Canary in a Coal Mine - Pipeline Capacity Risks and Opportunities
The Energy Information Administration (EIA) tracks natural gas consumption on a monthly basis. The major categories that EIA uses to track consumption, however, misses a key type of entity that holds a substantial share of pipeline capacity on the interstate system, exploration and production companies and gas marketing companies. As we discuss below, the 40% of the contracted capacity held by the E&P/Marketer category is the one that is most volatile and creates the greatest risk of non-renewal for a pipeline, but potentially offers possible market players the ability to capitalize upon a buyer’s market. There are four exploration and production companies, each of which have over one Bcf of capacity that expires between now and 2021.
EIA Usage Compared to Contract Capacity
If you are a pipeline company looking for new shippers, or a shipper looking for capacity that may be soon available, or an investor anticipating the renewal risks faced by a pipeline, you would be well served to focus on this one class of shipper, which you can easily do in our platform by searching across pipelines by a shipper’s name.
EIA Data Doesn’t Tell the Whole Story
The categories of users tracked by the EIA are the more stable users of pipeline capacity because they need gas for an end-use that typically cannot be easily altered. Therefore, these users, local distribution companies, commercial and industrial users, and electric power producers, tend to either have long term contracts that are regularly renewed or they exercise the right of first refusal (ROFR) provided in a pipeline’s tariff to annually renew the capacity. The ROFR right, which is required to be present in every pipeline tariff, gives a shipper with a contract term of twelve consecutive months or more at the applicable maximum rate for that service the right to automatically extend the contract by matching the longest term and highest rate for its firm service, up to the applicable maximum rate, offered to the pipeline during the ROFR offer period in the pipeline's tariff. This right is often exercised by simply agreeing to roll over an expiring contract for 12 months at the maximum rate so as to keep the ROFR right in place for the expiring contract.
Gas marketers and exploration and production companies, however, enter into capacity contracts to capture market gains, to provide their marketing services, or to assure the flow of gas from a basin. This can lead to contracts of varying terms, but all of which present a greater risk of non-renewal as the market changes and makes a previous contract uneconomic, or the customer base of the marketer changes, or a producer’s production from a basin decreases. While a declining contract life for a pipeline is the “canary in the coal mine,” an early indicator of significant problems for pipelines, it potentially offers exploration and production and marketers and traders access to a buyer’s market.
The Big Picture
LawIQ collects information for the contracted capacity, rates, and key contractual provisions for every interstate pipeline. This allows our customers to assess the risk to a certain pipeline from renewals by its shippers, but also allows our customers to search across the industry for the capacity held by a particular company on all pipelines to see the contract profile for a particular shipper. The chart below shows the total contract capacity held by the combination of exploration and production companies and gas marketing companies over the next few years. As seen in the chart, these shippers have over 40 Bcf/day of contracts that expire between now and the end of 2025.
Expiration of Contract Capacity by E&P/Marketers
E&P Shipper Contract Expirations
In particular, there are four exploration and production companies, each of which has over one Bcf of capacity that expires between now and the end of 2021:
By using our platform, our customers can quickly dive into a detailed look at any of these companies and analyze not only the contract terms but also the pipelines on which they hold capacity for a better understanding of the risks of non-renewal associated with this almost 10 Bcf of expiring contracts.
Insights Coming Soon
- LNG (Cameron/Sabine) phase/hurdle Analysis
- Petitions for Declaratory Orders