Infrastructure in the form of major U.S. natural gas pipelines is often viewed as simply being there – something that exists and is always available to support our energy economy. However, most people do not think about the operation of this NGPL infrastructure until a major change occurs – such as when an operator announces that it intends to begin the formal process of soliciting interest for its unused capacity.
An important notice — but one that also holds significant commercial weight
The question at hand then transitions from one of mere documentation to one of what underlying conditions in the natural gas market are causing a shift in how the gas market operates.
Kinder Morgan announced the opening of a formal solicitation for unused capacity on its Natural Gas Pipeline Company of America (NGPL) pipeline system via an electronic bulletin board posting. On its face, this announcement is part of normal pipeline operational procedures. Its purpose is to assess whether market participants wish to utilize available or potentially available capacity in the NGPL pipeline system.
It is uncommon for these types of postings to occur in a vacuum. Generally, they are a result of ongoing discussions and negotiations occurring between the operating companies and their customers. By formally assessing market interest, Kinder Morgan is essentially gauging the temperature of market interest for utilizing its pipeline across its entire footprint — encompassing the largest producing regions of the country and some of the largest consumer markets along the Mississippi River Valley and the Gulf Coast.
The structure of the solicitation process enables the operator to move from assessing informal interest to documenting commitments. This will provide greater clarity regarding the intended utilization of the pipeline system in the future.
Why NGPL is so critical in today’s marketplace
NGPL provides a unique link between producing regions of the country and large population/industrial consumption centers, thus providing a clear indicator of regional demand and flow patterns in the natural gas market. Absorption of capacity on NGPL can indicate small incremental changes in the regional demand. Solicitation for capacity indicates a much larger reevaluation of how the pipeline system is positioned.
In today’s highly variable natural gas market, variability of weather-driven demand, generation needs from electric utilities, and changing industrial consumption play significant roles in determining how interested shippers are in utilizing transportation rights. As such, maintaining firm capacity is no longer about having the option to utilize capacity, but to ensure that the capacity is available to meet the shipper’s expectations.
Thus, the solicitation process serves to match the contractual agreements of the shippers to their actual expected use of the pipeline versus how the pipeline was used historically.
What shippers and investors will be paying attention to
Shippers will focus primarily on availability, but also on flexibility. Obtaining participation in the solicitation can provide the shipper with a means to obtain access to the pipeline under specific contract terms, providing them with a level of predictability in an environment where there is an increasing amount of risk associated with spot market pricing.
Shippers will also benefit if there is a reallocation or release of capacity, as it will significantly impact the shipper’s competitive position regardless of whether additional capacity is added to the pipeline system.
None of these interpretations requires a publicized announcement
Investors will generally view these solicitations as indicators of the overall health and stability of the pipeline’s cash flows. Investors will view a successful solicitation as indicative of a stable source of revenue for the pipeline. Conversely, lackluster interest from potential shippers could raise questions regarding the demand for natural gas in the respective region. Like many other developments related to pipeline systems, the true insights gained will be based on participation rates and subsequent filings.
