FERC issues a surprising order regarding responsibility for LNG-related retrofit costs.
James Goddard is counsel at Locke Liddell & Sapp LLP in Houston, Texas. Contact him at or email@example.com.
“The Federal Energy Regulatory Commission (FERC) will not accept requests from interstate natural-gas pipelines to compensate customers or other downstream entities for any costs they may incur in using gas supplies that include revaporized liquefied natural gas (LNG) that meets approved standards for gas quality and interchangeability.”
This is the lead paragraph from an April 19, 2007, FERC press release announcing FERC’s order in AES Ocean Express LLC v. Florida Gas Transmission Co., which was issued one day later. FERC’s order, which many believed would answer some important questions regarding the introduction of LNG into the U.S. pipeline grid, thus left open the most important question on the topic: Who ultimately will be responsible for cost-mitigation measures to accommodate the introduction of large quantities of LNG into the U.S. pipeline grid?
LNG Is Coming, Like it or Not
LNG is still an enigma to many. The term conjures up visions of exploding supertankers with nuclear bomb-like intensity. This is something experts say physically cannot happen. On the other end of the spectrum, some say that LNG will be the end-all to the problem of rising natural-gas prices in the United States. This is something that may be equally unlikely. No matter what your opinion regarding LNG, one thing is clear: LNG has started to wash ashore in the United States in increasing volumes and likely will continue to do so for many years to come.
In early 2007, there were five LNG regasification terminals in the United States, with a combined capacity of 5.835 billion cubic feet (Bcf) per day (see Figure 1). Another 23 terminals, with a combined capacity of 34.72 Bcf per day, have been approved by the relevant U.S. agencies, and an additional 15 terminals, with a combined capacity of 17.3 Bcf per day, have been proposed. During the first quarter of 2007, the United States imported approximately 262.5 Bcf of LNG, a 60-percent increase over the volume of LNG regasified in the United States during the first quarter of 2006.1 The U.S. Energy Information Administration (EIA) has projected that LNG imports into the United States in 2007 will rise to 790 Bcf and should surpass 1 trillion cubic feet (Tcf) in 2008.2 EIA estimates that LNG imports into the United States will continue to increase over the next several years, with annual LNG imports reaching 4.5 Tcf in 2030.3
What’s the Big Deal? LNG Is Just Natural Gas, Right?
While many consumers may cheer at the news that increased LNG supplies will be hitting U.S. shores, supplementing the decreasing domestic supply of natural gas and, hopefully, mitigating the price volatility in the U.S. natural-gas market, technical issues arise with respect to the introduction of LNG into the U.S. pipeline grid. The biggest technical issue involving LNG is interchangeability, or the extent to which LNG can safely and efficiently replace gas normally used by an end-use customer in a combustion application. The measure most often used to calculate the interchangeability of natural gas is known as the Wobbe Index, which is determined by dividing the gross heating value (or higher heating value [HHV]) in Btu per standard cubic feet (scf) of a gas stream by the square root of the specific gravity of that stream. FERC has described the importance of the Wobbe Index as follows:
The formula for determining the Wobbe Index takes into account the fact that the heat release rates for a gas stream vary directly with its BTU content, but inversely with the gas’s specific gravity. That is because gas with a higher specific gravity has a lower volumetric flow rate. Therefore, if a gas stream with a higher gas gravity is substituted in a given burner with a fixed fuel-supply pressure, fewer cubic feet of gas will flow across the metering orifice. As a result, to ensure delivery of the same heat release rate to the burner, the substitute gas stream must have a higher heating value per cubic foot to offset the reduced volumetric flow rate. Conversely, if the substitute gas stream has a lower gravity, more gas volume will flow across the orifice during a given interval, and, hence, the heating value of the substitute stream must be lower to maintain the same Wobbe Index.4
Simply put, the introduction into the United States natural-gas pipeline grid of large quantities of LNG containing a materially different composition than that contained in historic domestic natural-gas supplies, could have serious consequences for end-use combustion applications. As reported by the NGC+ Interchangeability Work Group—comprising 76 participating members from various stakeholder groups across the country, including LNG suppliers, natural-gas pipelines, utilities, power generators, feedstock suppliers, appliance manufacturers, research organizations, gas processors, and state officials—“varying natural-gas composition beyond acceptable limits can have the following effects in combustion equipment:
a. In appliances, it can result in soot formation, elevated levels of carbon monoxide and pollutant emissions, and yellow tipping. It can also shorten heat-exchanger life, and cause nuisance shutdowns from extinguished pilots or tripping of safety switches.
b. In reciprocating engines, it can result in engine knock, negatively affect engine performance and decrease parts life.
c. In combustion turbines, it can result in an increase in emissions, reduced reliability/availability, and decreased parts life.
d. In appliances, flame-stability issues including lifting are also a concern.
e. In industrial boilers, furnaces and heaters, it can result in degraded performance, damage to heat transfer equipment and noncompliance with emission requirements.”5
After months of collaboration, the NGC+ Interchangeability Work Group published a set of guidelines regarding the quality of LNG received into interstate natural-gas pipelines to ensure that LNG can be received into the U.S. pipeline grid with minimal impacts on current end-user equipment. Specifically, the group recommended the following guidelines: (1) use of the local historical Wobbe Index average with an allowable range of variation of plus or minus four percent, with a maximum Wobbe Index of 1,400; (2) a maximum heating value limit of 1,100 Btu/scf; (3) a limit of butanes and heavier hydrocarbons of 1.5 mole percent; and (4) an upper limit on the amount of total inert gases (primarily nitrogen and carbon dioxide) of up to four mole percent.6
On June 15, 2006, FERC issued its Policy Statement on Provisions Governing Natural Gas Quality and Interchangeability in Interstate Natural Gas Pipeline Company Tariffs (the Interchangeability Policy Statement), wherein FERC strongly encouraged pipelines and their customers, in negotiating technically based solutions, to use the guidelines established by the NGC+ Interchangeability Work Group. FERC also noted that, to the extent pipelines and their customers could not resolve disputes over gas quality and interchangeability, FERC would give significant weight to the NGC+ Interchangeability Work Group’s guidelines.
While some commentaters had asked FERC to address in the Interchangeability Policy Statement the issue of who should be responsible for mitigation costs resulting from the introduction of LNG into the U.S. pipeline grid, FERC declined to address the issue, stating that the issue “should be addressed, if and when problems are identified, in specific cases.”7 The industry has waited since the issuance of the Interchangeability Policy Statement for the specific case in which FERC would address the issue of who would be responsible for mitigation costs resulting from changes to pipeline tariffs in response to increasing LNG volumes reaching U.S. shores. Many thought that case was AES Ocean Express (see, “The Case That Mattered,” p. 53), but even after FERC issued its opinion in that case on April 20, 2007, the question remained unanswered.
Where Are We Left After AES Ocean Express?
Even after FERC’s Order in AES Ocean Express, the question of who pays for mitigation costs resulting from the introduction of LNG into the U.S. pipeline grid remains. FERC suggested that state regulators are in the best position to make the determination related to costs incurred by state-regulated entities. Thus, in the absence of an appellate court overturning AES Ocean Express on the issue of mitigation costs, it is likely that utilities that incur mitigation costs related to LNG will seek to recover such costs in state rate-making proceedings. Therefore, the ultimate answer to the question of who will bear the downstream costs resulting from the importation of LNG appears to be the ratepayers.
1. “U.S. overtakes Spain as largest LNG Importer in Atlantic Basin,” LNG Daily, Vol. 4, No. 82, April 30, 2007, p. 1.
2. Energy Information Administration, “Short-Term Energy and Summer Fuels Outlook,” May 8, 2007.
3. Energy Information Administration, “Annual Energy Outlook 2007,” Feb. 2007, at 12, 94, http://www.eia.doe.gov/oiaf/aeo/pdf/0383(2007).pdf.
4. AES Ocean Express LLC v. Florida Gas Transmission Co., et al., opinion and order on initial decision, Opinion No. 495, 119 FERC ¶ 61,075, at par. 30 (Apr. 20, 2007).
5. NGC+ Interchangeability Work Group, “White Paper on Natural Gas Interchangeability and Non-Combustion End Use,” Feb. 28, 2005, at p. 5.
6. Id. at p. 26.
7. Policy Statement on Provisions Governing Natural Gas Quality and Interchangeability in Interstate Natural Gas Pipeline Company Tariffs, 115 FERC ¶ 61,325, at par. 47 (June 25, 2006).