Williams CEO details regulatory hurdles, growth strategy

Corrections were made to this article Oct. 8.

Crude oil and natural gas pipeline systems in the US are growing at a very rapid pace as new infrastructure is introduced in an effort to optimize utilization of shale resources. Williams Cos., Tulsa, is an active participant in this growth. Pres. and Chief Executive Officer Alan Armstrong talked with Oil & Gas Journal regarding regulation’s role in this process and Williams’s growth plans during the International Pipeline Conference last week in Calgary.

Armstrong sees a once-in-a-generation opportunity for the US to become an energy superpower, with a 30-year hydrocarbon supply that can be profitably produced at low cost. Market demand exists to match this supply, but what’s missing is the infrastructure linking supply to demand.

In addition to the longer-term market inefficiencies this creates, Armstrong views it as a source of price volatility, citing last winter’s gas market as an example, with gas “trading for $4/MMbtu in western Pennsylvania and $120/MMbtu only 200 miles away” at city gates to the east. The current regulatory environment is holding back new pipeline development, according to Armstrong.

Jurisdictional certainty

“It is much more difficult right now than it’s ever been, by far,” he says. “The challenge lies mostly in the lack of jurisdictional certainty. Even jurisdictions that are supposed to respect [the US Federal Energy Regulatory Commission’s] authority don’t, which makes it pretty difficult for long-haul pipelines.”

As an example, he cites the Constitution gas pipeline that Williams is building with Cabot Oil & Gas, Piedmont Natural Gas, and WGL Holdings from Susquehanna County, Pa., to the Iroquois Gas Transmission and Tennessee Gas Pipeline systems in Schoharie County, NY.

The 124-mile, 30-in. OD line extends through relatively rural areas but has still encountered permitting issues. “FERC and specifically the [US Army] Corps of Engineers (ACE) delegated certain permitting authority to the State of New York’s Department of Environmental Controls, and as a result the state basically has blocking power on the project,” Armstrong explains. “So even though FERC is supposed to have broad permitting authority, it really doesn’t, because [ACE] delegated part of the authority and the state takes the perspective that it doesn’t have to operate within the same time constraints the federal agencies do.”

Armstrong contrasts this with Williams and DCP Midstream’s Keathley Canyon Connector project in the offshore Gulf of Mexico. Keathley Canyon uses roughly 200 miles of 20-in. OD pipe reaching water depths of about 7,800 ft. With wall thickness a little more than 2 in., the pipe cost alone was roughly $1 million/mile, with the lay vessels used for those water depths—Allseas Group’s Audacia in this case—costing $750,000-1.5 million/day, according to Armstrong.

Williams expects Keathley Canyon to enter service by yearend at a final cost of about $1.7 million/mile. Constitution, meanwhile, with steel costs less than one third of those the offshore project has been in the permitting process for more than 30 months and will cost more than twice as much per mile to install, Williams says.

Constitution’s in-service date has already been delayed by 1 year and is in danger of being delayed a second year while waiting for completion of state agency reviews. Williams expects the line to enter service late in 2015 or early in 2016. In the meantime, pipelines have become a favored target of those opposed to hydrocarbon development. “This lack of jurisdictional certainty has just brought things to a halt in many areas,” says Armstrong. “Most of the opposition to fracing and other shale gas activities has recognized that it’s very difficult to stop a private land-owner from letting a company drill on its land, but they have a lot of ability to stop linear projects, because you have creek crossings and road crossings and federal land crossings, and all these other areas that have multiple jurisdictions in terms of permitting.”

He continues, “It’s not the land-owners in the area that are generally the issue, most times issues are stirred up by people who don’t even live in the area.”

Armstrong explains, “And it’s not like the pipeline is going to be any better, like the quality of the pipeline or environmental issues are being addressed any better. It’s truly just the process of getting permitting right now is so difficult, and there are so many parties involved, that you’re constantly having to change routes, and then you get to a stream crossing, and the permitting agents are saying that the only place you can cross this stream is…here.”

The resulting monopoly for use of that land allows the property owner to effectively set its price, with both this and the cost overruns stemming from the delays ultimately passed on to the energy end-user.

Williams and other large pipeline operators are left with little choice but to increase their lobbying efforts as a result. “The regulators are given authority through legislation,” says Armstrong. “So really, what we have to work back through is the legislative process, and the budgeting process through the legislators. I will tell you Williams, while we really used to try to stay off the radar politically, just because it wasn’t all that relevant to us, we’re now having to become very politically engaged in trying to look for senators and congressmen who are sensitive to this issue and who understand the need to really have more rational jurisdiction. We’re also trying to get out to the public, and to labor unions, and other people that want the jobs and understand the importance of having low-cost energy, and bring them in as allies.”

Next wave: derivative infrastructure

While making the moves necessary to advance its current projects, Williams also is looking down the road to what comes next. Armstrong says that supply infrastructure development is now approaching maturity but that getting new supplies to demand centers remains a wide-open prospect.

“The next [wave] is derivative infrastructure,” he explains. “With natural gas you’ve got to build out to the power plants, you’ve got to build out to the methanol plants, to LPG export sites. But you also have a tremendous wave coming behind that taking advantage of all the natural gas liquids we’re awash in. And getting those NGLs distributed to the olefinic plants, to the ethylene and propylene facilities, and then getting that ethylene and propylene moved around to where it’s utilized in the derivative infrastructure; we haven’t even really started that construction yet.”

Armstrong describes Williams’ role in the next phase as more than simply building the infrastructure. He sees the company acting as a broker between olefins consumers wanting to lock in low raw-material prices and suppliers looking for the long-term offtake security required to expand rapidly.

The company recently completed a 600-million lb/year ethylene capacity expansion at its Geismar, La., olefins plant and anticipates startup of the now 1.95-billion lb/year in total production in the “very near future.”

“We think about connecting the low-cost supplies in our nation to the very best markets and what that requires in infrastructure to make it happen,” says Armstrong regarding Williams’ future course. “There’s plenty of price signal out there from the international players saying, ‘Hey, I desperately want to build an ethylene cracker alongside yours. If you can get me that ethane supply, I can make that happen.’ We’d love to structure a deal with an Indian or Korean petrochemical company that wants the ethylene to make polyethylene and ship it by drybulk to their country, or ethylene oxide or ethylene glycol, whatever derivative they’d prefer; we’d love to be able to have this party make a contract say all the way back to the Rockies ethane producer, or a producer in the Marcellus-Utica, and we provide the infrastructure in between. We want to have the gathering and processing infrastructure, the NGL fractionation, the NGL transportation, and the ethane line and storage, all the way through our cracker.”

Skilled labor shortage

Like in so many other areas of the energy complex, a tight supply of skilled labor—whether in welding and pipe-fitting or project management—remains a bottleneck on the rate at which the next round of expansions can take place. The lack of regulatory coordination also complicates this issue.

“We have to be able to build safely,” says Armstrong. “We have to be able to build at a predictable cost level. But let’s say there’re 20 large-diameter pipeline projects slated to be built. If you could coordinate the equipment and skilled labor force in a manner where you could move from one project to the next, you’d be fine. But you can’t do that because of the regulatory uncertainty. You have no idea when you’ll be able to start construction. We can’t contract to a particular window because we don’t know when we’re going to get the permits. So we wind up with these huge peaks and valleys in labor load, because we can’t get any predictability out of the permitting issue. And we’ll run into the same issue when we start the petrochemical build out.”

Contact Christopher E. Smith at [email protected].