US Natural Gas Regulatory agenda for 2014: the Highlights

Federal and state regulatory agendas are shaping the evolution of the natural gas market

The shift from fossil-based fuels to natural gas has left some federal and state regulators struggling to keep pace with this transformation.

A major battle is on-going over how the benefits of expanded natural gas use will be allocated— whether to maximize producer revenues, or to promote domestic manufacturing and support energy efficiency.

With foreign natural gas prices much higher than domestic ones, US natural gas producers are promoting LNG exports as a means to increase their revenues. Before producers can export natural gas to countries with which the US lacks a free trade agreement, the Department of Energy (DoE) must determine whether such exports are in the public interest.

Since August 2012, the DoE has approved five such applications—and rejected none. Yet with NYMEX natural gas prices up more than 35% over the same period, big industrial users of natural gas are clamouring for a rethink of existing policy.

“In our view, the DOE is not doing appropriate public interest determination evaluations, and they’re not doing the job that they’re obliged under statute to do,” says Paul Cicio, president of the Industrial Energy Consumers of America (IECA), comprised of large manufacturers that consume substantial quantities of natural gas and electricity.

The DOE is still using domestic demand assumptions that are three years old when it evaluates LNG export applications. “We think that’s incredible, given everything has changed in three years ” — including EPA regulations that are driving power generation away from coal to NG and the increase in energy-intensive manufacturers constructing new NG-fuelled plants.

The longer term implications of exports are poorly understood. And much can change on both domestic supply and demand sides over the thirty year lifespan of these applications. “Exports don’t reduce risk to the US consumer, they only increase risk to the US consumer,” Cicio says.

Yet Brad Rogers, president of consultancy Moreland Advisors, thinks higher natural gas prices are necessary to convince producers to make major investments in further resource extraction. “Exporting natural gas shouldn’t be seen as a threat to American manufacturers.” he says. “natural gas prices may rise as a result, but that price increase will only entice more gas production and create a healthy, sustainable industry.”

Manufacturers will still reap benefits from switching to natural gas. “Even with increased prices, there will still be significant cost savings and environmental benefits to be realized with natural gas,” Rogers says. And the domestic location of substantial natural gas reserves will provide another bonus, since “the additional transportation costs required to get exported gas to foreign markets will provide US-based manufacturers with a significant competitive advantage in the marketplace,” he adds.

State incentives
States are playing a key role in promoting a shift to natural gas in transportation uses, driven largely by expected emissions benefits from switching away from fossil fuels, and in the case of major natural gas producers— such as Oklahoma— a desire to increase in-state production. About three dozen states have some form of natural gas incentives in place, and currently, Texas, Florida, and Pennsylvania have either proposed or are implementing especially ambitious natural gas promotion plans.

Yet it’s California, the longstanding bellwether for emissions standards, that continues to blaze a trail with the most innovative NGV promotion incentives. The California Air Resources Board (CARB) will consider several new policies in its upcoming 12 December meeting.

natural gas currently has two challenges to overcome in the fuels arena, notes Tim Carmichael, president of the California natural gas Vehicle Coalition. The first is the familiarity of diesel and liquid fuels.

The second is the zero emissions achieved by battery and fuel cell technologies, and it’s this challenge that CARB has targeted in a proposed optional low NOx standard. The standard would set NOx emissions benchmarks of 50%, 75%, and 90% cleaner than the baseline of 2010 heavy duty engine emissions. The goal: promoting transfer of current technologies from laboratories to market.

“The more that natural gas engines improve, and get cleaner and closer to zero emissions, the greater and more long lasting their competitive advantage will be,” says Tim Carmichael, president, California natural gas Vehicle Coalition. “This standard is a way to get them onto that track.”

Carmichael emphasizes that while many believe that natural gas engines will be able to meet tighter standards, it’s unlikely that anyone will build or buy these engines without incentives. Thus, CARB will need to develop effective incentives for engine manufacturers to build cleaner engines, and possibly, a separate set of incentives for fleets to purchase cleaner engines—which are likely to cost more than current engines (at least initially). None of these incentives exist today, neither are such details part of the package due to be presented to the CARB Board in December.

Fuel economy
The federal government will soon take the next step in promoting fuel efficiency for MD and HD vehicles. In 2011, the Obama administration was the first to push the fuel efficiency framework — first adopted in 1975 for passenger cars— to include larger vehicles.

In August 2012 the latest renewal of fuel economy standards for passenger cars and LD vehicles was announced. This is a stretch standard, intended to press OEMs to make major fuel economy innovations, rather than tweak at the margins of existing technological capabilities. The standard levelled the playing field, so that NGVs are treated on the same basis as other categories of alternative fuel vehicle. It’s not altogether clear that OEMs will be able to meet the new standard in time for planned 2017 implementation (which would cover model years out to 2025).

All eyes now turn to whether federal regulators will adopt a similarly aggressive approach in setting next generation MD and HD standards. The announcement of a proposed rule is expected imminently, and it’s expected that a final standard will take at least a year of consultation with affected stakeholders to achieve. Once in place, expanded state incentives are expected to follow, to help operators purchase the new rigs.