Kinder Morgan’s leadership fielded questions on the factors that led to the company’s decision to cancel the proposed Northeast Energy Direct pipeline from financial analysts during an earnings call this week, and it boiled down to a lack of firm customers, regulatory hurdles and an unstable global energy market.
Kinder Morgan CEO Steve Kean told analysts during the call Wednesday night that the company decided to nix the Northeast Energy Direct and another pipeline project in Georgia to cut about $4 billion in capital spending, according to a transcript posted on the investment news website Seeking Alpha.
“While many of our (local distribution companies) customers did sign up, we did not receive enough contractual commitments from electric customers to make the project viable,” said Kean. “So, we will fulfill our obligation to consult with our customers over the next 30 days or so, but this project is not economic, so we’re removing it from the backlog. In both cases, NED and Palmetto (the Georgia pipeline), based on all the facts, we believe this is the right outcome for our investors.”
Kean said the return on the Northeast Energy Direct project would have been less than 6 percent – a situation he described as “clearly not viable.”
“We value our New England customers and continue to believe along with many others that additional capacity is needed in the region, but we’ll have to look for other ways to serve some part of those needs,” he continued. “We didn’t get there on this one and the action we’re taking is undeniably the right call for our investors.”
Kean said a dramatic downturn in the gas and oil production sector has hit Kinder Morgan hard. Much of the midstream gas and oil industry has been plagued by similar woes as global commodity prices have plummeted.
Robert Pollan, a distinguished professor of economics at the University of Massachusetts Amherst, said that a steep drop in oil and gas prices is being driven by the emergence of hydraulic fracturing as an inexpensive way to extract natural gas.
That, he said, has seen oil producing companies such as Saudi Arabia and others in the Organization of Petroleum Exporting countries which have the ability to slash their prices do so in an effort to offer a cheaper product, undercutting that new competition and driving them out of business. That can constrain the supply.
On the demand end, the regulatory hurdles make it unclear whether the gas that is produced will even be bought on the other end.
“No investor is going to want to invest in a project if they don’t know they have a solid market once they’ve produced their product,” Pollan said, of Kinder Morgan’s inability to secure demand-side customers. “If Kinder Morgan is saying they don’t have the customers, then that’s an issue.”
Kean also said in the call that one of the Northeast Energy Direct’s “significant prospective customers” decided to put their volume somewhere else, with a significant negative impact on the project. He did not specify which customer that was.
That, and an opposition movement toward the use of fossil fuels as an energy source that is growing worldwide, Pollan said could put pressure on investors to abandon oil and gas companies.
That sentiment, in part, drove much of the grassroots opposition spawned by the proposed project.
“We are a lot better off with that $3.1 billion back in our pockets and being put to some other use. The project wasn’t going to produce the return that would be required to make it viable, because again the contracts weren’t there,” he said. “We’re better off having that money back.”
He expressed optimism that gas would grow moving forward, though.
“I think we’ll continue to see growth in natural gas and natural gas liquids exports,” he said. “And those long-term trends are good for North American energy midstream companies like Kinder Morgan.”
Kean noted the Palmetto pipeline was sunk by the Georgia Legislature preventing the company from getting eminent domain powers and other state permits. He said joint-venture projects elsewhere are going well.
Tennessee Gas Pipeline Co., the Kinder Morgan subsidiary that would have built the Northeast Energy Direct project, has sued the state over Article 97 of the Massachusetts Constitution, which requires a legislative override to remove conservation restrictions on some of the land the company’s Connecticut Expansion project is set to cross in Sandisfield.
The Northeast Energy Direct project would also likely have encountered a sizeable portion of that land along its own route.
Tom Martin, the company’s vice president for natural gas pipelines, said the company will continue to pursue alternatives for getting more gas into the Northeast, but that will likely need to be done through local distribution companies, and on a smaller scale.
Meanwhile, Berkshire Gas plans to maintain a moratorium on any new natural gas service hookups into the foreseeable future, citing a lack of alternative ways to obtain the gas it needs to maintain system pressure.
“There is need both in the near-term and ultimately we believe in the long-term in the region, but we’ll just try to scale up with that demand as it develops,” Martin told analysts.
Kean told analysts, “But there is a regulatory process that has to get sorted out up there for how the power part of the business is going to procure the needs for their generating assets.”
Kinder Morgan cited those regulatory hurdles, which prevented power generators from signing on to the project, as a significant factor in the decision to suspend the Northeast Energy Direct project.
“That’s been a work in progress and who knows when they ultimately get that resolved,” Kean said. “So there’s definitely less producer push activity for anything large. And we think on the demand side infrastructure is still needed, but they’ve got to come to terms with how it can get contracted for.”