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| Source: NGSA |
The natural gas industry is an extremely important segment
of the U.S. economy. In addition to providing one of the
cleanest burning fuels available to all segments of the
economy, the industry itself provides much valuable commerce
to the U.S. economy. Below is a brief description of the
structure of the natural gas industry and market, as well
as links to information on the make-up of the various
segments of the natural gas industry, and recent statistics
regarding the supply of natural gas.
To jump ahead to specific topics in this section, click
on the links below:
- Overview of Industry Structure
- discusses how different market participants
interact to bring supplies of natural gas to the market.
- Industry Makeup -
discusses the composition of the industry.
- Natural Gas Market Overview
- discusses the natural gas market, and the forces
that affect the interaction of supply and demand for
natural gas
.
- Market
Activity -provides a snapshot of recent wholesale
market activity as reported by various indices and
platforms.
Overview of Industry Structure
The structure of the natural gas industry has changed
dramatically since the mid-1980's. In the past, the
structure of the natural gas industry was simple, with
limited flexibility and few options for natural gas
delivery. Exploration and production companies explored
and drilled for natural gas, selling their product at
the wellhead to large transportation pipelines. These
pipelines transported the natural gas, selling it to
local distribution utilities, who in turn distributed
and sold that gas to its customers. The prices for which
producers could sell natural gas to transportation pipelines
was federally regulated, as was the price at which pipelines
could sell to local distribution companies. State regulation
monitored the price at which local distribution companies
could sell natural gas to their customers.
Getting Natural Gas to Market - Prior to Deregulation
and Pipeline Unbundling
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| Source: NGSA |
Thus, the structure of the natural gas industry prior
to deregulation and pipeline unbundling was very straightforward.
However, with regulation of wellhead prices, as well
as assured monopolies for large transportation pipelines
and distribution companies, there was little competition
in the marketplace, and incentives to improve service
and innovate were few. Regulation of the industry also
led to natural gas shortages in the 1970s, and surpluses
in the 1980s.
The natural gas industry today has changed dramatically,
and is much more open to competition and choice. Wellhead
prices are no longer regulated; meaning the price of
natural gas is dependent on supply and demand interactions.
Interstate pipelines no longer take ownership of the
natural gas commodity; instead they offer only the transportation
component, which is still under federal regulation.
LDCs continue to offer bundled products to their customers,
although retail unbundling taking place in many states
allows the use of their distribution network for the
transportation component alone. End users may purchase
natural gas directly from producers or LDCs.
One of the primary differences in the current structure
of the market is the existence of natural gas marketers.
Marketers serve to facilitate the movement of natural
gas from the producer to the end user. Essentially,
marketers can serve as a middle-man between any two
parties, and can offer either bundled or unbundled service
to its customers. Thus, in the structure mentioned above,
marketers may be present between any two parties to
facilitate the sale or purchase of natural gas, and
can also contract for transportation and storage. Marketers
may own the natural gas being transferred, or may simply
facilitate its transportation and storage. Essentially,
a myriad of different ownership pathways exist for natural
gas to proceed from producer to end user.
Simplified Structure of Industry after Pipeline
Unbundling
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| Source: NGSA |
The diagram shows a simplified representation of the
structure of the natural gas industry after pipeline
unbundling and wellhead price deregulation. It is important
to note that the actual ownership pathway of the gas
may be significantly more complicated, as the marketer
or the LDC are not the final users. Either of these
two entities may sell directly to the end user, or to
other marketers or LDCs.
The regulatory environment of the day has a dramatic
effect on shaping the structure of the industry.
The actions of the federal government and its related
agencies and departments can also have a significant
impact on the structure and functioning of the natural
gas industry.
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| Source: NGSA |
Industry Makeup
Now that the basic structure of the natural gas industry
has been discussed, it is possible to examine the business
characteristics and relevant statistics of each industry
segment.
An excellent source for statistics and information
on the natural gas industry and its various sectors
is the Energy Information Administration (EIA). The
EIA was created in 1977 as the statistical arm of the
Department of Energy, charged with developing energy
data and analyses that help to enhance the understanding
of the energy industry. For a good overview of relevant
updated statistics related to the natural gas industry,
view the EIA's summary statistics on natural gas.
Below are some statistics (based on EIA data for the
year 2007) on the makeup of the natural gas industry.
Follow the links to view the most up to date information
on each sector:
- Producers - There are over 6,300 producers
of natural gas in the United States. These companies
range from large integrated producers with worldwide
operations and interests in all segments of the oil
and gas industry, to small one or two person operations
that may only have partial interest in a single well.
The largest integrated production companies are termed
'Majors', of which 21 are active in the United
States. Information on the production of natural gas is available on EIA's website.
- Processing - There are over 530 natural gas
processing plants in the United States, which were
responsible for processing almost 15 trillion cubic
feet of natural gas and extracting over 630 million
barrels of natural gas liquids in 2006. For more information
on natural gas processing, visit the Gas Processors
Association.
- Pipelines - There are about 160 pipeline
companies in the United States, operating over 300,000
miles of pipe. Of this, approxiamtely 180,000 miles are interstate
pipelines. This natural gas pipeline infrastructure is capable of transporting
over 148 Billion cubic feet (Bcf) of gas per day from
producing regions to consuming regions. To see a list of major pipeline companies, including
links to their websites, visit the Federal Energy
Regulatory Commission.
- Storage - There are about 123 natural gas
storage operators in the United States, which control
approximately 400 underground storage facilities. These facilities
have a storage capacity of 4,059 Bcf of natural gas,
and an average daily deliverability of 85 Bcf per
day. The EIA maintains a weekly storage survey, monitoring
the injection and withdrawal of stored natural gas.
This survey gives a good indication of the status
of the natural gas market, measuring the natural gas
that is extracted or stored at any one time in response
to the demand for natural gas.
Learn more about statistics and information related to
natural gas storage in the United States.
- Marketing - The status of the natural gas
marketing segment of the industry is constantly changing,
as companies enter and exit from the industry quite
frequently. As of 2000, there were over 260 companies
involved in the marketing of natural gas. In this
same year, about 80 percent of all the natural gas
supplied and consumed in North America passed through
the hands of natural gas marketers. The volume of
non-physical natural gas that passes through the hands
of marketers is very large, and can be much greater
than the actual physical volume consumed. This is
an indication of vibrant, transparent commodity markets
for natural gas. For instance, in 1998, it is estimated
that for every thousand cubic feet of natural gas
consumed, about 2.7 thousand cubic feet passed through
natural gas marketers. For more information on natural
gas and energy marketers, visit the National Energy
Marketers Association.
- Local Distribution Companies - There are
about 1,200 natural gas distribution companies in the
U.S., with ownership of over 1.2 million miles of distribution
pipe. While many of these companies maintain monopoly
status over their distribution region, many states
are currently in the process of offering consumer
choice options with respect to their natural gas distribution.
To learn about the status of distribution restructuring
across the United States visit the EIA.
To learn more about natural gas distribution companies
and their regulatory structure, visit the National
Association of Regulatory Utility Commissioners.
The American
Gas Association is also an excellent source for
information on LDCs.
Natural Gas Market Overview
The nature of the natural gas market is similar to
other competitive commodity markets: prices reflect
the ability of supply to meet demand at any one time.
The economics of producing natural gas are relatively
straightforward. Like any other commodity, the price
of natural gas is largely a function of demand and the
supply of the product.
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Natural Gas Volatility and Price
Levels at Henry Hub
(Click Image to Enlarge) |
Source: Energy Information
Administration, Office of Oil and Gas;
based on Natural Gas Monthly publications |
When demand for gas is rising, and prices rise accordingly,
producers will respond by increasing their exploration
and production capabilities. As a consequence, production
will over time tend to increase to match the stronger
demand. However, unlike many products, where production
can be increased and sustained in a matter of hours
or days, increases in natural gas production involve
much longer lead times. It takes time to acquire leases,
secure required government permits, do exploratory seismic
work, drill wells and connect wells to pipelines; this
can take as little as 6 months, and in some cases up
to ten years. There is also uncertainty about the geologic
productivity of existing wells and planned new wells.
Existing wells will naturally decline at some point
of their productive life and the production profile
over time is not known with certainty. Thus, it takes
time to adjust supplies in the face of increasing demand
and rising prices. Learn more about factors that
affect the supply of natural gas.
The supply response to prices was demonstrated emphatically
following the winter of 2000-2001 as producers substantially
increased production investments and activities in response
to higher prices. Likewise higher prices (and the U.S.
recession) also reduced the quantity demanded for natural gas. The
supply and demand responses led to a new equilibrium
in 2002 between supply and demand at market clearing
prices far below the 2000-2001 peak.
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| Source: NGSA |
In an environment of falling gas prices, the converse
will be true. Producers will respond to lower natural
gas prices over time by reducing their expenditures
for new exploration and production. Production decline
in existing wells will decrease productive capacity.
At the same time, the lower prices will increase the
quantity demanded. This, in turn, will ultimately
result in upward pressure on gas prices. This relationship
between changes in the price of natural gas and variations
in the supply of and demand for natural gas is sometimes
referred to as the "natural gas market cycle."
In the short term, and in relation to existing producing
wells, the supply of natural gas is relatively inelastic
in response to changes in the price of natural gas.
Contrary to some views, producers do not routinely shut
in wells when natural gas prices are low. There are
several economic drivers that provide an incentive for
producers to continue producing even in the face of
lower prices.
- First, if production is halted from a natural gas
well it may not be possible to restore the well's
production due to reservoir and wellbore characteristics.
- Second, the net present value of recapturing production
in the future may be negative relative to producing
the gas today -- i.e., it may be better to produce
gas today than to wait until the future to produce
the gas. If a producer chooses not to operate a well,
the lost production cannot be recovered the next month
but is instead is deferred potentially years in the
future. There are no guarantees that the prices for
gas in the future are going to be higher than prices
today.
- Third, some gas is produced in association with
oil, and in order to stop the flow of natural gas,
the oil production must be stopped as well, which
may not be economic.
- Finally, a producer may be financially or contractually
bound to produce specific volumes of natural gas.
Producers and consumers react rationally to changes
in prices. Fluctuations in gas prices and production
levels are a normal response of the competitive and
liquid North America gas market. While the price of
the natural gas commodity fluctuates, it is this inherent
volatility that provides the signals (and incentives)
to both suppliers and consumers to ensure a constant
move towards supply and demand equality.
Because the natural gas market is so heavily dependent
on the interaction of supply and demand, it is important
to have knowledge of the factors that affect these two
components. To learn more about the supply and demand
of natural gas in the United States, click on the links
below:
To learn more about the pricing of natural gas in competitive
markets, visit the International Energy Agency.
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