You have to modify the contents of the List<string>
passed to the extension method, not the variable that holds the reference to the list:
public static void ForceSpaceGroupsToBeTabs(this List<string> lines)
{
string spaceGroup = new String('.', 4);
for (int i = 0; i < lines.Count; i++)
{
lines[i] = lines[i].Replace(spaceGroup, "T");
}
}