By David Schumacher

A new policy statement issued by the Federal Energy Regulatory Commission in July will let each interstate gas pipeline and its customers work out quality standards for gas the pipeline will transport. The standards must be within certain general parameters.

The policy statement will affect all participants in the gas industry, including suppliers of liquefied natural gas, or LNG, and end users of gas like owners of power plants.

The commission adopted a case-by-case approach rather than impose uniform gas quality standards that would apply to all pipelines.

Background

The agency was prompted to act by an increase in the last five years in the volume of administrative litigation before FERC over pipeline gas quality specifications. A lot of the litigation is linked to actual or proposed LNG imports and to unprocessed, non-conforming gas being delivered to pipelines for transportation. In the past, pipelines were more likely to be asked to transport processed gas.

Each interstate pipeline in the United States imposes gas quality specifications as part of a tariff it has approved by the Federal Energy Regulatory Commission. However, the specifications are not uniform across the industry. Because of this lack of uniformity, FERC has tried to achieve an industry consensus on the proper regulatory approach to gas quality specifications. The Natural Gas Council, an organization of representatives from the various sectors of the natural gas industry, produced two reports on the issues of gas quality and interchangeability.

Despite these efforts, no industry consensus developed on a uniform approach to gas quality specifications. It also became clear that additional research is needed to address some of the issues facing the industry. As a consequence, FERC decided to handle quality issues on a case-by-case basis — at least for now.

The policy statement addresses two issues under the heading “gas quality specifications.” They are “gas quality” and “interchangeability.”

 “Gas quality” primarily addresses the issue of hydrocarbon liquid dropout. When natural gas is produced, its principal component is methane. The gas stream also contains other hydrocarbons and contaminants. When natural gas is processed after production, most of these other hydrocarbons and contaminants are removed from the gas stream. Sometimes it is better economically for the gas producer to transport and sell unprocessed gas instead of paying for a processing plant to strip the other hydrocarbons from the gas stream before transporting and selling the gas. Hydrocarbon dropout occurs when unprocessed gas is delivered into the pipeline and, due to changes in temperature and pressure, the heavy hydrocarbons in the unprocessed gas assume a liquid form and “drop out” of the gas stream. These heavy hydrocarbons can adversely affect the operation of pipelines, gas distribution facilities, and an end user’s equipment, such as a gas-fired turbine.

The pipelines have used different methods to regulate hydrocarbon liquid dropout in their systems. Each approach has its drawbacks.

Gas “interchangeability” refers to the extent to which a substitute gas can safely and efficiently replace gas normally used by an end user. Interchangeability is important to interstate pipelines because the gas a pipeline transports typically comes from multiple sources. The most widely used measure of interchangeability is the “Wobbe index.” Through industry efforts to achieve a consensus on appropriate gas interchangeability standards, it became apparent to FERC that additional research is needed on the best measure of interchangeability. Most of the available science on gas interchangeability dates from the 1930s and 1940s. Until additional research is completed, FERC concluded that it would not be appropriate to adopt a uniform gas interchangeability standard.

New Rules

The new FERC policy on gas quality and interchangeability adopts five basic principles.

First, pipelines can enforce only the quality specifications in the tariffs FERC has approved. This will significantly restrict the ability of pipelines to use operational flow orders, or OFOs, to impose gas quality specifications on shippers, a practice that was becoming more common among pipelines.

Second, pipeline tariff provisions on gas quality and interchangeability can be flexible to enable each pipeline to adapt to rapidly-changing circumstances. Flexible tariff provisions will allow the pipelines to balance safety and reliability, on one hand, and maximize the quantity of gas transported on the other.

Third, pipelines should develop appropriate gas quality specifications in consultation with their customers. The agreed-to gas quality specifications must be based on sound technical, engineering and scientific considerations.

Fourth, the Natural Gas Council reports on gas quality and interchangeability should provide a common reference point to the pipelines and their customers for resolving gas quality and specification issues.

Finally, FERC will resolve disputes between a pipeline and its customers over gas quality and interchangeability issues on a case-by-case basis. FERC will give significant weight to the Natural Gas Council reports if asked to resolve these disputes. FERC recognizes that issues such as the configuration and geographic location of a pipeline, the ability of a pipeline’s customers to have access to processing facilities, gas pressure and temperature on a pipeline, ambient conditions surrounding a pipeline, historic characteristics of the gas transported through a pipeline, the requirements of the end users’ equipment in a market, and the needs of interconnecting pipelines will affect the ultimate gas quality and interchangeability standards that are adopted by a particular pipeline.

The new FERC policy will apply to developers of LNG receiving terminals. FERC will require each terminal developer seeking authority to construct and operate an LNG receiving terminal to include in its permit application information that demonstrates the compatibility of the LNG that will be delivered to its project with the gas quality and interchangeability requirements of all interconnecting pipelines. FERC refused to impose on LNG receiving terminal developers’ specific obligations for merchantability of imported LNG. Additionally, LNG receiving terminal developers will not have to identify, or compensate parties for, adverse impacts arising from differences between the quality of imported LNG and the quality of domestic natural gas.