Originally published for customers May 31, 2022.
What’s the issue?
As we have noted before, FERC approved almost no new gas pipeline projects in 2021 as Chairman Glick hit pause on approvals while he waited for a Democratic majority.
Why does it matter?
The lack of approvals not only impacts the plans of the applicants, but also the revenues of those companies that provide services to the gas pipeline industry.
What’s our view?
As we had expected, overall outside spending by gas pipelines in 2021 was comparable to the lows reached in 2020. But based on the lack of approvals in 2021 and the apparent lack of spending on services that typically precede new projects, 2022 and even 2023 could be a very bad year for the revenues of most companies in the gas pipeline economic system.
As we have noted before, FERC approved almost no new gas pipeline projects in 2021 as Chairman Glick hit pause on approvals while he waited for a Democratic majority. The lack of approvals not only impacts the plans of the applicants, but also the revenues of those companies that provide services to the gas pipeline industry.
As we had expected, overall outside spending by gas pipelines in 2021 was comparable to the lows reached in 2020. But based on the lack of approvals in 2021 and the apparent lack of spending on services that typically precede new projects, 2022 and even 2023 could be a very bad year for the revenues of most companies in the gas pipeline economic system.
2021 Was Slightly Worse Than 2020 for Gas Pipeline Company Vendors
In their annual reports filed with FERC, the gas pipeline companies are required to report the names of all providers of outside services in areas including rate, management, construction, engineering, research, financial, valuation, legal, accounting, purchasing, advertising, labor relations, and public relations to whom they paid at least $250,000 in the prior year. Each year the companies that are paid the most across the industry are typically mainline pipeline contractors and Solar Turbines, a wholly owned subsidiary of Caterpillar Inc. that manufactures the gas turbines commonly used in compressor stations throughout the industry. In most years, a handful of mainline construction companies lead the list for total payments, with Solar somewhere near the top. But this year was different in that Solar led the list and was the only company that was paid over $200 million.
When we reported on these expenditures after the 2020 annual reports were filed in Interstate Pipeline Vendor Spending Returns to Normal and Appears to Be Holding, we noted that such spending had peaked at above $8 billion in 2017, fell off precipitously in 2019 to about $5 billion, but seemed to have stabilized at that level for 2020. Overall, 2021 was very similar to 2020.
As seen above, the total spending in 2021 was just slightly lower than in 2020, but that overall number hides some troubling trends. Perhaps the most troubling trend was a precipitous fall in the amount of spending on mainline contractors. This is almost certainly tied to the fact that FERC refused to approve any new projects in time to allow construction to begin in 2021.
As seen above, payments to the biggest mainline contractors dropped by almost one-third in 2021 compared to 2020 and that catapulted Solar to the top of the spending list. In 2020, seven different mainline contractors were paid over $100 million, but in 2021, there was only one such contractor.
2022 and Perhaps 2023 May Be Even Worse
We recently noted in Pipeline Expansion Projects Receive Approvals, But the Glick Commission Backlog Remains that, at its April meeting, FERC approved all of the pending projects that had been put on pause by Chairman Glick as he awaited a Democratic majority. Ironically, all of those projects were approved under the 1999 certificate policy statement after Chairman Glick revoked his 2022 certificate policy statement in response to strong pushback by Congress. However, those approvals may have come too late to allow those projects to begin construction this year, and so we may not see any significant spending on them until 2023.
An additional problem is that while overall outside spending may have levelized for now, the spending in areas that could typically be associated with the planning of larger projects seems to have fallen precipitously in 2021 compared to 2020. As we noted in MVP is Not Alone in Suffering Regulatory Delays That Impact Project Economics, Commissioner Danly has been regularly sounding the alarm that the regulatory uncertainty caused by FERC’s lack of a consensus on how and whether to approve projects may be suppressing the development of projects. The spending in some key areas may be an early indicator that he is correct.
As seen above, spending in four key areas fell dramatically in 2021 compared to 2020. All four of these areas are typically associated with the planning of projects. Long before a project is submitted for approval at FERC, the applicant will typically conduct an engineering study to determine the most efficient facilities to be added to its system to address a particular market need. That study will usually be followed by the hiring of land agents to meet with landowners to obtain access to their property and gauge their interest in providing an easement. That access to the land is necessary for the environmental groups to determine the best routing options given the environmental constraints that may be present. Only then will a project be advanced enough for the employment of the lawyers to begin addressing legal and regulatory risks associated with the project. The fact that spending is down with professionals in all four of these areas could be an early indicator that the number of major projects being investigated has fallen in 2021 compared to 2020, which means we may see fewer projects being proposed later this year and early next year, which could further suppress spending in 2022 and 2023.
The One Bright Spot
In Will Maintenance Capital Become Profit Centers for Pipelines Going Forward?, we noted that while Chairman Glick had paused expansion project approvals, he was approving pipeline and compressor station replacement projects. The annual spending reports indicate that this may be the one bright spot for the service providers to natural gas pipelines.
As seen above, the spending in three key areas that may be associated with such maintenance capital spending all increased in 2021 compared to 2020. Increased spending on station contractors and field service contractors could be an indicator that the companies are increasing their maintenance capital budgets for projects that can be completed under their blanket certificates or with limited approval from FERC. Similarly, inspection services may be associated with increased efforts to identify and prioritize such maintenance projects. We may continue to see increased spending in these areas as pipelines modernize their pipeline systems as long as they can recover such spending promptly through some rate mechanism like those we discussed in Will Maintenance Capital Become Profit Centers for Pipelines Going Forward?