Pipeline Abandonments and ConversionsPipeline Abandonments and Conversions

2014 FEPA Summer Symposium2014 FEPA Summer Symposium July 24, 2014July 24, 2014

Berne L. Mosley, Energy Projects Consulting, LLCBerne L. Mosley, Energy Projects Consulting, LLC

Complete Partial

•Remove facilities

•Isolate and abandon in place

•Capacity lease

•Sell

•Downrate (pipeline MAOP or turbine hp for example)

•Downsize (smaller diameter)

•Limit service schedule

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Personal Rule of Thumb:Action taken to temporarily inactivate a facility which can be reversed in a short period of time to restore service upon demand and with little/no ground disturbed is not abandonment.

Examples: closing and locking valves or removing EFM equipment from meters

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FERC

Regulatory approval followed by

physical disconnection

BSEE

90 days of no flowif no SOP approved

DOT

Purge hydrocarbons

STATE PERMITS

(i.e., Louisiana )

Inactive 12 months

Unintended Abandonment?

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Automatic Blanket

Prior Notice Blanket

Section 7

Excluded Facilities

LNG take-awayMainline

Storage field ∆ cap.

Leased mainlineDefault mechanism

for all facilities

Replication Cost (2013)

<$11 M $11M - $31.4M > $31.4M

Environment

“No effect” -and- FERC Plan / Procedures

“No effect” -and- FERC Plan / Procedures

Public good outweighs impacts. Mitigation required

Misc.Inactive 12 mos. or consent req’dNo FT contract

Written consent if service w/in 12 mos.No protests

Considers protests and alternatives

Pipeline Issues Creative Responses

•“Death spiral” from rising O&M costs and falling revenue volumes

•Declining revenue throughput so no incentive for FT. Majority of volumes flow on IT at discount

•New supply sources strand pipe segments and compression.

•Policies and regulations from other agencies

•Spin-down / spin-off of assets to form stand-alone regional pipeline

•Conversion to transport liquids or other energy forms

•Create gathering system for gas supply from new basins (i.e., shale)

•Traditional sale to third party with lower cost structure

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Producers “free to the pool” or with deeply discounted rates may have to negotiate contracts with new owner. If producers not currently paying for transport of the affected gas, FERC regulations do not give them much weight in the analysis.

When abandoning regional assets to new company, shippers may now have multiple rates for single haul. If these are IT/FT shippers, proposed new company needs to settle with affected customers to avoid protests.

Offshore producers may argue that their production will be stranded upon abandonment. Possible claim onshore as well, but it is not as expensive to establish new outlet. FERC takes this issue very seriously if the offshore platform is not dually connected and no other pipelines are in the vicinity.

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End user concerns in cases of physical abandonment or conversion to other energy transport include operational reliability of the existing pipeline they contracted with.

On the other hand, FT customers may be pushing for abandonment and will support application in order to reduce rates by removing these assets and associated O&M from the pipeline rate base.

Landowners have significant rights regarding physical abandonment across their property. If they want complete removal, but pipeline and environmental assets favor abandoning in place, FERC will balance the competing valid arguments.

Landowners in general are more sophisticated, partly due to FERC outreach process, in negotiating for the method of abandonment and mitigation they expect.

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Environmental groups that were focused on E&P activities now view the pipeline application process as a vehicle to thwart further shale development, including protests against gathering system designation.

State and federal agencies have become more involved in the future obligations regarding disposal of pipeline assets.

The abandonment of pipelines in traditional producing basins impact state and regional public policy, including issues such as jobs, tax revenues, future site cleanup, and national energy policy.

With aging infrastructure, and more stringent integrity and testing requirements, there is increased pressure to abandon interstate pipelines.

Pipeline companies will increase efforts to find creative alternatives to traditional pipeline removal or abandonment in place.

FERC regulations, and those of other agencies having over-sight, will add to the complexity of the decision of when, and how, to abandon pipeline assets.

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INFRASTRUCTURE HIGHWAY

Traditional Production Flow

Shale Production Flow

N

S

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FERC Regulation of Natural Gas and Oil Converting Pipelines from Transporters

of Natural Gas to Transporters of Oil and Petroleum Products…and Why Now?

FERC’s Role in Such Conversions – Two Case Studies (and info on a third)

Challenges to Accomplishing Such Conversions

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FERC Regulation of Natural Gas and Oil

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The Commission's responsibilities include: Regulation of pipeline, storage, and liquefied

natural gas facility construction Regulation of natural gas transportation in

interstate commerce Issuance of certificates of public convenience and

necessity to prospective companies providing energy services or constructing and operating interstate pipelines and storage facilities

Regulation of facility abandonment Oversight of the construction and operation of

pipeline facilities at U.S. points of entry for the import or export of natural gas

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With respect to Natural Gas projects, FERC safeguards the environment by: 

Disclosing, analyzing and minimizing impacts where it is feasible and reasonable to do so

Encourage applicants to communicate with relevant federal and state natural resources agencies, Indian tribes, and state water quality agencies, prior to submitting an application

Ensuring that all applicants perform the necessary studies to make an informed decision on the project

Issuing environmental assessments (EA) or draft and final environmental impact statement (EIS) for comment on most projects

Including requirements with any certificate issued to reduce environmental impacts

Visiting proposed project areas to determine the range of environmental issues requiring analysis and holding scoping meetings as appropriate

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The Commission's responsibilities include: Regulation of rates and practices of oil pipeline

companies engaged in interstate transportation; Establishment of equal service conditions to

provide shippers with equal access to pipeline transportation; and

Establishment of reasonable rates for transporting petroleum and petroleum products by pipeline.*

FERC has no jurisdiction over construction or maintenance of production wells, oil pipelines, refineries, or storage facilities!!!

* See Declaratory Order (OR13-29) for jurisdictional discussion on Ethane transportation. 17

Converting Pipelines from Transporters of Natural Gas to

Transporters of Oil and Petroleum Products…and Why

Now?

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Higher crude oil-to-natural gas ratio encourages drilling for oil in preference to natural gas and makes natural gas liquids developments (e.g., ethane) relatively more attractive than the development of dry natural gas resources.

19Source: http://www.eia.gov/todayinenergy/detail.cfm?id=5830

Natural gas is a combustible mixture of hydrocarbon gases. While natural gas is formed primarily of methane, it can also include ethane, propane, butane and pentane, and other constituents

Source: http://www.naturalgas.org/overview/background.asp 20

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Nearly half of the world’s ethylene will be produced from ethane and liquefied petroleum gas (LPG) by 2023, mostly at the expense of naphtha.

The feedstock shift is most dramatic in North America, where prolific shale gas production yields cheap ethane in the US and is driving a petrochemical resurgence.

Source: http://www.hydrocarbonprocessing.com/Article/3257517/Ethane-LPG-to-trump-naphtha-as-preferred-ethylene-feedstocks.html 22

The ethane can be removed from natural gas, but for petrochemical uses it must first be “cracked”, typically using steam…

There are few crackers in and around the Marcellus and Utica Shale Plays…

There are many crackers in the Gulf Coast…

There is unused / spare capacity on traditional South-to-North long haul pipelines…

Hence the gas-to-liquids pipeline conversions!

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FERC’s Role in Such Conversions

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Tallgrass was authorized to abandon approximately 432.4 miles of mainline pipeline facilities for the purpose of re-converting the facilities into crude oil pipeline facilities, and to construct and operate certain replacement facilities in order to continue natural gas transportation service to its existing firm customers.

To satisfy NEPA, FERC issued an EA (not an EIS) that addressed geology, soils, water resources, wetlands, vegetation, fisheries, wildlife, threatened and endangered species, land use, recreation, visual resources, cultural resources, air quality, noise, safety, cumulative impacts, and alternatives. In addition, section B.9 of the EA discussed the cumulative impacts of the conversion to oil -- the construction of:

260 miles of 24-inch-diameter pipeline (Cushing Lateral) from KS to OK that would connect to Tallgrass (Pony Express) Pipeline from Lincoln County, Kansas to Cushing, Oklahoma;

16 span replacements and eight electric oil pump stations along the existing Pony Express Pipeline segment;

2 electric oil pump stations along the Cushing Lateral. 26

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The abandonment by transfer of the 432.4 miles of PXP would have no ground disturbance and is not addressed further. The abandonment and/or modification of aboveground facilities would cause minimal disturbance entirely within existing work areas or existing right-of-way.

Regarding the cumulative impacts of the Cushing Lateral…“[s]ince the FERC does not regulate the sitting of oil pipelines, we do not have detailed information concerning the environmental impacts of the planned Cushing Lateral, other than what TIGT has provided, as discussed above. The environmental review would be subject to the regulations of the USACE and other applicable Kansas and Oklahoma state permitting agencies. We conclude that the Project would represent a negligible contribution to the overall cumulative impacts of the combined oil transportation project discussed above."

Relevant Language from the EA:

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Trunkline was authorized to abandon by sale to an affiliate approximately 770 miles of mainline transmission pipeline and appurtenant facilities for conversion to oil pipeline transmission service, and to abandon in place certain mainline compression facilities that it would no longer need after the pipeline facilities are abandoned, while still maintaining natural gas service to its firm customers.

To satisfy NEPA, FERC issued an EA (again, NOT an EIS) that addressed geology, soils, water resources, wetlands, vegetation, fisheries, wildlife, threatened and endangered species, land use, recreation, visual resources, cultural resources, air quality, noise, safety, cumulative impacts, and alternatives.

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Relevant Language from the EA:

“After the abandonment, Trunkline would no longer be responsible for the facilities and the Commission will have no remaining jurisdiction. Thus, the EA did not include a detailed analysis of the impacts that could occur after the abandonment. However, the EA did provide available information about the anticipated conversion and about potential cumulative impacts associated with the construction of facilities to support the proposed future use.”

and

“In the event that the abandoned pipeline is converted for use in oil transportation, the relevant authorizing and permitting state and federal agencies, including the U.S. Department of Transportation, are responsible for addressing environmental and safety matters.”

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From the application:• Texas Gas sought authority to abandon approximately 623 miles of natural gas pipeline segments from Eunice, Louisiana to Hardinsburg, Kentucky and associated facilities.

• All of Texas Gas’s installed facilities south of Eunice and north of Hardinsburg would remain in interstate natural gas transportation service.

FERC issued an Environmental Assessment [emphasis added] on February 14, 2014, but project was withdrawn on June 3, 2014…

• Following abandonment, Texas Gas would continue to provide natural gas transportation service on its remaining pipeline facilities.

• After receipt of abandonment authority, the pipeline segments will be taken out of natural gas service and repurposed for use in natural gas liquids (“NGL”) service.

Challenges to Accomplishing Such Conversions

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As Noted Above:FERC has no jurisdiction over construction or maintenance of production wells, oil pipelines, refineries, or storage facilities

This means:Products pipelines are “sited” on a State-by-State basis (if a pipeline crosses 10 states, then 10 different siting agencies may be involved)

This doesn’t mean: Products Pipelines are exempt from other Federal agency requirements, or requirements of State agencies administering Federal requirements (i. e., CZMA, CWA, CAA, etc.)

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Natural Gas is transported by being compressed by large reciprocating or turbine motors at compressor stations

Compressor stations are sited along the length of a pipeline based on flow engineering analysis of transportation distances, transportation volumes and operating & delivery pressures

Liquids are “pumped” and pumping stations are sited along the liquids pipeline based on hydraulic analysisThe locations of historic compressor station sites may not align with the required pumping station sites, leading to new, and possibly significant, construction for gas-to-liquid conversion projects!

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The trend to convert unused natural gas pipelines to oil- and products-pipelines will continue, owing to higher oil-to-gas prices, and the market for NGLs

FERC will continue to assert economic jurisdiction on such pipelines

FERC’s NEPA role in conversion projects will be limited

Project proponents for conversion projects will still be subject to certain Federal and State oversight

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Contact Information:

Berne L. Mosley, PresidentEnergy Projects Consulting, LLCbernemosley@yahoo.com

FERC – Federal Energy Regulatory Commission; the agency responsible for interstate and some offshore transportation of natural gas, oil and “oil products”

NGA – Natural Gas Act; law that gives natural gas companies authority to construct & operate (Sec 7(c)) and abandon (Sec 7(b)) interstate natural gas facilities

DOT – Department of Transportation; regulatory agency with safety authority over interstate gas and oil facilities

BSEE – Bureau of Safety and Environmental Enforcement; regulatory agency responsible for safety, environment and conservation of offshore oil and natural gas resources

Blanket Certificate Program – a subprogram of a Section 7(c) application, comprising “automatic” and “prior notice”

Blanket Certificate Program – a subprogram of a Section 7(c) application, comprising “automatic” and “prior notice”

FT – Firm Transportation; transportation guaranteed at full contract level of service

IT – Interruptible Transportation; transportation provided on an “as available basis” with no level-of-service guarantees

MAOP – Maximum Allowable Operating Pressure; the pressure, in PSI, at which a pipeline is allowed to operate, based on the yield strength of the steel and DOT requirements

EFM – Electronic Flow Meters; meters that measure the amount of gas flowing through a pipe