No Pipeline = No Gas
Manufacturers typically look to either a local gas distribution company (LDC) or an interstate transmission company to secure access to the energy and manufacturing feedstocks they need. While both good options, often the parties have divergent business objectives. This can result in expensive, long-lead-time projects or worse, disinterest in building new infrastructure for your plant — forcing you to eliminate an otherwise competitive site.
For large interstate transmission companies that transport over two billion cubic feet of gas/day on a single pipeline, even a major manufacturing project may not provide adequate financial incentive to make your project a priority. Likewise, regulated LDCs may have a lower risk tolerance for developing new projects for a single user and be subject to a captive gas source with inflexible, high-cost tariff rates. But, a lesser-known alternative, midstream companies, could ultimately offer the best option and should always be considered in your evaluation.
Midstream companies build, own, and operate natural gas infrastructure to connect energy sources to energy markets. Although some midstream companies primarily focus on gathering gas from energy producers or building large interstate pipelines, there are a few midstream companies that are well suited to helping manufacturers not only develop turnkey infrastructure, but also develop the right strategy to source competitively priced natural gas from the market.
Midstream companies build, own, and operate natural gas infrastructure to connect energy sources to energy markets. A direct connection to interstate pipelines is becoming more common with sophisticated companies that seek to optimize infrastructure and energy costs. For example, the new $6 billion Shell Chemicals plant near Pittsburgh, Pennsylvania, and several new independent power projects such as EmberClear’s Birdsboro plant have recently partnered with midstream companies to build new infrastructure providing optionality and critical access to interstate gas markets.
As an example, Figure 1 illustrates a comparison of an LDC’s plan and our midstream plan for a new greenfield manufacturing plant in the Midwest. Option A was dead on arrival, and Option B (using a midstream company) was much more competitive and allowed the company to move forward with the site.
Benefits of Utilizing Midstream Companies
While there are similarities with respect to quality, safety, and regulatory compliance, midstream companies could offer some key distinctions that would be beneficial to your project.
- Gas rates: Many LDCs have inflexible tariff rates set by state regulators that could be significantly more expensive than sourcing gas from an interstate gas market. In a recent example, we forecasted a 10-year NPV savings of $15MM for a 2,500 MCF/day user by providing access to the open market vs. the LDC’s industrial tariff rate. Full analysis can be seen here. A direct connection to interstate pipelines is becoming more common with sophisticated companies that seek to optimize infrastructure and energy costs. Working with a midstream company can significantly shorten the timeline to execute a project.
- Capital expenditure: It’s common for an LDC or interstate transmission company to have a much higher (2–3x) construction cost for a similarly scoped project — and they may require you to pay for this up front. Likely contributors are higher G&A required to operate a regulated company, lower risk tolerance, and limited competition. Depending on the midstream company, there may be little-to-no upfront CAPEX required.
- Timeline: For the reasons above, in addition to the prioritization of competing projects, working with a midstream company can significantly shorten the timeline to execute a project.
- Responsiveness and customer service: With competing priorities and thousands of residential and commercial customers to manage, it’s often a challenge to get personalized service and create winning relationships. Some LDCs can balance this very effectively, while others simply do not. Smaller, focused midstream companies make this a priority. So, as you evaluate potential sites and propose budgets, consider discussing your confidential project with a midstream company that understands manufacturing and how to optimize natural gas supply. It could have a major impact on your project and, potentially, the future of your company.