Oregonian: Palomar gas partners pull the plug on controversial pipeline proposal

http://www.oregonlive.com/business/index.ssf/2011/03/palomar_gas_partners_pull_the.html

By Ted Sickinger, The Oregonian

Northwest Natural Gas Co. and TransCanada Corp. have withdrawn their joint venture's application to build the controversial Palomar pipeline, telling regulators that demand is insufficient to support the project in the near term.

The announcement moves the project off the map and out of a labyrinthine regulatory process in Washington, D.C., where elaborate environmental studies and high-priced lawyers can quickly lay their own high-capacity pipeline into shareholders' wallets.

Yet NW Natural insists that the project isn't dead. The companies say they plan to submit a revised cross-Cascades pipeline proposal to regulators as early as next year, this time in conjunction with Northwest Pipeline, which operates much of the gas transmission system in Oregon and Washington.

"We're making some route changes, working through timing issues with potential customers," said Kim Heiting, a NW Natural spokeswoman. "The recession has pushed out the need ... but we definitely need another pipeline."

Notwithstanding that prospect, Palomar's withdrawal was heady news for environmentalists and landowners along the 217-mile pipeline route, which stretched from the banks of the Columbia River east of Astoria to central Oregon, looping south of Portland to Molalla and traversing the Cascades through the Mount Hood National Forest.

"It's great news," said Sam Sweeney, a farmer in Dayton whose land was bisected by two pipeline proposals. "We've been battling this since 2007. We couldn't sleep over it. We have neighbors who couldn't sell their property."

Olivia Schmidt, a community organizer for Bark, an advocacy group for the Mount Hood National Forest, said that "when and if they come back with a proposal to illegally go through the Mount Hood National Forest and weaken protections for wild and scenic rivers, Bark will be there to stop them again.

"We will not stand by ... even if they reroute their pipe through the Warm Springs Reservation."


Gas market evolves

In the end, the withdrawal had more to do with the changing economics of natural gas than any grass-roots opposition. NW Natural has been looking to build a cross-Cascades lateral pipeline for years, arguing that reliability would be bolstered by an alternative to shipping all its gas through the Columbia River Gorge on the network owned by Northwest Pipeline.

The Oregonian’s continuing coverage of plans to build the Palomar natural gas pipeline across the Oregon CascadesPalomar is an expensive project, however, and NW Natural has never been able to demonstrate sufficient demand to justify the investment. That was the case until energy developers proposed building several terminals near the Oregon coast to import liquefied natural gas. The proposed volume of imports was massive, far more than local markets could absorb, necessitating big pipes to move the gas to central Oregon and from there to California.

NW Natural finally had the volume it needed to go forward and proposed Palomar in 2007. While the companies denied any direct connection to LNG projects, the economics of the project were based on carrying gas between the proposed Bradwood Landing LNG terminal on the Columbia River and an interstate gas pipeline in central Oregon, via Molalla. The Bradwood terminal committed to use most of Palomar's capacity and underwrite the development costs.

Last year, however, Bradwood's backers, surrendering to regulatory delays and market realities, declared bankruptcy, leaving NW Natural and TransCanada with millions in unpaid development costs and no anchor user for their proposed pipeline. The partners went back to focus on the 113-mile eastern section of Palomar, looking to drum up sufficient commitments from big utilities and industrial customers in Oregon and Washington.

But the demand wasn't there.

"Potential customers have recently indicated that a new pipeline will not be needed as soon as predicted due to the global recession and other factors," the companies said in their filing with regulators.

Heiting, from NW Natural, says the market eventually will justify the Palomar pipeline. She said demand will be bolstered by continued population growth and additional demand from utilities to generate electricity from natural gas as they transition from coal and look to back up their growing portfolio of intermittent renewables with more dependable generation. Heiting claimed that the gas transmission system is already full up on days of peak demand, and forecast enough demand for a new pipe to come on line in 2016 or 2017.

Ken Zimmerman, an analyst at the Oregon Public Utility Commission, disputed the notion that the transmission system is currently too congested and said NW Natural's own projections show a decline in gas consumption because of successful conservation efforts.

Zimmerman said he fully expects to see a new project proposed, but he said he couldn't speculate on when or if it would go forward. "You've heard of the Alaska Pipeline? That's been around, on the back burner, for most of our lives."

Oregon LNG

Palomar's withdrawal also raises new questions about the viability of another proposed project: the Oregon LNG terminal in Warrenton. That project's backers, like Palomar's, proposed building a pipeline to carry its imported gas into Molalla. Unlike Palomar, however, that's where the Oregon LNG pipeline would terminate. That theoretically would leave it with a massive volume of imported gas being pumped into an already bottlenecked transmission system along the Interstate 5 corridor.

Oregon LNG is battling Clatsop County officials over its right to build a pipeline in the county, and the entire economic rationale for importing natural gas to the United States is questionable given the huge new reserves of shale gas in the United States and Canada.

Many industry observers believe the more likely scenario is for the LNG projects in Oregon to be converted to export facilities serving lucrative Asian markets like Japan, which could become far more dependent on natural gas following its nuclear crisis.

Backers of LNG projects in Oregon acknowledge that's plausible. They don't have any current plans to pursue that route.