05 May Regulatory Outlook for the US Natural Gas Industry in 2017

Evolving factors across the oil and gas industry are likely to facilitate a rapid change in regulatory obligations for pipeline asset owners and operators throughout the rest of 2017 and beyond. To help those involved in the sourcing and delivery of natural gas in the U.S. interpret how the regulatory environment may evolve in the coming months, we thought it would be beneficial to look back at some of the major influences from the past year and discuss how they may impact the coming year.

North American Energy Standards Board (NAESB) Wholesale Gas Quadrant Standards Version 3.0 Goes into Effect

NAESB is an industry forum that develops standards that lead to a seamless, secure and accountable marketplace for wholesale and retail natural gas and electricity.

The introduction and roll-out of version 3.0 of the Wholesale Gas Quadrant Standards occurred in 2016. Among other changes, updates to the NAESB standard included a requirement that natural gas pipelines add an intraday nomination cycle to help synchronize all interstate gas pipelines. Pipelines now have to confirm and schedule five times a day instead of the previous four times daily. Adding in an additional nomination cycle has had a direct impact and consequence on interconnecting pipeline processes for operators. Natural gas pipelines run like a web across the entire country and are governed by complex regulations that differ between states. The change, as well as NAESB’s mandate for a compliant informational posting website, have had a large impact in the industry.

The unanimous adoption and compliance with the revised standards was to be completed by all interstate pipelines beginning on April 1, 2016. However, mid-way through the year, there was still no commercially available gas transaction management solution fully compliant with the latest NAESB standards.

Many pipeline asset owners are still playing catch up, struggling to manually manage the intraday confirmation process, build separate non-secure EBB websites, craft complex integrations, upload files or commit extra budget to ensure that the data on the required informational posting site correctly reflects the data from their internal systems.

Currently, the Federal Energy Regulatory Commission (FERC) can assess significant fines, which can run into millions of dollars each day if an audit fails. With this pressing need in operations, some may struggle to complete this process and rise to meet the needs presented by other factors from 2016, including:

Implementation of the NIST Cybersecurity Framework

As SCADA and industrial control systems become increasingly connected to the Internet of Things, there is also an increasing likelihood of vulnerabilities and the possibility that cyber attacks could bring down critical infrastructure in our nation. In addition, energy infrastructure that delivers to homes is increasingly susceptible to the threat of cyber criminals gaining access to private consumer data and/or manipulating energy readings through an attack on a piece of connected infrastructure.

In an effort to prevent these potential cyber attacks, regulatory bodies are continuing to investigate standards and frameworks to help mitigate risk. Both NIST and FERC have been pushing this issue into high gear, with a lot of renewed attention being placed on the NIST Cybersecurity Framework. Version 1.1 is expected to be released for public review and comment early in 2017. The proposed update will clarify, refine and enhance the Framework, making it even easier to use. Ease of use may be a critical factor in increasing adoption, because if 2016 proved anything, it was that hacking of US critical infrastructure is not only possible, but increasingly likely.

Natural Gas Demand and (De)Regulation Forecast

As we noted in our previous blog, demand for natural gas is growing exponentially. By energy source, natural gas accounts for the largest increase in world primary energy consumption. In the United States, natural gas pipeline exports increased by almost 22 percent in 2016, and the country is anticipated to become a net natural gas exporter in 2018.

With the majority of the natural gas industry meeting surging demand, but playing catch-up on many regulatory requirements, we should take a look at some of the evolving policy positions likely to affect the natural gas industry, including:

Increased and ongoing exploration of U.S. natural resources

The current Secretary of the Interior, Ryan Zinke, was a U.S. Representative from Montana’s at-large congressional district. His background is significant, as the Department of the Interior manages mining and grazing on large sections of the state – large sections that as Secretary, Zinke may look to open up for exploration and development. In fact, during confirmation hearings, Zinke stated unequivocally that he would be reviewing previous exploration limitations.

However, while his past voting record suggests some currently protected lands may be opened for exploration, he is at odds with many other Republicans when it comes to ceding Federal control of these lands. As a devoted hunter and fisherman, he is eager to preserve federal lands. Therefore, while we can anticipate further exploration, it is likely to be under a stewardship and contract with the government, rather than purchase of those lands by companies or private owners.

Both new and resumed construction on a growing network of energy infrastructure, primarily in the form of expanded pipeline and transport operations

The ongoing boom of natural gas exploration, production and exportation has been facilitated by an investment in the required infrastructure to transport this surge in supply. The United States has the largest network of energy pipelines in the world, with more than 2.4 million miles of pipe. This is anticipated to grow, particularly in conjunction with the likelihood of fewer restrictions on Federal land. The U.S. government is the single largest landowner in many of the states with natural gas deposits.

Technology to archive “tribal knowledge”

In addition, there will be a massive push to maximize the efficiency of existing operating pipeline through new, Internet-connected components, sometimes as a replacement for an aging and retiring workforce. Technology will provide a more accurate, real-time monitoring of operations to increase understanding of molecule transfer, reduce service calls and truck roles and proactively and automatically initiate maintenance and repair.

We believe that deregulation is likely to spur increased consolidation of asset owners, as those with the largest cash positions for technology investment seek to maximize the economic advantages afforded via deregulation. Long-term success will be determined by how well a company automates processes along the natural gas pipeline.

Conclusions:

In conclusion, given the ongoing growth in the natural gas market over the recent past, we anticipate continual and ongoing opportunities for success throughout the pipeline stream, if we can successfully navigate the pressing needs of NAESB and ensure safeguards are established to protect both existing and future critical infrastructure required to support the growing business demand.