Snedeker/My Turn: Skeptical pipeline financing

Gas industry’s risky business


  • Workers continue to install a shale gas pipe line, Friday, Feb. 13, 2015, in Zelienople, Pa. The pipeline is being installed to connect wells in the area to a compressor station. (AP Photo/Keith Srakocic) Keith Srakocic

Friday, March 25, 2016

The Town of Gill held a special town meeting on Feb. 22. One warrant article approved by voters was to “appropriate five thousand dollars to fund representation and technical assistance related to the Kinder Morgan/Tennessee Gas Pipeline (TGP) application before the Federal Energy Regulatory Commission (FERC), the Massachusetts Department of Public Utilities (DPU), and in related legal and permit proceedings, or other uses as deemed appropriate by the Selectboard.”

The DPU is holding hearings on the proposed natural gas supply contract between TGP and Berkshire Gas. The Town of Montague is the only town in Franklin County that has been granted intervenor status in the DPU hearings and is faced with substantial legal fees. The Town of Gill voted to support Montague because the DPU hearings are the best way for those of us in surrounding communities to get clarification about the supply contracts that TGP has signed.

These contracts, if upheld by the DPU, can then be used by TGP to demonstrate the need for the pipeline. Demonstrated need is a key factor that will be used by the FERC when it decides on TGP’s application to construct the Northeast Energy Direct (NED) pipeline. Besides the environmental and eminent domain concerns we’ve heard about, I would like to offer another look at the financial side of this pipeline — it’s why these hearings are so important.

In July 2014, when town officials were allowed to submit questions to Kinder Morgan as part of a meeting at Greenfield Community College, I asked two questions. The first question was “What are their bond ratings?” My second question was two-fold: “The Marcellus field production estimates from analysts are that it could last between 30 to 75 years. That’s a wide time frame. What current estimate is Kinder Morgan using for the Marcellus field and what is the source of that estimate? What are the implications of the estimate for financing the construction of the pipeline?”

The two-part second question was asked in regard to the credibility of KM’s data and contracts in the Marcellus field considering the large downward revisions reported by federal authorities in recoverable oil projections in the Monterey shale formation (which was revised downward by 96 percent according to a May 20, 2014 Los Angeles Times article).

My reason for both questions was to bring public awareness to the fact that there was a lot of risky financing and questionable data in the shale industry that was under-reported at that time. In September 2014, KM’s response to the first question was that their bond ratings are rated Baa1 from Moody’s. Since, their bond ratings have dropped to Baa3, and Moody’s had changed their outlook to negative up until KM slashed their dividends in December of 2015.

Their response to the second question was “TGP is a transmission company, not a drilling and production company. TGP does not drill in the Marcellus shale field. TGP’s pipelines serve customers in the Marcellus region and other locations via long-term shipping agreements. Because it does not drill for the gas in the Marcellus shale field, TGP has not performed estimates for Marcellus field gas yields. Data on the Marcellus (field) can be found on the U.S. Energy Information Administration website.”

Fast-forward a year and a half and we are now seeing headlines almost daily about the shale companies and their financial woes. Two years ago, the majority of the financial sector believed that pipeline companies, or midstream master limited partnerships (MLPs), were immune to the supply and demand of the shale drillers, and were, as KM stated in their response to my question, merely transmission companies. But it is apparent now that this is not the case. Reuters recently reported: “the attempts to shed the contracts by Sabine Oil & Gas and Quicksilver Resources are viewed by executives and lawyers as a litmus test for deals worth billions of dollars annually for the so-called midstream sector.”

The pipeline companies are only beginning to feel the full force of the shale industry markets and the risky financing that has driven them. For example, Chesapeake Energy, one of the larger natural gas producers, has had their bond ratings cut deep into junk status (Moody’s: Caa2). They carry a large debt load and it is questionable as to whether they can make their March debt payments. As more shale producers seek Chapter 11 bankruptcy protection from creditors, existing contracts with MLPs will be canceled and/or renegotiated. Too many shale companies went on a debt binge expecting OPEC to maintain its goal of targeting price. When OPEC shifted to targeting market share and not price, these same companies could not cut their capital expenditures and production fast enough because of their debt load, and their hedge positions against low oil prices can only shield them for so long.

As the DPU and FERC processes continue for the NED pipeline, the public should be asking whether or not we want to support the irresponsible financing of this industry. We should be skeptical and seek clarification of the contracts that have already been procured with pipeline companies such as Kinder Morgan. In so many ways, the devil is in the details.

Greg Snedeker is Selectboard chairman for the town of Gill.