The Future of Natural Gas Pipelines

July 2020

The month of July was not kind to the Oil & Gas pipeline business.  In a span of days, three major US pipeline projects were halted, in three different parts of the country.  The headliner was the Atlantic Coast Pipeline, a US$8 billion 600-mile natural gas pipeline project across West Virginia, Virginia and North Carolina: at the end of June, sponsors Dominion Energy and Duke Energy won a major battle at the US Supreme Court, receiving approval to cross the Appalachian Trail; a week later, the sponsors issued the stunning announcement that they would no longer seek to complete the project.  That same week, the Dakota Access Pipeline, after years of protests and battles with lawsuits, was ordered by a Federal Judge to cease transporting oil from the shale-oil fields of North Dakota to the Gulf of Mexico.  The Williams pipeline was intended to bring Pennsylvania fracked natural gas to the New York City area through a 200-mile pipeline, at a cost of over $1 billion, but – again the same week — failed to obtain its needed permits from either the state of New York or the state of New Jersey.  Yet another project, which has faced high-profile legal challenges for years without getting off the drawing board, the Keystone XL oil pipeline, saw an appeal from the current US administration to let it proceed turned down by the US Supreme Court.  A New York Times headline at the end of the week asked “Is This the end of New Pipelines?

Infrastructure Ideas had reviewed recently the prospects for the Natural Gas business as a whole (“What Next for Natural Gas?” from June 2020).  This post takes a follow-on look at the business of natural gas pipelines.  And a rising new competitor in energy transport.

It seems like only yesterday that the natural gas pipeline business was booming, a bright spot where so few large infrastructure projects were proceeded.  In the US alone, there are ongoing projects involving some $60-80 billion of investment in Oil & Gas pipelines, and projects worth close to $100 billion more have been announced.  Now the future looks uncertain, at least for any pipelines crossing outside of Texas and neighboring friendly states.  The same factors that have turned the situation upside down in the US are not yet playing out with the same visibility in the rest of the world, but one should expect that they will.

Environmentalism gets the loudest credit for derailing the pipeline projects in the news.  In the case of the Atlantic Coast Pipeline, legal challenges – based on “Not in My Back-Yard-ism,” environmental concerns along the planned pipeline route, and climate change concerns – had major impact.  The estimated costs of the project rose from $5 billion to $8 billion due to the related delays, and even a Supreme Court victory on one issue was no insurance against the risk of successful challenges on other issues.  Dominion CEO Thomas Farrell told investors “To state the obvious, permitting for investment in gas transmission and storage has become increasingly litigious, uncertain and costly.”  A piece in Forbes along the same line pointed out that pipelines were increasingly losing in the courts.

One aspect worth noting of the court decisions tilting against pipelines is the role of insufficient due-diligence.  The current US administration, among others, has sought to increase the level of infrastructure investment by encouraging the bypassing of environmental and social reviews, which is precisely what sank the Dakota Access Pipeline.  In the case of the ACP, judges repeatedly found that reviews had been inadequate and incomplete, forcing delays and cost increases.

Yet while environmentalism played a major role, what really bodes ill for the pipeline business, and what underlay the decisions made this month going against the projects, is economics.  The price of electricity from wind and solar increasingly is beating the price of electricity generated from natural gas.  Economics going forward will only get worse.  Technology is continuing to make solar and wind power cheaper, while natural gas prices are now, on the one hand, too low to enable many players in the business to stay afloat and explore and develop more gas reserves, and on the other hand being pushed up as the cost of transport pipelines are going up.  Combine this with the kind of regulatory concerns over emissions which have been growing in the US northeast, and more recently Virginia, and you have a battle going increasingly in favor of renewables, and increasingly against natural gas.  A report out of the Goldman School of Public Policy in Berkeley last month went as far as claiming that the US electricity grid could lower rates while getting 90% of its supply with no greenhouse gas emissions by 2035.

In a tell-tale sign of how big the ongoing shift is, the same day that it and Duke Power announced they would abandon their $8 billion project, Dominion Energy also announced that it would sell most of its natural gas assets to Warren Buffet’s Berkshire Hathaway, in a transaction valued at close to $10 billion.  The sale includes over 7,000 miles of natural-gas pipelines.  For a utility that has relied almost exclusively on coal and natural gas, and been one of the staunchest defenders of fossil fuels, the two announcements heralded a major watershed.  Dominion, the 6th largest US utility by revenue, will instead shift its business to wind and solar power.  It is already competing to become of the largest players in the burgeoning offshore wind industry (see “Offshore Wind: the Next Big Thing,” January 2020).

Coincidentally, the book out this month Lights Out: Pride, Delusion and the Fall of General Electric by a pair of Wall Street Journal reporters, focuses on the massive losses incurred by GE Power, one of the biggest players in the energy business worldwide.  Most of the blame for these losses, along with general opacity of finances and practices, is laid in the book at the feet of decisions made by former GE CEO Jeff Immelt to bet the house on natural gas – especially with his single largest acquisition, that of French natural gas turbine producer Alsthom.  Too much, too late, for the natural gas business.

Contrast the fate of the O&G pipelines with that of the Grain Belt Express.  One big energy transmission project which is going forward in the US at the moment is the 800-mile, $2.3 billion, 4-Gigawatt high-voltage power transmission line, which will tap convey wind-generated power from Kansas through Missouri and into Indiana and Illinois.  This is also a new generation of energy transport: the high voltage DC/ Direct Current line. Today’s transmission lines run on alternating current, and AC transmission involves significant energy losses over distance.  In a future where renewable energy resources are often located far from the centers of consumption, long-distance DC lines like the Grain Belt Express will be a major focus of new infrastructure investment.

Outside of the US, chances are that new opportunities to invest in natural gas pipelines will also be limited.  China is certainly one place where more will be built.  But there the assets will be owned by the Government.  The Government announced in late 2019 that it would establish a National Oil & Gas Pipeline Company (“Pipe China”) by combining pipelines, storage facilities and natural gas receiving terminals operated by China National Petroleum Corp (CNPC), China Petrochemical Corp (Sinopec Group) and China National Offshore Oil Company (CNOOC).  Beijing aims to complete the asset transfers and start operation of the new entity – valued by industry analysts at more than $40 billion – by October 2020.

In Europe, the mega-project pipelines envisaged to bring either Russian or Caspian Sea natural gas to western Europe consumption centers will face an increasingly precarious future.  Incentives to built wind and solar resources have always been more generous in Europe than elsewhere, and combined with the ever-cheaper availability of wind and solar, will make natural-gas generated electricity begin to look like an expensive choice.  We can also anticipate that, as concerns around climate change continue to grow, political pressure to reduce or eliminate energy-sector greenhouse gas emissions will be strongest in Europe.  This is increasing the risk that, even with long-term offtake contracts in place, the owners of pipelines bringing natural gas to Europe will face the kind of scenarios which have played out in the US this month: legal challenges and regulatory decisions that shorten their life-span significantly.

In the rest of the world?  LNG import terminals will retain their attraction for a time, as they raise few of the local environmental and social concerns, notably rights-of-way, which arise with pipeline construction.  But the future of within-border energy transport increasingly looks to be with long-distance DC electricity transmission lines, and not with natural gas pipelines.

 

 

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