A reader pointed me to a recent FERC “2014 State of the Markets Report”. This report is created by the FERC Office of Enforcement’s Division of Energy Market Oversight, and is the “staff’s annual opportunity to share our assessment on natural gas, electric, and other energy markets developments during the past year to better inform the Commission’s understanding of current and future trends”.

What they do in this presentation is look at the 2013/2014 season and compare that to how 2014/2015 has shaped up, and then make some projections into the future to indicate where they think the overall energy markets are going. They look at the markets in this way because the winter is the most important season for gauging natural gas usage and prices, so they time their coverage so the previous entire winter is included:

The presentation is available here:

http://www.ferc.gov/CalendarFiles/20150319162231-A-3.pdf

For our purposes I’ll focus on some interesting tidbits they dropped relevant to the natural gas markets.

“We’ll make it up on volume”

First up is page 8. I would have overlooked this slide but fortunately the reader who contacted me about this presentation has keener eyes than I do 🙂

Slide 8 is entitled “Marcellus Production Overwhelms Infrastructure”, and has a graph showing overall natural gas production as compared to pipeline capacity. This slide is fascinating for the amount of information it contains that text below completely fails to address. It shows that for awhile now pipeline capacity has been below production ability, due entirely to Marcellus Shale. However, the graphs project that by 2016 pipeline capacity will have been increased to match all production. This is good, right?

Sure. But here’s the problem. The graph shows two lines. One is Total Proposed, the other is Likely Pipeline Capacity. In 2016 the Likely Pipeline Capacity line starts creeping above the total production numbers, showing that our capacity will be exceeding production somewhat. That’s not good.

But there’s worse news there. The Total Proposed line takes a sharp bend at this point and diverges wildly from the Likely Pipeline Capacity one.

From this we end up with three numbers by 2018:

– 25 billion cubic feet/day: This is expected total production per day in 2018
– 32.5 billion cubic feet/day: This is the Likely Pipeline Capacity number in 2018.
– 40 billion cubic feet/day: This is the Total Proposed capacity in 2018.

What does this all mean? It means this:

– By 2018 FERC expects enough pipelines will actually be built to have 7.5 billion cubic feet/day of excess capacity (by subtracting the production totals from the Likely Pipeline Capacity number). That means we’ll have 30% more pipeline than we’ll actually need. Why would we do this?

– Worse, FERC sees 15 billion cubic feet/day of excess pipeline capacity being proposed by industry (by subtracting the production totals from the Total Proposed number). This is 60% over capacity being proposed by industry.

These numbers alone are pretty shocking, but that’s not the end of the story. If you read between the lines you can see that the FERC doesn’t expect all of those industry pipeline proposals to get built. Do the numbers and FERC seems to expect half of the pipeline proposals to never see the light of day for one reason or another.

This is clear evidence that FERC is aware of the cumulative impact of all these pipeline proposals, and they know it’s ridiculous how many are being proposed. In the words of the reader who forwarded me this:

FERC and the industry don’t expect all these pipelines to be built. Industry strategy for pipeline approval appears to be “Let’s just fling crap at the wall and see what sticks”.

Put another way, their strategy is to throw out a barrage of pipeline proposals, and then let the public do the hard work of figuring out which make sense via the scoping process.

Gas infrastructure in 2015 performed “Remarkably Well”
If we skip ahead to page 16, FERC is now talking about how 2015 fared compared to 2014. 2014 had the polar vortex and markets were stressed to their limits, but 2015 was no slouch either, with record snow in some areas and extreme cold hitting us again.

So how did the natural gas markets fare in 2015? Here’s what they say:

By many measures, this winter rivaled last year’s in terms of record low temperatures across much of the country, and in overall demand for electricity. However, compared to last winter, with its series of Polar Vortex events in early 2014, the wholesale power markets and natural gas pipeline system performed remarkably well.

They continue on the next page:

Despite challenging winter conditions, prices in the electricity markets remained moderate, helped by stable natural gas prices and lower forced outage rates. This stands in contrast to last winter, when outage rates were high, price spikes were common, and PJM and NYISO both sought and received authority to waive their $1,000 MWh offer caps to ensure that generators would be able to recover their fuel costs. Last winter, many generators also complained that they were unable to secure sufficient natural gas supplies to operate their
plants.

Huh. So we had two bad winters in a row, but the most recent one was weathered very well by our energy infrastructure. How is that possible?

FERC tell us how:

Notably, actions taken since last winter by the RTOs and market participants, such as PJM’s new Cold Weather Preparation Guidelines and the continuation of ISO-NE’s Winter Reliability Program for a second winter, appear to have improved operational performance and the availability of units, which helped to moderate prices. For example, real-time prices at the PJM Western Hub were $400 MWh lower on PJM’s peak day this winter, than on last winter’s peak day. The drop in real-time prices can also be attributed to an improved forced outage rate, with PJM’s outage rate dropping from 22% last winter to 12% this winter.

Across the RTOs and ISOs, no significant outages or major operational issues were reported and the bulk electrical system performed well despite changes to the resource supply mix. In particular, ISO-NE, which found itself in a stressed operational state last year, did not experience any significant reliability issues this winter despite the retirement of the Vermont Yankee nuclear station in late December, which removed 615 MW of baseload capacity from the grid.”

They continue to talk about the remarkable upswing in 2015 compared to the prior year:

As shown by the price differentials in this chart, the contrast between last year’s and this year’s winter cannot be understated. While no single reason can explain why the wholesale power markets performed better this winter, the relative improvements seen in terms of prices and operations are likely the result of several factors.

In addition to better cold-weather preparation of assets and measures approved by the Commission, such as New England’s Winter Reliability Program, electric transmission and natural gas pipeline operators are now communicating more effectively during periods of stress to improve coordination and the reliability of their systems. Moreover, as discussed below, record natural gas production, plentiful storage inventories, new pipeline infrastructure, and low oil prices, are factors that also contributed to this winter’s moderate electricity prices and the improved performance of the electricity markets.”

Skipping ahead page 20 reinforces this notion, it looks at the hub spot prices and notes that they were much lower in 2015 than they were in 2014, and that volatility was extraordinarily lower this year compared to last.

Finally on page 21 FERC notes that additional pipelines did play a role in stabilizing markets and keeping gas cheap in 2015:

Increased pipeline capacity to move natural gas into major Northeast demand centers, particularly New York City, was a major reason for the moderate price volatility the region experienced this past winter. This table shows some of the pipeline projects that went into service in 2014 in the Northeast. Operators put nearly 4 Bcfd of new pipeline capacity into service in the Marcellus and Utica Shale regions, with approximately 2.5 Bcfd of this new capacity serving Northeast demand and 1.5 Bcfd providing takeaway capacity for producers. The Texas Eastern’s TEAM 2014 expansion and Transco’s Northeast Connector added new capacity to move supply into the New Jersey and New York markets.

So pipeline projects that came online in 2014 were the final bit that helped 2015’s winter be a good from a natural gas perspective. We got extra capacity in here and now we seem to be good. For the future demand for natural gas is predicted to be relatively flat except for some coal plants being converted to natural gas, but we seem to have sufficient over capacity to deal with that.

So who needs PennEast?
I admit, I buried the lede here, but I think the journey along the way was important.

The reason I’m posting all this information is to tie it all back to PennEast’s justification for this pipeline. If you recall PennEast’s sole justifications are:

– To provide natural gas to businesses and consumers in Eastern PA and NJ
– To keep gas prices low
– And to decrease price volatility
– To keep electrical and industrial demands satisfied during peak loads

Well, guess what PennEast? If you read the FERCs annual report, those problems are solved. Do we have low prices? Check. Is price volatility fixed? Check. Are electrical and industrial consumers being supplied? Check.

We’re all good here PennEast. Please pack up your pipeline plans and go away.