Today’s report (week ended 2 February): EIA: -119 bcf, EA: -112 bcf
- Today’s reported withdrawal came in slightly higher than the consensus, which had called for a withdrawal in the mid-110s bcf.
- To ‘true up’ to today’s figure, we have upwardly adjusted power demand by 0.5 bcf/d and heating by 0.5 bcf/d. No changes to our supply-side assumptions were made.
Next Thursday’s report (week ending 9 February): EA preliminary: -194 bcf
- Versus our forecast from Tuesday, we have upwardly adjusted power demand on today’s baseline revisions, accounting for a 0.5 bcf/d increase. All other adjustments to our ledger were no more than 0.1 bcf/d—effectively a typical ebb and flow on daily readings.
Disorder in the court
For months, we have been preaching caution about the timeliness and utilization levels of pipeline capacity additions across the country in 2018 and beyond. Specific examples include delays to Rover Phase 1 and 2 and constraints on takeaway capacity in the Permian, where output is projected to grow by nearly 1.5 bcf/d y/y in 2018. Infrastructure risk, which to date has primarily centred around delays and utilization levels, will play a prominent role in any upside to supply growth estimates. A new decision by the Court of Appeals for the District of Columbia (DC) Circuit has added a new level of uncertainty to gas pipelines—not only those under construction, but potentially those already in service as well.
On 31 January, the court declined an appeal to review its decision from August that vacated the certificate orders for the Southeast Market Pipelines Project (SMPP). Last summer, the court ruled that FERC did not properly incorporate downstream greenhouse gas (GHG) emissions into its environmental impact statement (EIS) for the project. The three pipelines that comprise the SMPP are the Sabal Trail pipeline, the Hillabee Expansion, and the Florida Southeast Connection. The Sabal Trail is a 1.0 bcf/d underground pipeline which is currently in service between Alexander City, Alabama and Kissimmee, Florida. However, Sabal Phases II and III are still under construction in those states. When completed, the project will encompass 685 miles of pipeline and six newly built compressor stations with a combined capacity of 1.1 bcf/d. FERC and Sabal Trail Transmission had petitioned for the initial orders to be remanded to FERC for supplementation rather than being vacated altogether, a request that was declined by the court. The decision could put into doubt not only the ongoing construction of Sabal, but the line’s current flows too. This represents a new legal challenge for US pipelines. It is not uncommon for political risk to be a determining factor in project timeliness. Indeed, the Constitution Pipeline, which was planned to stretch from New York to Pennsylvania, was originally approved in 2014 before becoming mired in years of court battles, including three years of environmental review relating to its effects on local water quality. The Constitution Pipeline’s risk profile was thought to be extremely low, as its 0.7 bcf/d was fully subscribed between anchor shippers Cabot Oil & Gas and Southwestern Energy. More recently, Rover Phase 2 emerged from a 13-day drilling moratorium on 6 February after a spill of drilling fluid near the Tuscarawas River, raising the risk of delays beyond the projected end-Q1 18 start date. However, neither of these court decisions, nor the dozens of other political and regulatory hurdles that pipelines must meet, have forced a recent shutdown on projects that were already in-service and not in disrepair. The decision from the DC Circuit court sets a precedent in this regard.
Sabal Phase I came online in June 2017 and was already flowing at 0.3-0.6 bcf/d through H2 17. Due to Florida’s climate, power burn has an outsize effect on gas use in the state, which hits a seasonal minimum in the winter months, unless responding to spikes in demand related to space heating. Though flows on Sabal Phase I were down to 0.1 bcf/d in December 2017 and January 2018, the pipeline still played a key role during the recent cold snap, when Florida Power & Light used it to deliver 0.6 bcf/d in flows over 4-5 January. According to FERC’s EIS for Sabal Trail, natural gas represents the largest electric generation source for the state, at an average of 13 TWh per month (69% of total generation). Of the 5 TWh of new generation capacity forecast to come online in the next five years, 70% will be from new natural gas plants. Sabal Trail is already connected to power plants in Martin County and Palm Beach County, while Duke Energy’s Citrus County plant will need flows from the pipeline if it is to commence operations on schedule by the end of Q2 18. With only two other pipelines, the Florida Gas Transmission Pipeline and the Gulfstream Pipeline, currently operating to feed this demand in the state, Sabal Trail represents a meaningful piece of Florida’s gas infrastructure.
At issue in the recent decision was FERC’s original environmental impact statement (EIS) for the projects, which was approved in February 2016. The DC Circuit court vacated this ruling in August 2017 after a lawsuit was filed by several environmental groups, including the Sierra Club (the court case is Sierra Club et al v. FERC, No. 16-1329), which claimed that a true cost-benefit analysis was not included in the EIS due to the lack of consideration given to the greenhouse gas emissions from downstream users. In a filing from September, FERC argued that current climate models were not advanced enough for use in project-level analysis, saying that it ‘could not find a suitable method to attribute discrete environmental effects to GHG emissions’. The Commission specifically questioned the social cost of carbon metric developed by the Obama Administration and its lack of applicability to specific project impacts.
When that EIS was vacated, it left Sabal Trail without proper certification to operate. In its 31 January decision, the court claimed FERC should have ‘given a quantitative estimate of the downstream greenhouse emissions that will result from burning the natural gas that the pipelines will transport’. While this verdict could add additional GHG emissions standards to FERC’s future decision-making, it also sets a precedent that FERC’s approval for operating pipelines is not ironclad. In the short term, the court’s ruling also meant that, without new action from FERC or further legal challenges, construction and current flows on Sabal Trail would have to cease on 7 February.
To prevent such a situation, FERC filed a supplemental environmental impact statement (SEIS) for Southeast Market Pipelines on 5 February. It estimated that the project would increase emissions in Florida by between 8.36 Mt and 23.0 Mt CO2e (+3.6-9.9%) per year. It calculated three scenarios for emissions: the gross total minus emissions offset from retirements or conversion of other plants; the expected end-use of the four connected power plants; and an unlikely full-burn estimate for those plants. However, FERC still did not attach firm numbers, nor projected environmental impacts, to this estimate. It did not incorporate mitigation measures, as those would be the responsibility of downstream users, nor create a scenario in which the pipelines are not approved due to uncertainty about what fuel type would replace them. Though the Commission affirmed that GHG emissions are the primary driver of climate change, it repeated its earlier stance that there is not a suitable method to attribute environmental damage to individual gas projects given the complexity of climate systems.
Legal manoeuvring in advance of the 7 February deadline saw FERC request a 45-day stay of the DC Circuit’s order on 6 February. The Commission argued that a shutdown would endanger the supply of electricity to Florida residents, causing irreparable economic damage, while also noting that the SEIS proved it was working expeditiously to comply with the court’s orders. The project’s backers— Spectra Energy Partners, NextEra Energy, and Duke Energy—jointly filed for a separate 90-day stay on similar grounds. The companies cited the recent cold snap as evidence of the need for reliable service, as the Florida Gas Transmission pipeline and the Gulfstream pipeline were both 99% subscribed in early January. The court is expected to rule on these new requests by 16 February, pushing back the mandate to cease operations until that date. The Sierra Club petitioned for the shutdown to commence forthwith, though as of time of writing the 16 February deadline remained in effect.
Near-term view ahead
From a near-term perspective, today’s print, while moderately bullish versus consensus expectations failed to energize trading in the March contract. Based on overnight updates to weather, our end-February storage projection of 1.47-1.48 tcf. While next week’s projected withdrawal of 194 bcf is very constructive from a fundamentals perspective, a tangible sign of cold weather will be needed to make the market move above the current trading range as the 1.47-1.48 tcf end-February position is unlikely to stoke concerns over March’s inventory close, which we currently peg near 1.35 tcf.