The U.S. natural-gas sector will continue to grow, but market and regulatory forces are putting a damper on the prospects for big-dollar gas pipelines and liquefied natural gas export facilities, Black & Veatch says in a new report.

According to B&V’s “2013 Strategic Direction in the North American Natural Gas Industry,” the gas industry—boosted immeasurably by shale gas discoveries and by technology improvements in extracting gas from shale—is “in the midst of significant growing pains.”

The report, released October 31, says more than 95% of those surveyed for the report are either “optimistic” or “very optimistic” about the overall prospects for the gas industry through 2020. However, key elements of the industry, such as gas pipelines, are challenged by lack of market and regulatory support.

“The ability of pipelines to deliver gas when it is needed is of particular concern,” says the B&V report. “Electric power generators’ hesitancy to commit to firm capacity contracts makes it difficult for pipelines to attract the necessary capital needed to expand pipeline infrastructure to better serve this market.”

The demand for new pipeline capacity is clear. Utilities and independent power companies are increasing their reliance on gas-fired generation as more coal plants are retired. But “the details regarding how pipeline infrastructure is implemented and paid for—and who pays for it—represent the tension points for all stakeholders.”

Pipelines need firm commitments to attract investments in capacity—whether that is by adding on to existing systems or by building new pipelines, the report continues. Sticking points include firm capacity contracts—ones that would ensure owners of gas-fired capacity the ability to receive gas when it is needed during winter cold snaps, for example—that “do not necessarily align with the business model of electric power generators.”

The growing issue of U.S. natural-gas pipeline constraints was highlighted last winter in New York and New England, where generators relying on the natural-gas spot market “saw prices spike to up to 10 times higher than the price of gas elsewhere.”
B&V says that, while this extreme price volatility lasted for just a few days, “it highlighted a key problem the industry is facing—insufficient pipeline capacity to deliver growing peak demand gas to electric generators, as well as residential and commercial consumers.”

According to the U.S. Energy Information Agency, in 2012 new natural-gas pipeline construction was at its lowest level on a mileage basis since 1997, with only 367 miles of pipeline additions.

Regarding prospects for LNG export facilities that would liquefy gas and export it to Asia and other overseas markets, B&V says the consensus among survey respondents is that the federal government and market forces will limit the LNG export capacity built here to no more than 6 billion cu ft per day, or about equal to the capacity of the four LNG export terminals that so far have received export licenses from the Department of Energy. Another dozen or so LNG export projects are known to be under development in the U.S., but the survey results raise questions about how many—if any—of the projects will proceed to permitting, financing, final design and construction.

Still, B&V says there “is reason for optimism for growth in the transportation segment,” namely the expanded use of compressed natural gas and LNG as fuel for trucks and trains. “China, the top country in use of natural gas as a transportation fuel, has developed its natural gas transportation infrastructure using largely North American technologies and expertise,” the report says, noting that B&V itself has completed or is continuing work on 21 different LNG projects in China, many of which are used to support transportation functions. In as little as seven years, the growth of natural gas as a transportation fuel in the United States could rival that of China.”

Cummins, the engine-making giant, has begun full commercial production of dedicated natural gas-fueled engines, B&V says, and United Parcel Service has purchased nearly 1,000 engines from Cummings for its vehicle fleet. UPS has announced that every new Class 8 heavy-duty tractor the company purchases in 2013 will be fueled by either CNG or LNG.

Other key findings in the report, according to B&V are:

  • Survey participants and Black & Veatch analysts largely believe gas prices will rise to between $4.50 to $5.99 per Million British thermal units (MMBtu) between now and 2020.
  • Participants from the Upstream, Midstream and Downstream sectors all rated safety, economic growth and regulation top concerns within their respective list of Top 5 industry issues.
  • Commodity enhancement is a growing trend among natural gas producers. There is growing interest among producers for onsite LNG and/or CNG (compressed natural gas) production. This provides producers with new market opportunities as well as potential operational enhancements.
  • U.S. LNG exports have cost benefits over global competitors. In addition to lower pricing, U.S. LNG export prospects benefit from the existence of eight brownfield LNG terminal projects. These are facilities that were previously developed to import natural gas. Much of the existing infrastructure can be used for export terminal purposes. This speeds access to market for U.S. gas and supports their competitive advantage over most international projects.
  • Cyber security tougher task for small utilities. Only 42 percent of respondents from small utilities (less than 100,000 customers) have cyber security programs in place or in the planning stages. Nearly 90 percent of large utilities (more than 1 million customers) state a similar level of preparedness.

 Black & Veatch says 336 qualified industry responses made up the second annual natural gas survey, which it conducted between July 18th and August 23rd. The full report can be viewed on B&V's website.