Gas slight
The US interstate natural gas pipeline network runs slightly over
200,000 miles, with a handful of companies accounting for over half
of the total mileage. Annual demand for natural gas in the US is
expected to reach almost 30 trillion cubic feet (tcf) by the year
2010 ? up from present consumption of nearly 22 tcf.
Pipeline operators will have to increase capacity to move at least part of that stepped-up demand. Main targets for pipeline activity are the north-east, the south-east, the west and the state of Florida. Government officials maintain that the state will need an additional 25% of electric generation capacity by 2007. Said one pipeline executive, ?If they take off the prohibition on merchant plants, it will open the floodgates for natural gas going into Florida to feed the electricity.?
Proposed construction on the US interstate (regulated) system totalled 2,500 miles for the 12 months ended on June 30 ? up from the less than 900 miles proposed over the same period a year earlier. Proposed land projects bear an average cost of slightly more than $1.5 billion. Marine projects cost about $1.8 million per mile. Those costs include labour and materials as well as easement and miscellaneous costs. With right-of-way stripped from the equation, the cost of constructing pipe across land is closer to $1 million.
From a financing perspective, bankers estimate the expected useful life of a pipeline at 30 to 40 years. Pipeline people assert that, with the constant maintenance that characterises the business, pipelines can stay in use safely well beyond those estimates.
While the cheaper alternatives of compression and looping can reduce the need for new greenfields projects, the Interstate Natural Gas Association of America (INGAA) recently commissioned a study which found that approximately 2,100 miles of new pipeline would be needed each year until 2010 to serve the increasing demand.
Driving infrastructure growth is increased demand for natural gas-fired electric generation, particularly in the north-east and south-east where the largest growth is anticipated. Infrastructure and storage requirements to accommodate the additional demand by 2010 will cost the industry about $30 billion, according to John Somerhalder, executive vice-president of the El Paso Pipeline Group. Choice of financing for El Paso's pipeline projects is on a case-by-case basis, Somerhalder said. ?But typically we use project finance only on deals in which we take a partner,? he added.
?The need for storage is tremendous because the anticipated requirement of 30 tcf represents the amount of product required to handle seasonal peaks. But there will not be a constant need for that large natural gas requirement. The high requirement will coincide largely with summer months, traditionally the off-season for natural gas ? when pipelines are typically not operating at full capacity. In addition, merchant electric plants will be big users going forward,? according to Dorothy Ables, senior vice president of finance and administration and chief financial officer of Duke Energy Gas Transmission.
Punctuating the importance of storage, in mid-September, Duke Energy Gas Transmission (DEGT) acquired the natural gas salt cavern storage business commonly known as Market Hub Partners (MHP), from subsidiaries of NiSource Inc for $250 million in cash plus the assumption of $150 million in debt. This new line of business for DEGT has 23 billion cubic feet of storage capacity with significant expansion capability. MHP's Moss Bluff storage facility in Liberty County, Texas, and Egan storage facility in Acadia Parish, Louisiana, are active while natural gas storage projects in Mississippi and Pennsylvania are under development.
Because gas can be stored, existing pipelines can satisfy a large part of incremental demand. But additional infrastructure will be required to carry product from new sources and to attach new loads and supplies to the existing pipeline network. Duke also has a greenfield project in process.
The $1.5 billion Buccaneer Gas Pipeline is designed to provide approximately 900 million cubic feet per day of additional natural gas to the state of Florida by April 2002. The 674-mile pipeline would bring product from the onshore Mobile Bay area and would cross the Gulf of Mexico to a point just north of Tampa Bay. The project is a 50-50 relationship between Duke and Williams Pipeline Co. That project received a draft environmental impact statement (DEIS) from the Federal Energy Regulatory Commission (FERC) on August 31. The FERC concluded that construction and operation of the Buccaneer pipeline, with adoption of recommended mitigation measures, would have an acceptable impact on the environment. Final approval ? expected later this year ? is contingent on final environmental approval and a FERC Certificate of Public Convenience and Necessity. Ables said because of the preliminary stage of the Buccaneer project, financing has not been arranged.
Ables believes the financing of pipelines is changing from a traditional project finance model. ?The only true project financed pipeline that we have done is the ($1.3 billion) Maritimes and Northeast Pipeline, a joint venture that included some Canadian and other US companies. That project included a combination of traditional bank financing as well as a capital markets component, and was structured with a 75-to-25 debt-to-equity ratio.? The pipeline went into service in December 1999, and provides capacity to bring newly-developed natural gas reserves from the Sable Island area, offshore Nova Scotia, to markets in the northeastern US and Atlantic Canada. Ownership interests are: Duke Energy (37.5%), Westcoast Energy (37.5%), Exxon Mobil Corp (12.5%), and NS Power Holdings (12.5%.) ?The trend for pipeline finance is a combination of traditional bank debt and structured financing.?
Total debt financing for the Maritimes project was about $521 million in the US and about C$712 million in Canada. The package includes agreements to repay bank loans within the first 10 years while the bonds will be repaid in years 11 through 20 of pipeline operations. Proceeds will be used by the US and Canadian entities for construction, financing and operation of their respective portions of the pipeline. US placement agent for the bonds was Morgan Stanley and lead underwriter in Canada was CIBC. Bank loans in the US and Canada were arranged by Banc of America Securities (BoA) and CIBC, with BoA as administrative agent in the US and CIBC acting in that capacity in Canada.
Nor has financing been arranged for the Coastal Corp's $1.6 billion Gulfstream pipeline which would run from Alabama across the Gulf of Mexico to Florida. That project received its DEIS on September 8. Gulfstream officials expect the final approval process to be finalised by February. Construction is slated to begin in June 2001 and completed the following June. Coastal and El Paso are expected to complete their merger in the fourth quarter. On September 14, the companies announced that they would merge their pipeline operations into three organisations, led by El Paso's Somerhalder.
Gulfstream officials claim 20-year commitments for the majority of the 744-mile pipe's 1.1 billion cubic feet of natural gas per day capacity. A Coastal official said it is ?very likely? that both pipelines will receive final approval from FERC. Economics is another matter. ?We believe only one pipeline will be built.? Coastal has invested $40 million in right-of-way and property.
Testifying in late May before a House of Representatives Subcommittee on Energy and Power, Catherine G Abbot, chief executive officer of Columbia Gas Transportation Corp and Columbia Gulf Transmission Co, maintained availability of capital for pipeline projects would continue to be a challenge. However, bankers maintain that there is a readily-available supply of funding for pipeline projects.
?What banks are reluctant to do is provide finance when only 25% of capacity has been signed on for. As a general rule, a pipeline is a relatively easy asset to finance. The question is whether you can only get 40-50% leverage or, to get as high as 70%, do you have to go to your marketing subsidiaries and producers to support the deal,? according to Steven Greenwald, managing director in the global energy and project finance group at Credit Suisse First Boston (CSFB).
?Problems with looping ? running parallel pipe along the same easement ? is that the original pipeline might be encumbered with debt, with indentures against further debt. And I have never seen separate financing for a loop. When you loop, the whole profile of the pipeline could change.
?While there are several greenfield projects on the drawing board, there are not many that are nearing financing. In general, however, despite the size of the projects, there have been several greenfield projects financed ? Kern River, Iroquois, Alliance. As an asset, greenfields financing is discreet financing.? Greenwald noted that looping opens up a potential problem with securing a loan from the cash flows attributable to the looping as collateral, because it could be difficult to disaggregate a pipeline's cash flows, making it difficult to value the collateral.?
?In general, there is no problem in getting a pipeline financed in North America,? according to Skip McGee, co-head for global natural resources at Lehman Brothers. ?But among the deals which have been done, the trend is away from pure project finance. Much of what formerly was project finance has moved to the capital markets, with maybe a tranche of bank debt.?
McGee pointed to the $3.1 billion Alliance Pipeline, which received financing commitments in November 1997, as an example of a project to tap both the loan and bond markets. Banking group for that deal included Bank of Montreal, Bank of Nova Scotia, Chase Securities through Chase Manhattan Bank of Canada, and NatWest Markets through National Westminster Bank of Canada. Goldman Sachs and Scotia Capital Markets advised Alliance, which demonstrated to lenders firm shipping commitments in the form of 15-year precedent agreements worth over C$8 billion. Alliance is slated to begin commercial operations on October 30.
McGee said there are a number of projects in the discussion stage. ?While there may not be many greenfield deals in process now in North America ? other than in Florida ? in the back half of this decade we will see projects develop in Alaska and the Northwest Territories.?
?Our view is that there is available funding for pipeline projects. However, there is little deal flow. Among changes in the business is that the FERC has raised the bar on market support for approving greenfields projects,? according to Francois Poirier, vice-president at Chase Securities. ?But you will see North Slope greenfields projects soon.?
Poirier said changes in relationships between transporters and producers affect the way pipelines are financed. ?We see big changes as pipeline companies ramp up for the increase expected by 2010. Producers and pipeline companies may form joint ventures to construct or finance pipelines. Whether proposed projects are project financed remains to be determined. It also is unclear how much of the required additional capacity will be looped.? He added that the trend in financing is away from long-term project finance in the bank market and to a combination of bank debt and capital markets. Alliance Pipeline, Maritimes and Northeast, and Vector demonstrate the trend towards more supply-driven pipeline development, and Chase expects this trend to continue.
A spokesman for Williams Energy, which operates the Transco pipeline, said that during peak periods in winter in the north-east, the pipeline operates at full capacity. ?The busiest region is New York, New Jersey and Pennsylvania, where we can't move any more gas while the industry in general is moving 78% to 80% capacity. You will see more infrastructure built in the Northeast. For us, it will be looping in New Jersey. We have a single line and will build parallel on the easement.?
But even for a company with deep pockets, it's the US government ? FERC ? that has the last word. Potential pipelines must undergo scrutiny by that agency before certification, including justifying proposed rates, which may include the costs of financing which would be pushed off on to users. Before submitting application to FERC, would-be operators hold ?open season?, a process which normally takes 12 to 18 months, and which entails the signing up of customers. FERC will not ?certificate? a project unless benefit to new and existing customers can be demonstrated. Still, FERC has held up certification of at least one proposed pipeline when the agency discovered that the customer base was suspect. The agency determined that the list of signed-up customers included companies related to the pipeline company ? that the shareholders would shoulder the full risk of adding customers during and after construction. FERC finds that process unacceptable. It used to be called capitalism.
Pipeline operators will have to increase capacity to move at least part of that stepped-up demand. Main targets for pipeline activity are the north-east, the south-east, the west and the state of Florida. Government officials maintain that the state will need an additional 25% of electric generation capacity by 2007. Said one pipeline executive, ?If they take off the prohibition on merchant plants, it will open the floodgates for natural gas going into Florida to feed the electricity.?
Proposed construction on the US interstate (regulated) system totalled 2,500 miles for the 12 months ended on June 30 ? up from the less than 900 miles proposed over the same period a year earlier. Proposed land projects bear an average cost of slightly more than $1.5 billion. Marine projects cost about $1.8 million per mile. Those costs include labour and materials as well as easement and miscellaneous costs. With right-of-way stripped from the equation, the cost of constructing pipe across land is closer to $1 million.
From a financing perspective, bankers estimate the expected useful life of a pipeline at 30 to 40 years. Pipeline people assert that, with the constant maintenance that characterises the business, pipelines can stay in use safely well beyond those estimates.
While the cheaper alternatives of compression and looping can reduce the need for new greenfields projects, the Interstate Natural Gas Association of America (INGAA) recently commissioned a study which found that approximately 2,100 miles of new pipeline would be needed each year until 2010 to serve the increasing demand.
Driving infrastructure growth is increased demand for natural gas-fired electric generation, particularly in the north-east and south-east where the largest growth is anticipated. Infrastructure and storage requirements to accommodate the additional demand by 2010 will cost the industry about $30 billion, according to John Somerhalder, executive vice-president of the El Paso Pipeline Group. Choice of financing for El Paso's pipeline projects is on a case-by-case basis, Somerhalder said. ?But typically we use project finance only on deals in which we take a partner,? he added.
?The need for storage is tremendous because the anticipated requirement of 30 tcf represents the amount of product required to handle seasonal peaks. But there will not be a constant need for that large natural gas requirement. The high requirement will coincide largely with summer months, traditionally the off-season for natural gas ? when pipelines are typically not operating at full capacity. In addition, merchant electric plants will be big users going forward,? according to Dorothy Ables, senior vice president of finance and administration and chief financial officer of Duke Energy Gas Transmission.
Punctuating the importance of storage, in mid-September, Duke Energy Gas Transmission (DEGT) acquired the natural gas salt cavern storage business commonly known as Market Hub Partners (MHP), from subsidiaries of NiSource Inc for $250 million in cash plus the assumption of $150 million in debt. This new line of business for DEGT has 23 billion cubic feet of storage capacity with significant expansion capability. MHP's Moss Bluff storage facility in Liberty County, Texas, and Egan storage facility in Acadia Parish, Louisiana, are active while natural gas storage projects in Mississippi and Pennsylvania are under development.
Because gas can be stored, existing pipelines can satisfy a large part of incremental demand. But additional infrastructure will be required to carry product from new sources and to attach new loads and supplies to the existing pipeline network. Duke also has a greenfield project in process.
The $1.5 billion Buccaneer Gas Pipeline is designed to provide approximately 900 million cubic feet per day of additional natural gas to the state of Florida by April 2002. The 674-mile pipeline would bring product from the onshore Mobile Bay area and would cross the Gulf of Mexico to a point just north of Tampa Bay. The project is a 50-50 relationship between Duke and Williams Pipeline Co. That project received a draft environmental impact statement (DEIS) from the Federal Energy Regulatory Commission (FERC) on August 31. The FERC concluded that construction and operation of the Buccaneer pipeline, with adoption of recommended mitigation measures, would have an acceptable impact on the environment. Final approval ? expected later this year ? is contingent on final environmental approval and a FERC Certificate of Public Convenience and Necessity. Ables said because of the preliminary stage of the Buccaneer project, financing has not been arranged.
Ables believes the financing of pipelines is changing from a traditional project finance model. ?The only true project financed pipeline that we have done is the ($1.3 billion) Maritimes and Northeast Pipeline, a joint venture that included some Canadian and other US companies. That project included a combination of traditional bank financing as well as a capital markets component, and was structured with a 75-to-25 debt-to-equity ratio.? The pipeline went into service in December 1999, and provides capacity to bring newly-developed natural gas reserves from the Sable Island area, offshore Nova Scotia, to markets in the northeastern US and Atlantic Canada. Ownership interests are: Duke Energy (37.5%), Westcoast Energy (37.5%), Exxon Mobil Corp (12.5%), and NS Power Holdings (12.5%.) ?The trend for pipeline finance is a combination of traditional bank debt and structured financing.?
Total debt financing for the Maritimes project was about $521 million in the US and about C$712 million in Canada. The package includes agreements to repay bank loans within the first 10 years while the bonds will be repaid in years 11 through 20 of pipeline operations. Proceeds will be used by the US and Canadian entities for construction, financing and operation of their respective portions of the pipeline. US placement agent for the bonds was Morgan Stanley and lead underwriter in Canada was CIBC. Bank loans in the US and Canada were arranged by Banc of America Securities (BoA) and CIBC, with BoA as administrative agent in the US and CIBC acting in that capacity in Canada.
Nor has financing been arranged for the Coastal Corp's $1.6 billion Gulfstream pipeline which would run from Alabama across the Gulf of Mexico to Florida. That project received its DEIS on September 8. Gulfstream officials expect the final approval process to be finalised by February. Construction is slated to begin in June 2001 and completed the following June. Coastal and El Paso are expected to complete their merger in the fourth quarter. On September 14, the companies announced that they would merge their pipeline operations into three organisations, led by El Paso's Somerhalder.
Gulfstream officials claim 20-year commitments for the majority of the 744-mile pipe's 1.1 billion cubic feet of natural gas per day capacity. A Coastal official said it is ?very likely? that both pipelines will receive final approval from FERC. Economics is another matter. ?We believe only one pipeline will be built.? Coastal has invested $40 million in right-of-way and property.
Testifying in late May before a House of Representatives Subcommittee on Energy and Power, Catherine G Abbot, chief executive officer of Columbia Gas Transportation Corp and Columbia Gulf Transmission Co, maintained availability of capital for pipeline projects would continue to be a challenge. However, bankers maintain that there is a readily-available supply of funding for pipeline projects.
?What banks are reluctant to do is provide finance when only 25% of capacity has been signed on for. As a general rule, a pipeline is a relatively easy asset to finance. The question is whether you can only get 40-50% leverage or, to get as high as 70%, do you have to go to your marketing subsidiaries and producers to support the deal,? according to Steven Greenwald, managing director in the global energy and project finance group at Credit Suisse First Boston (CSFB).
?Problems with looping ? running parallel pipe along the same easement ? is that the original pipeline might be encumbered with debt, with indentures against further debt. And I have never seen separate financing for a loop. When you loop, the whole profile of the pipeline could change.
?While there are several greenfield projects on the drawing board, there are not many that are nearing financing. In general, however, despite the size of the projects, there have been several greenfield projects financed ? Kern River, Iroquois, Alliance. As an asset, greenfields financing is discreet financing.? Greenwald noted that looping opens up a potential problem with securing a loan from the cash flows attributable to the looping as collateral, because it could be difficult to disaggregate a pipeline's cash flows, making it difficult to value the collateral.?
?In general, there is no problem in getting a pipeline financed in North America,? according to Skip McGee, co-head for global natural resources at Lehman Brothers. ?But among the deals which have been done, the trend is away from pure project finance. Much of what formerly was project finance has moved to the capital markets, with maybe a tranche of bank debt.?
McGee pointed to the $3.1 billion Alliance Pipeline, which received financing commitments in November 1997, as an example of a project to tap both the loan and bond markets. Banking group for that deal included Bank of Montreal, Bank of Nova Scotia, Chase Securities through Chase Manhattan Bank of Canada, and NatWest Markets through National Westminster Bank of Canada. Goldman Sachs and Scotia Capital Markets advised Alliance, which demonstrated to lenders firm shipping commitments in the form of 15-year precedent agreements worth over C$8 billion. Alliance is slated to begin commercial operations on October 30.
McGee said there are a number of projects in the discussion stage. ?While there may not be many greenfield deals in process now in North America ? other than in Florida ? in the back half of this decade we will see projects develop in Alaska and the Northwest Territories.?
?Our view is that there is available funding for pipeline projects. However, there is little deal flow. Among changes in the business is that the FERC has raised the bar on market support for approving greenfields projects,? according to Francois Poirier, vice-president at Chase Securities. ?But you will see North Slope greenfields projects soon.?
Poirier said changes in relationships between transporters and producers affect the way pipelines are financed. ?We see big changes as pipeline companies ramp up for the increase expected by 2010. Producers and pipeline companies may form joint ventures to construct or finance pipelines. Whether proposed projects are project financed remains to be determined. It also is unclear how much of the required additional capacity will be looped.? He added that the trend in financing is away from long-term project finance in the bank market and to a combination of bank debt and capital markets. Alliance Pipeline, Maritimes and Northeast, and Vector demonstrate the trend towards more supply-driven pipeline development, and Chase expects this trend to continue.
A spokesman for Williams Energy, which operates the Transco pipeline, said that during peak periods in winter in the north-east, the pipeline operates at full capacity. ?The busiest region is New York, New Jersey and Pennsylvania, where we can't move any more gas while the industry in general is moving 78% to 80% capacity. You will see more infrastructure built in the Northeast. For us, it will be looping in New Jersey. We have a single line and will build parallel on the easement.?
But even for a company with deep pockets, it's the US government ? FERC ? that has the last word. Potential pipelines must undergo scrutiny by that agency before certification, including justifying proposed rates, which may include the costs of financing which would be pushed off on to users. Before submitting application to FERC, would-be operators hold ?open season?, a process which normally takes 12 to 18 months, and which entails the signing up of customers. FERC will not ?certificate? a project unless benefit to new and existing customers can be demonstrated. Still, FERC has held up certification of at least one proposed pipeline when the agency discovered that the customer base was suspect. The agency determined that the list of signed-up customers included companies related to the pipeline company ? that the shareholders would shoulder the full risk of adding customers during and after construction. FERC finds that process unacceptable. It used to be called capitalism.
Request a Demo
Interested in IJGlobal? Request a demo to discuss a trial with a member of our team. Talk to the team to explore the value of our asset and transaction databases, our market-leading news, league tables and much more.