in individual pipeline orders), or it could form the basis of a future FERC rulemaking proposal. Positions on the issue appear to be splitting along industry segment lines. Producers want the ability to transport higher Btu content gas when it is not profitable to remove liquefiable hydrocarbons from the gas stream for separate sale. Pipelines want to retain the ability to set gas quality standards for their systems and control what gas they accept for transportation. End-users do not want to have to modify their equipment to accept higher Btu content gas.

Additionally, Rae McQuade, executive director of the National Energy Standards Board, has indicated that NAESB will look at the possibility of developing industry-wide gas quality standards early this year. In the past, NAESB and its predecessor, the Gas Industry Standards Board, have garnered industry consensus on various standards issues and have filed proposals for approval by the FERC.