2015 STRATEGIC DIRECTIONS U.S NATURAL GAS INDUSTRY REPORT

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sdr-natural-gas

2015 STRATEGIC DIRECTIONS:

U.S. NATURAL GAS INDUSTRY REPORT

Black & Veatch Insights Group

Black & Veatch | 1


A NOTE

ABOUT

DESIGN

The annual Strategic Directions report series captures Black & Veatch’s

global engineering and thought leadership expertise across key

elements of the critical human infrastructure market. Just as advising

our clients requires mastery of design, strategy development and

project construction and execution, so too does selecting a report

theme that reflects the dynamics of change across industries.

For 2015, the idea of the universe, which encompasses distinct yet overlapping galaxies,

stood out as analogous to the continuous evolution of utility services. Interdependence

and convergence, as illustrated by ongoing conversations about the energy/water nexus

and consumer and utility technologies, are tangible examples.

From a design perspective, what you see reflected in the report’s cover and in the graphic

elements found throughout its pages, is purposeful art. Our aim is that this creative

approach produces reports that are informative and engaging resources for its readers.

This report, in particular, examines how the natural gas industry is managing near

constant change and the dual challenges of uncertain growth and low prices.


TABLE

OF

CONTENTS


ii

Table of Contents

03 Introduction

04 The Black & Veatch Analysis Team

08 2015 Report Background

12 Executive Summary

12 Low Prices, Uncertain Growth: A New Natural Gas Industry Normal

18 Changing Market Dynamics

18 As Safety and Aging Equipment Rank as Top Industry Concerns, a Question of Data

Integrity

24 Regulatory Proposals Broaden Reach Across Natural Gas Industry

30 Perspective: Global

30 Opportunities Exist in Time of Global Gas, Commodity Uncertainty

36 Opportunities for Growth

36 Optimism Runs High Among Local Distribution Companies

40 Pipeline Expansion Critical as Companies Organize to Promote Benefits

44 Global Markets Shaping the Future of North American LNG Exports

48 Perspective: India

48 Urbanisation, Industrialisation Driving India’s Demand for Power

52 Gas-Fueled Power Generation Expected to Grow, Propelled by Public Demand and

Government Regulation

56 Perspective: Africa

56 Natural Gas Critical to Unleashing Africa’s Full Development, Industrialisation Potential

60 Closing Commentary

60 North America’s Natural Gas Industry: A “Tale of Two Cities”

64 List of Figures/Tables


2 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


INTRODUCTION

Welcome to the Black & Veatch 2015 Strategic Directions: U.S. Natural

Gas Industry report. This fourth annual report exemplifies the old

adage, “the only thing constant is change”. Heightened activity across

the industry that characterized last year’s report has been tempered

by this reality: as U.S. natural gas prospects grow, so do the challenges

associated with greater economic interdependence.

This report examines how the continuing supply boom, incremental demand growth

and a drastic drop in the price of oil are testing the industry’s ability to plan for muchneeded

strategic and operational investments. It also analyzes the impact of regulatory,

geopolitical and environmental concerns on each element of the value chain.

We do not yet know how long this cycle will last. The industry, however, understands that

recovery will require new focus on efficiency, risk management and collaboration.

On behalf of Black & Veatch, we thank all who participated in the 2015 industry survey.

We also acknowledge the contributions of our professionals who have provided their

knowledge and expertise to develop and analyze the key issues identified in the survey.

We welcome your questions and comments regarding this report or Black & Veatch

services. You can reach us at MediaInfo@bv.com.

Sincerely,

JOHN CHEVRETTE | PRESIDENT

Black & Veatch management consulting

Black & Veatch | 3


The Black & Veatch

Analysis Team

EXECUTIVE SUMMARY

Peter Abt is Managing Director of Black & Veatch’s Oil & Gas strategy practice. He has

more than 30 years of experience in the energy industry, focused primarily on natural

gas and electric power generation business development, marketing and trading. Abt is

based in Houston, Texas.

CHANGING MARKET DYNAMICS

Jason Abiecunas is a Project Manager and leads microgrid projects for Black & Veatch.

He has more than 14 years of experience in the power industry including feasibility

studies, project development support, and support during execution of renewable and

fossil-fueled power stations. His experience includes projects located in the United

States, Asia, Africa and the Middle East. Abiecunas is based in Overland Park, Kansas.

Andy Byers is an Associate Vice President and Director of Environmental Services

in the Black & Veatch energy business. He currently serves as the energy business

Environmental Regulatory and Legislative Policy Advisor, responsible for tracking

developments and advising on risks and opportunities arising from key federal

legislative, regulatory and judicial initiatives. Byers is based in Overland Park, Kansas.

Jeff Meyers is a Manager in Black & Veatch’s Oil & Gas management consulting practice.

He has more than 20 years of experience in the natural gas utility industry as an engineer

and 10 years of providing consulting services to utilities. He is a registered professional

engineer and is based in Tennessee.

Rick Porter is a Director in Black & Veatch management consulting with more than

36 years of midstream regulatory experience, having worked or consulted for most

major North American gas pipeline companies. As an expert in natural gas regulatory

matters, he specializes in providing advisory services to clients in the oil and gas pipeline

industries. He advises clients on matters relating to regulatory policy and strategy

development, pipeline rates and services, regulatory compliance, project and business

development and M&A regulatory due diligence. Porter is based in Houston, Texas.

John (Rod) Walker is a Director within Black & Veatch’s Oil & Gas strategy practice with

more than 25 years of industry experience. Prior to joining Black & Veatch, he held a

variety of positions throughout a 19-year career with a large investor-owned natural gas

utility and two municipal gas utilities. Walker is based in Georgia.

Will Williams is the Director of Black & Veatch’s Asset Management consulting practice.

He has more than 20 years of experience in asset management planning, including asset

failure analysis, risk assessment, performance benchmarking, maintenance optimization

and business change management. Williams is based in Atlanta.

4 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


OPPORTUNITIES FOR GROWTH

Ron Amen is a Director in Black & Veatch’s Financial

& Regulatory Services consulting practice. He has

more than 35 years of combined experience in utility

management and consulting in the areas of regulatory

policy, strategy and analysis; rate design and pricing

issues including time-of-use rates, revenue decoupling,

weather normalization and other cost tracking

mechanisms; resource strategy, planning and financial

analysis; and business process design, evaluation and

organizational structures. Amen is based in Seattle.

Deepa Poduval is a Principal Consultant with

Black & Veatch management consulting and is

responsible for business strategy and project

management. Her client engagements focus on strategic

analytical services supporting portfolio optimization,

asset acquisition, risk management and business strategy

development. Her expertise includes the valuation of

energy industry assets, analysis of oil and gas marketing

strategies and commercial agreements, performance

and risk measurement and analysis, and utilization of

natural gas industry structural models. Poduval is based

in Houston, Texas.

John Taylor is a Principal Consultant in Black & Veatch’s

Financial & Regulatory Services consulting practice.

Taylor has managed projects involving financial analysis,

regulatory support and strategy, market assessment,

litigation support, and organizational and operations

reviews. His work often involves providing support for

regulatory proceedings by conducting various studies

and analyses related to revenue requirements, affiliate

transactions, class cost of service and rate design. Taylor

is based in Florida.

Denny Yeung is a Principal Consultant at Black & Veatch

with expertise in natural gas market fundamentals, asset

valuation and financial analysis. He leads Black & Veatch’s

long-term gas market fundamentals modeling and

has rendered analysis and opinions assessing price

impacts, commodity basis and the market impact of

proposed natural gas infrastructure. He has accumulated

knowledge relative to gas supply portfolio development,

pipeline infrastructure optimization and gas-electric

interdependency in his experience with Black & Veatch.

Yeung is based in Houston, Texas.

Alap Shah is Turbine Technologies Manager and

Turbine Business Line Director in Black & Veatch’s energy

business. Shah has more than 16 years of experience at

Black & Veatch, serving in roles of Rotating Equipment

Engineer and Thermal Performance Section Supervisor.

He has worked closely with major turbine original

equipment manufacturers (OEMs) such as General

Electric (GE), Siemens, Alstom and Mitsubishi

Heavy Industries (MHI) in gas and steam turbine

technologies assessment and several “first-of-akind”

turbine technology launches on Black & Veatch

engineering, procurement and construction (EPC)

and services projects. Shah is based in Overland

Park, Kansas.

Black & Veatch | 5


PERSPECTIVES

Hoe Wai Cheong is incoming President of

Black & Veatch’s Oil & Gas business (effective January

2016). He is currently the Executive Vice President and

Executive Director, EPC Projects for Black & Veatch.

He leads Black & Veatch’s EPC business for energy

throughout the world. Cheong is responsible for global

strategy, business development, and project acquisition

and execution. He holds both bachelors and doctorate

degrees in chemical engineering from the University of

Aston in Birmingham, UK. Cheong is based in Singapore.

Mitesh Patel is Managing Director of Black & Veatch’s

management consulting practice for Southeast Asia. He

helps investors, developers and banks connect capital to

infrastructure projects in Asia and maximize their return

on investments. With more than 20 years of experience

across the life cycle of power projects, from project

development to asset management, Patel has worked

throughout Asia across all power technologies including

combined cycle gas turbines, supercritical coal-fired

plants, and renewables including wind and biomass. Patel

is based in Singapore.

Joseph Mahendran is Operations Manager for

Black & Veatch South Africa. He develops and maintains

client relationships, working in project management

over more than two decades of international work

across multiple industries. With experience in both

traditional engineering and EPC and turnkey operations,

he specializes in project controls, strategic and risk

management, competitor analysis, change management

and advanced statistical analysis. Mahendran is based

in Johannesburg.

Webb Meko is a Regional Business Development

Manager for Black & Veatch South Africa. He has

provided technical expertise, management and advisory

services for more than 20 years to South African and

international clients in the energy sector within Africa. His

areas of expertise include power system planning and

electrical power system design, electrification, project

management, program management, feasibility studies,

private power projects development and power plant

maintenance. Meko is based in Johannesburg.

Anand Pattani is Country Manager and Managing Director

for Black & Veatch India, where he drives the India Growth

Plan for the company’s oil and gas, power, water and

telecommunications businesses. Pattani’s experience

includes managing large and complex power projects in

many countries. This experience includes development,

project management, engineering, procurement and

construction of more than 25,000 MW of power plant

facilities. Based in Mumbai, Pattani has been with

Black & Veatch since 1998 and has a bachelor’s degree

in chemical engineering from the University of Mumbai

and a master’s degree in chemical engineering from

the University of Missouri-Columbia, USA. He is a U.S.

licensed professional engineer.

6 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


CLOSING COMMENTARY

John Chevrette is President of Black & Veatch

management consulting and works closely with clients

to address key challenges affecting today’s electric,

water and gas utilities. Chevrette has more than 20 years

of industry consulting experience and has worked with

domestic and international clients in the electric utility,

energy technology, gas pipeline, telecommunications

and water industries. Chevrette is based in Charlotte,

North Carolina.

Black & Veatch | 7


2015 Report

Background

The fourth annual Black & Veatch Strategic Directions: U.S. Natural

Gas Industry report is a compilation of data and analysis from an

industrywide survey. This year’s survey was conducted from 23 July

2015 through 19 August 2015. The online questionnaire was completed

by 404 participants who, through a series of screening questions,

identified themselves as natural gas utility/service providers or natural

gas industry providers.

The overall results of the survey have a precision of +/-4.8 percent at the 95 percent

confidence level. Statistical significance testing was conducted on the final survey results

to identify key differences by various groups of respondents. The following figures

provide additional detail on the participants in this year’s survey. Unless otherwise noted,

survey data presented within this report reflect the opinions of all respondents.

The term “natural gas service provider” refers to survey respondents who produce,

gather, transport, distribute, sell/trade or consume natural gas. The term “natural gas

industry participant” or simply “industry participant” refers to all survey respondents,

both natural gas service providers and natural gas industry providers (those providing

services to natural gas service providers).

For more information on Black & Veatch, please visit www.bv.com.

8 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Primary Business Region

11.9 %

Northwest

20.6 %

Rocky Mountain

37.6 %

Midwest

14.9 %

New England

25.6 %

Mid-Atlantic

24.1 %

Southwest

28.9 %

Southeast

23.4 % U.S. - Multi-Regional

4.7 % Other U.S. Locations

17.9 % Canada

10.0 % Mexico

11.2 % Other Countries

Source: Black & Veatch

Industry Type

22.8 %

Industry Providers

77.2 %

Services

Providers

Source: Black & Veatch

Black & Veatch | 9


Survey Participants by Natural Gas Service Provider Type

10.3 % Natural gas producer

14.4 %

3.2 %

16.0 %

3.9 %

30.4 %

1.9 %

2.2 %

9.0 %

8.7 %

Natural gas gathering and processing

Natural gas storage

Interstate/intrastate pipelines

Natural gas marketing

Local distribution companies

LNG importer/exporter

Merchant electricity generator

Utility/regulated electricity generator

Industrial user

Upstream Midstream Downstream

Source: Black & Veatch

10 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Survey Participants by Industry Provider Type

32.6 % Equipment/service provider

20.6 %

15.2 %

12.0 %

7.6 %

3.3 %

1.1 %

7.6 %

Architect, engineering, EPC contractor

Consultant

Law firm

Industry associations

Financial institution

Regulator/government agency

Other natural gas industry organization

Source: Black & Veatch

Black & Veatch | 11


EXECUTIVE

SUMMARY

Low Prices,

Uncertain Growth:

A New Natural Gas

Industry Normal

By Peter Abt

Events of the past year have significantly changed the landscape of

the global oil and natural gas industries. Domestically, the ongoing

shale revolution has oil and natural gas production levels near their

peak, even as producers cut rig counts in response to dramatically

lower commodity prices. Demand from the U.S. power sector and

export markets continues to grow, but the bullish expectations for

midstream development have been tempered by new regulatory and

non-governmental hurdles. On the local distribution company (LDC)

front, the search for new sources of revenue while managing aging

infrastructure remains top of mind.

To move forward, the North American industry must take advantage of opportunities

created by the current price environment. The cross-industry optimism of 2013 and

2014 has been replaced by a bifurcated market in which some producers face existential

threats from an extended period of low gas prices and declining arbitrage opportunities

for exports. Meanwhile, opportunities to expand service in the power sector may create

favorable circumstances for midstream companies and LDCs if those providers can

deliver access to firm gas supply.

The 2015 Strategic Directions: Natural Gas Industry report examines how industry players

are managing through the current low price environment while continuing to look for

growth opportunities. It also looks at how traditional and potential markets have been

affected by economic, regulatory, environmental and geopolitical factors. The report

closes with a look ahead at the market based on insights from Black & Veatch’s century

of expertise.

12 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


INFRASTRUCTURE, REGULATORY ISSUES REMAIN EVERGREEN

In the United States, investments in midstream pipeline capacity and local distribution infrastructure improvements

characterize recent optimism. Those investments reflect an industry that in hindsight used a favorable climate to begin

to address perennial issues. Survey respondents agree. While safety again topped the list of issues participants ranked

as the most important to the natural gas industry, concerns about aging infrastructure ranked significantly higher in

2015 than in years past, with the majority of respondents citing it as a “very important” issue by a higher margin than any

other concern (Table 1).

Table 1

On a 5-point scale, where a rating of 5 means “Very Important” and 1 means “Very Unimportant,” please rate

the importance of each of the following long-term issues to the natural gas industry.

Top 10 Natural Gas

Industry Issues

By Year

2012 2013 2014 2015

Safety 4.57 4.70 4.68 4.43

Aging infrastructure 4.08 4.19 4.19 4.30

Environmental regulation Not asked 4.26 4.26 4.27

Economic growth 4.22 4.29 4.27 4.20

Available pipeline capacity Not asked Not asked Not asked 4.19

Gas supply reliability 4.21 4.31 4.39 4.08

Rate and regulatory certainty 4.21 4.32 4.24 4.03

Electric-gas interdependency 3.94 4.05 3.93 4.01

Gas price stability 4.01 4.06 4.07 3.97

Cyber security Not asked 4.02 4.06 3.88

Source: Black & Veatch

Black & Veatch | 13


Over the long term, firms

that embrace operational

efficiency and seek out

new markets will survive

challenging times.

From a regulatory perspective, the final version of the

U.S. Clean Power Plan (CPP) fostered concern within

the industry because its focus on renewable energy and

limits on carbon dioxide (CO 2

) emissions were at odds

with the treatment of natural gas in the draft regulation.

Survey respondents echo these concerns. Reduction of

CO 2

emissions from existing and new power plants in the

United States rank first and second, respectively, among

issues they believe will have an overall impact on the

natural gas industry (Figure 1).

Regulatory challenges hit home throughout the value

chain. For midstream companies and liquefied natural

gas (LNG) importers/exporters, regulatory uncertainty

was seen as the top issues facing the pipeline industry

over the next three to five years (Figure 2).

What do these apparent conflicts mean for stakeholders?

In the short term, oil and natural gas producers will

face increased competition and decreased profits.

Consolidation and asset rationalization are likely to

become increasingly important over the next two to three

years. Over the long term, firms that embrace operational

efficiency and seek out new markets will survive

challenging times.

14 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Figure 1

On a 5-point scale, where a rating of 5 means “Very Positive Impact” and a rating of 1 means “Very Negative

Impact,” what overall impact do you feel each of the following regulatory initiatives will have on the natural gas

industry?

3.72

3.69

3.51

3.27

2.81

2.81

Reduction of CO 2

emissions from existing power plants

in the U.S.

Limitation of CO 2

emissions from new power plants in

the U.S.

Requirements/incentives to utilize lower carbon-intensive

fuels in the U.S.

Binding national commitments to reduce greenhouse gas

emissions — global

Reduction of methane from existing oil & gas supply chain

networks in the U.S.

Reduction of methane from oil & gas production in the U.S.

Source: Black & Veatch

Figure 2

What do you see as the THREE most significant issues facing the natural gas pipeline industry during the next

three to five years?

Regulatory uncertainty

82.0 % Sustained growth in demand for natural gas

56.0 %

48.0 %

24.0 %

22.0 %

Safety and system integrity

Sustained growth in natural gas production

Cyber security

Source: Black & Veatch

Black & Veatch | 15


UTILITY BUSINESS MODELS ADJUST

While North American producers grapple with oversupply

or an inability to provide gas to constrained markets,

utilities and LDCs are exploring ways to balance slowerthan-anticipated

demand growth against the need to

make investments in capital intensive projects that range

from infrastructure maintenance to smart technology.

In stark contrast, the Gulf Cooperation Council (GCC)

countries face a different predicament where demand for

natural gas is outstripping supply. In Africa, development

of Mozambique’s vast resources, although more than a

decade away, may help address the need for new power

generation and could affect the face of the global gas

market.

Some utilities are exploring new business models that

include ownership on the production side. Others, such

as Atlanta-based electric utility Southern Company,

have looked to acquisitions as a path to expand pipeline

capacity and secure supply.

Interstate pipeline investments are also on the rise to

meet demand from new or underserved customers. Yet,

these strategies are not without challenges. Regulatory

authorization wait times and limits on capital recovery

along with entrenched opposition from environmental

and other non-governmental organizations (NGOs)

present challenges to the successful execution of

projects (Figure 3).

Resilient LDC and pipeline operators will implement

strategies that include consideration of community and

environmental group priorities, a diligent assessment of

risk and an understanding of future growth opportunities.

GEOPOLITICS, ECONOMICS COMPLICATE

MARKET PROSPECTS

From a global standpoint, the International Energy

Agency (IEA) in its 2015 Medium-Term Gas Market Report

identified years of high gas costs as a brake on demand

growth, particularly in light of other low-cost fuel options.

However, the recent dramatic price declines, which

typically should propel gas adoption, are depressing

upstream capital investments. Further, the restart of

Japan’s nuclear sector and China’s economic slowdown

may further curb demand for gas.

A NEW NORMAL

While the majority of survey respondents remain

optimistic about the future growth of the North

American natural gas industry between now and 2020,

mean importance ratings were also significantly lower

compared to previous years (Table 2). What is clear is

that the exuberance of 2014 is waning. In its place is a

more cautious optimism buoyed by an expectation that

LNG exports and natural gas-powered electric generation

— along with opportunities in transportation — will fuel

industry growth, but pricing will remain depressed by

historical standards.

The 2015 Strategic Directions: U.S. Natural Gas Industry

report offers a preview of what the new low price

normal looks like for the industry and its stakeholders.

It also offers a way forward for those willing to create a

foundation for change and long-term sustainable growth.

It has often been said that the cure for low prices is

continued low prices, and that’s why we believe growth

prospects abound for natural gas. Increased exports

to Mexico, LNG exports from the lower 48, growth in

demand from natural gas power generation and new

industrial demand growth all underline the market

mandate for natural gas in spite of its current price point.

This growth should ultimately result in higher prices,

which will then lead to an increase in gas-directed drilling.

Abundant supply, prospects for growth and the outlook

for improved prices are rightfully driving optimism.

16 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Figure 3

Which TWO items are the most significant barriers of expansion associated with the construction of new

pipeline capacity? (All Midstream, LNG Importers/Exporters and Merchant Electric Generators)

73.1 %

67.7 %

33.8 %

12.3 %

5.4 %

Delays from

opposition

groups

Regulatory

uncertainty

Insufficient

firm

subscriptions

Access to

capital

Shipper creditworthiness

Source: Black & Veatch

Table 2

What is your general outlook on the future growth of the North American natural gas industry between now

and 2020?

Outlook on the Future

Growth of the North American

Natural Gas Industry Between

Now and 2020

By Year

2012 2013 2014 2015

Very optimistic 36.1 % 48.2 % 45.4 % 27.7 %

Optimistic 56.8 % 47.1 % 47.2 % 54.1 %

Neutral 5.1 % 3.2 % 5.8 % 14.3 %

Pessimistic 2.0 % 1.4 % 1.6 % 3.9 %

Mean rating 4.27 4.42 4.36 4.05

Source: Black & Veatch

Black & Veatch | 17


CHANGING

MARKET

DYNAMICS

As Safety and

Aging Equipment

Rank As Top

Industry Concerns,

A Question Of Data

Integrity

By Jeff Meyers

The mandate of a natural gas provider is clear: provide a safe and

reliable supply to customers and communities. Distribution of natural

gas has inherent risks and safety concerns that must continually be

addressed. The majority of gas infrastructure is located underground

and, in many instances, under pavement in older, densely populated

areas. Some areas are served with natural gas systems that date back

to the mid-1800s, varying in the type of materials and pressure controls

used throughout the system.

Safety and aging infrastructure technically exist on separate planes, but they are

inextricably linked for natural gas providers. Safety and health risks posed by aging

pipelines remain a leading anxiety for an industry often vexed by the vulnerabilities of

decades-old cast iron or bare steel pipes. Most pipelines share common characteristics,

but each carries a unique history influenced by environmental conditions, material

selection, workmanship and construction methods. Capturing, understanding and acting

on this information — along with how the asset owner/operator documents the pipeline’s

history, condition and asset management — are critical to successful risk management.

This last consideration may be the most resonant imperative gleaned from the 2015

survey responses: the increasingly important role of consistent and reliable data and

recordkeeping in a resilient system.

MIXED PERCEPTIONS OF INFRASTRUCTURE RESILIENCE

Safety again ranks top among the industry’s most important issues. Aging infrastructure

is right behind amid new concerns about pipeline integrity, significantly increased

regulatory oversight and punitive judgments against providers considered to be at fault

or in violation at the time of an incident. Safety and aging equipment rated highest for

local distribution companies (LDCs) as shown in Table 3.

Perceptions of infrastructure resilience appear mixed. While half of industry participants

viewed the increasing focus on energy system resilience as an opportunity for their

system to provide additional services to existing and potential customers, 17 percent

indicated they are evaluating their systems, and only 3.8 percent viewed this as a threat

because they are not prepared to meet enhanced resiliency/reliability requirements for

their customers.

18 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Of particular interest is that 30 percent of respondents said their organizations either had no current plans to assess

resilience or were not aware of such efforts being under way (Figure 4)

Numerous influences raise the risks of an aging system. Extreme weather, underground environmental conditions,

variability in operations (changes in pressure throughout the life of the asset), third-party excavation, maintenance and

operational practices, infrastructure improvement projects and a lack of reliable documentation about the system are

all factors.

Table 3

On a 5-point scale, where a rating of 5 means “Very Important” and 1 means “Very Unimportant,” please rate

the importance of each of the following long-term issues to the natural gas industry.

By Natural Gas Services Provider Type

Importance of

Industry Issues

Natural

Gas

Producer

Natural Gas

Gathering/

Processing

Interstate/

Intrastate

Pipeline

LDCs

Utility/

Regulated

Electricity

Generator

Industrial

User

Other

Aging infrastructure 4.27 4.14 4.36 4.63 4.33 4.12 4.09

Aging workforce 3.87 3.83 3.86 4.10 4.19 3.69 3.80

Safety 4.33 4.42 4.26 4.73 4.59 4.41 4.51

Source: Black & Veatch

Figure 4

How do you view the increasing focus on energy system resilience with respect to your system? (Energy System

Resilience refers to the ability of an energy system to become less vulnerable to the loss of power and damage to

energy infrastructure related to unforeseen changes such as extreme weather or growing urbanization.)

22.7 %

Don’t know

7.3 %

Not currently evaluating the

situation and do not plan to

1/3

Respondants

no plans

49.3 %

Opportunity to provide

additional services to existing

and potential customers

16.9 %

Currently evaluating the situation

and have not made plans

3.8 %

Viewed as a threat,

not prepared to meet enhanced

resilience/reliability requirements

Source: Black & Veatch

Black & Veatch | 19


LEAK-PRONE PIPELINES PROMPT

RESILIENCE PLANNING

According to the Pipeline and Hazardous Materials Safety

Administration (PHMSA), roughly 98 percent of the

nation’s underground distribution network is composed

of cathodically protected coated steel and plastic pipes,

with the remaining 2 percent — or about 30,000 miles —

made of cast and wrought iron. In addition, there remain

about 40,000 miles of non-cathodically protected bare

steel in distribution systems. The majority of the cast

iron infrastructure serves natural gas in urban centers,

including the Northeast, where cycles of freezing and

thawing, construction, water main breaks and other factors

degrade cast iron’s integrity. Of the 1,400 distribution

gas operators reporting annually to PHMSA, only 42

companies have more than 100 miles of cast iron, and 55

companies have more than 100 miles of non-cathodically

protected bare steel remaining in service.

With the majority of utilities having limited leak-prone

pipelines, it is encouraging that resilience planning has

ascended to the top of many gas providers’ to-do lists, or

that safety now ranks as a top issue. Many organizations

understand the risk. Nearly half of responding natural

gas service providers reported they had adopted a riskbased

planning approach that identifies criticality and the

likelihood of failure under extreme weather conditions.

However, more than 50 percent of the organizations had

not performed an assessment or the respondents did not

know if one had been undertaken. This disconnect can be

attributed to a false sense of security, further underscoring

the need for process improvement.

The natural gas industry must continually evaluate its

systems, not only for the leak-prone material of today but

for the risks in the future.

Recordkeeping is a key issue in measuring a pipeline

infrastructure’s life cycles and managing associated risks.

PHMSA’s requirement that transmission and distribution

operators follow and update their Transmission Integrity

Management Plan (TIMP) or Distribution Integrity

Management Plan (DIMP) has prompted organizations

to establish internal historical data collection projects,

geographic information system (GIS) enhancement

and maximum allowable operating pressure (MAOP)

verification initiatives, as well as to investigate and

implement modern data collection.

Through our involvement with many gas providers,

Black & Veatch has observed that more organizations

are implementing bar code readers, GIS and Global

Positioning System (GPS) technology and other methods

for quickly and accurately cataloging equipment and

material. System assets can be found and assessed, with

important information about maintenance, operation and

asset history conveyed to field personnel.

Figure 5

In targeting investments in system reliability, have you adopted a risk-based planning approach that identifies

criticality and the likelihood of failure under extreme weather conditions? (Natural Gas Services Providers)

19.7 % A full risk-based prioritization has been

undertaken and used to target investment

26.1 %

54.3 %

The likelihood of failure under extreme conditions has

been systematically assessed for all assets

A formal risk-based planning approach has

not yet been undertaken to my knowledge

Source: Black & Veatch

20 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Natural gas service providers understand that missing or

inaccurate information can lead to errors and increased

risks, and high-profile incidents have reinforced the urgency

about risk assessments.

PIPELINE INCIDENTS HAVE MANY FACTORS

We believe the root causes of incidents are

interconnected, with data management having a

relationship with other key factors (Figure 6).

Many gas providers are also impacted by aging workforces

that need to be infused with new talent. There is heavy

demand for highly technical and qualified office and field

personnel who can thrive in a complex and changing

environment. A key component of this is the transfer

of working knowledge to staff in the design, planning,

project managing and other phases of project execution.

Other issues affecting system resiliency and safety include

robust emergency response training, including drills,

employee training, and adequately funded operations and

maintenance budgets.

Figure 6

Causes of Pipeline Incidents

DATA

MANAGEMENT

WORKFORCE

PLANNING

COMMUNICATION

PROCEDURES

Natural gas service providers understand that missing or

inaccurate information can lead to errors and increased

risks, and high-profile incidents have reinforced the

urgency about risk assessments. Still, much work remains

as providers secure the pipeline infrastructure, so vital to

the role of natural gas in reliable power generation.

EMERGENCY

RESPONSE

AGING

INFRASTRUCTURE

PIPELINE

INCIDENTS

Source: Black & Veatch

Black & Veatch | 21


According to the Pipeline and

Hazardous Materials Safety

Administration (PHMSA), roughly 98

percent of the nation’s underground

distribution network is composed of

cathodically protected coated steel

and plastic pipes, with the remaining

2 percent — or about 30,000 miles

— made of cast and wrought iron. In

addition, there remain about 40,000

miles of non-cathodically protected

bare steel in distribution systems.

22 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


80% of the remaining cast and wrought iron pipeline reside in these 10 states

IL

MI

NY MA

CT

PA

NJ

MD

15,000 miles

of cast and

wrought iron are

located in NY, PA,

NJ and MA.

MO

AL

1.3 %

Steel Unprotected Coat

1.0 %

Steel Cathodically

Protected Bare

37.4 %

Steel Cathodically

Protected Coated

2.3 %

Cast Iron/

Wrought Iron

0.1 %

Other

3.3 %

Steel Unprotected Bare

54.5 %

Plastic

Black & Veatch | 23


Regulatory

Proposals Broaden

Reach Across

Natural Gas

Industry

By Andy Byers and

Rick Porter

The scope of regulatory oversight facing the natural gas industry

grew significantly this year as more federal agencies unveiled

sweeping proposals directed at environmental and safety issues.

On August 3, the natural gas industry appeared to get a boost when

the Environmental Protection Agency (EPA) issued its final Clean

Power Plan (CPP). The CPP seeks to increase the use of natural gas

in reducing and displacing emissions from existing coal-fired power

generation. The CPP goal is to lower carbon emissions from power

plants by 32 percent by 2030 compared to 2005 levels.

However, later in August, after this survey report was recorded, the EPA issued proposed

additional federal regulations intended to decrease methane emissions from the oil

and natural gas industry. The regulations are part of an Obama administration initiative

designed to reduce methane emissions by 40 to 45 percent from 2012 levels by 2025.

It also supports the administration’s larger climate change commitment to reduce

emissions of greenhouse gases such as methane, which is 25 times more potent than

carbon dioxide in contributing to greenhouse gas effects. Together, these EPA actions

have left the natural gas industry caught between the potential implications of the CPP

and methane rules.

Natural gas industry leadership is faced with the challenge of discerning what these

potential regulations mean for their individual operations (Figure 7). Although the

industry generally relies on trade associations or contracted/in-house experts, it is

still difficult to fully comprehend the potential ramifications of the emerging EPA and

Pipeline and Hazardous Materials Safety Administration (PHMSA) regulatory actions.

24 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Figure 7

On a 5-point scale, where a rating of 5 means “Very Positive Impact” and a rating of 1 is “Very Negative

Impact,” what overall impact do you feel each of the following regulatory initiatives will have on the natural gas

industry?

Very Positive Impact Positive Impact No Impact/Neutral Impact

43.1 % Negative Impact

17.0 %

9.9 % 10.0 %

17.3 %

32.5 %

20.2 %

41.8 % 10.6 %

27.3 % 14.1 %

20.7 % 23.8 %

18.8 % 17.6 %

20.0 %

47.0 %

54.9 %

30.2 %

41.6 %

47.9 %

21.5 %

5.5 %

5.2 %

Reduction of

methane from

existing oil &

gas supply

chain

networks in

the U.S.

Reduction of

methane from

oil & gas

production in

the U.S.

Binding

national

commitments

to reduce

greenhouse

gas emissions

— global

Requirements/

incentives

to utilize lower

carbon-intensive

fuels in the U.S.

Reduction

of CO 2

emissions

from

existing

power

plants in

the U.S.

Limitation

of CO 2

emissions

from new

power

plants in

the U.S.

Source: Black & Veatch

Black & Veatch | 25


DISCERNING REGULATORY IMPLICATIONS

Separately, PHMSA is in the process of implementing

a multiyear Pipeline Safety Reform Initiative to comply

with the Pipeline Safety Act’s mandate to reduce the

risk of future pipeline failures. These reforms proposed

new compliance obligations that address pipeline

replacement, operator training and certification as well as

a potential restructuring of the PHMSA pipeline design

review process. The industry is carefully evaluating the

cost of complying with these new regulations.

Without question, the natural gas industry is focused on

the costs associated with retrofitting and modernizing

facilities under the EPA methane proposals and PHMSA

initiative. The Federal Energy Regulatory Commission

(FERC) has stepped in and provided gas pipeline owners

a method to recover the significant amounts of capital

expected to be spent. However, respondents indicate

they are very concerned about the regulatory focus and

pressure at levels unprecedented for this energy sector

(Figure 8).

Figure 8

What do you see as the THREE most significant issues facing the natural gas pipeline industry during the next

three to five years? (Pipelines)

82.0 % Sustained growth in demand for natural gas

Regulatory uncertainty

56.0 %

48.0 %

Safety and system integrity

24.0 %

Sustained growth in natural gas production

22.0 %

Cyber security

“Regulatory Uncertainty” breakdown by year

82.0 %

65.3 % 2014 2015

Source: Black & Veatch

26 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


ACTIVISTS ENGAGE REGULATORS AND INDUSTRY

Pipeline projects are receiving greater attention from

environmental and safety activists as owners attempt

to build infrastructure to meet the rising demand for

gas power generation and liquefied natural gas (LNG)

exports. Environmental activists have recently turned

their attention to FERC’s extensive pipeline siting process

as an opportunity to slow or block projects.

In particular, environmental groups opposed to increased

supply from shale gas production have tried to disrupt

FERC pipeline proposal meetings through mounting

protests and social media campaigns. This creates

additional hurdles for maintaining project timelines and

has the potential to derail pipeline projects because of

rising development costs and missing key milestones in

contract obligations (Figure 9).

Figure 9

Which TWO items are the most significant barriers of expansion associated with the construction of new

pipeline capacity? (Pipelines)

Most Significant Barriers to the Construction of New Pipelines

4.0 %

Shipper

creditworthiness

78.0 %

Delays

from

opposition

groups

38.0 %

Insufficient

firm

subscriptions

8.0 %

Access to

capital

68.0 %

Regulatory

uncertainty

Source: Black & Veatch

Black & Veatch | 27


COST RECOVERY CONCERNS

A major concern for pipeline owners is how to recover

the costs of complying with proposed environmental

and safety regulations. Capital costs associated with

modernization programs are estimated to be in the

hundreds of millions of dollars per pipeline system.

FERC created a rate filing mechanism allowing pipeline

owners to track costs associated with retrofitting or

modernizing facilities to comply with environmental or

safety regulations. This tracker filing approach provides an

avenue for pipeline owners to recover their costs sooner

instead of making a full rate case filing.

However, there are major trade-offs that pipeline owners

must consider in making a rate filing. FERC outlined that

under the tracker mechanism, pipeline operators cannot

compel their captive customers to subsidize funding

shortfalls in surcharge collections. As a result, the

pipeline’s shareholders must bear some of this cost in the

tracker filing option. Conversely, a full rate case filing may

provide the ability for more complete cost recovery.

As a result, pipeline owners must evaluate each

customer’s contract and rate profile to determine

whether using a tracker mechanism is preferable to using

a traditional rate case filing. However, the owner must

consider the risks versus the rewards associated with the

creation of additional potential earnings issues in a rate

filing and the relatively quick revenue stream generated

by the tracker. This requires a complex data analysis of

customer revenue streams so that the best decision is

made for recovering the capital required to meet the new

proposed regulations (Figure 10).

Figure 10

Please indicate the top THREE regulatory practices you feel would be most helpful in promoting the growth of

natural gas pipeline infrastructure and the ability of a pipeline to generate satisfactory earnings. (Pipelines)

Procedures that reduce the

time required to receive

authorization to construct

pipelines projects

75.5 %

76.0 %

Regulatory policies that

promote stable cash flow

30.6 % 48.0 %

Allowing pipelines and shippers

to enter into contracts for

bundled pipeline services

28.6 % 38.0 %

Greater flexibility to recover

large one-time costs

34.7 %

34.0 %

Market responsive return

on equity policies

30.0 %

36.7 %

2014 2015

Source: Black & Veatch

28 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


SHIFTING CUSTOMER PROFILE REQUIRES

STRATEGIC REGULATORY SOLUTIONS

In addition to increasingly complicated regulations,

pipeline system owners are experiencing an ongoing

major shift in their customer bases. Historically, local

distribution companies and heavy industrial users

comprised the greatest share of the customer rate base.

With new regulations and the increase in U.S. natural

gas production, this customer base is shifting heavily to

electric generators and LNG exporters. LNG exporters

present a special challenge for pipeline operators

since they use a different contractual approach for gas

pipeline delivery that owners must navigate (Figure 11).

This approach requires LNG exporters to secure longterm

(e.g., 20 years) firm transportation contracts for

significant gas quantities to the terminals to ensure the

ability to meet their liquefaction obligations. Generally,

the terminal’s operating characteristics require that

the delivering pipeline provide substantial operational

flexibility, such as pressure guarantees and load

management support.

Pipelines have a long history of commitment to safety

and will spend the capital required to comply with the

new regulations. FERC has acknowledged its role in

providing pipelines with the opportunity to recover the

capital spent to maintain the natural gas grid. Natural gas

pipeline owners will need to carefully deploy their capital

in maintaining high safety standards and protecting

shareholder value.

Figure 11

What do you see as the top TWO growth markets for pipeline companies over the next three to five years?

(Pipelines)

Electricity generators

68.0 %

79.6 %

LNG exports

66.0 %

73.5 %

Not asked in 2014

Exports to Mexico

32.0 %

Industrial load

14.0 %

24.5 %

LDCs and small

distribution companies

10.2 %

12.0 %

2014 2015

Source: Black & Veatch

Black & Veatch | 29


PERSPECTIVE: GLOBAL

Opportunities Exist in Time of Global Gas,

Commodity Uncertainty

By Hoe Wai Cheong

30 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


The prolonged drop in oil prices continues to change the outlook for the

global gas sector, including future infrastructure investment decisions.

Not all prospects are gloomy, however.

This year’s report reflects a softening outlook on the

growth prospect of the U.S. natural gas industry between

now and 2020 with significantly fewer respondents “very

optimistic” (27.7 % in 2015 falling from 45.4 % in 2014) and

a rise in “neutral” respondents (14.3 % up from 5.8 % )

(Table 2). Although yet to directly impact the U.S. gas

industry, what we are seeing emerge is a new economic

normal that is affecting the global gas industry with a

shift from a sellers’ to a buyers’ market. This shift will see

winners and losers.

As recently as 18 months ago, optimism was high

regarding the supply of gas, particularly in the form of

liquefied natural gas (LNG) from North America to Asia.

The shale gas boom meant that a new, abundant

lower-priced Henry-Hub-traded gas supply was

available to export.

Demand in Asia for LNG was also robust. There was a

growing demand for an alternative fossil fuel post the

Fukushima tragedy and China’s continued growth and its

hunger for energy represented a potentially huge market

for imported LNG. Critically, indexed against the price

of crude oil, Asia’s considerably lower gas price meant a

sizeable arbitrage opportunity existed for shipping cooled

natural gas from North America to Asia’s shores.

A NEW NORMAL

The oil price slump, a softening of the Chinese economy

and recent thawing of opposition to nuclear power

means that today the demand and price for gas in Asia

has weakened.

Outside of long term contracting, the spot market,

although seasonal, is often a reasonable indicator of

demand. For seven consecutive months in 2015, between

March and September, prices on Platts’ Japan Korea

Marker ranged at $7 to $8/MMBtu (one million British

Thermal Units). This contrasts with (winter) prices from

recent years beyond $15/MMBtu rising up to $20 MMBtu

in early 2014 and also shows a convergence of pricing with

European hubs’ prices.

Demand could be further hit in Japan. At the time of

this writing, power generation had begun at Japan’s

Sendai nuclear facility in August ahead of resuming full

operations in September. Similar restarts of other nuclear

facilities in Japan (and Korea) would see a falloff in LNG

demand from what has been the world’s largest importer

of LNG and accounts for more than a third of the total

LNG trade worldwide.

The supply scenario is evolving also. The global LNG

market is tipping into a state of structural oversupply

as we move to 2020. Worldwide, according to the

International Energy Agency, supply of LNG already

exceeds demand. Global LNG production capacity stood

at 14 trillion cubic feet in 2014 , already higher than

demand of nearly 12 trillion cubic feet.

Black & Veatch | 31


The last few years’ dash to supply gas to Asia prompted

a glut of liquefaction capacity development particularly

in Australia and North America. By end of 2016, the first

wave of increased supply from a number of these projects

in Australia, Malaysia, Indonesia and the first US export

trains at Sabine Pass will be in operation.

Most of these projects, however, are already committed

to buyers as part of long-term negotiated contracts.

One of the biggest near-term effects will be to reduce

Asia’s reliance further on the spot market, leading to

potentially even lower trading prices in Asia and a shift

of these cargoes to trading markets in Europe. This may

also weaken the need of European buyers on pipeline

gas from Russia and other locations. In addition, it would

lend a strong hand to buyers’ negotiating long-term

contracts from the second or third wave of liquefaction

projects both potentially delaying these projects as well

as reducing price. We also foresee the terms of long-term

deals evolving in favour of buyers in terms of flexibility

volume and pricing.

Adding further to this picture is the near certainty that

economic sanctions will be lifted on Iran in the months

ahead. This is likely to see a further abundance of gas

(and oil) from Iran looking to take advantage of new

economic freedoms. Home to some of the world’s largest

reserves including the giant South Pars gas field, the

government is looking to take advantage of post-sanction

export deals, having already met with official delegations

from Korea and Japan, for example, in August. The

discovery of gas resources off Egypt will also in time add

further supply to the market.

OPTIMISTIC PICTURE OF DEMAND

OVER THE LONG TERM

Good visibility of future supply can be attained given the

long lead of construction timelines for importing and

exporting infrastructure. In contrast, this same visibility is

not available when determining the projection of future

demand.

Despite near-term threats to demand for LNG in Asia,

an optimistic longer term view would hold that demand

is still under-developed. In 2013, LNG accounted for

only 5 percent of Asia’s total energy consumption and

represents a considerable future growth prospect.

Asia’s geography provides clues to long-term appetites

for LNG. Sea separates most demand centers from

supply centres whether they are in Asia (even sometimes

within the same country) or from further afield locations.

LNG, therefore, has a strong possibility of remaining a

high-demand, safe-to-transport low carbon-emitting

fossil fuel product in Asia.

Beyond power generation too, LNG has other industrial,

commercial and residential uses. One such emerging use

is as a bunker fuel in shipping.

BUNKER FUEL DEVELOPMENTS

The international Marpol Annex VI maritime emissions

standards are beginning to prompt change. Restrictions

on emissions like sulfur and nitrogen oxide will tighten

in 2016 within designated emission control areas (ECAs),

including the waters surrounding North America. In a

move to comply with these regulations TOTE is deploying

the world’s first container ships fueled by LNG in favour of

costly high-grade diesel upgrades or installing scrubbing

technology, viewed by some as of-yet not adequately

advanced to meet the regulations.

Moves in Singapore this summer boosted this sector

further. Singapore is the world’s largest ship refueling

destination with over 42 million metric tons of bunker

fuel sold to vessels arriving at the city state in 2014. The

Maritime and Port Authority of Singapore launched its

first Request for Proposal (RFP) for interested parties to

apply for a LNG bunker fuel supply license in July. LNG

fueling facilities are also being built at major Korean ports

to help the shipbuilding giants of Samsung, Hyundai, and

Daewoo capture that market.

32 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


LOWER CONSTRUCTION COSTS

The prolonged oil price drag is also having other impacts

on the broader economic situation. Developers stepping

back will see opportunities to avail of the lower general

commodities prices. For example, low iron ore and, in

turn, steel prices mean construction costs are lower. Given

the coinciding oil, gas and mining sector slowdowns,

fierce competition prevails within the construction and

engineering sector for companies to compete for EPC

contracts. All this means that capital costs for developers

to build should be lower than before.

WHY ARE LNG INVESTMENTS NOT SLOWING YET?

Finally, if we step back and look across the industry,

we are not seeing today as many LNG projects being

postponed compared to the broader trend facing the

upstream oil & gas sector as a whole. Developers are

continuing to press on. Demand within the LNG market is

unlikely to be saturated and many developers in advanced

stages of project development are conscious of losing

momentum against other developers who have also

made commitments to the race to supply LNG over the

next three to four years.

The shale gas boom has not gone away either. With

NYMEX Henry-Hub prices averaging around $2 to $3/

MMBtu, the arbitrage opportunity of North American

projects, whether supplying Europe or Asia or elsewhere

may still remain attractive.

Floating liquefaction may also remain appealing to

developers globally, given the capital gains from such

an emerging approach to processing — they are proving

faster to build and more cost effective overall. The

mobility of such a solution may also prove advantageous

as the global dynamics of spot trading continue to evolve.

What is certain is that the market for LNG is changing. As

long as gas prices remain segmented across the world,

value for developers remains; a real market opportunity

will exist if developers adapt their thinking to this

emerging scenario. In some cases, given the broader

economic squeeze playing out today, counter-intuitively,

this might indeed be a good time for developers low-indebt

to invest in the right project.

LNG investments must also be projected out at a

minimum of three to four years into the future, given the

average timelines to build and then supply customers

with LNG. The picture being painted of future supply is

more certain than how demand will evolve.

The restart-up of nuclear power in Japan and Korea

could still be a long way off. It is still very early in the

restart process and public opinion and political will is by

no means certain. A nuclear reactor back on line after a

complete two-year blackout is significant but there are 42

remaining nuclear reactors, public concerns throughout

Japan and elevated safety and compliance standards to

meet. Recent reports have already emerged speculating

that only seven such reactors will be restarted, down from

previous estimates of 14. Lessons from the struggles that

administrations in Taiwan have faced in developing its

own new nuclear facility over the past decades should be

heeded.

The picture being

painted of future

supply is more certain

than how demand

will evolve.

Black & Veatch | 33


What is certain is that the market for LNG

is changing. As long as gas prices remain segmented

across the world, value for developers remains; a real

market opportunity will exist if developers adapt their

thinking to this emerging scenario.

34 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Black & Veatch | 35


OPPORTUNITIES

FOR GROWTH

Optimism Runs

High Among

Local Distribution

Companies

By Ron Amen

and John Taylor

While natural gas local distribution companies (LDCs) are dealing

with tough reliability, aging infrastructure and expansion challenges,

they remain optimistic about the future. The vast majority of survey

respondents are either very optimistic or optimistic about the industry’s

growth prospects between now and 2020. This confidence is directly

tied to how the industry is addressing some of its most pressing

concerns.

The top five industry issues reported by LDCs are, in order of ranked importance: safety,

aging infrastructure, available pipeline capacity, gas supply reliability, and rate and

regulatory certainty. These issues are being addressed through various means and

related business decisions of LDCs. While safety has always been a top priority, and

we are confident it will remain on top, other priorities may fluctuate with the changes

in gas market economics. The focus on aging infrastructure, pipeline capacity, supply

reliability, and rate and regulatory certainty reflects the current dynamics of the market —

consumers want reliable access to natural gas. Companies want to provide that reliable

access but need to make sure the rate and regulatory mechanisms are in place to do so.

Increasingly, we are seeing evolving state legislative and regulatory policies throughout

the United States, largely due to wholesale market economics that are creating

compelling opportunities for reaching customers who previously had no natural gas

service. Currently, 35 states have some form of gas expansion initiatives either by the

utilities themselves or facilitated by legislation and/or regulatory actions to make

natural gas more available for consumers (Source: American Gas Association and

Black & Veatch research).

36 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


In fact, LDCs are quite active in natural gas expansion programs. Forty-two percent of LDC respondents said their

company had an active expansion program that had either received regulatory approval, is awaiting approval or is under

development (Figure 12).

Figure 12

Does your company have an active natural gas expansion program? (LDCs)

36.1%

Yes, program received

regulatory approval

6.0%

Yes, program filed

with regulator and

awaiting approval

YESNO

15.7%

No, program currently

under development

27.7%

No, no current

expansion plans

Source: Black & Veatch

Black & Veatch | 37


Currently, 35 states have some form of gas expansion

initiatives either by the utilities themselves or facilitated by

legislation and/or regulatory actions to make natural gas

more available for consumers.

With regard to the priority of aging infrastructure

(ranked second by LDCs), more than 63 percent of LDC

respondents indicated their company has an approved

capital cost recovery tracker or accelerated infrastructure

cost recovery mechanism. Indeed, the percentage of

respondents indicating they have a cost recovery tracker

has increased from 46 percent in 2013 and 53 percent in

2014, a clear signal these mechanisms are becoming even

more prevalent (Figure 13).

The growing participation by LDCs in new pipeline projects

upstream of the city gate are particularly important to

ensure that as new pipelines are built they will serve the

utilities’ market areas so that the incremental capacity

will be there to reliably support long-term growth. It is

becoming a strategic move for utilities to be involved in

those pipelines as an equity partner or long-term capacity

holder.

While LDC respondents indicated that pipeline capacity

was their second highest issue, the geographic focus was

on the New England and Mid-Atlantic regions. Industry

participants’ responding to the survey felt the New

England market would be most in need of incremental

natural gas pipeline capacity over the next five years (59.8

percent of respondents). LDCs have become increasingly

more involved in developing interstate pipelines from

shale gas supply basins. New England, Mid-Atlantic

and Southeast LDCs, for example, are contracting for

incremental long-term firm capacity or taking equity

positions in pipeline ventures into their regions.

The reported optimism among the LDC respondents

may be due in part to the success LDCs are having with

regulatory support for natural gas expansion programs

and capital cost recovery mechanisms. These programs

directly address the most important issues of the LDC

survey respondents — replacement of aging distribution

infrastructure and increased reliable access to natural gas

for new customers — and do so by providing more rate and

regulatory certainty for the recovery of the related capital

investment. The challenge remains particularly acute for

smaller-sized utilities, which may not or do not have these

regulatory mechanisms in place at the same rate as larger

utilities.

38 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Figure 13

Does your company have an approved capital cost recovery tracker or an accelerated infrastructure cost recovery

mechanism to recover the cost of distribution pipeline replacements? (LDCs)

Yes

46.3 % 53.7 % 63.1 %

No, but my organization is

currently planning to request

approval of a tracker

10.2 %

5.1 %

3.6 % 35.2 %

No, and my organization has

no plans to request one

22.6 %

31.6 %

2013 2014 2015

Source: Black & Veatch

Black & Veatch | 39


Pipeline Expansion

Critical As

Companies Organize

To Promote Benefits

By Denny Yeung

and Rick Porter

The extended favorable pricing of natural gas relative to other energy

sources continues to feed the demand for increased deliverability of

gas to fuel-hungry markets. Satisfying this demand is limited by both

the takeaway capacity from producing regions and the deliverability to

consuming areas. Thus, it is no surprise that expansions of mainlines

and laterals on the interstate pipeline system are identified by industry

participants (59.2 percent and 52.1 percent) as the type of capacity

most needed to serve emerging gas demand (Figure 14).

New England is ground zero of this capacity shortage, identified by nearly 60 percent

of respondents as having the most critical need of incremental delivery capacity over

the next five years, with the Mid-Atlantic and Southeast markets immediately following

(Figure 15).

The need for incremental takeaway capacity in the Mid-Atlantic market is centered on

the projected growth of the Marcellus and Utica shales (Appalachian). Lower oil and gas

prices may have slowed drilling activity and dampened near-term expectations, but many

survey respondents still expect it to be the most prolific basin by 2020 (Figure 16). The

need for increased gas pipeline capacity to satisfy power generation load growth was also

identified as one of the overriding concerns in Black & Veatch’s 2015 Strategic Directions:

U.S. Natural Gas Industry report.

Figure 14

What types of incremental natural gas pipeline capacity will be most needed to

serve emerging gas demand?

Interstate pipeline

mainline expansions

59.2 % Interstate pipeline laterals

52.1 %

37.3 %

29.2 %

Local Distribution Company (LDCs)

systems reinforcements/expansions

Greenfield pipeline additions

15.9 %

Don’t know

Source: Black & Veatch

40 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Figure 15

Which of the following markets will be in need of incremental natural gas pipeline capacity over the next five

years? (North American Respondents)

1.8 %

Rockies

22.9 %

Midwest

59.8 %

New England

14.6 %

West Coast

31.8 %

35.4 %

Mid-Atlantic

Southeast

19.6 %

30.1 % Mexico 12.5 % Canada 12.5 % Don’t know

Gulf Coast

Source: Black & Veatch

Figure 16.

Which North American gas supply basin will be the most prolific by 2020? (North American Respondents)

6.6 %

Permian

1.5 %

WCSB

1.8 %

Rockies

20.3 %

Dont know

60.2 %

Appalachian

9.6 %

Gulf Coast

Source: Black & Veatch

Black & Veatch | 41


Interestingly, the survey also showed that, compared to

the 2014 report, the urgency expressed by respondents

for adding incremental capacity dropped off in every

major market area — by nearly 18 percentage points for

New England, 14 points for the Mid-Atlantic and nearly 10

for the West Coast.

What’s going on?

It may be that respondents perceived “incremental” as

something in addition to the various major projects that

have already been announced. There has also been

conflicting information, particularly coming from New

England, where different studies have frequently come

to different conclusions about the need for capacity. Or,

it may be that the announcement of numerous pipeline

projects has calmed the anxiety of the industry as

attention is focused on securing regulatory approvals for

the proposed projects.

That last point may be worth consideration. The two

factors that pipeline respondents felt were the most

significant barriers associated with the construction of new

pipeline capacity were delays from opposition groups, 78

percent, and regulatory uncertainty, 68 percent (Figure

17). To provide additional guidance for project participants,

Federal Energy Regulatory Commission (FERC) recently

issued a set of guidelines that it expects the pipelines to

follow: check with landowners and the community, know

who you should notify and how to deal with environmental

groups. If an energy company has not checked the boxes,

it is pretty clear that FERC is not going to process the

application to build the pipeline. At the same time, the

interstate pipeline industry is pushing back against the

noisy opposition, rather than letting the activist groups

monopolize the story unchallenged. Industry associations

are finding new ways to reach the public, such as the use

of social media and other venues, while attempting to

reach the landowners first.

The process is in educating the public and engaging in

community outreach sooner than later. Every proposed

pipeline project must include a proactive public and

community relations effort. Even FERC experienced

the activist push at its meetings and has seen everyday

citizens become unexpected interveners in routine filings.

Interstate gas pipelines were built to serve the local

distribution companies (LDCs), but the market is

changing. Historically, LDCs bought all their supply from

pipelines, with all gas delivered to the city gate but, in

1992, FERC Order 636 was issued and unbundled the

pipeline services. This allowed utilities to start buying

at the wellhead and arranging with the pipelines for

transportation. Today, industry participants believe that

the markets of the future will depend on power generation

and liquefied natural gas exports.

The model will have to change once again.

42 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Figure 17

Which items are the most significant barriers of expansion associated with the construction of new pipeline

capacity? (Pipelines)

Delays from opposition groups

71.4 % 78.0 %

Regulatory uncertainty

57.1 % 68.0 %

Insufficient firm subscriptions

38.0 %

46.9 %

Shipper creditworthiness

4.0 %

18.4 %

Access to capital

4.1 % 8.0 %

2014 2015

Source: Black & Veatch

Black & Veatch | 43


Global Markets

Shaping the Future

of North American

LNG Exports

By Deepa Poduval

In the past decade, the North America LNG market has been subject to

significant periods of volatility. From initial plans for the development

of import terminals along both coasts, Mexico and even Long Island

Sound in the mid-2000s, to multi-billion dollar capital investments

focused on export facilities, the sector has been transformed by market

factors. Though still viewed as one of the more bullish opportunities

overall for domestic gas, global growth concerns, the drop in oil

prices and expanding supplies from new market entrants are forcing

investors and potential LNG customers to reevaluate their capital

allocation strategies.

As recently as a year ago, the opportunity to earn long-term, attractive returns from

the sale of low-cost domestic natural gas resources to international markets attracted

LNG developers and investors alike. Rising demand in the Asia Pacific region, including

Japan and China, led many international LNG customers to seek to lock in natural gas

contracts given upward pricing momentum through June 2014. However, with LNG prices

indexed to oil prices in many markets, as prices retreated below $75 a barrel, China’s

economy slowed and Japan moved ahead with plans to restart nuclear power facilities,

the arbitrage opportunity for North American suppliers began to wane.

44 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Figure 18

What do you see as the biggest impediment to U.S. LNG exports? (U.S. Respondents)

Regulatory approvals

31.1 %

46.6 %

Global competition

17.4 % 22.1 %

Cost structure of projects

14.9 %

15.1 %

Geopolitics

2.5 % 11.5 %

Low global market demand

1.8 % 9.0 %

2014 2015

Source: Black & Veatch

These concerns were reflected in our survey results. In

contrast to the 2014 Strategic Directions: U.S. Natural Gas

Industry report where regulatory approvals for license

applications were perceived as the largest impediment

to exports by a wide margin, survey respondents are

increasingly concerned about the effects of geopolitics,

competition, and low market demand (Figure 18).

One of the most interesting geopolitical issues is the

relationship between Russia and China. Until recently,

China was seen as a significant potential source of

demand for U.S. LNG supplies. While those estimates

remain fairly aggressive, China has sought supply from

elsewhere, including Australia and Russia. Russia and

China have entered into a number of transactions as

Russia strives to serve growing demand in China and

decrease its dependence on the European Union. This

relationship and its potential effect on U.S. markets

creates an interesting dynamic for U.S. LNG.

Stateside, U.S. LNG developers are entering into a phase

of the market where excess supply is affecting near and

mid-term planning. Those already in queue to enter

the LNG market may opt to slow or halt activity until the

global market begins to show signs of recovery from a

demand perspective.

Black & Veatch | 45


U.S. LNG developers

may opt to slow or halt

their plans until the

global market begins

to show signs of

demand recovery.

LNG developers recognize that there is a market

slowdown which makes it more challenging to be

successful now than it was two or three years ago. There

will, however, be opportunistic projects that will go

forward. In this climate, the sector is increasingly seeing

trading houses and other investors taking the place of the

traditional end users from a demand perspective.

Geopolitical and market challenges aside, some optimism

prevails. In the U.S., utilities that have historically seen

LNG as a competing source of demand are today more

comfortable about the level of U.S. natural gas resources

(Figure 19).

U.S. LNG developers recognize that the market is tapping

the brakes from one year ago, but they remain optimistic

about the potential for additional LNG projects to secure

long-term buyers and agreements. By its very nature, the

LNG marketplace will always be subject to geopolitics as

well as regional economics. Investments decisions today

must be made with a long-term perspective and an eye

beyond 2015.

46 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Figure 19

On a 5-point scale, where a rating of 5 means “Significant Impact” and a 1 means “No Impact At All,” please

rate the potential impact of U.S. LNG exports on the following. (U.S. Respondents)

3.63 Increased shale gas production

3.49

3.26

3.07

3.03

2.30

Decrease in global LNG prices

Increase in U.S. natural gas price

Increase in U.S. economic benefit — GDP

and jobs in 10-20 years

Increase in U.S. economic benefit — GDP and

jobs in 5-10 years

Loss of U.S. manufacturing and industrial jobs

Source: Black & Veatch

Black & Veatch | 47


PERSPECTIVE:

INDIA

Urbanisation,

Industrialisation

Driving India’s

Demand for Power

By Anand Pattani

48 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


India is already among the world’s largest energy consumers. Urbanization,

industrialization — and government’s commitment to 24/7 energy access

for all — mean India’s need for power will continue to grow. As Power

Minister Piyush Goyal observed recently, “I am confident that in the next

seven years or so, India will be able to double its electricity generation from

one trillion units to two trillion units.”

As a result of substantial domestic reserves, coal

dominates the country’s energy feedstock portfolio. Coalfired

generation accounts for approximately 60 percent of

India’s energy. The remainder is generated by a mix of oil,

gas, nuclear, hydroelectric and renewables.

While coal will remain important for the foreseeable

future, use of other feedstocks will grow. Power

generation from coal has suffered from fuel shortages

caused by cancellations in coal block auctions and other

supply-side challenges. Additionally, the volume of fuel

required to meet demand forecasts means alternatives to

coal are necessary.

Natural gas will become increasingly important. Demand

is forecast to grow at a rate of 6.8 percent per year

reaching about 713 million cubic meters/day (25 billion

cubic feet/day) by 2029-2030, up from 227 mcm/day

(8.0 bcfd) in 2012-2013. This includes the fertilizer sector

as well as power generation.

Natural gas offers several attractions. Compared to the

average emissions from coal-fired generation, natural gas

produces half as much carbon dioxide, less than a third

as much nitrogen oxides and 1 percent as much sulfur

oxides, according to the U.S. Environmental Protection

Agency.

Power generation typically requires a lot of water, which,

as India faces another poor monsoon, is a serious

consideration. The burning of natural gas in combustion

turbines requires comparatively little water. However,

natural gas-fired boiler and combined cycle systems do

require cooling water.

Of the three fossil fuels, natural gas offers power station

operators the shortest startup time. This means a gasfired

power station can quickly provide extra electricity

when there is an increase in demand.

Currently, India has about 24,000 megawatts (MW)

of gas power stations, constituting nearly 10 percent

of the nation’s generation capacity. Insufficient gas

supplies pose problems for India’s gas power stations.

To tackle this, the government recently approved a

policy framework for mixing imported gas with supplies

from domestic fields to fuel 14,000 MW of gas-fired

generation capacity, which is inactive due to a lack of fuel.

The framework should also benefit power plants with

a combined capacity of 9,000 MW that are running at

suboptimal levels because of fuel shortages.

Black & Veatch | 49


India is the world’s fourth largest LNG importer;

according to Moody’s, India’s LNG imports are set

to more than double over the next five years to

24 million tons per year by 2020.

India holds less than 1 percent of the world’s natural gas

reserves, and the development plan for them has not

progressed as desired. Lower than anticipated output

from the Krishna Godavari Dhirubhai 6 (KG-D6) block in

the Bay of Bengal is not expected to change in the short

term. As a result, the country is seeking to significantly

increase the amount of imported gas.

Importing gas via overland pipelines is not viable in the

short term. Challenges include the need for greater

stability in Afghanistan and the improvement of security in

Pakistan, in addition to other issues concerning financing

of the project and the price of the gas. Successful

completion of the Turkmenistan-Afghanistan-Pakistan-

India (TAPI) pipeline will help, but gas is not expected to

flow until 2018 at the earliest.

These factors help to make increased imports of liquefied

natural gas (LNG) more attractive. India is the world’s

fourth largest LNG importer; according to Moody’s, India’s

LNG imports are set to more than double over the next

five years to 24 million tons per year by 2020 from the

10.7 million tons in the financial year ended March 2014.

Historically, the majority of India’s LNG, 80 percent in

2012 and 2013, has come from Qatar, with the remainder

sourced from Yemen, Nigeria, Egypt, Australia and

Algeria.

The drive for LNG has two main infrastructure

implications. One is the need to develop the gas

distribution network, the cost of which has been

estimated at Rs 35,000 crores .*

The second is the need to increase the number and

capacity of terminals able to receive and re-gasify tankerborne

LNG. India’s LNG import and regasification capacity

is forecast to increase from the current operational

capacity of 17 million tons per year to around 55 million

tons by 2025.

Existing receiving terminals are located at Dahej, Hazira,

Dabhol and Kochi, all of which are located on the west

coast. There are plans for new facilities at Mundra on the

west coast and two facilities on the east coast. Earlier

this year Indian Oil Corporation Ltd. (IOCL) awarded

the engineering, procurement and construction (EPC)

contract for the first east coast terminal, at Ennore, to a

Black & Veatch-led consortium with KSS Petron India.

In addition to onshore import terminals, there will be a

role for ship-borne floating LNG (FLNG) infrastructure.

A number of floating storage and regasification

units (FSRUs) are in advanced planning stages, and

Black & Veatch India professionals have major roles in

FLNG EPC projects for Golar and Exmar.

Creating east coast terminals will help facilitate

diversification of India’s LNG suppliers. Australia is likely

to have a greater role. In addition, as a result of the

development of shale gas reserves, GAIL has import

agreements with two U.S. exporters. Imports from these

two suppliers alone could amount to 11 percent of India’s

projected LNG imports, and further U.S.-India export

agreements are likely.

* A crore is a unit in the Indian numbering system representing 10,000,000.

50 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


India plans to create 100 smart cities in the next five years. Among the smart cities’ aims is a 24/7 electricity supply derived from

“clean” fuels. LNG can help meet these aims.

Collocating new infrastructure offers a synergy between

regasification terminals and gas turbine power stations

by utilizing LNG’s “cold energy” to chill gas turbine

inlet air. This makes both regasification and gas turbine

power stations more efficient and cheaper to operate.

The combustion turbine’s inlet air provides the heat

energy to vaporize the LNG using a glycol circulation loop

connecting LNG vaporizers and coils in the combustion

turbine air inlet ducts. This gives a significant increase in

power station output and efficiency.

This synergy was demonstrated on a project near Ponce,

Puerto Rico. Black & Veatch provided engineering and

procurement services for a 507 MW combined cycle

power station and integration with a 160,000 cubic meter

(m3) storage capacity LNG terminal.

LNG has become a global commodity on a scale

previously unprecedented. The maturation of the market

offers a reliable source of fuel. Natural gas has half the

carbon dioxide (CO 2

) emissions of a conventional coalfired

power station.

The Smart Cities Mission envisages solar energy,

including rooftop solar, playing a meaningful role in

providing energy for the new urban centers. Renewable

energy, and especially distributed generation such

as rooftop solar, can have a profound impact on daily

demand curves. The ability of gas-fired power stations to

ramp up more quickly than those using other feedstocks

means they are a viable baseload option — able to

respond quickly to increases in demand — for smart cities

using power from renewable sources.

LNG FOR SMART CITIES

Additional reporting by Alap Shah, Turbine Technologies

Manager, Black & Veatch

India plans to create 100 smart cities in the next five years.

Among the smart cities’ aims is a 24/7 electricity supply

derived from “clean” fuels. LNG can help meet these

aims.

Black & Veatch | 51


Gas-Fueled Power

Generation Expected

to Grow, Propelled

by Public Demand

and Government

Regulation

By Alap Shah

In the race to reduce carbon footprints and replace coal as a primary

energy source, much has been made of an alleged battle between

natural gas and renewables. The competition among progressively

cheaper energy sources, some say, is one natural gas is bound to lose

despite its low cost, plentiful supply and scalability. Solar and wind

represent practically endless energy sources, and the costs of their

delivery technologies are falling.

But a more astute market read — fueled by recent regulatory mandates, the rise of

microgrids and gas-fueled generation, and moves by utilities to position natural gas

alongside renewables in balanced portfolios — may find the two sectors growing in

conjunction for decades to come.

The prospects for natural gas in this race brighten considerably when one considers

that natural gas is no slouch when it comes to distributed energy. Natural gas-fueled

microgrids and microturbines, which are beginning to find use by large manufacturers

as a legitimate and low carbon footprint power source, are entering service and, in some

cases, relegating the main grid to backup-source status.

52 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Natural gas-fueled microgrids and microturbines, which

are beginning to find use by large manufacturers as a

legitimate and low carbon footprint power source, are

entering service and, in some cases, relegating the main

grid to backup-source status.

GROWING OPPORTUNITY IN DISTRIBUTED

ENERGY RESOURCE

Momentum is building across the natural gas industry

for distributed energy resources. More than two-thirds

(67.7 percent) of natural gas service providers viewed the

growth of natural gas distributed energy resources as

an opportunity to grow their business. Only 7.8 percent

viewed this as a threat to their business (Figure 20).

Figure 20

What is your view of the growth of natural gas

distributed energy resources with respect to your

business? (Natural Gas Service Providers)

67.7 %

Those numbers may rise as organizations maneuver

to meet emissions reduction goals set out in the Clean

Power Plan (CPP). The CPP proposes state-by-state

emissions levels for existing power plants, with the

cumulative goal of reducing nationwide carbon emissions

by 32 percent by 2030.

Among the CPP’s objectives is one that involves going

above 70 percent capacity in the existing combined cycle

plants, up from the current 48 percent. The CPP will

require plant owners to implement significant equipment

upgrades to boost efficiency. Combined cycle facilities

that are around 15 years old are strong candidates for gas

turbine upgrades, along with an associated upgrade of the

steam turbine generator, heat recovery steam generator

and the balance-of-plant equipment.

7.8 %

14.2 %

Forecasted growth in capacity, combined with an

abundant supply of natural gas and a need to integrate

renewable portfolios, will drive future investments in

natural gas-based power generation projects. The CPP,

despite its uncertain legal future in the states, will likely

prompt investments in power generation, primarily to

combined cycle plants and renewables.

Opportunity

to grow my

business

Source: Black & Veatch

Threat to my

business

No impact to

my business

Black & Veatch | 53


Other factors will play a role, led primarily by price

stabilization. Natural gas production methods, including

hydraulic fracturing, are becoming more accepted and

are expected to keep production levels high and prices

steady. Even with higher consumption in power plants,

such stabilization is expected to give investors confidence

in the role of natural gas going forward.

A recent Black & Veatch Energy Market Perspective

forecast for U.S. generating installed capacity predicts

combined cycle will expand its share from 21.8 percent in

2014 to 38.2 percent in 2038, while combustion turbine

(simple cycle) will change by only a few points over that

span, moving from 13.5 percent in 2014 to 15.6 percent in

2038.

Most sectors within the natural gas industry — from

producers to local distribution companies (LDCs) to

industrial users — see the opportunity (Table 4).

FROM COMPETITOR TO COMPLEMENT

Plant owners should ensure that future turbines meet

efficiency standards as part of their risk management

process. Owners should also focus on negotiating longterm

service agreements, a key point toward minimizing

life cycle costs of the plant.

Overall, the combustion turbine market is bright, although

some factors have yet to materialize. While long-term

pricing appears stable, a slowly recovering economy has

led to uncertainty in fuel pricing, lack of adequate pipeline

capacity to move the gas and a lack of load demand from

industry and households.

Demand, ranging from residential consumers to large

manufacturers, for lower emissions energy sources is

positioning natural gas and renewable sources to be

leading power generation sources moving forward.

Technological advances are allowing natural gas to

provide baseline power that can support the intermittency

of solar and wind when the sun isn’t shining or the wind

isn’t blowing.

Table 4

What is your view of the growth of natural gas distributed energy resources with respect to your business?

(Natural Gas Service Providers)

View of the Growth

of Natural Gas

Distributed Energy

Resources

Natural Gas

Producer

Natural Gas

Gathering/

Processing

By Natural Gas Services Provider Type

Interstate/

Intrastate

Pipeline

LDCs

Utility/

Regulated

Electricity

Generator

Industrial

User

Opportunity to grow

the business

80.0 % 72.2 % 61.2 % 73.0 % 61.5 % 47.8 %

Threat to the

business

3.3 % 2.8 % 12.2 % 5.6 % 23.1 % 4.3 %

No impact 10.0 % 8.32 % 10.2 % 12.4 % 11.5 % 39.1 %

Source: Black & Veatch

54 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


The Clean Power Plan proposes

state-by-state emissions levels

for existing power plants, with

the cumulative goal of reducing

nationwide carbon emissions

by 32 percent by 2030.

Black & Veatch | 55


PERSPECTIVE: AFRICA

Natural Gas Is Critical To

Unleashing Africa’s Full

Development, Industrialisation

Potential

By Webb Meko and Joseph Mahendran

56 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


With an estimated 7+ percent of the world’s gas reserves and growing

infrastructure needs, Africa’s under-explored abundant natural gas

reserves represent one of the critical keys for unlocking the continent’s

full development and industrialisation potential.

Large finds in Mozambique and Tanzania, in particular, which account for about half of gas-fueled power potential in

Africa, acknowledged prospects in Angola, and significant proven and developing reserves in Nigeria are set to change

the face of the region.

Among key targets of development, heightened gas expectations are focused on:

Mauritania

Its offshore gas

discovered

earlier this year

reportedly

holds between

5 and 12 Tcf of

gas — some are

calling it the

largest find in

West Africa.

Nigeria

Tanzania

Its known natural gas

reserves increased to

55 Tcf up from 47 Tcf

in 2014 following a

number of offshore

discoveries.

Its exports of Liquefied Natural Gas

(LNG) quadrupled since 2000, ensuring

West Africa leads production.

South Africa

In the Karoo, 19.5 Tcf of shale gas potential

is expected.

Mozambique

Rovuma Basin’s off-shore gas

reserves are estimated at

130.65 Tcf; and its proven

natural gas reserves are at

100 Tcf, making it the

third-largest proven natural

gas reserve holder in Africa,

after Nigeria and Algeria, and

fourth in the world.

Mature African natural gas markets — Algeria, Egypt and Libya to the north — have among the highest concentrations of

Africa’s reserves and are primarily serving domestic demand. Their potential lies in dual production for the region and

export to other markets.

Black & Veatch | 57


African governments are

struggling to meet base-load

demand — often operating

in emergency mode and

drawing on high-cost

technologies and fuel to keep

the lights on.

The Africa Progress Report (2015) notes that African

countries need energy strategies that drive growth, and

reduce energy poverty, while transitioning to a low-carbon

economy.

Interest in gas being displayed by global investors

also represents significant opportunity for local skills

development and the emergence of a thriving gas sector

in Africa that supports localised growth and contributes

to global gas supply. African countries are poised to make

use of the most cutting-edge extraction and production

technologies available, potentially leapfrogging others in

the global gas race.

The fundamental value of natural gas as a fuel lies in

its ability to produce power, from consumer to large

scale industrial applications. Its use as an energy source

for cooking, heating, electricity generation by way of

combustion turbine power plants, vehicle fuel, and

chemical feedstock has profound implications for the

transformation of African lives; and for socio-economic

development.

For example, according to South Africa’s Standard Bank,

LNG will add $39 billion to the Mozambican economy

over the next 20 years, boosting GDP per capita from

approximately $650 in 2013, to $4500, by 2035.

Additionally, Columbia University’s Sustainable

Engineering Lab recently produced modelling that

shows how developing a regional gas grid in eastern and

southern Africa could bring gas to more than 260 major

urban areas across eight countries. This new supporting

infrastructure would benefit 185 million people in urban

areas with possible power and industry expansion to

reach 600 million people throughout the region .

It is also arguably the cleanest burning of the fossil

fuels, reducing emissions while bringing critical power

to underserved areas faster than long-lead time project

alternatives. This is particularly the case for lower income

countries in need of timely, affordable reliable energy.

Still, gas alone is not the silver bullet for Africa, which

needs a complex, supportive policy and planning

environment, adequate energy mix plans and follow

through, and capital and infrastructure. Africa’s future

calls for truly tapping into the potential of gas in the

context of what the International Energy Agency (IEA)

has called the ‘golden age of gas’ — with an estimated

14.13 TCM of potential natural gas pin-pointed throughout

Africa and 600+ Tcf of proven reserves.

The immediate needs are also significant. While aging

energy infrastructure curtails economic expansion,

African governments are struggling to meet base-load

demand — often operating in emergency mode and

drawing on high-cost technologies and fuel to keep the

lights on. Gas may relieve a significant portion of current

pressures, while creating local jobs and increasing the

number of skilled workers.

As an indication of the potential, the natural gas industry

supplies almost a quarter of U.S. energy, making it a

major player in the country’s economy. It also provides

employment for almost 3 million Americans. With the

right planning and investment, a similar energy mix

could develop throughout Africa, with similar significant

benefits.

58 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


This being said, a number of factors external to the continent also

affect its development potential. The fall in commodity prices in 2015,

particularly oil, increasing global gas supply, and persistent economic

uncertainty, coupled with China’s limited growth, mean that there are

often dynamics at play. But, there is no doubt that energy needs are a

constant and that natural gas is cheaper, more consumer friendly, and can

be tapped; provided it forms part of a well-thought out energy mix.

SHALE GAS IS ANOTHER RESOURCE

Shale gas resources lie predominantly in North Africa — concentrated in Algeria, Libya

and Tunisia — but also in the Karoo in South Africa, where industry estimates suggest

that a natural gas industry could boost GDP by as much as $18 billion within the next 15

years, and create up to 328,000 direct and indirect jobs.

Gas could also potentially bridge the electricity supply gap as older coal-fired power

stations are decommissioned. It also solves an economic gap created by a contracting

mining industry. South Africa’s Integrated Resource Plan (IRP) 2010-30 for electricity

leaves room for a greater role for gas, the country must now take advantage of the

opportunity.

HOW BEST TO USE AFRICA’S GAS RESERVES

Debates continue over whether gas reserves serve the continent best as a commodity

for export or whether it should be used within Africa; or if a combination provides the

ideal scenario.

Exporting natural gas from Africa converts the precious commodity into much needed

cash, which in turn contributes to local economies. However, if high priority is given to

utilising natural gas as a local power source, it could drive the industrialisation of Africa;

and thus further long-term economic growth. This view suggests the greater good is

achieved by putting Africa’s gas to work, helping to improve the lives of people in Africa.

This can only happen in the context of well-managed and transparent policy frameworks

and a regulated supporting environment, defined by meaningful gas master plans that

address tax and licensing models, achievable local content requirements and also make

provision for adequate processing and storage facilities, supportive supply and logistic

chains, safety and environment, and skills development.

The careful development and use of gas and supporting infrastructure has far reaching

implications for Africa, including available supply and affordable gas prices for end users,

and the liquidity and power to sustain industrialisation and socio-economic growth of

Africa and better lives throughout the continent.

Black & Veatch | 59


CLOSING

COMMENTARY

North America’s

Natural Gas

Industry: A “Tale

Of Two Cities”

By John Chevrette

Consistent with the oil and gas boom/bust cycles of the last century,

the past 15 months caught many industry participants flatfooted.

Commodity markets roiled as concerns of oversupply and declining

global demand resulted in U.S. oil and natural gas prices consistently

below $50 and $3 for much of the year.

Independent of the market turmoil, 2015 offered a host of market defining events for

the gas industry: the Obama Administration’s Clean Power Plan introduced new doubts

regarding the role of domestic natural gas in the nation’s energy mix based on tangible

differences between the draft and final rules. Safety concerns continued to influence the

operation and development of gas transport and distribution networks. Historic weather

events drove market innovation in PJM, the world’s largest competitive wholesale

electricity market, as the convergence of gas and electricity markets continued.

As we finalized the 2015 Strategic Directions: U.S. Natural Gas Industry report, further

cuts to credit facilities for North American oil and gas producers are expected to be

announced as the financial sector concludes its semi-annual assessment of oil and

gas holdings. The ongoing downward pricing pressure on oil and gas despite major

reductions in the number of active drilling rigs has created the conditions for a major

shakeout of producers. This is particularly likely to impact those carrying high levels of

debt that simply cannot produce oil and gas at current market levels to generate enough

cash flow to service the debt. With global events such as the economic slowdown

in China, reduced gas demand from Japan (the world’s largest market for LNG) and

emerging large scale gas projects in the Mediterranean, Mozambique and elsewhere

coming online in the years ahead, Black & Veatch has little expectation for a pricing

rebound before 2020.

60 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


Though the upstream sector faces the prospect of radical

transformation, the mid- and downstream sectors have

much to be positive about. According to the U.S. Energy

Information Administration, demand for gas in the United

States is expected to grow from 73.5 Bcf/d in 2014 to

76.6 Bcf/d in 2016 driven by key sectors including power

generation, exports to Mexico and LNG exports. Pipeline

activity remained robust at the interstate level, while a

moderation of intrastate activity took hold in the third

quarter. Volume-based pricing models, often on longterm

fixed contracts, continue to insulate many pipeline

service providers from the movements of the commodity

markets.

Similarly, nearly 60 percent of local distribution

companies (LDCs) indicate some level of planning or

implementation of an active natural gas expansion

program. Positive momentum in the housing market,

urban greenhouse gas reduction efforts like New York

City’s “One City, Built to Last” and the Chicago Climate

Action Plan, as well as opportunities to support new

microgrid customers also bode well for the sector.

The CPP proposes state-specific goals based on the

number and type of facilities in each state. Compliance

can be achieved using a rate-based approach, in which the

average emissions of all energy generated must be equal

to or below the state target, or a mass-based system in

which the total level of emissions must be below the

target.

Critically, the EPA did not include generation from new

natural gas-fueled combined cycle resources (NGCC) as

a potential way to reduce CO 2

emissions from affected

sources. Their stated reason for not doing so is that such

assets are long-lived, and adding additional fossil fuel

capacity to the power system is counter to the long-term

goal of reducing CO 2

emissions. However, given that a

combined-cycle gas turbine offers significant reduction

in carbon emissions compared to coal generation and

the continued forecast of low natural gas prices, new

combined-cycle gas turbines are viewed as an attractive

compliance tool. We believe NGCC will be adopted by

states in their compliance plans spurring new gas supply,

processing and transportation demand, but the CPP as

written could limit new generation.

CLEAN POWER PLAN — OPPORTUNITIES

(IN FACT) ABOUND

On August 3, 2015, President Obama announced the

Environmental Protection Agency’s (EPA) final Clean

Power Plan (CPP) rule for reducing carbon dioxide (CO 2

)

emissions from existing fossil fuel electric generating

units . The final rule establishes uniform CO 2

emission

performance rates for coal and natural gas plants based

upon the EPA’s determination of the best system of

emission reduction. It applies to two groups of existing

facilities including electric utility steam generating

units and stationary combustion turbines, with a final

compliance date of 2030.

Black & Veatch | 61


SAFETY, RESILIENCE AND THE MACRO ECONOMY

Safety remains the number one issue of natural gas

industry participants, with significant concern focused

on the status of older transportation and distribution

pipes. LDCs gave significantly higher importance ratings

for safety and aging infrastructure likely due to their

proximity to end use customers and the potential for

new regulations targeting gas leaks. But from a macro

perspective, the interstate pipeline network raises

its own unique concern. Specifically, unlike the more

distributed electric and telecommunications grids

crossing the nation, the interstate gas pipeline system

lacks the redundancies of those networks. As the

United States becomes more reliant on natural gas for

power generation, it is conceivable that we are putting

substantial parts of our economy at risk. To mitigate this

challenge, service providers must identify and remediate

issues with aging infrastructure, expand the capacity of

our aging networks and harden key nodes from external

threats.

CAN WEATHER RESHAPE THE POWER MARKET?

With first edges of winter only weeks away, 2015 saw

PJM strive to address system imbalances exposed by

the Polar Vortex of 2014. During that historically cold

season, the forced outage rate experienced by power

generators across the PJM regional transmission

organization’s footprint approached nearly one-quarter of

the generation assets (22 percent). This represented an

unprecedented level of producers unavailable to deliver

power due to the impacts of extended cold temperatures.

To address this gap, the 2015 capacity auctions (for

2016-2017, 2017-2018 and 2018-2019 delivery years)

required a capacity performance resource to be capable

of sustained, predictable operation throughout the year,

regardless of weather or extreme conditions.

As an incentive, payments for capacity performance

will rise at the same time that new, more stringent

penalties for non-performance are introduced. This latter

development means that for capacity performance units,

a significant portion of their capacity revenues will now

be at risk unless investments are made to enhance fuel

security, reliability and unit flexibility. As a result, we

expect significant exploration of asset purchases and

divestments, facility capital investment and portfolio

transitions as the economics become clearer.

62 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


MANAGING GAS’ BRIGHT FUTURE

Even with an abundance of optimism in the mid- and

downstream markets, capital decisions, particularly longterm

capital commitments for natural gas generation

infrastructure or other generation technologies are more

complicated than ever.

For example, Black & Veatch’s forecast of gas prices

of $4-$5 for the next 10 years doesn’t create a lot of

demand for investment in gas infrastructure from the

equity or debt markets. Increasing supplies and the

quick response capabilities of producers to deploy rigs in

response to price spikes supports forecasts at this level.

On the generation asset side, though PJM is not the

first market to undertake a performance driven capacity

model, its scale, and the increasing reliance on natural

gas generation, may influence other regions to consider

similar reliability measures. This step to address reliability

could also be influenced by the fact that areas most in

need of new generation typically aren’t located near salt

caverns, a traditional resource for natural gas storage, and

surface storage is very expensive.

Internationally, China’s late September announcement

of a cap and trade program may have far-reaching market

effects. As the world’s largest producer of emissions,

the program will target major industries including steel,

cement, paper and electric power, much of which is

powered by coal. Though implementation of the system

will be enormously complex, the effort could provide a

jolt to LNG and other natural gas imports in the mid-term

even as other sectors experience slower growth.

A final consideration as we look ahead is a consideration

of the industry’s aging human capital. Though discussed

across the industry since the early 2000s, the percentage

of industry workers eligible for retirement within the next

five years continues to climb. The oil and gas sector is

particularly susceptible to a retirement boom because

during the last cyclical crash, the industry did not hire

for 15 years creating a lack of 35-50 year olds ready to

assume leadership roles. Though technology would

indicate the industry likely doesn’t have to replace staff at

a 1:1 ratio, the knowledge that will be walking out the door

is significant.

Despite these challenges, it is Black & Veatch’s

view that the North American natural gas industry

will continue to grow and support the next wave of

economic development across the continent and

beyond. We look forward to serving our clients in the

oil and gas and power generation sectors during this

dynamic period of change to find value in the market.

Black & Veatch | 63


LIST OF FIGURES

15 Figure 1

On a 5-point scale, where a rating of 5 means

“Very Positive Impact” and a rating of 1 means

“Very Negative Impact,” what overall impact

do you feel each of the following regulatory

initiatives will have on the natural gas industry?

15 Figure 2

What do you see as the THREE most significant

issues facing the natural gas pipeline industry

during the next three to five years?

17 Figure 3

Which TWO items are the most significant

barriers of expansion associated with the

construction of new pipeline capacity? (All

Midstream, LNG Importers/Exporters and

Merchant Electric Generators)

19 Figure 4

How do you view the increasing focus on energy

system resilience with respect to your system?

(Energy System Resilience refers to the ability

of an energy system to become less vulnerable

to the loss of power and damage to energy

infrastructure related to unforeseen changes such

as extreme weather or growing urbanization.)

20 Figure 5

In targeting investments in system reliability,

have you adopted a risk-based planning approach

that identifies criticality and the likelihood

of failure under extreme weather conditions?

(Natural Gas Services Providers)

21 Figure 6

Causes of Pipeline Incidents

25 Figure 7

On a 5-point scale, where a rating of 5 means

“Very Positive Impact” and a rating of 1 is “Very

Negative Impact,” what overall impact do you feel

each of the following regulatory initiatives will

have on the natural gas industry?

26 Figure 8

What do you see as the THREE most significant

issues facing the natural gas pipeline industry

during the next three to five years? (Pipelines)

27 Figure 9

Which TWO items are the most significant

barriers of expansion associated with the

construction of new pipeline capacity? (Pipelines)

28 Figure 10

Please indicate the top THREE regulatory practices

you feel would be most helpful in promoting the

growth of natural gas pipeline infrastructure and

the ability of a pipeline to generate satisfactory

earnings. (Pipelines)

29 Figure 11

What do you see as the top TWO growth markets

for pipeline companies over the next three to five

years? (Pipelines)

37 Figure 12

Does your company have an active natural gas

expansion program? (LDCs)

39 Figure 13

Does your company have an approved capital cost

recovery tracker or an accelerated infrastructure

cost recovery mechanism to recover the cost of

distribution pipeline replacements? (LDCs)

40 Figure 14

What types of incremental natural gas pipeline

capacity will be most needed to serve emerging

gas demand?

41 Figure 15

Which of the following markets will be in need of

incremental natural gas pipeline capacity over the

next five years? (North American Respondents)

41 Figure 16

Which North American gas supply basin will

be the most prolific by 2020? (North American

Respondents)

43 Figure 17

Which items are the most significant barriers of

expansion associated with the construction of

new pipeline capacity? (Pipelines)

64 | 2015 Strategic Directions: U.S. Natural Gas Industry Report


LIST OF FIGURES CONTINUED

LIST OF TABLES

45 Figure 18

What do you see as the biggest impediment to

U.S. LNG exports? (U.S. Respondents)

47 Figure 19

On a 5-point scale, where a rating of 5 means

“Significant Impact” and a 1 means “No Impact

At All,” please rate the potential impact of U.S.

LNG exports on the following. (U.S. Respondents)

53 Figure 20

What is your view of the growth of natural gas

distributed energy resources with respect to your

business? (Natural Gas Service Providers)

13 Table 1

On a 5-point scale, where a rating of 5

means “Very Important” and 1 means “Very

Unimportant,” please rate the importance of each

of the following long-term issues to the natural

gas industry.

17 Table 2

What is your general outlook on the future

growth of the North American natural gas

industry between now and 2020?

19 Table 3

On a 5-point scale, where a rating of 5

means “Very Important” and 1 means “Very

Unimportant,” please rate the importance of each

of the following long-term issues to the natural

gas industry.

54 Table 4

What is your view of the growth of natural gas

distributed energy resources with respect to your

business? (Natural Gas Service Providers)

Black & Veatch | 65


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