Natural Gas Curtailment: It could happen to You!

By Neal Shaw, September 20, 2016

The winter of 2013-14 was one of the worst on record for the United States. Last winter, 2015-16 was characterized as the winter that wasn’t.  When extreme cold weather does show up, the natural gas industry gets hit the hardest.  Prices can rise due to the high level of demand that comes along with below zero temperatures and diminishing supply.

With extremely cold temperatures, the interstate pipelines work hard to keep the gas flowing at maximum capacity in order to meet the high energy demands of its pipeline’s customers. Almost nothing in the pipeline can fail without causing some fluctuation in price or supply at one or more points in the delivery chain.

In 2014, TransCanada Pipeline (TCPL) experienced a fire on the Emerson lateral on Jan. 25 which caused prices for natural gas to skyrocket in the upper Midwest. Many natural gas customers were curtailed, facing a reduction of gas deliveries for hours and even days due to a shortage of supply as demand for service exceeded capacity.

Some plants and facilities were prepared with emergency plans in place and access to alternative fuels; others were not. As a commercial or industrial natural gas customer, it is important to know how to prepare for curtailment and the necessary plans to engage during curtailment. The following are some important points on how industrial/commercial facilities can do just that, rather than be caught off guard when curtailment occurs:

Expect Curtailment

There are two major reasons for curtailment. The first is what several major natural gas pipelines experienced in January, when the cold was so widespread from coast to coast and border to border that pipelines were unable to deliver adequate supplies. On these extended cold days, the pipeline does not have a chance to recover. The natural gas stored during the warmer months is often very low late in the winter due to heavy withdrawals and the lack of opportunities for replenishing storage volumes.

The other type of winter curtailment is caused by a rupture which can be an extremely severe issue. When a rupture occurs, pipelines are unable to meet load demand, so loads are cut drastically. Prices tend to follow supply and demand rules: As demand gets tight, prices rise.

Ruptures can result in serious price increases, which is exactly what happened in the Midwest last January. The explosion in Canada affected deliveries to the middle of the heartland, which resulted in gas prices soaring into the $40-80/Dth range, plus penalties of as much as $113/Dth for taking more gas than originally nominated. This price spike represented an extremely expensive departure from the normal price range of $3-$5/Dth.

Weighing Cost-Benefit of back-up fuel

Municipalities and some industrial/commercial facilities need an alternate fuel source such as propane or Liquefied Natural Gas (LNG). The costs of a standby fuel system can pay for itself in the long run if health and safety are involved of your plant’s production line cannot be interrupted without significant expense.  While backup options, such as propane air systems and backup generators can be expensive to purchase and maintain and may be rarely used, their value in an energy crisis is unquestionable.

Any backup system needs to be tested on a regular basis to ensure that it will be ready for operation at any moment. This means ensuring that plant and backup facility operators have tested all the elements of the backup system without using natural gas. To avoid critical production issues, testing of backup fuel sources should happen at the beginning of each winter to ensure they are ready to perform.

Staying On Top Of Weather

A natural gas pipeline distribution system is built to serve the coldest hour of the coldest day of the year for all of its firm service customers.  It’s difficult to predict when this extreme cold will hit, the level of severity or how long the cold snap will last. Having access to accurate and clear weather forecasts, including how long a cold snap is predicted to last and the severity of the weather event, will allow a company to make informed decisions before a curtailment hits.

Know Pricing

Curtailment can be expensive. If a company chooses to continue operations during curtailment, fines can be extremely high. Make sure to weigh the costs of stopping or cutting back operations against continuing operations with a penalty. This means calling the pipeline, utility or an energy management services provider to fully understand if continuing to run production is even a possibility, and if so, what the cost will be. Figuring out how much it will cost to shut down operations completely or rely on an alternative fuel source during curtailment will allow a company to make informed decisions based on cost-benefit analysis.

Even if it’s never happened before, it’s important to remember that curtailment can happen  – whether for a couple of hours or for days at a time – and companies should have a plan in place before it does. No facility is immune to events such as the TransCanada pipeline rupture.

According to the Office of Electricity Delivery and Energy Reliability of the U.S Department of Energy, ten unique energy events (7 are natural gas related) were identified as Major Events in 2015, compared with 12 events in 2014.  The figure below maps these events:

energy-events-2015

One Step Ahead

As we continue to experience extremely severe and volatile winter weather in the United States, it will become more important for all commercial/industrial end users to know what to do when faced with curtailment how much the financial implications will be associated with that curtailment. A company should always have the appropriate knowledge to consider what options make the most sense.