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LNG's Final Hurdle

Interchangeability issues threaten to delay vitally needed LNG projects.

Fortnightly Magazine - March 2006

the only entity considering the issues. The commission’s individual terminal and pipeline proceedings and public meetings have occurred in a context of vigorous industry discussion, as well as government policy efforts.

In 2004, the Natural Gas Council (NGC)—an organization of executives representing numerous gas-industry stakeholder groups—convened two working groups to produce white papers, one focusing on interchangeability and the other on hydrocarbon liquid drop out. 6 The white papers, published in February 2005, outlined general guidelines on quality and interchangeability, and urged the federal government to research the issues further and develop standards.

FERC addressed the white papers through its ongoing generic proceeding on gas quality and interchangeability. 7 As part of testimony in that proceeding, the Natural Gas Supply Association (NGSA)—a group of gas producers and marketers—petitioned FERC to issue formal national standards largely reflecting the recommendations set forth in the NGC white papers. The petition sparked a furious debate among stakeholders about whether national standards are feasible, and if so, what they should require.

In the face of considerable disagreement among industry stakeholders, FERC sought help from the Department of Energy, requesting that the DOE take the lead role in researching gas quality and interchangeability. Accordingly, last summer DOE commissioned the National Energy Technology Laboratory (NETL) to conduct a comprehensive study of the issues.

The NETL study, when completed, will provide an important technical foundation for FERC’s decision-making efforts going forward. Among other things, the study will examine the effects of non-homogenous gas supplies on end-use operations, including power plants. As such, NETL’s analysis will help FERC as it considers conflicts over technical specifications in interstate pipeline tariffs.

Additionally, decisions in individual cases on FERC’s current docket likely will establish regulatory precedents that might shed light on future cases. Whether and how the results of the NETL study will factor into these cases depends on timing. In the past, FERC has avoided delaying work while it waits for pending research, meaning it might rule on current cases before it has the benefit of NETL’s analysis. Thus any precedents then will need to be interpreted in the context of a changing technical framework.

Resolving Uncertainties

As gas supplies from new sources, including LNG, become increasingly important to meet growing U.S. demand, FERC’s proceedings and the NETL study will establish an important federal road map for resolving gas composition issues equitably and facilitating the development of important supply infrastructure, while at the same time ensuring the safe operations of the natural gas pipeline grid.

Beyond that, responsibility for determining whether to create a formal set of standards rests on FERC’s shoulders. FERC faces significant pressure to maintain its historic approach to resolving such issues on a case-by-base basis. Given continued geographic variations in terms of pipeline gas composition and dominant market applications, FERC likely will resist forcing national standards. Instead, the commission seems more likely to issue a broad set of gas composition guidelines drawn from the NGC white papers, the forthcoming NETL study, and findings in such cases as AES v. FGT.

It is likely, however, that with the ever-increasing U.S.