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Location Factors for a Large Natural Gas User

By following the four strategies outlined below, the location team for a natural gas user can uncover more potential sites, reduce costs, and enhance competitiveness.

Q1 2023
With natural gas prices surging, growing fears of global energy insecurity, and ongoing supply-chain disruptions, manufacturers are increasingly looking to relocate or expand their operations in the United States. Developers know that selecting the right location is paramount to the success and viability of the new facility. But what options are available if a site is a strong candidate but lacks adequate natural gas service? How can site selection teams overcome this hurdle to deliver the best-possible sites for their projects? Here are a few tips that may help you keep your options open and identify the best location for your facility.

  1. Look beyond the default option.
    Many stakeholders in the development world rely on local gas utilities when evaluating and marketing industrial sites. This strategy can work. It can also unintentionally eliminate sites that are otherwise ideal for development. Failing to consider a direct connection to nearby interstate transmission pipelines could be a costly mistake. A utility’s evaluation must consider how the new plant will impact hundreds or thousands of other customers on their system. And, at times, the new facility may be deprioritized for the benefit of other customers. Connecting directly to an interstate pipeline offers your new project access to a dedicated system, which is less complex and provides less risk of being deprioritized.

    What options are available if a site is a strong candidate but lacks adequate natural gas service? If a potential site has access to both options, carefully evaluate and understand the benefits and challenges of each. For a large gas user, access to an interstate pipeline will likely have significant long-term advantages and may be accessible for no additional CAPEX from the customer.
  2. Understand “basis” differentials and how to access advantaged natural gas.
    Natural gas trades at different prices in different parts of the world. “Basis” commonly refers to the price differential between the U.S. benchmark (Henry Hub), and the local cost of gas at a specific location. Common drivers for this difference are local production economics, regional demand, transportation costs, and pipeline capacity. For example, in a prolific production basin like the Marcellus/Utica, which also has limited pipeline takeaway capacity, the local prices face downward pressure and trade at a discount to Henry Hub. The state you are considering for development could have multiple interstate pipelines — each with a different basis. As part of your search, you will want to explore which pipeline is currently advantaged…and why.
    3. Failing to consider a direct connection to nearby interstate transmission pipelines could be a costly mistake.
  3. Validate capacity and ability to execute extensions/interconnects.
    “The gas line is only a mile away.” That sounds convenient, but what if the pipeline operator is unmotivated to build a lateral to your site or it lacks the capacity to meet your energy needs. While well-intentioned, relying on superficial information can be a fatal mistake. You must work directly with the pipeline operator or midstream company if you plan to connect to an interstate pipeline. They can provide commitments on capacity and cost, estimate a timeline, and explain their abilities to execute new infrastructure.
  4. Optimize the “Firm Transportation” (FT) strategy.
    Undoubtedly, your board and investors will want guaranteed gas access for the plant, so acquiring Firm Transportation (FT) capacity may be critical. FT can be tricky. Some markets are liquid and have ample unsubscribed FT. If this is the case, the plant may be able to shed some or all the FT commitments after the plant is operational. Routinely right-sizing the FT portfolio, while carefully weighing risk, could result in major savings.
Your board and investors will want guaranteed gas access for the plant, so acquiring Firm Transportation (FT) capacity may be critical. Leading a site selection team is a hefty responsibility with enormous implications. Advantages and disadvantages compound over time, so ensuring adequate infrastructure, managing costs, and adhering to timelines are essential to project success. Taking the conventional approach can lead to project delays, elevated development costs, and increased operational costs. Taking a new approach, however, and keeping these points in mind, you can: (1) unlock more sites, (2) uncover cost savings, and (3) ultimately position the project for long-term competitiveness.

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