STATE SHOULD NOT ENTER INTO THE GAS PIPELINE BUSINESS, GOVERNOR SAYS
CHEYENNE, Wyo. - In a recent letter to the Wyoming Legislature’s Joint Minerals, Business and Economic Development Interim Committee, Gov. Dave Freudenthal reiterated his support for the Wyoming Pipeline Authority and its work to address the state’s natural gas price differential.
Some believe that in order to increase the price of natural gas exported from Wyoming, the state should acquire pipelines or purchase capacity on existing pipelines. The Governor said he continues to oppose the idea.
“I remain skeptical both as a philosophical matter and in deference to the limitations imposed by the Wyoming Constitution about suggestions that Wyoming become directly engaged in the interstate natural gas pipeline business,” the Governor wrote. “The Wyoming Constitution established clear boundaries between governmental and private sector activities. The government should not try to compete in the private economy.”
Freudenthal said the larger issue surrounding the depressed price of natural gas in Wyoming seems to be assured access to the resource rather than state involvement in the natural gas pipeline business or incentives like severance tax credits for producers.
“While everyone remains frustrated with the pace of the private sector marketplace decisions to develop pipelines, I believe we should continue to support the WPA role in moving those decisions forward,” Freudenthal said. “I continue to support those activities by this office, the Legislature and the WPA which facilitate the operation of a free market economy. This includes actions such as encouraging certainty in resource availability, dissemination of market-clearing information and asking producers and commercial consumers to contract for pipeline capacity.”
The text of the Governor’s letter follows.
August 21, 2008
Senator Grant Larson, Chairman
Joint Minerals Business and Economic Development Committee
P O Box 3490
Jackson, WY 83001
Representative Tom Lockhart, Chairman
Joint Minerals Business and Economic Development Committee
770 East 12th Street
Casper, WY 82601
Gentlemen,
I am in receipt of your August 5, 2008 letter which offers several questions, all of which we have discussed in some detail over the last several years. I am glad to respond in writing since that appears to be your desire. Before addressing your thoughtful and open-ended inquiries, I might share some information we gathered from the Wyoming Pipeline Authority (WPA). According to the WPA, the following pipeline capacity has been added since 2002.
May 02 Trailblazer +325 mmcf/d (Cheyenne to MidContinent)
May 03 Kern +900 mmcf/d (Opal to NV/CA)
Nov 03 WBI +80 mmcf/d (PRB indirect to MidContinent)
Jan 05 Cheyenne Plains +560 mmcf/d (Cheyenne to MidContinent)
Jan 06 Cheyenne Plains +170 mmcf/d (Cheyenne to MidContinent)
Jan 08 REX +1400 mmcf/d (Cheyenne to MidContinent)
Jan 08 Cheyenne Plains +70 mmcf/d (Cheyenne to MidContinent)
Total +3,505 mmcf/d
This added 3.5 B of capacity has been helpful but remains insufficient. While much of the added capacity is the result of the marketplace at work, I am convinced that the WPA has played a significant role in moving the marketplace forward.
I have also attached a chart provided by WPA providing information on nine projects under discussion in Wyoming. As your letter correctly observes, the timing of these projects is 2010 at the earliest. Again, the WPA has been an active part of the discussion surrounding these proposals. While everyone remains frustrated with the pace of the private sector marketplace decisions to develop pipelines, I believe we should continue to support the WPA role in moving those decisions forward.
I will attempt to provide some insight as to the questions you have presented. I doubt that I am providing you with any new information since we have all wrestled with these questions for many years. Early on in my first term, we activated and re-defined the Wyoming Pipeline Authority to work on these issues. I continue to look to them as the experts in the area.
Question 1: From your perspective, can you tell us what you believe are the consequences for Wyoming producers as the result of the lack of adequate pipeline capacity?
The most accurate answer to the question would come from the producers. The impact for producers is generally negative. However, it varies depending on the size of the producer. Large producers with contracted production who have pledged some portion of their balance sheet to “own” firm capacity suffer fewer negative consequences. Smaller producers who are either unable or unwilling to contract for long term firm pipeline capacity are most negatively impacted. And this impact can be severe. This is a very real problem for CBM producers who cannot shut-in production.
Question 2: Will you provide us with an estimate of the loss of revenue to the state as a result of the lack of pipeline capacity?
Clearly there is a serious negative revenue impact. Determining the amount is a forecaster’s dream. Like most economic forecasts or calculations, it is entirely dependent on the assumptions employed in the projection. I have attached a paper from the WPA explaining their $500 million calculation and the assumptions they employed.
The difficulty I have in accepting the assumptions and the $500 million state revenue loss is what it means in terms of the private sector loss. The total of state severance tax rates, federal mineral royalties and local property taxes equals around 18 percent of value. For the state to be foregoing $500 million, the private sector would be foregoing approximately $2 billion of revenue net of royalties and state and local taxes. I have two observations. First this seems like a sufficiently large sum to motivate expedited producer attention to adding pipeline capacity. Secondly, these same producers continued to sell gas into this market at the prevailing prices. Assuming they are economically rational, it is hard to accept that they would voluntarily forego $2 billion in income.
There are questions about the interaction of markets and whether it is ever reasonable to expect a sustained one-to-one correlation between Henry Hub and Opal. The market is further complicated by individual producer decisions to shut-in production, enter long-term contracts or use their pipeline capacity for production from other states, notably Utah or Colorado. As the attached chart prepared by A&I demonstrates, the emergence of new capacity may have a short-term impact on the differential. But even this conclusion does not negate the fact that more pipeline capacity is better than less. The point being that no one, including the WPA, has formulated a strategy which allows us to draw a direct line between a particular state action and capturing hypothetical estimates of lost revenue.
Question 3 and 4: What initiatives are you aware of that may be effective in resolving this issue? Which of these initiatives would you support?
First, I think it is important to recognize the complexity of the gas market, the numerous players involved, the multi-state nature of this issue, the financial commitment required of commercial consumers, producers and pipeline companies to underwrite pipeline construction, the significant costs of construction and the lead time required to place capacity into service.
I continue to support those activities by this office, the legislature and the WPA which facilitate the operation of a free market economy. This includes actions such as encouraging certainty in resource availability, dissemination of market-clearing information and asking producers and commercial consumers to contract for pipeline capacity.
I remain skeptical both as a philosophical matter and in deference to the limitations imposed by the Wyoming Constitution about suggestions that Wyoming become directly engaged in the interstate natural gas pipeline business. The Wyoming Constitution established clear boundaries between governmental and private sector activities. The government should not try to compete in the private economy.
I have yet to meet with a pipeline company or a significant producer who advocates direct state involvement in the natural gas pipeline business. Even when the discussion arose about giving producers a severance tax credit for signing up for long-term pipeline capacity, the general response was they would be delighted to receive a tax break, but it would not actually change the decision horizon for a long-term commitment to pipeline capacity. The larger issue seemed to be assured access to the resource.
Question 5: What support can we provide to assist in resolving these issues?
Most of this is addressed in the prior discussion. I would add a couple of observations. First, I understand this is a frustrating issue for all of us in public life and for the producers. I am open to suggestions about added steps beyond the WPA’s current activities. But most of these discussions reflect our frustration that the marketplace works slowly and at its own pace. Everyone agrees that more pipeline capacity is desirable. However, I do not support changing the Constitution and placing the State in the pipeline business either as owner of equity in the line or as guarantor/owner of long-term capacity in a line. Having stated my position, I also recognize that I may be wrong. I remain open to persuasion and to other proposals.
Best regards,
Dave Freudenthal
Governor
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