Natural Gas and Energy Industry

Introduction

The natural gas industry is actually a segment of the overall energy industry, which is primarily focused on the production and delivery of energy to end-users. Usable energy is mainly in the form of natural gas, petroleum products, coal, renewable energy and electricity. The majority of the coal production in the United States and Canada is for electrical generation, although large industrial manufacturing facilities still use coal directly for the conversion to process heat and on-site electrical generation.

Natural gas makes up 24% of the total energy consumed in the United States according to year 2002 projected data from the Energy Information Administration. Total energy consumption for 2002 is estimated at 98,156 trillion Btu (British Thermal Units), of which 23,662 trillion Btu is provided by natural gas.

Natural gas is consumed by various market sectors for heating, process heating and electrical generation. A breakdown of natural gas usage by sector shows that the industrial sector is the largest user, accounting for 32% of consumption, with power generation consuming the second greatest quantity (24%), and residential third (22%). Commercial usage consumes 14% of total natural gas usage and other usage 8%.

Natural gas has become a very popular fuel for new electrical generation capacity brought on line over the past 15 years, due to its clean burning nature and reduced capital costs for plant construction. These newer facilities typically burn natural gas directly in turbines to drive electrical generators and then recover the waste heat in boilers to drive additional turbines. These “combined-cycle” plants are much more efficient than steam units or gas turbines alone, and can achieve thermal efficiencies of up to 50 to 60 percent compared to 33 to 35 percent efficiency from traditional steam generation units that burn coal or other fossil fuels (including natural gas).

An emerging trend is to produce electricity with natural gas in individual, smaller sized electric generation units at residential, commercial, and industrial sites of use. These small-scale power plants, which are primarily powered by natural gas, operate with small gas turbine or combustion engine units, or natural gas fuel cells. This trend known as “distributed generation” utilizes electrical generating units either at an end-user’s location or on the electrical grid infrastructure downstream from the distribution transformer.

Natural gas is one of the leading energy sources for distributed generation. Because of the extensive natural gas supply infrastructure, and the environmental benefits of using natural gas, it is one of the leading choices for on-site power generation. There are a number of ways in which natural gas may be used on-site to generate electricity. Gas-fired reciprocating engines, industrial natural gas fired turbines, and microturbines, are all popular forms of using natural gas for on-site electricity needs. In the future, fuel cells and hybrid fuel cell/turbine systems may also see increased use for electric power generation.

Industry Components and Segments

The natural gas industry is defined by the various processes and functions that occur to get natural gas from deep under the ground to the end-user, the ultimate consumer of the energy. These various processes and functions are defined below with a brief description of the business function performed by the companies that are involved in each.

Exploration and Extraction

The exploration of natural gas involves the application of advanced geological location methods to locate natural gas formations and expand existing ones. Large, publicly held energy companies engaged in the production of crude oil and natural gas, as well as independent producers, typically employ geologists and geophysicists to study formations under the ground to locate new sources of oil and gas. Currently there are an estimated 8000 oil and gas producers active in the United States, 24 of these considered “major” producers. Exploration occurs both onshore and offshore. Seismic techniques are employed to find and characterize these formations. Exploratory wells are then drilled to confirm the availability of the suspected deposits of natural gas and petroleum. Often the two are found in combination, but natural gas only exploration is also common.

Once the location of the natural gas formation has been confirmed by exploratory drilling, an economic analysis is performed based on anticipated production, drilling and production costs, and the projected market price for the natural gas. If this analysis is favorable, the decision is made to proceed with commercial drilling. Generally companies engaged in the business of drilling and other well services do the drilling for the producers. If a newly drilled well comes in contact with the anticipated natural gas reserves, the well is completed to facilitate its production of natural gas. If the newly drilled well does not confirm the existence of natural gas in marketable quantities, the well is termed a “dry well”, and production does not proceed.

Production and Processing

The production of natural gas involves the completion of the well and piping the output of the well into gathering lines. There are various techniques employed in well completion, depending on the characteristics of the formation and whether the well is onshore or offshore.

The processing of natural gas involves getting the natural gas out of the ground and processing it for transportation. Natural gas often contains a variety of other organic compounds, as well as oil and water, as it comes out of the ground. This raw source of natural gas must be processed to remove most of these non-methane substances to meet quality specifications before the natural gas can be sold and transported in the pipelines. The first stage of natural gas processing occurs near the well with removal of the majority of the oil and water through mechanical separators. The raw gas is then piped to natural gas processing plants, located regionally near most major areas of natural gas production.

The gas is then dehydrated in processing units to removal most of the remaining water vapor through either absorption with glycol or adsorption with a dehydrating agent. The natural gas liquids, including ethane, propane, butane and heavier hydrocarbons are removed from the raw natural gas and separated for sale. Sulfur and carbon dioxide are also removed in separate units. The remaining product is known as “pipeline quality” natural gas, which usually consists of at least 90% methane. There are over 580 natural gas processing plants in the United States, the owners of which are often subsidiaries of the major producers and pipeline companies.

Transportation

There are about 160 pipeline companies in the United States, which operate over 285,000 miles of pipe. Interstate pipelines, those that transport natural gas across state boundaries, own and operate 180,000 miles of these pipelines. This pipeline capacity is capable of transporting over 119 Billion cubic feet (Bcf) of gas per day from producing regions to consuming regions. The Federal Energy Regulatory Commission (FERC) regulates interstate pipelines. The rates the pipelines can charge, operating and safety practices, and applications for the construction of new facilities are approved by the FERC.

The interstate natural gas pipeline network transports processed natural gas from processing plants in producing regions to those areas with high natural gas requirements, particularly large, populated urban areas. Natural gas that is transported through interstate pipelines travels at high pressure, anywhere from 200 to 1500 pounds per square inch (psi). The elevated pressure reduces the volume of the natural gas being transported and provides the force to move the natural gas through the pipelines.

The main pipelines are usually between 16 and 48 inched in diameter. Lateral pipes, which deliver natural gas to and from the mainline, are usually between 6 and 16 inches. Compressor stations are usually located every 40 to 100 miles to boost the line pressure of the natural gas. The natural gas that enters the compressor station is compressed by a turbine, motor, or engine, usually fueled by natural gas. Interstate pipelines are usually owned by pipeline companies, or are subsidiaries of integrated energy companies.

There has been a fair amount of consolidation in the pipeline segment over the past five years. Traditional electric utilities and other pipeline companies have purchased pipelines to create greater operating efficiencies. The impact of this pipeline industry consolidation has been relatively transparent to the natural gas markets and end-users to date.

Storage

Natural gas can be stored underground, usually in large storage reservoirs, for an indefinite period of time. These storage facilities are usually depleted well formations that have been converted to storage facilities. Depleted salt domes and aquifers can also be used to create natural gas storage. Currently there are about 114 natural gas storage operators in the United States, with control over 415 underground storage facilities. These facilities have a storage capacity of 3,923 Bcf of natural gas, and an average daily deliverability of 78 Bcf per day. In addition, there are several facilities in the United States that store liquefied natural gas that can be injected into pipelines for additional capacity.

Storage is critical to provide peak day capabilities for natural gas pipelines and distributors and to maintain the supply and demand balance in general. Natural gas storage inventories are reported weekly by the Energy Information Administration and have become an important fundamental for energy trading markets. Local gas distributors, marketers and end-users can purchase storage and movements in and out of storage can affect market pricing. Storage facilities are usually operated by pipeline companies and local distribution companies.

Distribution

Natural gas distributors, most often known as local distribution companies (LDCs), are usually regulated utilities that deliver natural gas from the pipelines to end-users. In most cases, they are the customer interface with the natural gas industry at the local level. LDCs offer transportation services to end-users who purchase natural gas from a third party (most industrials and large commercial customers), offer bundled services for backup and swings, provide metering and maintain the pipelines to the customer facilities. There are over 1,200 natural gas distribution companies in the U.S., and these companies own and operate over 833,000 miles of distribution pipe. Most large LDCs are regulated entities at the state level that are a part of a larger investor-owned holding company. There are also hundreds of municipal LDCs that are exempt from state regulations.

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Marketing

As a result of deregulation of the interstate natural gas markets, finalized with FERC Order 636 in 1992, the natural gas pipelines are no longer in the merchant supply market for natural gas. This means they are no longer responsible for the purchase and sale of the natural gas commodity. Natural gas marketers are now providing this function. Marketers may be affiliates of producers, pipelines, and local utilities, or they may be separate business entities unaffiliated with any other players in the natural gas industry. Marketers find buyers for natural gas, secure supplies of natural gas in the market, and arrange a pathway for natural gas to reach the end-user.

It is estimated that over 80 percent of all the natural gas supplied and consumed in North America passes through the hands of natural gas marketers. The volume of non-physical gas that passes through the hands of marketers can be greater than three times the amount of actual natural gas consumed. This is a sign of a vibrant commodity market.

The diagram below from the Natural Gas Supply Association shows the various ways natural gas can move from the producer to end-user. In reality the transactions are often quite more complex than shown. Often the marketer and LDC will sell the gas to other marketers and LDCs before it reaches the end-user.

Source: NGSA

Energy Service Companies

Energy Service Companies, or ESCOs, are another relatively new entrant to not only the natural gas industry, but also to the energy industry in general. ESCOs perform services related to how the customer utilizes energy on site. These services often focus on demand management or demand reduction through managing energy utilization and include system upgrades with performance guarantees, data acquisition systems and other energy products and services.

The originally concept of providing energy upgrades paid for by energy savings was actually pioneered by the building control companies in the 1980s. These companies used energy savings to justify the sales of their control systems, the equipment these systems controlled and service contracts. The concept of these “performance contracts” became relatively successful in the educational and other commercial market segments. This success led many traditional energy delivery companies, such as natural gas and electric utilities, to form unregulated businesses to provide similar services and attempt to market this concept to industrial customers with large energy expenditures. Other companies, such as traditional providers of equipment that consumed energy, entered this market as well. The success of marketing performance contracts and other energy products and services by these many entities has been mixed and many have exited the market over the past few years. The industrial customer tends to require very short paybacks on projects in today’s economy and is often unwilling to make the lengthy commitments that performance contracts often require.

More Information

For more information about natural gas and the natural gas industry, go to the Natural Gas Supply Association's educational web site located at www.naturalgas.org.