Is It the Death Knell For Dominion’s Pipeline?

By Peter Galuszka

For more than a decade, hydraulic fracturing drilling for natural gas and oil has transformed the American energy picture, leading to big revivals in such energy fields such as Marcellus in West Virginia and Pennsylvania and the Bakken field in the Dakotas.

It has prompted Dominion Energy and its utility partners to push forward with an $8 billion or so Atlantic Coast Pipeline that will take Marcellus gas through Virginia all the way to South Carolina. The project, tied up in court fights, has been enormously divisive as property owners have protested the utilities’ strong arm methods of securing rights of way.

But now there’s clear evidence that the fracking boom is over, and that has huge implications for the ACL project. The reason? Oil and gas prices have dropped thanks to a perfect storm of issues. There’s the coronavirus pandemic tanking the U.S. economy, bitter energy wars between Russia and Saudi Arabia, and the fact that fracking gas and oil rigs are enormously expensive and wells can produce for only a short period.

The Hill reported last week: “Oil sank to $23 (a barrel) from a high of $53 in mid-February, far below the break even point that producers need to drill new wells to maintain supply, and with volumes rapidly diminishing at existing wells.”

The newspaper points out that a fracking well can cost more than $10 million while a traditional well is only $2 million. As price pressure mounts, the number of wells nationally has plummeted from 790 to 772 in one week.  At the Bakken field, reports The Washington Post, producers are cutting costs.

The situation has clear implications for the ACL project which was conceived at the height of the Marcellus boom. Dominion claimed that the gas would be badly needed in coming years while others claimed there isn’t enough demand.

A prolonged economic slowdown caused by COVID 19 would obviously weaken demand for gas. There’s also a suspicion, denied by Dominion, that the ACL project is actually intended to go to Liquefied Natural Gas seaports for export. But with the world petroleum market in turmoil and prices low, that doesn’t sound too promising.

When Dominion and its partners announced the project, they said its price tag would be about $5 billion. Now it is probably $8 billion. ACL officials have pushed back their projected opening by at least two years. Work stopped more than a year ago due to lawsuits.

The U.S. Supreme Court is expected to decide on permitting questions within a few months. For now, it looks like good, old-fashioned economics will do in the project.

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28 responses to “Is It the Death Knell For Dominion’s Pipeline?

  1. No question, markets exist to send signals about the rational use of capital. Can’t argue that about offshore wind and deny it about NG pipelines. The challenge is looking out years ahead. But looking back, when this debate started on this blog, I strongly remember wondering if BOTH of those proposed pipelines were going to make it, and a decision to proceed with only one (ACP or MVP) might leave the business case for at least that one in a stronger position. But it is interesting – this software searches blindly for related stories and one that popped up for this has the headline “Mark Warner: Let’s Out-Gas Putin” from 2014. You remember when the Obama Admin was all in for NG, right? You don’t, but the software just reminded us. Maybe someone should remind the good Senator?

  2. I remember Dems supporting the ACL. Been covering this thing from the beginning

  3. Give me a break. Why should anyone, including regulators (assuming we had any in Virginia) make a decision about a long-term, public utility investment based on what is clearly a short-term crash in oil prices? Fracking is not dead long-term.

    Whether the pipeline is needed; it’s costs and benefits; and i’s routing are different questions.

  4. Market conditions may well kill the ACP, but it’s worth remembering a couple of facts.

    — Yes, there is a glut of natural gas on the market right now. But energy markets are self correcting. As Peter pointed out, oil & gas companies are slashing capital spending. Gas wells will play out, and supply will contract.

    — I’m not sure that the natural gas glut hurts pipelines. The cheaper the gas, the more people and businesses will consume. Someone has to transport that gas.

    — A longer-term problem is the dampening of demand caused by the surge in solar and wind. I’m not persuaded that wind is economical in the Southeastern U.S. but solar unquestionably is. And until someone develops cost-competitive battery storage to store excess solar production on a utility-wide scale, the energy grid will need natural gas generation to complement solar. Cheap and ubiquitous solar may undercut the burning of gas for base-load generation, but gas will be needed to accommodate fluctuations in solar output.

    — The real killer for Dominion is the escalation in cost from the originally envisioned $5 billion to whatever the number is now. The last I recalled was $7 billion, but you say it’s now $8 billion. Whatever the number it’s huge, and it radically changes the Return on Investment analysis. If the ACP partners knew from the beginning that the project would cost $8 billion, they likely never would have embarked upon it. Now they have huge sunk costs, so they may decide they have no choice but to plow ahead regardless.

  5. Maybe cheaper gas will be more popular but it also hurts returns for gas companies. You need a sweet spot price. I’ve seem major swings in energy markets over the years. Never will forget that after the iranian cris in 1979 and1980, oil prices soared. There were 100 coal bulk carriers from europe and asia at anchor in Hampton Roads waiting to pick up coal

  6. Dollars to donuts, Dominion will get some of that “relief” money!

    😉

    Yes, we still will need gas but do we already have enough without another pipeline and why is a discretionary for-profit venture allowed to take land from others to essentially subsidize it’s venture?

    From the get go, the issue was about whether or not the gas was “needed” for a public “need” or to serve private sector economic demand.

    If the pipeline cannot stand on it’s own as a private venture then why should taxpayers, ratepayers and property owners have to pay to build it?

    Dominion undertook this project and promoted this project as a “public need” which was not true and now – the chickens are coming home to roost.

    We don’t need the gas. The more wind/solar we build, the less gas we will need to use. Ever MW of solar will displace a MW of gas – when that solar is available. When wind/solar is not available we’ll have to burn gas but when it is we will not.

  7. Peter, sure like your possible conclusion. “it looks like good, old-fashioned economics will do in the project…. the fracking boom is over.”

    The virus has exacerbated the cut electricity demand, but the financial negatives were there before the virus. America-is-awash-with-natural-gas. Oversupply is global and demand is flat. Even if we don’t use it, Virginia rate-payers could be charged $200 million annually for contracted ACP pipeline gas.

    The fracking industry was built on borrowed money and Wall Street hype, but the flow of low interest loans to shale oil and gas companies has dried up. Then, there is the question of how much gas is really available? Production in WVA peaked in Dec. 2018. (www.shalebubble.org)
    Shale fields contains ‘sweet spots’, comprising 20% of the field in the Marcellus Shale. Those sweet spots are drilled first, rapidly depleting the field. Today, “the Marcellus shale field production is not just declining, the field itself is going into decline.”

    Methane is 85 times worse as a heat trapping gas while it is in the atmosphere. Virginia has the 4th worst coastal threat in the US. We need to do our part for the climate and our coast. More natural gas will not do that.

    My daughter liked what she called the zinger in my WashPost letter she posted it …
    “A respectful and prudent owner would reevaluate their 2013 decision to build this now nearly $8 billion gas pipeline. Instead of continuing the fight to find a suitable “degree of injury” to the mountains, to the rivers and to historic black communities along the route, an astute owner would refocus their efforts on building a truly clean energy future.”

  8. The ACP wouldn’t still be a “thing” if Dominion wasn’t confident it will get rate payers to pay for it, even if it’s not needed or used. It’s a guaranteed source of long term income at an unreal rate of return. That’s why they want it.

    High return, no company risk. This is not how our “market” is supposed to work. FERC’s rubber stamp approval process that fails to respect landowners and is designed to approve no matter what is much of the problem. We need to change the Natural Gas Act! FERC never looks at the cumulative effect or cumulative need for pipelines. It accepts company guarantees that infrastructure is needed, not hard debated and agreed upon facts. Change the Natural Gas Act!

  9. Absolutely …
    It was written in 1938! And the FERC payout is set at 14 or 15%, no basic interest rate + a few points as the rates change.

  10. So why doesn’t Herring file an emergency petition to cut the allowed rate of return for interstate utilities with FERC? He could do the same with the VSCC for intrastate operations. The case law provides that customers have a right to not pay excessive rates. Herring could be the hero that undoes all the crap the GA has done for years protecting Dominion. But does he want to be?

  11. I can comment on the pipeline and not be in conflict with other work I am doing, so here goes:

    TMT – The Atlantic Coast Pipeline is not a “public utility investment.” It is a project that is ultimately owned by two utility holding companies, Dominion Energy and Duke Energy. It is a private investment for private profit. The profit will come if they can pass through the costs of the pipeline to the customers of their utility subsidiaries. A new law passed this session will make the pass-through of the 20-year contract with the ACP much less certain for Dominion.

    Jim – the market for gas has not been self-correcting. For the past decade we have had a glut of supply which has kept prices artificially low. Market forces would normally cause producers to reduce supply to match demand and the price would stabilize. Gas producers were too deep in debt to do that. They needed cash flow to pay the interest on their loans, so they kept producing.

    Gas producers have lost hundreds of billions in the past 10 years. Only continued access to capital has kept them afloat. That will now change. Expect many more bankruptcies and perhaps a consolidation in the industry which could reduce supply and increase gas prices. Higher gas prices will keep producers profitable but further reduce gas demand.

    Traditional uses of gas will continue to decline. Gas used to produce electricity will stabilize or decline depending on how quickly the economy recovers and how fast Dominion builds renewables.

    The offshore wind project is expected to be about 2600 MW, plus up to 16,000 MW of solar (and Dominion could build more wind). Dominion currently owns and contracts about 20,000 MW of capacity. If all of the renewable generation is operating at the same time, it creates a problem for the dispatch of Dominion’s intermediate and baseload capacity.

    Building more peaking units in Virginia is not automatically required. Changes in renewable output can be forecast far enough in advance for PJM to provide the necessary electricity, as long as there is sufficient transmission capacity.

    Combined cycle units could also startup in the simple cycle (peaking) mode and add output from the steam cycle over time.

    Reductions in gas usage from displaced intermediate and baseload gas-fired units will be larger than any increase in gas usage from peaking units.

    Long-term prospects for higher gas usage is questionable.

    It doesn’t make sense to build a new peaking unit in Virginia for $500 million that runs less than 10% of the time when it has to be shut-off halfway through its useful life.

    It is far cheaper (for ratepayers) for Dominion to pay for short-term use of the huge surplus of generation in PJM.

    The higher cost of the pipeline is a source of greater profits for the owners. The rates for the pipeline are based on its capital and operating costs, based on actual experience three years after commercial operation.

    If the costs of the 20-year agreements are passed through to ratepayers, based on a $7.75 billion cost (the last official estimate) Dominion’s utility customers would have $6 billion added to their energy costs over 20 years. Virginia Natural gas customers would pay over $3 billion more. Duke’s utility customers would pay $18 billion more over 20 years.

    The billions in added costs would provide no benefit to utility customers. Much more capacity than offered by the ACP is already in service in Virginia and the Carolinas. Expansions to existing pipelines that have served the Dominion and Duke utilities for decades can transport gas far cheaper than can the ACP.

    The choice of whether to go forward with the ACP has nothing to do with how much gas we need or if we need more pipelines. That has been settled. If we need more gas, there is abundant available capacity to provide low-cost delivery to get it to Dominion and Duke customers. If we don’t need more gas, we will not have to pay an exorbitant price for something that we don’t need (ACP and MVP).

    • “Jim – the market for gas has not been self-correcting.”

      All commodity markets self-correct eventually, unless government action prevents them from doing so. The gas bubble has been fueled by billions in junk bonds; the junk bond market has been propped up by the Fed’s low-interest rate policy. Sooner or later, all bubbles pop.

      • I agree. I was just pointing out that the gas market has been in a decade long bubble. It was created when the bubble burst in the mortgage-backed securities market and much of that money flowed into the oil and gas production market.

        The trillions in money printed by the Fed kept gas producers afloat and gas prices artificially low. Even with trillions more on the way it will likely go elsewhere this time and shale gas and oil producers will probably see a big shakeout.

        Wall Street has tried several ways of raising gas prices so they could get their money out, including promoting gas-fired generation and exports of LNG. Looks like the virus will do their work for them, but at a heavy cost to many other sectors.

  12. TMT – Last year, FERC opened a docket to explore the rate of return issue. It has been inactive since they were flooded with responses.

    I joined many others in saying that the current rates of return (15% for the ACP, 15.77% for the MVP and 14% for the equity financing portion) were completely out of touch with current low-interest conditions and the low-risk conditions for the pipeline owners who intend to pass-through the costs to the customers of their captive utilities.

    Utility customers were not represented in any of FERC’s proceedings. Although, the North Carolina Attorney General’s Office did make a filing in opposition to the high rate of return in the ACP case.

    Although the Natural Gas Act requires FERC to consider “public benefit”, it considers only the presence of contracts for pipeline capacity in establishing the benefit and need for the project. The rest is just regulatory theater.

    Nearly 80% of the capacity of the ACP was dedicated to new power plants planned by Duke and Dominion in 2015. Dominion announced it would not build any more combined cycle units. New peakers, if approved, would not use the ACP. Duke has plans to build some gas-fired units, now planned in the mid- to late-2020s at the earliest. But current demand and changes in the energy system do not support new gas-fired units in North Carolina.

    So why burden utility customers with billions in added costs for something they derive no benefit from?

    If the costs do not get passed though to customers, the utilities in Virginia and North Carolina will be on the hook to pay the 20-year contracts they signed. This could severely cripple our important energy companies, because of the greed of their parent companies.

    We are faced with a lose-lose scenario to benefit shareholders.

    If there was a definite need, that would be different, but there isn’t.

    If there was a cost savings to ratepayers, that would be different, but there isn’t.

    The best outcome would have been for FERC to do a proper regulatory review and discover the shortcomings in this project. But they didn’t.

    The next best outcome for the customers, shareholders and the general public is for these unnecessary pipelines to be cancelled before even more money is wasted.

    The economic collapse associated with the pandemic will create a shortage of capital. We should encourage Duke and Dominion to invest in projects that actually serve the needs of their customers. The Atlantic Coast Pipeline does not. The corporate leaders should have the courage to move on.

  13. Public. Private. Public-Private. No matter. Ultimately, decisions to pass costs on will go to idiots who accepted the argument that Long Ter Health Insurance depended on the cost of medical services and wasn’t simply a fixed benefit annuity.

  14. nightmare scenario – The coronavirus stimulus will bail out the ACP and likely also shower money on the utilities for their losses on capital investments and the “no one will be disconnected” policy.

    Dominion already has it all in one spreadsheet!

  15. The liberal narrative keeps changing.
    10-years ago they said we have to abandon fossil due to no supply and peak oil and high cost. They said there will be tremendous new battery inventions in renewables, while fossil fuels are ancient dead technology with no chance of technology improvement. Enter fracking, Gasoline has gone from $4 to $2 to 87 cents I see today in Virginia on Gas Buddy’s price Map, if I can believe my peepers.

    Which by the way, I have been predicting $1 gaso for some years because I follow TBond bull and economist A Gary Shilling, who had predicted the crude oil price wars some 4-5 years ago.

    Shilling influence partially explains my screen name TBill.

    • PS- Liberals say we have to use Offshore Wind which is extraordinarily expensive for construction and maintenance, a but the energy is free. How about clean technology where the capital cost is very low and the fuel cost is very low?

    • TBill,

      I think you are confusing the issue here. I usually try and avoid labels and politics when it applies to energy issues. Either something makes sense from an energy planning perspective or it doesn’t.

      The basic question is – does it make sense to ask utility customers to pay billions for something they don’t need?

      All of the power plants planned back in 2015 could be supplied by existing pipelines at a lower cost without the ACP. If it is likely that few, if any, of those plants will be built – why build the ACP? It profits only shareholders. There is no benefit to customers.

  16. There is no “liberal narrative.” I have been covering energy here and abroad for more than 45 years.

  17. The monolithic “liberal” viewpoint is a genetic problem with Conservative brains!

    As Peter says – used to be the word “Conservative” came from the word CONSERVE… and it was all about waste not , want not – and not idiocy in political viewpoints!

    From the get go, many folks (more than just liberals) felt that the damage to air quality in urban areas as well as some catastrophic oil spills and cars that got really shitty mileage – the whole conundrum was mixed up.

    The very Conservative idea of “saving money” directly relates to things like how much energy you use AND the costs of the external damages that we all get to pay the tab for.

    in terms of low capital outlays for low operating costs – yes – totally agree but real world – until we get there – next best? LCOE – where each source is tallied up in costs from capital to operating to externality costs.

    Very nice word – CONSERVE

  18. When we look at the cost of the pipeline, we need to know how much energy is in there? How much flow of potential electrons in a power plant? Presumably it is a very large amount of energy.

    Now look at off-shore wind. Same high cost for probably a tiny amount of electricity in comparison.

    Now then I agree siting is an issue, as far as eminent domain. I also do not like utilities, in general.

  19. There is no question at all that all fossil fuels and nuclear are more “energy dense” but the question is – do we need gas for electricity right now?

    Dominion initially started out making that claim but if was easily seen to not be true so then they starting making the argument on economic development and collected signatures from the Chamber of Commerce and other businesses that it would “attract industry” to Virginia but that’s never been proven either – but even if it were true – it’s no longer about a “public need” – it’s for-profit development – Dominion was not going to sell the gas at their cost – it was “for profit” and they’re using eminent domain to take land from property owners for their own corporate benefit.

    Even though FERC is apparently okay with this – my suspects are that the folks with the affected property are not done yet in court. They’re likely to challenge it on KELO grounds – and when that gets in front of people in Virginia – many elected legislators, especially in rural Va are going to be in a pickle defending it.

  20. Interesting thoughts … Dominion’s claim of increased business need was based on the data canters …. but then all the IT industry went on record fighting for clean energy. There was that letter, sent by many IT companies to VA government and the SCC, wanting changes in the regs so they could build or purchase 100% of their energy requirements as renewable energy.

    BUT .. this eminent domain use is dictated by the federal 1938 Gas act and doesn’t federal law trump? It was challenged by Sierra who claimed that FERC doesn’t really evaluate ‘need’ when they accept contracts for reservations on the pipeline by affiliated companies, contracts that can easily be broken, as the demonstration of need.

    Sure does look like a political pickle. Maybe there is a lawyer out there familiar with these conflicting issues?

  21. No, I think you are right. Tom has said that also but as you say, the lawyers know the nooks and cranny’s and I still think it puts elected officials in a pickle with voters on the fairness of the use of eminent domain for what is clearly a for-profit venture – not a public need. That aspect is going to stay bumpy.

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