KMI - Kinder Morgan

[JRM]

In the market where I work we are turning away large industrial users asking for a new gas service or asking for more gas. 

 

I don't want to pry too far into the details here, but is that because servicing them would require new investments in transmission infrastructure that the utilities don't think make long-term economic sense?  Or is it some other reason, e.g., it's inconsistent with a carbon reduction plan?

 

We are simply limited by the amount of gas we can supply through our pipes.  Our transmission mains, in most cases, are over 50 years old.  We have plans to replace these lines, but it will take 5 years or so.  The new lines would go on our rate base and increase customer rates.  That is the biggest pushback we are getting at this time.  They are not factoring in the offset from the industrial users we would add which help to subsidize residential rates.

[LearningMachine]

In the market where I work we are turning away large industrial users asking for a new gas service or asking for more gas. 

 

I don't want to pry too far into the details here, but is that because servicing them would require new investments in transmission infrastructure that the utilities don't think make long-term economic sense?  Or is it some other reason, e.g., it's inconsistent with a carbon reduction plan?

 

We are simply limited by the amount of gas we can supply through our pipes.  Our transmission mains, in most cases, are over 50 years old.  We have plans to replace these lines, but it will take 5 years or so.  The new lines would go on our rate base and increase customer rates.  That is the biggest pushback we are getting at this time.  They are not factoring in the offset from the industrial users we would add which help to subsidize residential rates.

 

Thanks JRM for sharing.  Biggest pushback from regulators or investment decision-makers at the company?

[LearningMachine]

As expected, Clean Future Act to require "retail electricity suppliers to provide an increasing percentage of clean electricity each year starting in 2023, rising to 80% in 2030, and 100% in 2035. Clean energy is defined as 'economy wide, net-zero greenhouse gas emissions, or negative greenhouse gas emissions, after annual accounting for sources and sinks of anthropogenic greenhouse gas emissions consistent with the coverage of emissions reported by the United States under the United Nations Framework Convention on Climate Change.'"

 

Sources:

* https://www.natlawreview.com/article/clean-future-coming-are-you-ready

* https://energycommerce.house.gov/sites/democrats.energycommerce.house.gov/files/documents/CFA%20Bill%20Text%202021.pdf

 

Is the existence of bills like these (and the sentiment behind them) bearish or bullish for pipelines (and oil and gas generally)? I don't want to get into a debate about whether the Clean Future Act is a good idea/policy, but the chances of the current bill being enacted as is seem low at this time.  Nevertheless, the sentiment behind bills like it seems like a significant risk to new long-term investment in any portion of the industry (except for short-cycle wells).  Like any other industry, the enemy of returns here seems to be competition.  So, if new CapEx is deterred, what will happen to, for example, Williams and Kinder Morgan?

 

Somewhat relatedly, here's an analysis of the pathways to getting to almost zero carbon electricity by 2035:  https://www.2035report.com/downloads/

In a nutshell, the analysts project that the US would need to install an average of 70GW of new wind and solar per year from now until 2035, along with significant battery capacity.  The US appears to have been at about half of that rate in 2020, potentially boosted by the expiration (since extended another year) of the investment tax credit (https://www.eia.gov/todayinenergy/detail.php?id=46976)

 

Even the 2035 Report scenario has roughly 10% of electricity coming from gas in 2035. It did not examine the continued use of gas in other areas, e.g., industrial and residential.

 

To answer your question, if the bill passes, I think it is bearish for some natural gas pipelines. 

 

Steve Kean explains in one of the videos how the pipeline pricing is based on price-differentials between source and destination, and how they were facing low-price differentials in some areas resulting in renewal issues.  Low-price differentials can be caused by gas already getting into the area not getting fully used by utilities.

 

So, we don't have to get 0% Natural gas in all of U.S. to cause issues for KMI.  Just increased incremental switching of power generation from natural gas to other means in some regions can start causing more-than-needed supply of natural gas in some regions, resulting in low-pricing or renewal issues.  I think there is risk that we'll start seeing the impacts on cashflows and as a result, ability to renew debt at good rates, while interest rates are going up. 

 

Even before the bill was proposed, if memory serves right, Steve Kean mentioned declining cashflows into 2021 and 2022.  Imagine, what will happen if the bill passes?  Will utilities still renew long-term contracts at high prices?

 

I understand it might be hard to imagine when you're seeing that a natural gas supplier is having to say no to industrial customers, but the question is how much of that unfulfilled demand is as a percentage of what is being supplied for power generation, and when the reduction in demand for power generation will be more than that unfulfilled industrial gas demand?

[JRM]

Good point.  I guess my point is there's more to natural gas consumption than just power plants.

 

https://www.eia.gov/dnav/ng/NG_CONS_SUM_DCU_NUS_M.htm

[LearningMachine]

Good point.  I guess my point is there's more to natural gas consumption than just power plants.

 

https://www.eia.gov/dnav/ng/NG_CONS_SUM_DCU_NUS_M.htm

 

Good point, JRM.

 

I edited above to say it will be bearish to "some" natural gas pipelines. 

 

For some heavily indebted companies, there is risk that "some" impact on natural gas consumption for power generation can have "medium" impact on pricing differentials, and "huge" impact on overall entity due to having to renew debt in declining-cashflow-and-rising-interest rate environment.

 

Regarding oil, beyond non-transportation uses, I think replacing entire U.S. car fleet will take much much longer than folks might expect, as we have discussed earlier in the thread.

[KJP]

 

 

To answer your question, if the bill passes, I think it is bearish for some natural gas pipelines. 

 

 

I agree, though "if the bill passes" is the key to that.  Whether the bill (or something like it) will pass is unknown.  That's why I was asking about the effects of the existence of the bill and the sentiments behind it, rather than the effects of the bill's enactment into law.  One possible hypothesis is that the bill or something like it is unlikely to pass in this Congress, but the push for such a bill and the continuing threat of such a bill prevents investment in competing pipelines that would drive down returns for existing pipelines.  In other words, regulation may be bad, but the threat of regulation that does not come could be good.

[LearningMachine]

 

 

To answer your question, if the bill passes, I think it is bearish for some natural gas pipelines. 

 

 

I agree, though "if the bill passes" is the key to that.  Whether the bill (or something like it) will pass is unknown.  That's why I was asking about the effects of the existence of the bill and the sentiments behind it, rather than the effects of the bill's enactment into law.  One possible hypothesis is that the bill or something like it is unlikely to pass in this Congress, but the push for such a bill and the continuing threat of such a bill prevents investment in competing pipelines that would drive down returns for existing pipelines.  In other words, regulation may be bad, but the threat of regulation that does not come could be good.

 

I see what you're saying.  To give you benefit of devil's advocate, the threat of regulation can also be bad in terms of long-term plans that utilities will build, long-term contracts that they will sign, and rates/duration that lenders will be willing to lend at.

 

Just so that I understand, why do you say it is unlikely to pass in this Congress given Democrat control of both houses and given this is Biden's election promise?

[KJP]

 

Just so that I understand, why do you say it is unlikely to pass in this Congress given Democrat control of both houses and given this is Biden's election promise?

 

Because emissions mandates are not directly related to federal government revenue or spending, I don't think they qualify for the current version of the reconciliation process that was used to bypass the Senate filibuster and enact the Trump tax cuts and the recent Biden stimulus.  So, even if all Democrats were on board (and I'm not sure they are), I believe they would have to fundamentally alter the current reconciliation/filibuster rules to pass something like the Clean Future Act, and I do not believe they will do that.

 

The path that I suspect would be open to them under the current rules is a carbon tax and big infrastructure spending on renewable energy projects.  But I also doubt we'll see a carbon tax any time soon because the politics of it and how it appears to fall very differently on different groups of people.

[JayGatsby]

Is 80% clean even feasible outside of nuclear? I guess you could also get there with massive solar + battery investments, but don't think we've really built any scale battery projects

[JRM]

I finally got around to reading some of that 2035 Report.  It kinda looked like they took the total grid load, subtracted desired nuclear and natural gas contribution, and divided by 14 years (2035-2021) to come up with 70 GW per year of renewables required to meet the goal.  Sounds great.

 

Maybe I haven't read far enough, but there are no discussions of decline rates in panel efficiency or replacement intervals.  Also, what is the carbon input required to make all of these solar panels and wind turbines?

 

They also don't seem to account for sourcing of the rare earth metals required to build all of this.  Don't forget, major grid upgrades and expansions are required, too.  2050 would be an outrageous goal for 90% renewable (with today's technology).  2035 is a pipe dream.

 

I think reports like these are very disingenuous, and suck in people who don't know any better. 

[LearningMachine]

 

Just so that I understand, why do you say it is unlikely to pass in this Congress given Democrat control of both houses and given this is Biden's election promise?

 

Because emissions mandates are not directly related to federal government revenue or spending, I don't think they qualify for the current version of the reconciliation process that was used to bypass the Senate filibuster and enact the Trump tax cuts and the recent Biden stimulus.  So, even if all Democrats were on board (and I'm not sure they are), I believe they would have to fundamentally alter the current reconciliation/filibuster rules to pass something like the Clean Future Act, and I do not believe they will do that.

 

The path that I suspect would be open to them under the current rules is a carbon tax and big infrastructure spending on renewable energy projects.  But I also doubt we'll see a carbon tax any time soon because the politics of it and how it appears to fall very differently on different groups of people.

 

Thanks KJP for the insight here.  What do you think of Biden's comments about the getting rid of the filibuster rule?  Even if they don't go all the way not requiring 60 senators, would the threat of that help pass something that is maybe not too drastic in every area?

[KJP]

 

Just so that I understand, why do you say it is unlikely to pass in this Congress given Democrat control of both houses and given this is Biden's election promise?

 

Because emissions mandates are not directly related to federal government revenue or spending, I don't think they qualify for the current version of the reconciliation process that was used to bypass the Senate filibuster and enact the Trump tax cuts and the recent Biden stimulus.  So, even if all Democrats were on board (and I'm not sure they are), I believe they would have to fundamentally alter the current reconciliation/filibuster rules to pass something like the Clean Future Act, and I do not believe they will do that.

 

The path that I suspect would be open to them under the current rules is a carbon tax and big infrastructure spending on renewable energy projects.  But I also doubt we'll see a carbon tax any time soon because the politics of it and how it appears to fall very differently on different groups of people.

 

Thanks KJP for the insight here.  What do you think of Biden's comments about the getting rid of the filibuster rule?  Even if they don't go all the way not requiring 60 senators, would the threat of that help pass something that is maybe not too drastic in every area?

 

I'd never say never, because the filibuster rules have been changed in the past, e.g., for judges.  But the Senate majority, not Biden, controls the issue.  I don't think they're fully aligned with Biden on it because Democratic senators understand they may be in the minority some day soon, so they have a longer-term view of the filibuster than Biden.  For example, they didn't dump the filibuster to pass a $15 minimum wage, despite Biden's support for that policy. 

 

I'm also skeptical that something like the Clean Future Act and its carbon emission mandates has the support of all 50 Democratic senators, much less so much support from each of them that they'd dump the filibuster for it.  But I don't know what a viable legislative compromise is, other than further extension of the ITC and things like that.  Many Democrats would be loathe to touch the environmental laws, but I could see bipartisan agreement on efforts to significantly streamline those statutes and the regulatory and litigation delays they cause, at least for certain types of projects.  The Democratic Party also doesn't seem too keen on nuclear power, so I don't see much happening there either.

 

All of this needs to be qualified by the fact that I'm far from a Washington insider, so I could be way off.