Political and financial barriers are pressuring midstream companies to limit their spending and building of new natural gas pipeline infrastructure. State mandates and state goals of becoming carbon-neutral, plus mounting activism by environmental, social and governance-oriented investors, are pushing many midstream companies to re-evaluate their business model.
While certain pipelines may transport cleaner fuels, such as renewable natural gas, it is increasingly the case that long-term contracts, signed around 2010, are not being renewed on comparable long-term conditions. In response, some midstream companies are considering selectively blending 10 to 15 percent of hydrogen into their natural gas stream to keep their existing pipelines from becoming stranded assets. However, this switch carries its own uncertainties.
While the Federal Energy Regulatory Commission has jurisdiction over natural gas that is transported using interstate pipelines, it may not have jurisdiction over the transportation of hydrogen in those same pipelines. That jurisdiction is in the hands of the US Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA), which has regulated hydrogen in pipelines since 1970. The PHMSA identifies several large policy questions that remain unresolved, such as whether the current natural gas pipeline infrastructure can and may be used to transport hydrogen, and how a new hydrogen pipeline network would be permitted.
Answers to these questions will require additional federal, state, and local governments to create standards and codes. As the PHMSA states on its website, “having adequate codes and standards for all aspects of a ‘hydrogen economy’ is a major institutional barrier to deploying hydrogen. Enabling a hydrogen economy will require new consumer products, new model building codes and equipment and other technical standards.”
Accordingly, as midstream companies re-evaluate their business model and how to restructure supply contracts with shippers, these companies are encouraged to consider the commercial risks posed by such regulatory uncertainty as well as possible responses. One example: the parties could agree to a mechanism to renegotiate particular points of their contracts in the event that legislation or regulation makes certain commercial terms unfeasible.
Find out more about the implications of this long-term trend by contacting either of the authors.