Interstate Pipeline Project Development Today The Intersection of Shipper Commitments and Regulatory Requirements

Transcription

1 Interstate Pipeline Project Development Today The Intersection of Shipper Commitments and Regulatory Requirements George D. Fatula April 1 st, st National Young Energy Professionals Law Conference WE KNOW ENERGY Introduction New supplies of oil and gas = rapid changes in infrastructure needs New pipelines for new supplies Turning old infrastructure needs on their head Producer/Marketer Commitments Are Win Win: Shipper commitments provide revenue flow for a project The project provides a reliable outlet to the market for the shipper s supplies 2 1

2 Shippers and Pipeline Project Developers: Shared Goals? Shippers want the best bang for the buck Rate certainty competitive pricing, no or minimal escalation, no project cost risk Priority for volumes the capacity must be there when I need it Mitigate project development risk: a right to walk away if development is not proceeding on agreeable schedule Regulatory constraints come into play 3 Shippers and Pipeline Project Developers: Shared Goals? Pipeline developers want commitments they can bank on Revenue certainty reservation charges, take or pay commitments Rates escalate over time Shared project development risk: Durable commitments with long lead times to meet milestones Right to walk away if the project does not go forward, without shipper recourse Regulatory risk mitigation and compliance: Shippers commit to support the project before FERC Terms of service offered on a non discriminatory basis no sweetheart deals unless the same terms are offered to all 4 2

3 FERC Jurisdiction and Regulation Natural Gas Projects FERC regulation of Interstate Natural Gas Pipelines under the Natural Gas Act is Cradle to Grave Project Approval Certificate of Public Convenience and Necessity Detailed environmental review, protests considered, process can take over a year Abandonment of service/assets requires approval from FERC Open Access contract carriers Reservation charges for firm service Tariff Requirements Non conforming service agreements filed 5 FERC Jurisdiction and Regulation Oil / Liquids Projects Interstate Commerce Act of 1887 FERC has jurisdiction over the transportation by pipeline in interstate commerce of oil, NGLs and refined products Not an all encompassing consumer protection statute Rather, adapted from the railroad context to curb monopolistic practices of pipelines Common carriers, not contract carriers FERC regulates rates and conditions of service for interstate movements FERC does not regulate construction or abandonment of oil pipelines Lighter hand, potentially broader scope 6 3

4 Terms of Service Open Seasons Common theme between liquids and gas non discrimination Open seasons are the pipeline s chance to make favorable terms of service available to anyone who may be interested Avoiding future complaints that some shippers were offered terms that others were not Publicly announced opportunity to review and commit to terms of service 7 Terms of Service Pre In Service Considerations Natural Gas Significant regulatory hurdles for new projects, e.g. certificate of public convenience and necessity Both project developers and shippers seek rights to terminate based on regulatory contingencies Project developers: longer lead times for milestones sought, right to walk away at any time for any reason, or no given reason Seek to bind shippers to support and not interfere in regulatory process Liquidated damages if shipper terminates without cause or breaches terms of agreement (for example, protests the certificate application before FERC) 8 4

5 Terms of Service Pre In Service Considerations Shippers: Seek tighter timelines for regulatory and construction milestones Rights to terminate and walk away from the project if certificate is not obtained by date certain Projects feeding LNG export facilities Shippers may seek even more robust pre in service outs, tied (directly or not) to the progress towards in service of the export facility 9 Terms of Service Pre In Service Considerations Oil/Liquids Significantly lower regulatory hurdles prior to construction/development No need for a FERC certificate Project developers may still seek shipper agreement not to protest Less likely to permit a shipper walk right than on the natural gas side Shippers will often still seek a right to walk away if in service date is delayed past an agreeable deadline 10 5

6 Terms of Service Shipper Commitments and Rates Natural Gas contract carriers, offer firm service based on payment of reservation charges Firm service on FERC regulated pipelines is inherently take or pay Interruptible service is of a clearly lower priority Therefore: a commitment is usually signing up for firm service Production dedications the offshore model adapted to onshore context 11 Terms of Service Shipper Commitments and Rates Oil / Liquids common carriers Even with no contract, any qualified shipper can move volumes at the posted rate, pay as you go Committed shippers can get volume incentive (discount) rates Preference for committed shipper volumes in allocation situations More recently, firm service is allowed for committed shippers who pay a premium to receive it Volume commitments, or production dedications 12 6

7 Terms of Service Priority and Curtailment Firm service under the ICA FERC has approved where: All interested shippers have the opportunity to secure service free from prorationing in an Open Season Shippers pay a premium rate for the right to be exempt from curtailment in the ordinary course Shippers volume commitment is then protected from prorationing in the ordinary course (assuming no FM, etc.) FERC has allowed this in a nod to commercial realities However, it remains untested in the courts 13 Terms of Service Priority and Curtailment Other forms of protection from curtailment for committed shippers under the ICA Historical prorationing Reserving up to 90% of capacity for committed shippers Committed shippers are allocated space based on the higher of their historical volume or their commitment, in relation to the available capacity The rise of hybrid prorationing systems historical method, where shippers can pay for firm service when allocation is needed Paying a premium only when allocation is a reality 14 7

8 Terms of Service Other Shipper Incentives Most Favored Nation clauses Where another shipper is offered a better rate, the shipper s rate is adjusted Contested issue what type of third party deal triggers this? Volume credits To what do they apply, and for how long? Preferential rights to extend term of service Shippers equity commitments / joint ventures 15 8