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Pipeline Construction Financing Issues

Oil and gas pipelines in Texas and throughout the country are needed to bring oil and gas to refiners and to markets, and result in cheaper fuel prices for consumers by lowering transportation costs. With the oil and gas industry flourishing, particularly in areas of the country like Texas, more pipelines are needed to transport increasing amounts of these raw materials. Without enough pipeline capacity, producers have to use trucks, barges, and trains to move oil, gas and condensate to refiners and to the market–all of which cost more than pipeline transport. There are numerous pipelines in the works right now. However, some of these pipelines are still subject to financing issues and face challenges with government approvals (such as with the high-profile Keystone pipeline project).

On the financing issue, the Association of Oil Pipelines (AOPL) has requested that the Federal Energy Regulatory Commission (FERC), the agency that oversees interstate oil pipeline tariffs, step in to fix a dispute that AOPL claims may impair the financing of new pipelines. Financing of pipelines often relies on secured revenue accrued after the pipeline is completed. This is accomplished through contracts setting the rates ahead of time for the delivery of crude oil, gas, condensate, diesel, and other products. Andrew J. Black, President of AOPL, said earlier this month that “(t)hese committed rate agreements give confidence to shippers that the infrastructure they need to deliver their production to market will be there when they need it. They also give confidence to companies and investors ready to fund new pipeline projects that their investments will be repaid.”

The problem has arisen in an ongoing pipeline case being considered by FERC, which includes testimony threatening the mutually beneficial rate contracts agreed upon by energy suppliers and pipeline companies. The case involves the Seaway Pipeline, which goes from Cushing, Oklahoma, to Houston, Texas and is expected to carry 150,000 barrels of crude oil per day initially. AOPL filed a motion asking FERC to confirm its rate contracts and to rule that the contracts are not subject to review during the pipeline’s future rate proceedings. Instead, FERC staff recommended a new rate and rate structure, throwing out the old agreements which were the basis for financing this pipeline. AOPL responded that this action could not only deter new pipeline projects, it could also bring a halt to pipelines currently under construction.

This debate is important, and one that will be followed closely by all those in the oil and gas industry. The pipeline companies believe that the current system is necessary to maintain pipeline construction and growth. On the other hand, oil and gas producers want protection in case the prices for their products experience large increases or decreases, in which event they could be stuck with a long term pipeline contract for an unrealistic price.

There is a 73% increase in expected pipeline construction in the coming year compared with last year, and so these questions will need to be answered sooner rather than later.

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