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Commentary By Charles Hughes

Cure for Cold: More Drilling, More Pipelines

The Trump Administration has announced plans to open offshore areas of the Atlantic and Pacific coasts to oil and natural gas development. The Interior Department is proposing 47 possible auctions of drilling rights in the U.S. Outer Continental Shelf. That is welcome news in the current cold spell.

Natural gas consumption in the United States reached a record-high 143 billion cubic feet on New Year’s Day. Weather forecasts indicate that the winter weather shows no sign of abating, as the Washington Post’s Capital Weather Gang forecasts more severe weather in the coming days, with the East Coast experiencing temperatures 20 to 40 degrees below normal.

The colder weather is increasing demand for natural gas, as almost half of U.S. households primarily use natural gas to heat their homes, according to the Energy Information Administration’s 2017 Winter Fuels Outlook. That report estimates that these households will spend 12 percent more on gas this winter, with the vast majority of the increase driven by higher consumption, rather than price increases.

Severe winter weather is a stark reminder of the benefits of the recent increases in pipeline capacity and domestic energy production. The Draft Proposed Plan for potential expansion of off-shore drilling will now move to a phase of public meetings and comments, and the preparation of a draft environmental impact statement. If and when the plan comes into effect, expanded off-shore exploration and drilling would increase domestic energy production even further, attenuating the burdens associated with keeping homes heated during the winter months.  

Winter weather, and its effect on the price and consumption of natural gas, also serve as a reminder of the problems that remain due to energy transportation constraints, especially in specific regions of the country.

During stints of severely cold weather, natural gas production can sometimes be hindered by water vapor freezing within the pipeline, which would reduce gas flow. Interstate flows have fallen to some degree during in recent days, although the effect on natural gas transportation within states is less clear. In a situation where natural gas production was not as robust as it has been over recent months, the risk of lower natural gas flows would be higher. However, in some regions that have stridently resisted proposed expansions to energy transportation infrastructure, significant constraints could lead to problems for customers grappling with cold weather.

Last week in New England, spot prices for natural gas tripled. The combination of a prolonged cold spell, more homes converting from heating oil to natural gas, and persistent constraints in pipeline capacity to the region lead to higher prices in the area.

These bottlenecks can impose other serious adverse consequences on consumers, especially in periods of inclement weather. This week National Fuel briefly notified residential customers in five counties in New York State that they needed to reduce natural gas usage by turning down their thermostats five degrees, in response to natural gas delivery problems. Fortunately, the company was able to rectify the situation in a few hours and revoked the request, but in areas with limited options for fuel delivery, the risk of disruption is higher.

New York State denied a water quality permit to one proposed pipeline project and took a similar action with another. The State was overruled by the Federal Energy Regulatory Agency, citing the state’s failure to act within the required timeframe. Antipathy towards energy infrastructure projects remains elevated in the region, which exacerbates existing constraints. Additional pipeline capacity cannot rule out delivery disruptions, but they could attenuate the risk and magnitude of those incidents, and help keep prices in the region from spiking.

Proposed pipelines in the New England region have faced a series of obstacles that could complicate their timelines or viability. According to an analysis by S&P Global Platts, more than five pipelines are scheduled to go into service in 2018. If completed, these pipelines would add substantial capacity to the region’s energy transportation infrastructure and could alleviate some of the squeeze put on customers next winter. However, less than a third of these projects are currently under construction, and the timelines or even the entire projects could be hindered by environmental action or a lack of cooperation from the relevant state agencies.

The recent cold spell and this weekend’s looming winter weather will increase demand for natural gas as people will need it to heat their homes. Robust domestic natural gas production and the growing capacity of our energy transportation infrastructure will reduce risks of disruptions and keep prices increases more manageable. Opening up more areas of the Outer Continental Shelf of the U.S. coast to oil and gas exploration could further increase domestic energy production. 

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes

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