Photographer: Vincent Mundy/Bloomberg

A new barrier in pipelines’ path: brutal economics

June 24, 2016 Mark Drajem

The First Word Energy team draws on Bloomberg’s worldwide resources to cover all aspects of energy policy. Learn how Bloomberg Government can help your energy lobbying or policy analysis—contact Peter Hsu at yhsu24@bloomberg.net or 202-416-3035.

Today’s Agenda

Oil posted its biggest loss in more than two months  after Britain voted to leave the European Union. Still, the International Energy Agency said the fundamentals of supply and demand “remain unchanged” amid the turmoil. Futures fell more than 6.6 percent in New York and London. West Texas Intermediate for August delivery fell as much as $3.41, or 6.8 percent, to $46.70 a barrel on the New York Mercantile Exchange and was at $48.28 at 9:19 a.m. London time.Back here in America, politicians are divided on gun control, immigration, other issues. But one thing unites us: the importance of infrastructure for moving around fuel and electrons.

Transmission of electricity and pipelines for natural gas are the apple pies of energy issues. Building the Energy Interstate (i.e., lots of big transmission lines) could help bring wind power from the gusty Texas panhandle to Florida or South Bend — leading to an 80% cut in power emissions, according to a recent article in The Atlantic. More pipelines are needed to ferry natural gas out of North Dakota or western Pennsylvania to power plants in California or North Carolina, drillers say. Only with those can states meet their carbon-reduction goals, advocates claim.

The Senate energy bill — the one that both parties agree on — includes a series of measures aimed at boosting transmission lines, and one to charge FERC with coordinating approvals for pipelines. “We undoubtedly will need some additional natural gas pipeline capacity,” Sen. Maria Cantwell said at a hearing this month. “Natural gas is a very important ‘bridge fuel.’ ”

Since 2009 federal authorities have approved some 5,000 miles of natural gas pipelines. Companies are seeking approval for an additional 3,500 miles, representing an investment of about $35 billion.

Matthew Philips writes in this week’s BusinessWeek about the standoff between one family of maple syrup producers in rural Pennsylvania and Williams Cos., which has been trying to build the Constitution pipeline from the Marcellus shale fields to gas-hungry consumers in New England. Just seven weeks before New York regulators denied a permit for the pipeline, the company got a judge’s order so it could come in and cleared 90% of the maples on the property of 23-acre homestead of the Holleran family to clear a path for the pipeline. “Those trees will never grow back in my lifetime,” Megan Holleran says. “We’ll never be able to produce syrup on that land again.”

Pipeline developers are used to clearing any barrier. But Philips says there might be one to high to clear. “It’s time to consider whether there is both a need for more pipelines and enough political and popular will to go on building them,” he wrote.

The economics of pipelines are becoming less favorable. Building a pipeline requires customers to sign long-term contracts that lock them into buying gas sometimes for as long as 20 years. With wind and solar getting cheaper by the day, those commitments no longer make as much sense as they once did. Natural gas pipeline companies, in testimony to federal electricity regulators, have acknowledged as much and that the trend toward renewable energy limits the economic viability of their pipelines, he writes.

Cheap prices are making natural gas an attractive replacement for coal, but it’s also making it hard for shale drillers to survive. Oh, and in the Marcellus region, maple syrup may be the best use of the land; there may not be a pipeline shortage after all. If all 24 pipeline projects that are proposed for those regions get built, by 2019 new pipeline capacity will be three times greater than new gas production, energy analyst Rusty Braziel says.

Look for pipelines to be in the news today, as Judge Sam Glasscock is set to rule in the legal battle between pipeline companies Energy Transfer Equity LP and Williams Cos. Energy Transfer’s lawyers want to persuade Glasscock they can’t close the merger because of crippling tax issues. What looked like a good deal last year to combine two of the U.S.’s largest pipeline operators turned sour after plummeting oil prices upended the deal’s financial logic.

Shell ends its push to extend drilling rights in the Arctic. Eileen Jones, chief administrative judge for Interior Board of Land Appeals, signed an order dismissing Shell’s appeal of a Bureau of Safety and Environmental Enforcement decision denying the company’s request for a five-year extension of leases in Chukchi and Beaufort seas, Jennifer Dlouhy reports.

In other news: Federal judge Scott Skavdahl struck down the BLM’s fracking rules, saying Congress hadn’t given regulators the authority to regulate the practice. Now the lawyer whose article Skavdahl relied on for the decision pulled an Woody Allen-Marshall McLuhan on him: Hannah Wiseman wrote that the decision twists the meaning of an earlier law review article about the limits of EPA oversight of fracking: “Nothing in my 2009 article indicates that the exemption of fracturing from the SDWA, which is administered by the EPA, weakens the federal regulation of fracturing by other agencies under other acts,” she wrote.

Here’s a twist on the labor unions vs. greenies: The Laborers’ International Union of North America launched a campaign to push for the Clean Power Plan. It says the rule puts the “spotlight on the need for natural gas,” and so the push by environmentalists to “keep it in the ground” is misguided. “It’s time to take a hard look at our energy needs and start bridging the gap with a common-sense energy policy that includes natural gas,” Terry O’Sullivan, the union’s general president, said in a statement. “Renewables hold a tremendous amount of potential but as they are brought to scale, natural gas is critical as a cleaner source of energy.”

Here’s another reason to doubt the merits of the Tesla-Solar City deal: Net metering. SolarCity’s operations in states that have net metering means, “Solar is an economic purchase for the majority of residential consumers, whereas batteries are not today given ability to sell and buy back from the grid at equal price,” UBS analyst Julian Dumoulin-Smith wrote in a report. “The overlap between SCTY solar sales and new customer prospects for TSLA’s battery products appears more limited.”

It’s A/V Friday, so watch Citi equity strategist Tobias Levkovich make the bullish case for stocks this year. “The oil price recovery, does give you a better trend,” he said. “Energy is probably going to be better than most people believe.”

Also today, Barack Obama, clean-tech venture capitalist?; the U.S. Chamber of Commerce and Natural Resources Defense Council debate the costs of the Clean Power Plan; and you are The Predictor: What you say will happen on the Renewable Fuel Standard in 2017.

Chart of the Day

“PG&E wins in the Diablo Canyon shutdown, with a path to full recovery of its $2 billion investment. So do the solar industry and environmental activists, who oppose nuclear,” Bloomberg Intelligence analyst Kit Konolige wrote. “The big losers may be the air and consumers. Replacing the plant entirely with natural gas plants would add 7 million metric tons of carbon dioxide a year. Replacing it with new solar capacity may cost over $15 billion.” (The graph above is from PIRA Energy Group.)

The Predictor

According to you, RFS reform is a sure thing.  The results of yesterday’s survey are in and it seems that our dear readers overwhelmingly believe that Congress will revamp the Renewable Fuel Standard in 2017. (Somewhere in Texas, Joe Barton is nodding sagely while sipping on his Diet Dr. Pepper.) A meager 16 percent of you said that RFS reform proposals are dead in the water. Does this mean that the refiners among you are a ridiculously confident bunch, or that you biofuel advocates are pessimists at heart? Feel free to send us your thoughts.

Quotable

“How can we make sure the provisions that will be sent back to us are not poison pills,” Cantwell told a forum on energy efficiency, discussing the contentious negotiations between the House and Senate on the energy bill and conference.

“I bet this was probably awkward,” former Rep. John Dingell on Twitter. He linked to a report in which Pebble Mine executive Tom Collier told Rep. Debbie Dingell of his respect for her “late husband.”

Contact Us

Send us your comments, tips and what the heck to do in Washington when your family is out of town. Mark Drajem is the editor (mdrajem@bloomberg.net or @drajem), Catherine Traywick (ctraywick@bloomberg.net or @ctraywick) and Laura Curtis (lcurtis7@bloomberg.net or @LouKCurtis) cover Congress and regulation.Bloomberg Government subscribers can get this and any of our eight other newsletters in their inbox every morning. Click here to modify your subscriptions. Contact Peter Hsu at 202-416-3035 or yhsu24@bloomberg.net for more information or if you have colleagues that would also value access.

Inside the Beltway

Cantwell Lays Down Her Markers for an Energy Conference   After spending weeks saying she’s opposed to reconciling energy legislation because the House’s package is “a bunch of junk,” Sen. Maria Cantwell seems to be warming to the idea of going to conference. While negotiators aren’t totally agreed on what measures should be included in a conference, “we shouldn’t hold up good energy policy to resolve those issues,” she told the Energy Efficiency Forum yesterday. “We want to deal with these things, but we don’t know if the energy bill itself can bear the weight” of some of their complexities, she said.Cantwell also laid down some markers after the forum, telling Bloomberg’s Jennifer Dlouhy that in addition to being concerned about the fire and water provisions included in the House’s package, she also wants to make sure that the final bill includes the energy efficiency title from the Senate legislation she co-sponsored. She gave a special shout-out to the SAVE Act, an amendment adopted to the Senate bill that calls for federal mortgage agencies to consider a home’s energy efficiency cost savings when determining whether a loan applicant has sufficient income to repay loan.

Shelanski Contempt of Congress Vote Delayed in House   A House panel delayed a planned vote to hold the Obama administration’s regulatory gatekeeper in contempt of Congress after receiving a significant number of additional documents, a committee aide told Bloomberg BNA’s Anthony Adragna.

EIA Projects 18 Percent Fuel Savings Under New Truck Rules   Updated fuel economy and greenhouse gas emissions standards for medium- and heavy-duty trucks could reduce their diesel fuel consumption by 18 percent by 2040, the Energy Information Administration predicted.

EPA’s McCarthy: Actions Consistent With Court Stay   The Environmental Protection Agency is working with states to develop energy efficiency plans and other measures to help meet the requirements of the Clean Power Plan, EPA Administrator Gina McCarthy told an energy efficiency forum, Alan Kovski reported.

EPA Exceptional Events Air Rules at White House for Review   June 23 (BNA) – The White House is reviewing a pair of Environmental Protection Agency final rules to update procedures states use to exclude uncontrollable events such as wildfires from their air quality data when demonstrating compliance with federal standards.

Outside the Beltway

Pa. Gov. Signs Bill Settling Fight Over Drilling Regulations: AP   Legislation signed by Gov. Tom Wolf is killing tougher regulations over Pennsylvania’s traditional shallow oil and gas drilling industry approved in April by an independent regulatory board. The bill he signed Thursday was part of an agreement with lawmakers. It settles a drawn-out fight over the regulations written by Wolf’s Department of Environmental Protection. The agreement ends an effort by lawmakers to overturn the entire slate of regulations, which also apply to the Marcellus Shale natural gas industry. The Democratic governor says his administration will start work to redraft new regulations for the traditional, shallow industry.

NRC Promises Vigilance at Diablo Canyon Despite Closure Plans: Tribune   Officials with the federal Nuclear Regulatory Commission Wednesday repeatedly assured the public that it will not lessen its oversight of Diablo Canyon nuclear power plant now that it is scheduled to close down in 2025. “From the NRC’s standpoint, it really does not change what we are doing,” said Ryan Lantz, the NRC’s deputy director for reactor safety. “We are not reducing any of our resources.” The NRC held a meeting in San Luis Obispo Wednesday to review Diablo Canyon’s safety performance in 2015 and early 2016. Lantz said the plant was safely operated and all of its color-coded safety ratings were green, which is the highest safety rating.

Budget Makers Eye Revival of Natural Gas Gross Receipts Tax: AP   Budget makers in an 11th-hour search for cash to support a deficit-strapped budget are considering reinstating a gross receipts tax on natural gas sales in Pennsylvania. Senators said Thursday that the idea is one of several that have been brought up in budget negotiations with Democratic Gov. Tom Wolf. The state ended the tax in 2000. Democrats say it would raise a substantial sum, in excess of $500 million a year. But Senate Majority Leader Jake Corman says Republicans still aim to assemble a spending plan that doesn’t require a tax increase.

Railroad Blamed for Fiery Oil Train Derailment: AP   Federal investigators on Thursday blamed Union Pacific Railroad for a fiery oil train derailment along the Oregon-Washington border, saying the company failed to properly maintain its track. Preliminary findings on the June 3 derailment in the Columbia River Gorge raise questions about why the company didn’t find the broken bolts that triggered the wreck when it inspected the tracks right before the derailment. Union Pacific faces potential penalties for safety violations, officials said.

Oil, Gas and Coal

Oil Patch ‘Left for Dead’ Will Spark New IPOs for U.S. Explorers   As the oil industry emerges from the biggest bust in three decades, shale drillers in a neglected corner of the biggest U.S. oil field are poised to take a new generation of gushers public. Long an also-ran to the more prolific Midland Basin 100 miles to the east, the Delaware Basin straddling the Texas-New Mexico border is yielding larger and larger oil discoveries for explorers. Both regions are part of the Permian Basin, a sprawling field seven times the size of Massachusetts that produces more crude than any other domestic source, Joe Carroll reports.Devon Energy Corp.’s newest Delaware finds are spewing twice as much crude as nearby wells drilled three years ago, Chief Executive Officer Dave Hager told investors at a conference last month. Drilling rights there are selling at about a 60 percent discount to acreage in the Midland region, said Mike Wichterich, president of Three Rivers Operating Co., a Delaware explorer bankrolled by private-equity firm Riverstone Holdings LLC.

Canada Moves to Strengthen Environmental Reviews of Pipelines   Canada Prime Minister Justin Trudeau will overhaul the country’s pipeline regulator as part of an effort to rewrite and strengthen environmental laws.The federal review of environmental assessment rules unveiled Monday will include a strategy for how to “modernize” the National Energy Board regulatory agency in a bid to restore confidence. Trudeau campaigned in last year’s election on toughening environmental laws, cutting emissions and expanding consultation with the country’s indigenous people.

BP’s Dudley Sees Oil Markets Balancing With $50 Crude This Year   Rising petroleum demand in China, North America and Europe will help bring global oil markets into balance this year, BP Plc Chief Executive Officer Bob Dudley said.“Global supply and demand recently have moved toward a better balance, and we expect this trend to continue into the second half of 2016 and probably reaching a balance by the end of the year on a daily basis,” Dudley said in a speech to the Economic Club of Washington, D.C. As stockpiles are drawn down, oil prices will probably firm.

Merkel Set to Pass Legislation Banning Gas Fracking in Germany   Legislation in Germany’s parliament to be passed on Friday is set to end years of discussion over whether the nation should follow the U.S. in launching a boom in drilling. Merkel’s coalition of Christian Democrats and the Social Democrats will use their majority to amend natural gas extraction rules, in effect banning the unconventional method of tapping oil and gas deposits not reachable with traditional methods, according to a draft bill obtained by Bloomberg News. Conventional fracking that doesn’t involve extraction from shale may be continued to be practiced under strict rules, the draft shows.

Up for Debate

Clean Power Plan: All Cost, Little Benefit  By Stephen Eule

Since the Environmental Protection Agency (EPA) issued its Clean Power Plan (CPP) proposed rulei to regulate carbon dioxide emissions from electricity generating stations in June 2014, the agency has touted the alleged environmental and economic benefits of the rule based on its own analysis.ii As the 17th century French mathematician Blaise Pascal famously observed, however, “The justest man in the world is not allowed to be judge in his own cause,” and what goes for men and women should go for regulatory agencies, too.

In 2014, House Committee on Science, Space & Technology Chairman Lamar Smith tasked the Energy Information Administration (EIA) with taking an independent look at the economic and energy market effects of the proposed CPP using its National Energy Modeling System. We produced a detailed look at the results of the EIA’s analysis and found that its model runs showed economic costs greatly exceeding benefits under the rule, a very different story from EPA’s.

EIA’s CPP Case projection indicates that by 2030, carbon dioxide emissions from the power sector in the CPP Case will be 35% below 2005 emissions—three percentage points more than the 32% goal announced by the administration.

EIA data show that cutting emissions so rapidly and deeply would come at a tremendous economic cost, both in total and in a relation to each ton of carbon dioxide reduced. When set against EIA’s No CPP scenario, cumulative economic costs over CPP’s 2022 to 2030 compliance period are an estimated $529 billion in lost GDP. Annual losses range from $16 billion in 2023 to $87 billion in 2029. The average GDP hit over the compliance period is $59 billion. These values are considerably higher, in most cases by an order of magnitude, than EPA’s estimated compliance costs of well less than $10 billion per year.

The graph below shows the annual economic cost per ton of carbon dioxide calculated for 2022 through 2030 and the administration’s Global SCC estimate for that year. As the chart shows, the cost for each ton of carbon dioxide reduction under EPA’s plan far outstrips the benefits. Cost per tons average an extraordinarily high $210 over the 2022 to 2030 period, ranging from a low of $99 (in 2023 (to a high of $253 (in 2027).

To produce a net climate benefit, the SCC must be greater than the economic cost of each ton of carbon dioxide cut. But as Figure 2 shows, this is certainly not the case here. Indeed, over the compliance period, the average per-ton economic loss is almost four times greater than the SCC benefit.

Taking into account these SCC estimates, contentious as they are, the net loss to the economy over the compliance period falls by $135 billion to a still large $394 billion. That equates to an average net loss of about $44 billion per year and a net cost per ton of carbon dioxide reduced of $157. In other words, even by the Administration’s own highly controversial standard, the economic costs of the CPP exceed the climate benefits.

EIA’s independent analysis of EPA’s CPP final rule shows that under CPP, the economy will suffer net economic losses averaging from $22 to $59 billion per year over the 2022 to 2030 compliance period, rising electricity rates (4.9% in 2030) and bills (2.4% in 2030), and fewer jobs (376,000 in 2030). CPP also poses a direct risk to the coal sector. The results out-lined here even obtain when taking into account the inflated benefits the administration has used to support its new rule.

(Stephen Eule is the vice president of the U.S. Chamber’s 21st Century Energy Institute.)

Clean Power Plan: Easy Peasy  By Kevin Steinberger

A deeply flawed report released by the Chamber of Commerce misrepresents the EPA’s and EIA’s analysis of the Clean Power Plan.

The EPA found that the Clean Power Plan will have health and climate benefits four times its costs. The U.S. Chamber of Commerce would like you to believe that EPA cooked the books. That’s ridiculous. In reality, EPA’s cost-benefit analysis follows sound economic practices and likely underestimates the health and climate benefits of power sector pollution reductions. In particular, climate researchers have argued that the cost of future climate damages has been dramatically underestimated.

Here’s the real news from the EIA analysis: Meeting the CPP carbon targets will be even easier and less costly than EPA projected just last year when it issued the plan. As a result of the extension of renewable tax credits and strong expected growth in wind and solar energy, the power sector will be well-positioned to meet or even exceed the CPP targets. Many other independent analysts have reached the same conclusion.

EIA’s Projection of Emissions Falling Even Without CPP

However, EIA’s analysis is, if anything, conservative because it underestimates the potential for energy efficiency gains. Recent analysis from MJ Bradley & Associates reaffirms EPA’s finding that strong investments in energy efficiency could result in lower electricity bills for households. Moreover, EIA’s findings of the impact on GDP and employment are highly sensitive to state policy decisions, including how to distribute the value of carbon allowances. The CPP represents a significant economic opportunity for states, and by returning allowance value to customers and strengthening investments in clean energy and energy efficiency, policymakers can bolster economic growth and create jobs.

The economic benefits of smart carbon policies have already been demonstrated in the real world. The nine Northeastern and Mid-Atlantic states that make up the Regional Greenhouse Gas Initiative (RGGI) have committed to auctioning off carbon allowances and reinvesting revenues in clean energy and energy efficiency. As a result, since 2009, RGGI has generated significant economic benefits, including about $3 billion in value added to the regional economy, more than 30,000 new job-years of work, and consumer energy bill savings of $395 million, all while helping participating states cut carbon pollution by more than 37 percent.

Far from the Chamber’s dire claims, the Clean Power Plan will build on and accelerate existing market trends towards a lower-carbon electricity system. Smart states and power companies will continue to move ahead and take steps to maximize the economic, climate, and health benefits of this transition.

(Kevin Steinberger is a policy analyst in the Climate and Clean Air Program of the Natural Resources Defense Council.)