January 15, 2007

Barriers continue to crimp natural gas supplies

By Steven F. Greenwald and Christopher A. Hilen

U.S. demand for natural gas is projected to increase by more than 50% by 2020. Companies are building—and the public is opposing—receiving terminals on three coasts that would increase imports of liquefied natural gas. The pros and cons of "opening up" Alaska, coastal waters, and federal lands to drilling are still being debated.

These politically charged battles divert attention from regulatory policies and practices that are inhibiting greater production of natural gas from proven fields with less environmental impact. These regulatory barriers include:

• Inadequate access to transmission and gas-gathering systems.
• Restrictions on the delivery of gas to storage facilities.
• Opaque rules that effectively bar needed investments in gas infrastructure.

Sick transit

Maximum production of natural gas requires a reliable, cost-effective system for moving the gas from underground fields to gas-gathering systems and then into interstate pipelines or local distribution networks. A confluence of circumstances is limiting the rate of this flow.

In many cases, utilities fail to provide adequate means for moving the gas from the wellhead to the gathering system and/or from the gathering system to the utility's system. In other cases, the owner of a gathering system—often, the interconnecting utility—concurrently lacks incentives to maintain or expand the system and faces regulatory disincentives to sell it to a party more financially able to expand it. In yet other cases, the utility or gathering system imposes minimum wellhead flow requirements or takes months to provide new hookups.

As a poster child for ineffective regulation, in 1989 the California Public Utilities Commission "strongly encouraged" one utility to divest all of its gathering systems with the intent of encouraging needed investment in them. Nearly 20 years later, the first two of those systems are only now beginning the sales process. In the interim, the utility's entire gas-gathering system has been starved of financial sustenance to the detriment of its health.