In our Going With the Flow series, we are discussing the evolution of policy related to the recent bi-directional flow of natural gas that has resulted from an increased supply of gas in the Northern and Eastern regions of the United States. In our previous “Going With the Flow” post, we discussed the traditional backhaul transportation of natural gas and impending changes in the assessment of fuel charges against pipeline customers engaging in reverse flow transactions to transport natural gas from north to south or east to west. In this post, we discuss how the reverse flow of gas that exceeds optimal quality standards is impacting pipelines and their customers, including the potential effect on electric generators on the receiving end of the higher quality gas. The Federal Energy Regulatory Commission (“FERC”) recently issued an Order in Docket No. RP13-1015-000 establishing a Technical Conference to explore this gas quality issue on the Texas Eastern Transmission, LP (“Texas Eastern”) pipeline system, which runs from Texas and offshore Louisiana north into Philadelphia and New York. A subsequent Notice of Technical Conference set the conference for Thursday, September 12, 2013, at 10:00 a.m. Texas Eastern has described the challenge posed by the reverse flow of higher quality gas as an “operational emergency” on its system, in part due to the severe effect that the higher quality gas could have on gas-fired generators. We highlight the issues raised by the Texas Eastern proceeding below.
Bi-Directional Gas Flow
Fracking in the Marcellus Shale has markedly increased the supply of natural gas produced in the Appalachian Basin, which is typically of higher quality than gas produced from the Gulf. This increased supply has resulted in a shift in the historical pattern of gas flow. As we discussed in our previous post, natural gas historically has flowed downstream from the Gulf to the North and gas did not physically flow upstream in the reverse direction (north to south).
To transport gas from north to south, gas would be taken out upstream (in the South) and the same quantity of gas would be put back into the pipeline downstream (in the North). This displacement of gas known as backhaul transportation would also take place in the transportation of gas from east to west on pipelines that historically have transported gas from west to east. The increasing quantities of natural gas entering pipelines from the North has resulted in gas actually flowing both downstream and upstream through pipelines and has required pipelines like Texas Eastern to address controlling the quality of gas now flowing upstream.
The Quality of Natural Gas
Natural gas is composed primarily of Methane and also contains a mixture of other hydrocarbon gases and additional components that affect natural gas quality including, Ethane, Propane, Butane, etc. (“C2+ gases”), and water, carbon dioxide, oxygen, sulfur, hydrogen sulfide, nitrogen, and helium. The levels of these C2+ gases and additional components differ depending upon the original source of natural gas, and gas is subjected to processing to remove some of the contaminants and hydrocarbon gases that can be liquefied (referred to as “NGLs” or “natural gas liquids”). The resulting variations in the composition and quality of natural gas presents a challenge to pipelines in that many of the contaminating components and NGLs pose a threat to the safety and reliability of pipeline and end user operations and equipment. With the increasing interdependency of the natural gas and electric industries, the bi-directional flow of natural gas presents unique challenges to gas-fired electric generators. High C2+ gases can cause serious problems for gas-fired electric generators by impairing the functionality of gas turbines and possibly waiving the warranty on the turbines, particularly if the C2+ gas levels exceed 12 percent, the heating value exceeds 1110 British thermal units (“Btu”), and the Wobbe Index Number (a measure of gas interchangeability) exceeds 1400. To mitigate the threat posed by contaminants and NGLs, pipelines establish gas quality limits in their tariffs that delineate acceptable levels of contaminants and C2+ gases in the natural gas that will be transported through the pipeline. Pipelines also may blend streams of natural gas of differing qualities in order to create a combined stream that meets its gas quality standards. See the AGA White Paper on Liquid Hydrocarbon Drop Out in Natural Gas Infrastructure for additional information regarding natural gas quality.
The Texas Eastern Control Zone
To address the increased supply of higher quality natural gas from the Appalachian Basin, Texas Eastern came to an agreement with its customers in 2010 to establish a “Control Zone” that allows the pipeline to receive gas that exceeds its tariff quality specifications between the discharge side of the compressor station in Berne, Ohio and the discharge side of the compressor station in Uniontown, Pennsylvania. Under this Control Zone Exemption to its tariff, Texas Eastern agreed to accept non-conforming gas in the Control Zone, with the proviso that a blended stream of gas can be created that meets the tariff specifications by the time the gas reaches the “Control Point” at the discharge side of the Uniontown, Pennsylvania compressor station. Texas Eastern agreed to accept non-conforming gas with up to 17 percent C2+ gases, a heating value of 1150 Btu, and a 1430 Wobbe Index Number, and the mechanism of the Control Zone allows the pipeline to blend the gas to ensure that conforming gas flows east as it leaves Uniontown. The Control Zone as initially established protects the pipeline and its customers east of Uniontown, Pennsylvania. But, the volume of non-conforming gas produced in the Appalachian Basin that flows into the Control Zone at times exceeds the demand of Texas Eastern’s customers east of Uniontown and the excess gas is directed to flow in reverse to customers west of Berne, Ohio.
In June 2013, Texas Eastern filed a request for a tariff revision to establish a second Control Zone west of Berne, Ohio to control the quality of gas now flowing west on its system. Texas Eastern argues that the Control Zone Exemption was created based on the critical assumption that gas would continue to flow from south to north and west to east. Therefore, the unanticipated volume of production from the Appalachian Basin and resulting change in the direction of gas flow constitute material changes that would permit modifications to the tariff under the terms of the 2010 settlement agreement. Texas Eastern proposes to add a second Control Point west of Berne, Ohio which would allow the pipeline to implement the same mechanics to ensure that conforming gas flows west on its system. According to the FERC Order, “Texas Eastern contends that the consequences of delivering the high C2+ gas west of Berne could be serious because this area includes delivery points for a number of gas-fired generators that could experience significant impacts to their operations if C2+ levels exceed 12 percent, the Btu level exceeds 1110, and the Wobbe Index Number exceeds 1400.” Texas Eastern has taken the position that the bi-directional flow of non-conforming gas along its pipeline threatens the pipeline and its markets west of Berne, Ohio, constituting an “operational emergency.”
Texas Eastern’s proposal to create a second Control Zone has been met with mixed reactions. Some parties have opposed the request on the grounds that the reverse flow of gas does not present an operational emergency or material change sufficient enough to modify Texas Eastern’s tariff under the settlement agreement. Parties have argued that “the reversal of flow on the Texas Eastern system does not constitute an operational emergency as suggested by Texas Eastern because the reversal was quickly remedied by critical alerts and voluntary producer actions consistent with Texas Eastern’s existing tariff.“ Others contend “that gas quality specifications must be as flexible as possible and that Texas Eastern’s assertions concerning issues with gas quality simply do not support its proposal to institute new limits which upset tariff provisions that resulted from years of discussions with its shippers.” FERC concluded that a technical conference is the best forum to address the concerns raised about Texas Eastern’s proposal to create a second Control Zone, which “may be unjust, unreasonable, unduly discriminatory, or otherwise unlawful.” The technical conference will be held on Thursday, September 12th.
The Texas Eastern gas quality and fuel surcharge proceedings that we have highlighted in this series foretell of the considerable impact that larger scale reversals in gas flow on additional pipelines will have on pipeline customers throughout the country. The Texas Eastern and future proceedings present pipeline customers the opportunity to influence the development of policy in this area. We will be watching developments and will keep you posted.