I’ve put together a FERC submission detailing Dalton expansion project in relation to PennEast, and other projects where PennEast will clearly be shipping gas out of the Eastern PA/NJ markets. Will update with the FERC link once it’s available.
tl;dr – PennEast pipeline partner AGL Resources is working with Transco pipeline company to bring PennEast gas to Georgia.
Many people pointed to the participation of Elizabethtown Gas in the PennEast pipeline project as proof that this pipeline was being built to benefit the people of New Jersey. I mean, hey, this is a local natural gas company, clearly they’re going to use it to lower gas prices in the state. Right?
Well, as it turns out things are not always what they seem. When PennEast does non-official presentations to the public or the press they play up the Elizabethtown Gas angle. However, if you look at their official filings you’ll note that Elizabethtown Gas is not mentioned. Instead, their parent company, AGL Resources, are the actual company of record that’s involved with PennEast.
But that’s just a technicality, right?
Well, no, as it turns out that makes a big difference. While Elizabethtown Gas is a local company, AGL Resources is not. According to their web site AGL resources is in fact “the largest natural gas-only distribution company in the United States”.
And their plans for PennEast look to be quite a bit bigger than providing gas to NJ.
Williams, the owner of the Transco pipeline network, announced that they are working in cooperation with AGL Resources to expand their pipeline capacity to get more gas flowing from Mercer County, NJ to the south east. Their press release is here.
The purpose of this project is to get Marcellus shale gas from Transco’s Mercer County interconnect down to Georgia. On its end Transco will be beefing up the compressor stations along the route to deliver more gas at higher pressures along existing pipelines. AGL is partnering with them to build another 111 mile pipeline to connect into this infrastructure.
The kicker of course is that the “Marcellus Gas” Transco and AGL are talking about will be coming from the PennEast pipeline. The Mercer County interconnect is where the PennEast pipeline terminates in Hopewell Township, NJ. The pipeline that was being built to “benefit consumers and businesses in PA and NJ” is yet again being proven to not benefit our states at all.
And what this also shows is the knock-on effects these pipelines will have. Pipelines will beget more pipelines. Companies will be motivated to upgrade existing infrastructure. More and more infrastructure will be built out to get this gas where they can make the most money out of it.
And once the Marcellus region is played out, all those pipes will be useless.
I’ve done a number of posts analyzing the natural gas market and looking at where all this production could possibly go. To that end I’ve been using the production numbers to show how it’s driving a push to get gas to new markets, such as through LNG exports.
Eric from Cranford, NJ is looking at it from the other end. He’s analyzed the market around Shale gas production and has shown that the rigs are way over-producing and that the market is in a free fall. Debt in in the industry is rampant and drillers will be drilling at a loss for now and into the foreseeable future. He reckons the shale drillers have made themselves a bubble that’s now on the verge of total collapse.
EIS Scoping Comment 20150227-5507 submitted on February 27, 2015 by Eric Weisgerber called for an examination of the general investment and financial environment for shale gas fracking companies to judge their long-term viability, a determination of the likelihood of the current environment being a “bubble” and thus full of malinvestment, and an examination of the necessity of the shale gas industry to never stop drilling in order to keep up production even in a money-losing environment. Mr. Weisgerber also called for a vigorous and skeptical examination of the financial justifications for the pipeline as stated by PennEast.
As followup to the above scoping comment I am submitting the article “Natural Gas Prices To Crash Unless Rig Count Falls Fast” published on March 22, 2015 on oilprice.com:
He includes some quotes from the article in his submission (note: these bullets are out of quotes just for formatting purposes – all of these bullets are Eric’s):
- rig counts for shale gas drilling are too high
- an orgy of over-production is taking place in the Marcellus Shale
- shale gas plays are not commercial at less than about $6/mmBtu except in small parts of the Marcellus core areas where $4 prices break even. Natural gas prices have averaged less than $3/mmBtu for the first quarter of 2015 and are currently at their lowest levels in more than 2 years.
- Bank of America fears sub-$2 gas prices now that winter heating worries are over. http://www.bloomberg.com/news/articles/2015-03-18/surprising-natural-gas-output-has-bofabracing-for-sub-2-prices
- The only criterion that seems to matter to investors these days is production guidance. If production drops, stock value will fall even farther than it has already. This will trigger loan covenants if asset values fall below thresholds set out in the loan agreements. When that happens, the loans will be called unless the companies can come up with more cash. This might result in bankruptcy. So, the drilling must continue as long as there is capital.
- The table shows financial data through year-end 2014. What it reveals is not pretty. 2014 negative cash flow reached $15.5 billion, an increase of $7.2 billion over 2013. [Table of 22 top operators in the shale gas plays, see below]
- On average, shale-gas companies earned only 68 cents for every dollar that they spent in 2014. Total debt increased almost $10 billion to $93.5 billion and average debt exceeded stated equity by 18% excluding companies with negative equity including the now-bankrupt Quicksilver Resources.
- Shale gas plays are commercial failures. The misuse of capital to continue to increase production while destroying price and shareholder equity has gone on for too long. Investors should demand that shale gas companies cut rig counts at least as much as tight oil companies have.
The article quoted above provides evidence in support of the importance and necessity for an investigation into the true need for the PennEast pipeline. It shows that the current environment for shale gas plays is highly negative and that the future viability of those plays is gravely in doubt. It makes no obvious sense to build the PennEast pipeline, therefore the reasons for building it must be non obvious, unstated, and quite possibly highly speculative at the best, and fraudulent at the worst.
Eric’s analysis dovetails nicely with my own. Both sides show that there’s a glut of natural gas in the market place, and that producers are desperate to get the gas somewhere to prop up their drilling operations. They are in even more dire straights then you could imagine because they have covenants in their drilling agreements with the land owners that they must continually produce from the land. If they stop they lose their rights to drill. So they’re caught between losing a big percentage of their investment – or losing the entire damn thing.
This is where the LNG exports come in. They’re the hail mary pass the industry is making to save all that shale investment. If they can open up new markets their investments will be saved, and as a bonus gas prices will begin to rise again.
It’s been said here and elsewhere countless times, but bears repeating: This gas is not for NJ and PA. PennEast is lying to you and the government in their FERC application.
Eric’s full submission is available below:
Like many FERC commentors, Dana from Easton, PA doesn’t pull her punches. She believes the FERC is short-sighted and stupid, and PennEast has comported itself in a misleading and unethical manner.
I am writing to express my opposition to the proposed PennEast gas pipeline. Most of the properties it crosses have been preserved with either federal, state or local funds for preservation of open space. How
can a for profit endeavor outweigh the will of the taxpayers who chose to protect their land?
PennEast has NOT shown that there is a need or want for this project. I have been following the FERC filings very closely, and of the almost 800 filings I’ve saved to my hard drive, only 2 dozen or so have been in support, and all but 4 of these were from individuals, not corporate entities. Doesn’t that tell you something?
Regarding PennEast’s actions during this profiling period, there does not appear to be a coordinated regional plan for pipelines, even within FERC. FERC reviews each application in isolation, without regard to the cumulative effect on the region. This is short-sighted and just plain stupid. Also, PennEast has been deliberately vague in providing the public with the information regarding the actual route of the pipeline, has deliberately scheduled the few meetings with the public at inappropriate locations and at inconvenient times, and has overall been NOT forthright in providing the information the public needs, and is entitled to, to make informed decisions regarding support or opposition to this project. I find their actions in this matter to be misleading and unethical.
When PennEast suggests that this will bring “affordable gas to millions of homes in NJ and PA”, I have my doubts. Most of the affected lands along the course of this proposed pipeline are rural… we do NOT have any natural gas infrastructure in place, nor will there ever be. This is clearly a plan to enrich the owners and stockholders of the energy conglomerates, with no concern for the actual landholders affected.
And what of the natural lands, flora and fauna of the region? PennEast seems to care little for their welfare, only for the profits they may reap.
Finally, there have been numerous scientific findings regarding the fragile geography of the region- karst geology, sinkholes, fault lines, etc. that suggest further disturbing the topography of the region would
be a very BAD idea.
For these reasons, and for those expressed in the overwhelming opposition expressed by others on this forum, I strongly urge FERC to reject this project.
Thank you for your consideration in this matter of dire importance.
I completely agree with Dana on all points, and I think in particular the FERC needs to not acccept PennEast’s vague hand-waving and assertions. I believe federal regulations require that FERC must force PennEast to be extremely specific in their plans and their responses to scoping comments. I could spend a year documenting all of the instances where PennEast is deficient in this respect, but some of the most egregious ones include:
- A vague and changing pipeline route.
- Vague assertions that they will follow “industry standards” without specifying exactly which ones
- Hand waving about “heating 4.7 million homes” without actually breaking down the expected consumption by end users
- Saying they will re-route where “practical”, with no indication of what they consider practical or not
- Hand waving about “mitigation”. How do you mitigate ripping out orchards and reduced crop damage?
- Saying they will “compensate” owners of preserved lands. How can you compensate someone for losing their preservation status?
- Lumping serious individual concerns on a wide variety of locales with ecological, historical, and cultural impact into single generic buckets in their scoping responses
As I say, the list goes on and on. We can only hope that the FERC wakes up and starts doing its regulatory duty here. Either force PennEast to give specific answers to specific concerns, or hit them with the “No Build” option and call it a day.
Dana’s submission is available below:
We’re starting to see individuals and organizations react to the anemic and wholly inadequate responses of PennEast to the FERC scoping comments. Joan from Hopewell, NJ writes to the FERC:
I am appalled at PennEast’s failure to address legitimate municipal and resident concerns in its recent response to scoping comments. Its cavalier attitude towards environmental, cultural, historical and geological problems is inexcusable.
I completely agree. I was in total shock when I read the PennEast’s responses. Sink holes? They’re not worried about them. They say their pipe is engineered to withstand a 100′ fall, so no worries!
Environmental concerns? They’ve got it covered, they’ll mitigate!
Pipeline going through conserved areas? Well they’ll try to route around them. As long as it’s not too inconvenient to them.
99% of their responses are like that.
In my comments, I specifically asked where the gas is intended to go. This is a very simple matter of asking all PennEast partners where they will sell the gas. There is no question that the gas will not be going to 4.7 million homes in NJ, or PA, or even NY, as PennEast keeps repeating. The US Census data is clear that it is impossible to heat 4.7 million homes when there are fewer than 4 million homes in NJ and two thirds of them already have natural gas. The PennEast partners — UGI, NJR, etc. must have knowledge of where they are selling this gas; otherwise, they would not buy gas on speculation. PennEast should tell all of us where the gas is going to be sold. There is no convenience or necessity to local residents for companies to make profits by selling gas overseas.
Without an answer to this question, there is no “necessity” and no “convenience” for FERC to grant a Certificate of Public Convenience and Necessity. There is no benefit to mid-Atlantic residents. Yet, they will have to bear all the destruction and environmental disasters that will result from this proposal. PennEast is engaged in subterfuge and obfuscation in its answers and should be accountable to provide specific answers.
This is indeed a critical question, and one I’ve harped on as pivotal in looking at PennEast’s proposal. Their smoke screen about gas for businesses and consumers in PA and NJ is a complete fabrication. As Joan points out there is no need for this billion cubic feet of gas to flow into our state a day.
PennEast has also not accurately represented the effect of its pipeline on residents’ gas bills. Although the price of LNG is decreasing temporarily, this does not mean that residents will pay less on their bills. All PennEast partners acknowledge that they can and will pass through their infrastructure costs to its customers. On a $1 billion pipeline, customers bills will go up, not down. PennEast is misleading FERC and the public. FERC should not grant the Certificate. PennEast is not an honest and reliable source of information regarding any of its plans.
And this is the final insult. All the poor people writing that PennEast will lower their gas bills are going to be in for a rude shock if it actually comes to pass. Pipelines aren’t free, and there will be tarriffs to go over this one. And shale gas is on average more expensive to produce than conventional gas. PennEast is trying to indicate that having gas “local” is an advantage but in reality this is not true. Historically production from wells has cost more than the pipeline transmission costs. And that’s when we’re pumping it from the gulf coast.
And finally – if they export the gas flowing over PennEast, market forces will come into play. Natural gas in Asia and Europe is extremely expensive. Marcellus producers are going to naturally want to ship there. Production is rising but now we have an entirely new market as well. An expensive one. The natural market effect of this is that prices will go upslightly for everybody. And when it hits 15 degrees outside we’ll be competing for gas with Japan and India who will pay top $$$. Guess who will win?
Joan’s submission is available below:
I’d like to share a bit of my work history with everyone to show some parallels between the financial services industry in the 90’s/2000’s and where we’re at today with the energy industry. Note that in many areas here I’m simplifying things greatly, especially when talking about financial instruments and models.
For many years I’ve worked as a software developer in financial services. And for a long time I was very pro-markets, as were a lot of people. This was the time of the Clinton Administration deregulating a lot of markets, of Alan Greenspan being worshipped as a God, and America as a nation was letting loose a money-making and GDP-exploding phenomena across the world.
At the same time, I was young and naive way back then. I believed nearly everyone had the world’s best interests in mind when they did things, that “evil” people or villains were just things you saw on TV. Real life people were just folks doing their jobs.
I didn’t realize that some people have incredibly strong drives to better their own fortunes, and they don’t care who gets in their way on the way there. If they were in the way they were just a problem to be taken care of. I saw a lot of it when I worked at a famous brokerage (now defunct) for 3 1/2 years in the mid to late 90s. At bonus time we’d all go out drinking at noon and people would be driving to Atlantic City or a car dealership to blow half of it. People obsessed over what you drove. The head of a trading operation was known to take a personal helicopter into work occasionally. And in the new (lack of regulatory) environment, these driven people were concocting all sorts of money making schemes. Making money off of short term lending. Making money off of increasingly complex derivative products. Make money off of anything your brain could dream of. And with the increasing speed and power of computers people like me helped make it happen. We built the networks, the algorithms, the pricing systems that helped shore all this up.
All of this was made possible by the relaxing of regulation and increase in computer power. We leaped far ahead of what the government even understood what we were doing, and they didn’t care. “Let the market speak!”. There was light regulation but is seemed to be mostly prima facie stuff and not all that serious.
While I was proud of what I built I always had nagging suspicions in the back of my mind. There were always scandals going on, and some aspects of deals seemed a bit….dirty. Or at least very fogged up. Lots of money flowed around and it was devilishly hard to track. It bugged me and I eventually burned out, drifted away and around for awhile in other jobs.
As more regulations get relaxed, the industry gets more…creative
I then worked for another big financial firm in the 2000’s for 7 1/2 years. I worked in the credit derivatives IT department. My group worked with the quants to do the risk models that valued all the increasingly complex financial instruments. Along the way I learned about how various credit derivatives worked. I often came away really puzzled. For examples a Credit Derivative Swap (CDS) is really just insurance on a bond. So if you buy an IBM bond and are worried IBM is in financial trouble and might default, you get insurance on that investment.
But in my head I thought “But what if the insurance company defaults? Why is the insurance company more reliable than the bond issuer?”. I was told not to worry about that, no big deal, the model will cover it.
Mostly we just made money, but occasionally someone would actually default and there’d be an “oh shit!” moment. It was before my time but I heard than when Parmalat went bankrupt nobody’s default models actually worked. The whole system was broken and IT people had to scramble like mad to fix them. Not at one company but across all of Wall Street.
In any case I learned about about more complex things like “Indexes”, “Baskets” and “Collateralized Debot Obligations” (CDO). Indexes were just a bunch of CDS’ piled together. It gave you “default protection” across an industry or otherwise related companies.
The more complex ones were bundles of companies that were sliced into what are called “tranches”. Let’s take a gross made example of a basket of IBM, Ford, and Apple Computer.
You buy a basket of these, and you are protected from them going bankrupt. For this protection you pay X dollars a month for some amount of time (often 5 years). Think of the money like insurance premiums.
But with a basket, it’s a little complicated. You don’t just buy protection on a group of companies going bankrupt. You can pick a percentage of companies that go bankrupt too. You might say “this only applies for the first 33% of companies”. So in reality you’d get paid if any any one of the companies went bust, but then the deal was off.
Then there were Collateralized Debt Obligations (CDO). These were very different. These were basically individual pieces of debt that package together, and then you got the cash flowing out of all of them. It could be personal loans, mortgage, credit card debt, whatever. These were tranched too, but a little different. If you were at the bottom and someone defaulted, you just lost that portion of the cashflow. If you were higher up you were protected until N number of people defaulted. At the very top end you’d be protected unless a huge number of the loans or whatever went bust.
As a result the bottom tranches cost very little because they were risky.
The top ones cost more money because they were viewed as safe.
Then they got even fancier and you could have a CDO where each “debt” wasn’t just one debt, it was actually another CDO! This was called a CDO2, short for “CDO-squared”.
People would occasionally mention how crazy some of these securities were. They explained it like this.
All this stuff comes with risk, and what investors do a lot is figure out how much risk you’re willing to take and invest based on that. You could buy very risky things cheaply. Or you could buy very safe things for more money.
Back to CDO2. The top end of these things – where like 20% of people had to default – were seen by investors as ultra-safe. They were rated AAA. They said “hey, no way 20% of the general population is going to default”!. But they also had high yields. Low risk and big rewards – sounds awesome! People bought them in droves.
But as people explained it, there was a reason they had such high yields.
It turned out that by having a CDO of CDOs, investors only looked at the first level (the top end) but not so much the underlying the CDOs in the individual buckets.
And what banks did was solve a problem they had had for awhile. There’s a lot of junk debt out there. High risk people with home mortgages. Low level office workers with $30K credit card debt. No one would buy this stuff.
But what if you bundled all of them together. Then you took the riskier ones – the lowest tranches with first defaults. And then you got an other bundle like that from another basket. And a third from yet another basket. You literally skim the worst parts of each. And you assemble them into your new shiny CDO2, and you sell the top end of that as AAA.
This is just what a lot of CDO2 securities were. Not all, but some.
They were all junk from the top to the bottom. Normally you have a random mix of people in a basket, so the tranche model made sense. But here the debt was uniform – they were all people with poor credit who would likely default en-masse if there was any bumps in the economy.
It was a bit of sleight of hand. Not illegal but bad things were hidden where ordinary large scale investors would be unlikely to find them.
The ratings agencies were involved in all this by assigning this stuff AAA. I have no idea why but they did, but this helped. As it turns out companies pay for their ratings from Moodys or S&P or whoever. So there’s a bit of conflict of interest there. Especially since firms could shop around for ratings. And there was no regulation to reign this in.
And as a result cities and pensions and insurance companies and mutual funds all bought into them. Around this time I started to feel rather uneasy about my job. I was no longer proud of my work. And my job suffered since I didn’t believe in it anymore.
It hits the fan.
Then 2007 and 2008 happened. What people described actually happened. The housing bubble burst. House prices plummted. People went underwater. Liar’s loans were a big part of that and go all the way back to Clinton’s degulation. People started defaulting on their mortgages, on their credit cards, on their car loans.
Things didn’t just come apart financially. Just like with Parmalat, it turned out the models didn’t really work. Not in that environment at least. Everyone’s values were wrong based on a shared incorrect model.
All that debt was sold to pensions and insurance companies and mutual funds as AAA debt at the highest levels of protection went bust. The impossible scenario happened because the sleight of hand didn’t match reality.
The final icing on the cake were “naked” derivatives. This was buying a derivative without actually owning anything. You could buy CDS insurance without having a bond.
The problem there was that people bought more CDS insurance then there were actual bonds. It was like buying insurance for a house – but you don’t own the house. It’s not totally insane – it was integral to hedging strategies and why companies loved the derivatives so much.
In the end there were many times more derivatives than actual bonds that needed protection. As the markets stressed more people were called to pay 10x more money out than they had in collateral. It was impossible.
In the end the Fed had to bail everybody out to the tunes of trillions of dollars. The deregulation of the Clinton years and speeded up by the Bush one ended up with standards loosened everywhere, and the financial companies ate it up. They pushed the loosened standards to the max. Except that in the end it was all a house of cards, and it blew up in their faces.
Personally I got even more disenfranchised at my job, lost interest and my job performance plummeted. In the end I was caught in a round of layoffs in 2012. Which worked out well for me in the end – I got enough money to move to where I live now in West Amwell, and start again. I still work in financial services but now I work for a financial service information and news firm. What we do is basically inject transparency everywhere we can in the system and help bring the truth to everyone. It’s a liberating change.
Don’t let the FERC ape the financial regulators of the past
Bringing this back to my original point. I’ve seen first hand that companies by themselves cannot self regulate. They want to maximize their profit and growth, and they can be incredibly innovative (and sneaky, and underhanded) to get there. You need independent regulators to define the rules and make companies abide them. In finance you see things finally changing. Now we are seeing companies going to court. Firms sued for deceptive CDO2 stuff. Companies all over Wall Street settling with the government over collusion in FX pricing. Mortgage rules are being re-instated so you can’t do liar loans anymore. Proprietary trading desks have been busted up. The government realizes they can’t be frat brothers with the finance firms. They have to be the responsible watchers and punishers.
We need the same for infrastructure regulation. We can’t rely on self-regulation or collaborative buddy systems between government and industry. The human race has it hard-wired into its DNA to angle for the edge, to shave off a few points where they can, to scrabble to get ahead. And a percentage of us will cheat to get there. It’s just the way it is, and corporations are no different.
The big problem here is the FERC. Their goal is to be just like financial regulators in the 90s and 2000s – to be cheerleaders and help companies increase their bottom line and grow GDP. To be their drinking buddies.
This is totally wrong.
Now I’m not talking about shutting down infrastructure. I’m talking about making the companies building infrastructure to do it responsibly. To double-under score that gas is a transition fuel and we need to cap it’s usage at some point. To show that fracking is incredibly harmful and also should be capped. That some day soon we’re going to have to rely on geothermal, wind, solar. Maybe nuclear if we can ever get it done right. There are enormous challenges to doing that, so I acknowledge we just can’t wipe out nat gas and oil instantaneously. But there has to be a clear plan and FERC et al have to reign in excesses.
To do that, they have do what we did in 2008 with finance. They have to get tough. They need to grow teeth. They need to dictate terms to energy companies, not ask them what they want done. Executives need to go to jail when they break the law. The FERC should stop turning a blind eye to federal guidelines and laws. Concerned residents, conservation organizations, and environmental protection agencies should not be seen as “problems” for FERC to work around.
The government, and the people, should not trust vague assurances. “We’re exerts, we know what we’re doing, we’re following industry best practices”. This is what the people behind the financial collapse said. They said trust us, this model will work – and the all fell apart when Parmalat went bankrupt. They said trust us, this model will work again – and then the Basket and CDO models went to crap when the market dove. They said no no no, wait wait, give us one more chance – and Lehman went under and the Fed started printing money 24/7 to keep the lights on for everyone.
The energy companies should finance this. The FERC budget should come from energy companies as a production tax. Their budget problems would evaporate if they got even a fraction of a percent of the production numbers.
Sounds just like PennEast and all the other drilling and pipeline companies, doesn’t it?
Congress and the administration should act too. FERCs sole-approval authority should be revoked. They should be peers to the other agencies, not above them.
Industry should not be inviting FERC directors to give presentations of projections at their conferences. The industry should be scared to death of them. That’s when you know you’re doing it right.