Cliff’s Notes – The Taming of Firm Pipeline Contracts

With the production of natural gas shifting from one region of the country to another alongside growing natural gas consumption, you would expect shifts in transportation to follow. While monitoring real time flows over the long term can be laborious and time consuming, identifying the contracting vehicles for that transportation, which are available before gas is flowing, can be a sound Cliff’s Notes approach to gauge expectations. As discussed in LawIQ notes and provided in Platform tariff alerts, gas pipelines that experience significant roll-offs have generally been more amenable to reduced rates and flow reductions. Today, we’ll look back and examine contracts that rolled off last quarter and highlight some opportunities to purchase under-utilized capacity.

The interstate transmission of natural gas on a daily basis is underpinned by firm transportation agreements entered into by shippers and pipelines. Firm service guarantees shippers access to the transport of a particular quantity of gas on a daily basis within designated points on the pipeline system. Interruptible service transportation contracts, on the other hand, leave accessibility to the determination of the pipeline. In addition, pipelines also offer various other types of service based on the various attributes of their system.

Firm contracts typically have long terms (e.g., 10-20 years) and, as a result, are critical to the financial health of a pipeline as an operating asset. Much like pipeline project precedent agreements, which are captured in our web-based platform, the greater the percentage of total system capacity contracted, the greater the demonstrated need for the pipeline. In fact, ratings agencies rate pipelines based on various factors, including market position and contract quality. For contract quality, essentially, greater firm contract revenues, longer duration contracts and a longstanding set of shippers, with high credit ratings, will earn pipeline assets high marks.

Therefore,  when substantial contracts approach expiration, especially those for large quantities, the pipeline is looking at a contract cliff, with potentially significant financial ramifications. So spotting these well ahead of time is essential. Here are the top contract roll offs for Q42017:

Contract Roll Offs During 2017 Q4 (Dth/day)
Shipper
Max Transport Quantity
BP ENERGY COMPANY
666311
MACQUARIE ENERGY LLC
608822
TENASKA MARKETING VENTURES
597043
KAISER MARKETING APPALACHIAN, LLC
471199
CONOCOPHILLIPS COMPANY
414421
SEQUENT ENERGY MANAGEMENT, L.P.
410942
PSEG POWER, LLC
397480
DOMINION ENERGY TRANSMISSION, INC.
335809
DUKE ENERGY FLORIDA, LLC
325000
EDF TRADING NORTH AMERICA, LLC
321662

 

Shifts in market position for a pipeline can lead to contract roll offs, as we discussed in It’s the Final Countdown – E&P Shipper Contract Cliffs, which described recontracting issues for ETC Tiger, the Fayetteville Express Pipeline and Rockies Express. While each contract roll-off has its own story, examining the market position — demand growth, competition, and throughput trends —  is  a valuable point of consideration. For example, Dominion plans to  sell its Questar Southern Trails Pipeline to the Navajo Tribal Utility Authority, the pipes’ only firm shipper.  In Dominion’s  application to the FERC to approve the transaction, it explained the changing market position:  “QST has experienced consistent and significant operational losses year after year, and there is insufficient current or reasonably expected demand for the transportation services it offers to warrant continued operation.”  

In recent years, as power generators and utilities have become more dependent on natural gas, they have come to represent a greater number of the shippers entering into firm transportation agreements. Due to concerns about rates in the long term, and what these costs mean for end users, many shippers have opted to enter into relatively short term contracts (e.g., five years). One of the shippers which saw the greatest quantities of firm contracted capacity expire last  quarter falls into this category. But is this true looking forward into 2018.

Contract Roll Off Risks for 2018 (Dth/day)
Shipper
Max Transport Quantity
COLUMBIA GAS OF OHIO, INC.
2002253
BP ENERGY COMPANY
626369
NRG POWER MARKETING LLC
625000
ANTERO RESOURCES CORPORATION
591892
TIDAL ENERGY MARKETING (U.S.) L.L.C.
490533
CAMERON LNG, LLC
400000
TEP ROCKY MOUNTAIN LLC
400000
PETROCHINA INTERNATIONAL (CANADA) TRADING LTD.
376530
ANR PIPELINE COMPANY
342100
MACQUARIE ENERGY LLC
341693

In the fourth quarter of 2017, a variety of companies have large contracts that have the risk of rolling in 2018, including those held by producers, marketers and utilities. Do these shippers actually intend to ship less gas in 2018, or will they be entering into new agreements? Perhaps with other pipelines? LawIQ’s firm transportation contract and tariff data lets you track shipper activity, and our expert team can help you gauge the fine points of these contract specifics, such as the impact of most favored nation clauses.

Contact us to see how to use the LawIQ Energy regulatory analytics and intelligence platform to provide you insights into the unforeseen and provide you a competitive advantage.