A losing proposition even for the pipeline companies-

Susan from Milford, NJ has made a series of FERC submissions which are very well thought out and make persuasive arguments against the pipeline. She continued with one today that is particularly on-point and should make the FERC sit up and take notice:

I call on the FERC to return the “NO BUILD” option for the PennEast pipeline project (hereinafter “PE”). Not only does this project offer NO benefit to the people along its route (it will take the gas to South
Jersey and New England, not to the residents along the proposed route in PA or NJ) but also it is becoming increasingly obvious that this project is not financially viable.

The six member companies of PE are listed as its “customers” but their distribution networks were already in place so there is no real customer increase. Despite PE’s vague denials, the only way PE could make back their investment would have been to get gas to New England, ready for anticipated LNG export stations, or to Cove Point for export. But according to the following article, (www.moodys.com/research/MoodysLiquefied-natural-gas-projects-nixed-amid-lower-oil-prices–PR_322439?WT.mc_id=AM~RmluYW56ZW4ubmV0X1JTQl9SYXRpbmdzX05ld3NfTm9fVHJhbnNsYXRpb25z~20150407_PR_322439) “Moody’s says low LNG prices will result in the cancellation of the vast majority of the nearly 30 liquefaction projects currently proposed in the US, 18 in western Canada, and four in eastern Canada.”

Without these anticipated export facilities, PE simply will not have the revenue from selling this gas to the existing customers of its 6 member companies. There are no new significant customer bases in NJ, nor any major coal-fired power plants to be upgraded along this proposed route.

Indeed, the Gilbert station in Holland Twp is already served by Elizabethtown Gas, and will only be a back-up station.

The article goes on to say “However, projects already under construction will continue as planned, which will lead to excess liquefaction capacity over the rest of this decade. Notably, through 2017, Australia will see
new capacity come online from roughly $180 billion in investments, which will result in a 25% increase in global liquefaction capacity. Likewise, the US is poised to become a net LNG exporter after the Sabine Pass
Liquefaction LLC (Ba3 stable) project goes into service in the fourth quarter of 2015.”

Susan is absolutely right. The Marcellus gas projects have always been somewhat tenuous because fracking is a very expensive operation compared to conventional gas drilling. You need fairly high prices to support it, somewhere in the neighborhood of $4 per thousand cubic feet. Any lower than that and you’re drilling at a loss.

Thanks to Saudi Arabia flooding the market with cheap oil, oil prices have plummeted, and natural gas prices have likewise followed suit. That, combined with the massive over-supply from Marcellus, has landed a one-two punch to the industry. They’ve got natural gas coming out of their ears right when prices are plummeting.

LNG export was seen as the savior here. Even though LNG is very expensive to produce (liquification and cross-continent shipping is very expensive), it was viable for awhile. After the Fukashima nuclear disaster Japan closed all their nuclear facilities and their demand for natural gas soared tremendously. Europe gets a lot of gas from the Russia, which is a politically unsavory source. And India is just plain starving for natural gas.

However, the window for Marcellus gas exports seems to be closing. The continued price pressure from the Saudis has devastated the industry (which was the Saudi’s exact intent). And other countries are stepping up.

Susan continues:

Not only is the PE project a certain detriment to the environment, a credible threat to the drinking water of 15 million people and a constant safety risk to all those within the mile wide “strike zone”, but now it
isn’t a money maker. The article states “Greenfield projects on undeveloped property are much more expensive, INVOLVE MORE CONSTRUCTION RISK (emphasis added), and take longer to build than brownfield projects, which re-purpose existing LNG regasification sites. Greenfield projects are also frequently challenged by local opposition and occasionally by untested laws and regulations. Based on the public estimates of companies
building new LNG liquefaction capacity, the median cost to build a US brownfield project is roughly $800 per ton of capacity, compared with the more advanced Australian greenfield projects, now estimated at around
$3,400 per ton.”

The information that Susan cites here is the other problem PennEast (and all the other new pipeline proposals) faces. They act like they exist in a vacuum, but they do not. There are international competitors to PennEast and Marcellus gas, and they haven’t been sitting on their hands. Australia is now emerging as a strong exporter of LNG. And anyone who can read a map can see that Australia is one helluva lot closer to Japan than the U.S. is. Australia is in a prime position to get cheap exports to Japan, Southeast Asia, and India. The U.S. simply can’t match their prices because we have to ship the gas so many thousands of miles further than they do.

Step back for a minute and imagine just how awful this scenario is. Let’s say for argument that FERC ignores everyone and approves this pipeline, and PennEast then goes ahead and builds it with their leveraged money. Let’s skip ahead in our imagination to 2017 at the ribbon cutting ceremony where the head of PennEast starts the first flow of gas. Protesters are chanting and displaying their anti-pipeline signs, with union representatives and industry cheerleaders intimidating and threatening the protester crowd.

Then skip ahead in your mind a little further, to 2019. LNG is at historic lows as Australia blankets Asia with its gas thanks to its geographic advantage. Nearly all of the proposals for LNG export terminals in the U.S. and Canada are withdrawn by their proposing companies. Cove Point LNG export and Sabine Pass limp along but are struggling to compete with Australia.

Meanwhile the Northeast experiences record low prices and consistently beats the Henry Hub prices as projects such as the Leidy Southeast Expansion come on line, and large industrial and electrical generation consumers continue to streamline their operations and make the most of the infrastructure in the region.

In other news PennEast quietly announces in their quarterly SEC filing that their pipeline is only running at 20% of capacity as one drilling company after another abandons their Marcellus properties. PennEast begins suffering repeating quarterly losses. They quietly mull filing to FERC to officially abandon their pipeline as its continued operation drags down the bottom line of its member companies. Investors start talking about lawsuits and SEC investigations as member companies declare losses year after year…..

Just imagine the government giving PennEast the power of eminent domain over your property, and then watching them go bankrupt 5 years later, with you left with an empty pipeline buried in your ground.

It sounds like a crazy, whacked-out scenario but it’s not. Energy companies historically like to take huge risks and shoot for the moon for large rewards. And as a result they also regularly fail and take gigantic loses. There’s a boom and bust cycle there that you can see across the country, little towns in Texas that were hosts to million dollar homes and fancy stores that are now all abandoned and shuttered up when the oil dried up. The same will be happening in PA one day soon.

Susan’s submission is available below:

Susan from Milford – FERC Generated PDF

Susan from Milford – FERC Generated PDF Alternate Site

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Mike Spille

I'm a thinker, an analyzer, a synthesizer. Maybe not in that order. I live in West Amwell NJ with my wife Kristina, our two kids Day and Z, our two dogs Fern and Cinna, and two cats Ponce de Leon and Xavier.

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