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Underground Industry: Gas Pipelines Are Big Business But Lightly Regulated

As natural gas pipelines proliferate, a loose web of federal and state rules govern a network of more than 2 million miles.

The gas pipeline industry is hardly glamorous. But it is lucrative and loosely regulated.

Last weekend, two oil and gas pipeline companies announced they would combine to create the biggest such firm in the U.S. when Kinder Morgan offered more than $20 billion to buy El Paso. If the deal goes through, the companies say, the behemoth would become the continent’s fourth largest energy corporation.

While the pipeline business has operated largely, well, underground, several recent accidents have drawn attention to safety and the web of regulations that governs the nation’s 2.3 million miles of gas pipelines. A growing controversy over a plan to build a major oil pipeline from Canada’s Tar Sands to Texas has also spotlighted industry practices.

On Monday, the Senate passed a pipeline safety bill that would increase fines, hire more inspectors and implement stronger safety standards. The industry has supported the measure, but some advocates have called for larger changes.

Here’s a primer on the industry and its regulations.

The Regulations

The system that regulates natural gas pipelines is complex and, critics contend, lax.

“There isn’t much regulation and it doesn’t really work,” said Rick Kessler, who sits on the board of the advocacy group Pipeline Safety Trust. Kessler is also a federal lobbyist on energy issues, but he does not represent pipeline companies.

To build a pipeline to transport gas from Pennsylvania to New York, company X would have to seek a permit from the Federal Energy Regulatory Commission and prove that the line is needed. If the company convinces FERC of the need and that the proposed route is appropriate, the government could grant company X the right to seize property through eminent domain if it can’t work out deals with landowners.

If the pipeline were not going to cross state lines a state commission would generally oversee the siting of the line. Texas is one of the more industry-friendly states on siting. It grants companies relatively wide latitude to seize property for new lines.

Once a line is approved, a different agency takes over to handle safety issues. The federal Pipeline and Hazardous Materials Safety Administration sets minimum safety standards, which states can supplement. If a pipe crosses state borders, enforcement generally falls to the federal government, while most states inspect lines that don’t leave the state.

But whether the regulators are from Washington or the states, “They don’t come out and necessarily walk the pipeline,” said Richard Kuprewicz, a former pipeline engineer for Arco who is now a consultant.

In fact, it is generally the pipeline operators themselves who inspect their own lines and report problems. Most government oversight involves checking the paperwork, making sure that things are up to code.

“It’s compliance with the regulations,” Kuprewicz said. “It’s not, ‘Are you safe or not.’”

The pipeline industry points to its safety record.  Despite several high profile accidents – such as the explosion that killed 8 people in San Bruno, Calif., last year – the number of incidents has not changed dramatically in recent years. There are typically about 275 gas pipeline accidents a year that kill 10 to 15 people and injure about 65 to 70. There was a jump in the number of accidents on transmission lines from 2002 to 2004, but the numbers have generally held steady since then, according to PHMSA.

The industry group for interstate transmission lines, the Interstate Natural Gas Association of America, did not respond to requests for comment.

Lydia Meigs, a spokeswoman for the American Gas Association, which represents the utilities that operate most of the 2 million miles of shorter distribution lines (the type of lines involved in recent high-profile accidents) said the industry is best suited to enforce best practices.

Critics disagree, pointing to the San Bruno explosion, where the operator didn’t run tests that could have detected the faulty weld that eventually failed.

There’s also an entire class of pipelines that is largely unregulated. There are an estimated 200,000 miles of gathering lines – pipes that lead from wells to processing plants –  in sparsely populated areas for which PHMSA does not set safety standards (the agency does regulate such lines in higher density areas). Most states do not regulate these lines either, so there is no reporting on any leaks that may be found. Siting is generally worked out by energy companies and landowners.

These rural gathering lines are considered to be low risk not only because relatively few people live near them but also because they are generally smaller and operate at lower pressures than the lines that send gas from state to state. But in March, a federal advisory committee found that newer gathering lines, particularly those in shale gas development areas, are running at higher pressures and that operators should be required to submit safety reports. PHMSA, the federal regulator, is now considering whether to issue new regulations to cover these lines.

Currently, PHMSA has 125 inspectors to cover 290,000 miles of gas and liquids lines, while about 300 state inspectors oversee the remaining 2.2 million miles, according to PHMSA.

The Business

The industry is dominated by a handful of companies, including El Paso, Enbridge and Williams Gas Pipeline, according to Fadel Gheit, an oil and gas analyst with Oppenheimer and Co.

Kinder Morgan, for example, currently operates more than 37,000 miles of lines, carrying not only gas but also oil and carbon dioxide. Last year, the company had a net income of $1.3 billion on $8 billion in revenue.

The Federal Energy Regulatory Commission sets guidelines for what companies can charge to transport gas. The rates are based on market supply and demand and on the amount of money the company has to spend to build and maintain the line. A gas producer such as Exxon will generally buy a certain amount of transmission capacity and negotiate a rate within FERC’s guidelines.

“It’s like buying a seat on a flight,” Gheit said.

It’s a relatively predictable industry, Gheit said, because supply and demand don’t fluctuate wildly from year to year. When a company builds a line, it generally locks in long term contracts.

Increased gas development has led to a push for new lines. FERC has approved dozens of new projects over the past couple of years. The Interstate Natural Gas Association of America says that, due to projected increases in production and consumption, the industry will need to build 35,600 miles of transmission lines and 414,000 miles of gathering lines by 2035, at a cost of nearly $140 billion dollars.

Key Pipeline Stats*

Miles of all types of pipelines, gas and liquid – more than 2.5 million

Miles of federally regulated gas transmission and gathering lines – 321,000

Miles of gas distribution lines – about 2 million

Miles of unregulated gas gathering lines – about 210,000

*Source: Pipeline and Hazardous Materials Safety Administration

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