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SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
TheRoleofNaturalGasasaPrimaryFuelintheNearFuture,IncludingComparisons
ofAcquisition,TransmissionandWasteHandlingCostsofGaswithCompetitive
Alternatives
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Introduction
Naturalgasasanenergysourcecomprisesaboutaquarterof theUnitedStates’energyuse.
Naturalgas ismoreenvironmentally friendlythanoilandcoaldueto lowercarbonemissions
perunit, less costly per unit of energy,more readily availabledomestically, and in abundant
supply.However,duetoanumberofbarriersinboththepolitical, infrastructural,pricingand
otherarenas,theuseofnaturalgasasasignificantenergysourceintheUnitedStateshasthus
been limited. Inourpaper,wehighlightthefavorablequalitiesofnaturalgasand itsbenefits
for the consumer, producer, and environment, having compared the costs of the various
componentsof thenaturalgasbusiness suchasdrillingand transport to thatofcoalandoil.
Moreover,wetouchuponthemajor issues thathavepreventedamoreprevalentuseof the
gas,suchasthefactthattheinfrastructureofnaturalgasismorecostlysinceitistransported
thoughpipelineswhereasotherenergysourcessuchasoilandcoalhaveflexiblesystemsthat
userains,trucksandships.Inaddition,thepowerfullobbiesofthecoalandoilbusinessesalong
with recently passed bills that create further incentives for these industries pose an even
greater barrier for natural gas, despite its various attractive qualities. We also include
discussionsofpolicyproposalstoincentivegreateruseofnaturalgasinthefuture.
Naturalgasisformedintheearth’scrustasaresultoftransformationoforganicmatterdueto
heatandpressureofoverlyingrock.Thegashydrocarbonscanalsobeproducedasaresultof
microbialdecompositionoforganicsubstancesandalsoduetoreductionofmineralsalts.Some
ofthesegasesarereleasedintotheatmosphereorhydrospherewhiletherestaccumulatesin
theupperlayersoftheearth’scrust.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Thecompositionofnaturalgasvariesdependingonanumberoffactorsliketheorigin,location
ofdepositandgeologicalstructure.Naturalgasmainlyconsistsofsaturatedaliphatic
hydrocarbonslikemethane.Componentssuchascarbondioxide,hydrogensulfide,nitrogen
andheliumconstituteaninsignificantproportionofnaturalgascomposition.Naturalgasisthe
cleanestofallfossilfuelsandthemainproductsofcombustionofnaturalgasarecarbon
dioxideandwatervapor.Coalandoilarecomposedofmuchmorecomplexmoleculesand
whencombusted,theyreleasehigherlevelsofharmfulemissionssuchasnitrogenoxidesand
sulfurdioxide.Theyalsoreleaseashparticlesintotheenvironment.
Thecombustionofnaturalgasreleasesverysmallamountsofnitrogenoxidesandsulfur
dioxide,carbondioxide,carbonmonoxideandotherreactivehydrocarbonsandvirtuallyno
particulatematter.
FossilFuelEmissionLevels
‐PoundsperBillionBtuofEnergyInput
Pollutant NaturalGas Oil Coal
CarbonDioxide 117,000 164,000 208,000
CarbonMonoxide 40 33 208
NitrogenOxides 92 448 457
SulfurDioxide 1 1,122 2,591
Particulates 7 84 2,744
Mercury 0.000 0.007 0.016
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Naturalgascanbeusedinmanywaystohelpreducetheemissionsofpollutantsintothe
atmosphereasitemitsfewerharmfulpollutantsandanincreasedrelianceonnaturalgascan
potentiallyreducetheemissionofmanyoftheseharmfulpollutants.IntheUnitedStatesthe
pollutantsemittedfromthecombustionoffossilfuelshaveledtothedevelopmentofa
numberofpressingenvironmentalproblemsthatinclude:
• Greenhousegasemissions
• Smog,airqualityandacidrain
• Pollutionfromthetransportationsector
• Electricalandindustrialgenerationemissions
Greenhouseeffectisanenvironmentalissuethatdealswiththepotentialforglobalclimate
changesduetheincreasedlevelsofatmosphericgreenhousegases.Scientistsclaimthatan
increaseingreenhousegaseswillleadtoincreasedtemperaturearoundtheglobe.The
principlegreenhousegasesincludecarbondioxideandwatervapor,methaneandnitrogen
oxides.Thelevelsofgreenhousegasesintheatmospherehavebeenincreasingduetothe
widespreadburningoffossilfuelsbythegrowinghumanpopulations.
Themaincomponentofnaturalgas,methaneisitselfapotentgreenhousegas.Methane
emissionsaccountforonly1.1%ofthetotalU.S.greenhousegasemissions,theyaccountfor
8.5%ofthegreenhousegasemissionsbasedonglobalwarmingpotential.Astudyperformed
bytheEPA(EnvironmentProtectionAgency)andtheGRI(GasResearchInstitute)in1997lead
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
totheconclusionthatthereductionofemissionsfromincreasednaturalgasusewouldstrongly
outweighsthedetrimentaleffectsofincreasedmethaneemissions.Thereforetheincreaseduse
ofnaturalgascanservetoreducetheemissionofgreenhousegasesintheUnitedStates.
Smogisformedbyachemicalreactionofcarbonmonoxide,nitrogenoxides,volatileorganic
compoundsandheatfromsunlight.Groundlevelozoneandsmogcancontributetorespiratory
problemsthatrangefromtemporarydiscomforttopermanentlungdamage.
Theuseofnaturalgasdoesnotcontributetotheformationofsmogasitemitslowlevelsof
nitrogenoxidesandnoparticulatematter.Increasednaturalgasusecouldbeservedtocombat
smogproduction.Thiswouldreducetheemissionsofsmogcausingchemicalsandresultin
healthierair.
Acidrainisformedwhensulfurdioxideandnitrogenoxidesreactwithwatervaporandother
chemicalinthepresenceofsunlight.Theincreaseduseofnaturalgascouldprovideforfewer
acidraincausingemissions.
Naturalgaspoweredindustrialapplicationandnaturalgasfiredelectricgenerationoffera
varietyofenvironmentalbenefitsandenvironmentallyfriendlyusesthatinclude:
• Feweremissions
• Reburning
• Reducedsludge
• Cogenerations
• Fuelcells
• Combinedcyclegeneration.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Useofnaturalgas
Naturalgashasanumberofapplicationscommerciallyinhomes,industriesandthe
transportationsector.
Residentialuse
Naturalgasisoneofthecheapestformsofenergyavailabletoresidentialconsumers;itiseven
cheaperthanelectricityasasourceofenergy.
AccordingtoDepartmentofEnergy,in2007naturalgaswasthelowestcostconventional
energysourceavailableforenergyuse;itcostslessthan30%thecostofelectricity,perBritish
thermalunit(Btu).
Energysource ResidentialenergycostsperBtu
Kerosene 19.48
Propane 20.47
No.2HeatingOil 16.01
NaturalGas 12.18
Electricity 31.21
Naturalgasisusedforheatingandcooking.Cookingwithnaturalgasprovidesbenefitslikeeasy
temperaturecontrol,self‐ignitionandself‐cleaning.Agasrangecostsabouthalfthatofan
electricrangeandithasquickheatability.Thenewergenerationnaturalgasrangesaremost
efficient,economicalandversatilecookingappliances.
Naturalgasisthemostpopularfuelforresidentialheating.AccordingtoAmericangas
association(AGA),51%oftheheatedhomesinUSusednaturalgasheatingin2000.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Naturalgasairconditioningunits,likemanyothergaspoweredappliancesareinitiallymore
expensivethanelectriconesbuttheyarecheapertooperateandtheyhavelongerexpected
lifeandrequirelowmaintenance.Allgas‐poweredappliancesofferasafe,efficient,and
economicalalternativetootherfuelsources.
Almost70%ofthenewhomesinUSAusenaturalgasforheatingandthereforealargenumber
ofthemalreadyhavenaturalgasdeliveryinfrastructureinplace.Gaspipesthatcansupplygas
tofurnacescanbeusedtosupplyenergyforallgas‐poweredappliances,thusinstallationis
easy.
Naturalgascannotbesubstitutedforelectricityincaseofapplianceslikeblenders,televisions
andblenders.
Naturalgasfuelcellsandmicroturbinesofferresidentialconsumersthecapacitytodisconnect
fromtheirlocalelectricdistributor,andgeneratejustenoughelectricitytomeettheir
requirements.Thistechnologyisstillinitsstartingstagesbutispromisinginbeingableto
provideindependent,efficient,reliableandenvironmentallyfriendlyelectricityforresidential
needs
CommercialUses
Themaincommercialusesofnaturalgasincludespaceheating,waterheatingandcooling.
CommercialEnergyUse Percentage
SpaceHeating 36%
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Cooling 8%
Ventilation 7%
Waterheating 8%
Lighting 20%
Other 21%
AccordingtotheEnergyInformationAdministration,asoftheyear2003,thecommercialsector
consumedabout6,523trillionBtu’sofenergyannually(minuselectricalsystemlosses)mostof
whichisrequiredforheating,lightingandcooling.
Naturalgasisanefficientandeconomicalfuelforcommercialbuildings.Non‐spaceheating
applicationsofnaturalgasareexpectedtoaccountforthemajorityofthegrowthofnaturalgas
useinthecommercialsector.
Naturalgasprovides13%oftheenergyusedincommercialcoolingbutthispercentageis
expectedtoincreaseduetotechnologicalinnovationsincommercialnaturalgascooling
techniques.
Therehasbeenagrowthinthedemandfornaturalgasinthefoodserviceindustry.Naturalgas
isaflexibleenergysourceandnaturalgas–poweredappliancescancookfoodinmanydifferent
waysthatareeconomical,efficientforlargecommercialfoodpreparationestablishments.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Smallersystemsthatusenaturalgascanintegrategas‐firedfryer,griddle,over,hot/cold
storageareasandmultipleventingoptionsinasmallspaceasnaturalgas‐poweredappliances
canbeeasyandefficientwhilebeingcompact.
Technologicaladvancementsallownaturalgastobeusedtoincreaseenergyefficiencyin
commercialsettings.Naturalgas‐poweredfuelcells,reciprocatingenginesandturbinescan
generateelectricity.Theseunitsoffercommercialenvironmentsmoreindependencefrom
powerdisruption,consistenthigh‐qualityelectricityandcontrolovertheirownenergysupply.
Combinedheatingandpower(CHP)andcombinedcooling,heatingandpower(CCHP)systems
areusedtoincreaseenergyefficiency.Thesesystemsareabletouseenergythatisnormally
lostintheformofheatandusingthisenergythatisnormallywasted,energyefficiencycanbe
dramaticallyimproved.
UseinIndustry
Industrialusesinclude:
Naturalgashelpsprovidebaseingredientsforproductslikeplastic,fertilizer,anti‐freezeand
fabrics.Industryaccountsforabout25%ofnaturalgasuseacrossallsectors.Naturalgasisthe
secondmostusedenergysourceinindustryafterelectricity.
Naturalgasisusedprimarilyinthemetal,chemical,petroleumrefining,stone,clayandglass,
pulpandpaper,plasticandfood‐processingindustries.Thesebusinessesaccountformorethan
84%ofthetotalindustrialnaturalgasuse.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Naturalgasisusedforwastetreatmentandincineration,metalpreheating,glassmelting,
dryinganddehumidification,foodprocessingandfuelingindustrialboilers.
Naturalgasisusedasfeedstockforthemanufacturingofanumberofchemicalsandproducts
andasabuildingblockformethanol,whichhasanumberofindustrialapplications.Naturalgas
isconvertedtosynthesisgas(amixtureofhydrogenandcarbonoxidesformedbytheprocess
ofsteamreforming.Intheprocess,naturalgasisexposedtoacatalystthatcausesoxidization
ofnaturalgaswhenbroughtincontactwithsteam).
Synthesisgasisusedtomakemethanol(canbeusedasfuelsourceinfuelcell)–usedtomake
substanceslikeformaldehyde,MTBE(methyltertiarybutylether,(itisanadditiveforcleaner
burninggasoline)andaceticacid.
Gaseslikebutane,propaneandethanecanbeextractedfromnaturalgasandthesemaybe
usedasfeedstockforproductslikefertilizersandpharmaceuticalproducts.
Naturalgasdesiccantsystems(usedfordehumidification)areusedinpharmaceutical,plastic,
candyandrecyclingindustries.Theabsorptionsystemsusedtoheatandcoolwaterinand
economical,efficientandenvironmentallysoundway.
INFRAREDHeatingUnits
Naturalgasisusedforinfrared(IR)heatingunitsanditisaninnovativeandeconomicmethod
ofusednaturalgastogenerateheat.IRheatingunitsincreaseefficiencyofpowder‐coating
manufacturingprocesses.IRheatersheatmaterialsmoreefficientlyandquickly.Naturalgas+
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
panelofceramicfiberscontainingaplatinumcatalyst=reactionwithoxygenthatdramatically
increasestemperaturewithoutproducingflame.Usingnaturalgasinthismannerincreasesthe
speedofmanufacturingprocess+itisaneconomicalternativetoelectricity.
Directcontactwaterheaters
Energyfromcombustionofnaturalgasisdirectlytransferredfromtheflameintothewater.It
isanefficientapplicationforwaterheating.Whilenormalindustrialwaterheatersoperateat
60‐70%energyefficiencyrange,directcontactwaterheaterscanachieveanefficiencyofupto
99.7%.Therefore,therearecostsavingsinindustrieswherewaterheatingisrequired.
Industrialcombinedheatandpower
Industrialconsumersgetgreatbenefitsfromoperatingnaturalgascombinedcooling,heatand
power(CCHP)systemsandCombinedHeatandPower(CHP)systems.Naturalgasmaybeused
togenerateelectricityinacertainindustrialsetting,theexcessheatandsteamproducedby
thisprocessmaybeusedtofulfillotherindustrialapplicationssuchasspaceheating,water
heatingandtopowerindustrialboilers.Increasedefficiencysavesmoney.Burningattributesof
naturalgashelpsindustriesreduceharmfulemissions.
Industrialco‐firing
Naturalgasco‐firingtechnologieshelpincreaseindustrialenergyefficiencyandreduceharmful
atmosphericemissions.Co‐firing–processwherenaturalgasisusedasasupplementalfuelin
combustionofotherfuelslikecoal,biomassenergyandwood.Usingnaturalgascanimprove
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
theoperationalperformanceoftheboilerincludingitsenergyefficiency.Co‐firingcanbeused
togenerateelectricity.
Naturalgasisaclean,efficientsourceofenergyandachemicalbuildingblock,whichisan
importantpartofsuccessful,andenvironmentallysoundsindustryintheUSA.
Naturalgasinthetransportationsector
Accordingtonaturalgasvehiclecoalitionestimatesthereare120,000naturalgasvehicles
(NGVs)inUSAandmorethan8.7millionNGVsworldwide.Thereareabout1,100naturalgas
fuelingstationsinUSAalone.
DisadvantagesofNGVlikelimitedrange,trunkspace,higherinitialcost,lackofrefueling
infrastructureareimpedimentstofuturespreadofNGV.Somenaturalgasvehiclesarebi‐fuel,
sothereisflexibilityoffuelchoice.Manyofthesevehicleswereoriginallyjustgasolinebuthave
beenconvertedtobebi‐fuel.Conversioniscostlyandresultsinlessefficientuseofnaturalgas.
Newer,strictfederalandstateemissionlawsrequireanimprovementinvehicleemissions,and
naturalgasisthecleanestburningalternativetransportationfuelavailableanditoffersthe
opportunitytomeetthestrictenvironmentalemissionstandards.
Naturalgasissafeandlighterthanairsowhenthereisanaccident,naturalgasjustdissipates
intotheairanddoesnotformadangerousflammablepoolonthegroundlikeotherfuels.
Thereisnopollutionofgroundwaterineventofspill.ThenaturalgasstoragetanksonNGVs
happentobestrongerandsturdierthangasolinetanks.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Naturalgasisaneconomicalternativetoothertransportationfuels.NGVsareabout30%
cheaperthangasolinevehiclestorefuelandmaintenancecostslower.Naturalgasabundance
domesticallycanhelpdecreaseUSdependenceonforeignoil…therefore,moresecure,safe
energysupplyforUSA.
Naturalgasusereducesenvironmentallyharmfulemissions.Thevehiclesontheroadaccount
for60%ofthecarbonmonoxidepollution,31%ofthenitrogenoxidesand29%ofthe
hydrocarbonemissionsinUSA.Theseemissionscontributetosmogpollutionandincrease
dangerousgroundlevelozone.Vehiclesaccountoroverhalfofalldangerousairpollutantsand
about30%fthetotalcarbonemissionsintheUSA.Thiscontributestothepresenceof
greenhousegasesintheatmosphere.TheenvironmentaleffectsofNGVarelessdetrimental
thanthatofothers.
Duetothechemicalcompositionofnaturalgas,NGVsaremuchcleanerburningthanothers.
Naturalgas–methanemainly–emitssmallamountsofethane,propaneandbutane.
Gasoline/dieselfuels–containsharmfulcompounds–emitssulfurdioxideandnitrogenoxides
(combineinatmospheretoproducegroundlevelozone),arsenic,benzene,nickelandover40
othertoxicsubstances.
NGVproducesonaverage70%lesscarbonmonoxide,80%lessnitrogenoxidesand87%less
non‐methaneorganicgasthanothervehicles.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
ElectricityGenerationUsingNaturalGas
In2009,23,475MWofnewgenerationcapacityareplannedintheUSA,outofwhich,50%
(12,334MW)willbenaturalgasfiredadditions.Coalisthecheapestfossilfuelforgenerating
electricity,butatthesametimeitisthedirtiest.Itreleasesthehighestlevelsofpollutantsinto
theair.Theelectricitygenerationindustryhappenstobeoneofthemostpollutingindustriesin
theUSA.Newtechnologyallows,cleanergenerationofelectricityusingnaturalgas.
Naturalgasisusedinsteamgenerationunits,centralizedgasturbines,combinedcycleunits,
locomotives,distributedgeneration,industrialnaturalgasfiredturbines,microturbinesand
fuelcells.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Background
Beforethe1980sthepriceofgasgenerallyroseandfellwithoilprices.Therearemany
reasonstothis,oneoftheprominentreasonsbeingthatgascontractsusedtobenegotiated
withlinkstocrudeoiloroilproducts,especiallyinIEA1regions.Sincethenhowever,bothoil
andgasmarketshasbeendrivingtowardsliberalization/unbundlingofnetworkassets2.An
instanceofthisistheintroductionoffuturescontractfornaturalgasinthe1990bytheNew
YorkMercantileExchange,andthecreationof“hubpricing”,whichisanefficientwayto
coordinatemultipleplayersinthegasindustrybydeliveringuptodateinformationontheprice
ofnaturalgas.Thisisespeciallyimportanttopipelinecompaniesthatsetuptradingfacilitiesin
ordertomarkettheircapacityservicesandgainhigherutilizationfactorsfortheirpipelines,
infrastructurebuilderswhousesthepricesattwopointsinthesystemasanindicatorforthe
needfornewpipelineinfrastructure.Thevolatilityofthesehubpricesalsosignalstogas
customersasagoodindicatorformoreinvestmentinstorage.Thehubsystemisbecoming
increasinglyprevalentinNorthAmericaandgasisnowtradedatover40principalcenters
acrosstheNorthAmericancontinent,thebestknownbeingtheHenryHubinLouisiana,which
1InternationalEnergyAgency(IEA)isanintergovernmentalorganizationwhichactsasenergypolicyadvisorto28membercountriesintheirefforttoensurereliable,affordableandcleanenergy
2Partoftheliberalizationprogramistheunbundlingofnaturalgasservices.TheDutchcompanyGasuniewasthefirstContinentalgascompaniestoofferservicesalacarteandmanyothercompaniesfollowed.IntheUS,TheFERCOrderNo.436makeitanecessaryforpipelinestoseparatetheirtransportationandsalesservicessothatthecustomershaveachoiceinselectingproviderandquantityoftheirgassales,transportationandstorageservices.Thisissupposedtoreducethemonopolyofpipelinecompaniesandpunishmanyeconomic‘rentseekers’inordertofacilitatemoreefficientandreliabledeliveryofnaturalgastoendsusers.Withtheunbundlingofservices,customersarefreetodecideforthemselveshowmuchflexibilityandback‐uptheyrequire.Insteadofcontractingforaguaranteedsupplyunderallcircumstances(suchastemperaturevariation)eachcustomercanTheonlyresponsibilityleftforthecommercialplayersarethecontractualobligationstheymustfulfill.SeeAppendix(Deregulation)formoreinformation
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
isthereferencepointofgasfortheNYMEXgasfuturecontract.Suchinnovativefinancial
instrumentsallowsforthedevelopmentofaspotmarketfornaturalgas,whichensuredthat
gaspricereflectunderlyingissuesofdemandandsupply(e.g.theavailabilityofpowerplants,
hydrolevels,gasstoragelevels,oilprices,pipelines,temperature,levelofindustrialor
commercialdemand…etc)andnotjust“track”thatofoilprices.Nonetheless,thisisnottosay
thatgaspricingcannottrackoilprices,fortotheextentthattheyaresubstitutable,thepriceof
onewilldefinitelyhavetheeffectonthepriceofanother.
Itshouldbenotedhowever,thatwhilegaspriceshavebeendecontrolledatthewellheadand
atthebulkorwholesalelevel,thepricesoftransportationandstorageservices(whichmakes
upalargepartoftheenduserprices)remainonthelargepartregulatedbutthegovernmental
authorities
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Aninterestingaspectabouttheabovegraphisthatatsomepointsitseemslikegasandoil
pricesareinverselyrelated(before2007forexample,adipincrudeoilpricesisaccompanied
byarisepeakinginnaturalgasprices,thereverseistrueoncewehit2007,andwewitness
familiardipsandpeaksattimesthrough2008‐2009).Thisinverserelationshipinpriceis
indicativeofthehighcompetitivenessofnaturalgasrelativetooil(thattheriseinpriceofone
wouldleadtothedipinthepriceofanotherduetofuelswitching).
GasPricetrendsinNorthAmerica
Ideally,liberalizationissupposedtolowerprices/costsandallowconsumersbetteraccessto
resources.However,inthecaseofNorthAmerica,priceshavebeengraduallyincreasingsince
the1990s.Notonlyso,therehasalsobeenincreasedvolatilityinnaturalgasprices(the
historicalpricevolatilityofnaturalgashasalwaysbeen20%higherthanthatofcrudeoil).To
understandthiscombinedphenomena,oneshouldfirstunderstandtheunderlyingpowersof
supplyanddemandofnaturalgas.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Therearesomefeaturesinherentinthenaturalgasmarketthatinfluencesthestructureofits
price:
1) Pricesofnaturalgasgenerallytrackthewellheadprice(priceofthenaturalgasitselfas
acommodity),longdistancetransportationcostandlocaldistributioncost
2) Thelargeeconomiesofscaleassociatedwithpipelinetransmissionsystemtendtoward
anaturalmonopoly.Inthissense,aspotmarketfornaturalgaspricesmaynotbe
favorableasitcanstiflelongtermcontracting,henceinvestments.
3) Thereisnoexclusiveend‐usermarketinwhichnaturalgasdominates.Instead,itcompetesin
everymainusewithotherfuels,beitpowergeneration,domesticheating,industrial,
petrochemicals…etc
4) Thenaturalgasmarketineachregionisinfluencedbythestructureofentireenergymarket
complexineachregion,andbyexistinggasinfrastructureandpotentialprospectsforitsfuture
expansion
5) Naturalgasusuallyhaslargefixedtovariablecosts(fixedcostbeingstartupcapital,
infrastructure…etcvariablebeingtransmissionandassociatedcosts).Thisusuallynecessitates
longertermcontractsinordertoshiftsomeofthelargefixedcostsontoconsumers.
6) Indeed,balanceneedstobefoundtosmoothenthetensionbetweenthehighfixedcostand
lowaveragemarginalcostsinordertoensureshorttermcompetitivenesswithoutjeopardizing
longterminvestmentincentives
7) Itgenerallyhaslowincomeelasticity
8) Differentendusersofnaturalgashavedifferentelasticitiesofdemand,the
residential/commercialconsumersaregenerallytheleastresponsivetoachangeinpricedueto
theirinabilitytoaccessviablesubstitutes
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Point2)isespeciallyimportantbecauseunlikeoil,gasisaninfrastructuredrivenindustry.This
meansthatitspricedependsonaseriesofregionalmarketsinwhichseparatedevelopment
dependonthenatureofinfrastructureandregulationsinplace.Forthisreason,gassuppliers
aremoreexposedtotheriskofdisruptionthanoilproducers.Inthecaseofoil,temporary
supplyshortagescanbedealtwithby“transporting”oil(bytanker,truck,planeorrailroad)to
theemergencyregion.Ontheotherhand,gasrequiresfixedinstallationsthatarehighlycostly
andcannotbeconstructedinahurry.Asaresult,allgasusersthatarenotlocatedinthe
immediatevicinityofagasfield,apipelinehuboraLNGterminalwillfaceadangerousriskof
notbeingtoaccessgas.Thisisacompetitivedrawbackthatcannotbeignored.
Theextenttowhichsuchtemporarysupplyshocksare“dangerous”shouldnotbeexaggerated,
fordifferentusershavedifferentsupplyneeds.Forexample,largeindustrialusersusuallyhave
theabilitytosubstituteheatingoilorcoal,sotheydonotneedacontractthatprotectsthem
entirelyfromsupplyshocks.Onthecontrary,theymightevenprefercontractsthatdonot
protectthemfromthesupplyshocksbecausetheywillnotneedtopaythe“riskpremium”.On
theotherhand,powergeneratorswithshiftingrequirementsneedgreatersecurityinsupply,
butthemostvenerablegroupisstilltheresidential/publicservice/commercialconsumers
withoutsubstitutionability.Indeed,commercialconsumersgenerallypayhigherpricestoenjoy
protectionthroughstatutorydistributorstoragerequirementsandpriorityservices.
Onecanarguethatthesupplyriskassociatedwithnaturalgasdoesnotactuallypreventitfrom
achievinganefficientoutcome.Thepeoplewhoneedmoresupplysecuritywilljustenduppay
more.Inthelongrunhowever,asoilbecomesincreasinglyscarceandwelooktonaturalgasas
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
aviableoption,weshouldaimtomakenaturalgasmorecompetitiveinthecommercialsector
byreducingthesupplyrisks,andthusthepremiumspaidbytheconsumers.
USDemandofNaturalGas
TheNorthAmericangasmarket3isthelargestintheworldwith773bcmconsumedin2001,or
29%ofglobalgasdemand.TheUSaccountsfor608bcm.
USgasdemandhasbeensteadilyrisingfrom1980s.Domestically,naturalgascurrently
accountsforalmostaquarterofallenergyintheUS.Itheats50%ofexistinghomeandnearly
70%ofnewlybuilthomes.Gasfiredpowerplantsmakesup88%oftotalnewelectricalpower
plants.
Inthepastcoupleofyears,thegas‐firedshareofUSelectricitygeneration,includingco‐
generation,rosetocloseto20%.Electricitygenerationisexpectedtosurpasstheindustrial
sectorasthelargestconsumerInaturalgasintheUS.
TheEIAestimatesthatnaturalgasdemandintheUScouldbe24.36Tcfbytheyear2030,
whichisequaltoa6%increasefrom2007demandlevels,ascomparedtoanexpectedtotal
energyconsumptionincrease(fromallenergysources)of12%.Furthermore,itispredicted
thattheannualwilldemandincreaseatarateof0.5percentoverthenext21years
3WemayspeakofCanadaandtheUSasasinglenetworkasbothcountrieshavesimilarregulatoryframeworksandbothareNAFTAmembers.LargepipelinelinksalsocarrysubstantialflowsofgasfromCanadatotheUS
(estimated107bcmin2001).
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
DemandResponsetochangesinnaturalgasprices
Conventionaleconomictheorytellsusthatinthelongrun,consumerswillreacttopricesand
whatremainsforusisexploreiswhetherthishappensinthemarketfornaturalgas.
Asenergypriceshaverisensteadilyoverthepastcoupleofyears,therehasbeenanobserved
tendencytolowerammoniaandmethanoloutputandswitchesproductiontositesnearcheap
sourcesofgas.However,sincetheNorthAmericanpricesarenotindexed,asupplyshock/price
spikewilldecreaseconsumption,regardlessofwhethertheconsumerbuyspotpricesorfixed
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
pricegas.Inthecaseofthelattertheconsumerwilljuststopbuyingifthesportpricebecomes
toohigh,inthecaseofthelattertheconsumersmighthavetosellbacktothemarketfora
profitandtherebyinterruptinghis/herownconsumption.
SupplyintheUSmarket
TheUnitedStateshavethebiggestgasmarketinworld.Provengasreservesamountedto7.8
tcmatthebeginningsof2002,whichis4%ofworldgasreserves.
BelowareEIAestimatesofnaturalgasreservesintheUnitedStates.
NaturalGasTechnicallyRecoverable
Resources
NaturalGasResource
Category
(TrillionCubicFeet)
AsofJanuary1,
2007
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
NonassociatedGas
Undiscovered 373.20
Onshore 113.61
Offshore 259.59
InferredReserves 220.14
Onshore 171.05
Offshore 49.09
UnconventionalGas
Recovery644.92
TightGas 309.58
ShaleGas 267.26
CoalbedMethane 68.09
Associated‐DissolvedGas 128.69
TotalLower48Unproved 1366.96
Alaska 169.43
TotalU.S.Unproved 1536.38
ProvedReserves 211.09
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
TotalNaturalGas 1747.47
Source:EnergyInformationAdministration‐
AnnualEnergyOutlook2009
ThesinglelargestsourceofU.S.NaturalGasSupplyisunconventionalproduction,inparticularnatural
gasintightsandformations,whichispredictedtoaccountsfor30%oftotalU.S.productionby2030.
Productionfromshaleformationshowever,isthefastedgrowingsource.
TheUSNaturalGasMarket
TheUShasavastnetworkofhigh‐pressureinterstatepipelinesortrunklinesthatcarrygas
fromthemajorsupplyareas‐notablyMexicanGulf(onshoreandoffshore),thelowerMidwest,
thePermianBasinontheTexas/NewMexicoborder,theSanJuanBasininthesouthwestifthe
Rockies‐tothemainareasofconsumptionbothwithintheproducingregionsandinthe
Northeast,MidwestofCalifornia.Therearealsoanumberofpipelineslinkingtheprincipal
producingfieldsintheWesternCanadaSedimentaryBasinwithUSmarketsinCalifornia,the
MidwestandtheNortheast(theNortheastbeingthelargestconsumingregion).These
networksarehighlyintegratedsothatgasfromproducingstatesintheGulfregioncanin
principlemovejustaboutanywhereinthesystem.Thetransmissionsystemincludes270,000
milesofpipelines.Withthissaid,thesupplysecurityissuediscussedabovemaynotbeallthat
relevantinthecaseoftheUS.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
ThenextsectionisdevotedtothestudyoftwophenomenaintheUSnaturalgasmarket:the
riseinpriceandtheincreaseinpricevolatility.Whiletheyarecloselyrelatedbytheunderlying
causalfactors,oneneednotimplytheother.
Priceincrease
ThelongtermequilibriumpricefornaturalgasintheUShasbeenpersistentlyrisingduringthe
past10years,fromapproximately$2permillionbtutoaround$4.50in2003.Theextentto
whichthispriceincreaseisfeltbydifferentsectorsisdifficulttoquantifyaswehavementioned
earlier,thenaturalgasmarketisasegregatedonewithusersfacingsignificantlydifferent
prices.
Thereareacoupleofreasonsbehindthispersistentpriceincrease,themostcommonone
beingtheinflexibility/rigidityofnaturalgassupplyanddemand.Thisbringsusbacktoour
discussionaboutendogenous“features”ofnaturalgasthatdeterminesitspricingstructure.For
one,gasproductionandtransportationrequirelargeinvestmentbecauseofdifficultgeological
conditionsofextractionandproductionandtransportationconsiderations.Also,oncethe
projectisplannedoutanditsinvestmentfundsarecommitted,theproject’scarryingcapacityis
usuallyfixed,renderingitdifficulttokeepupwithchangingdemandtrends.Thereisalsothe
issuewithtimelags.IntheUS,whengaspricesspikes,producersincreasetheirdrillingbutit
usuallytakesaround18monthsbeforesuchnewdrillingtranslateintoadditionalproduction
capacity.Partofthissupplyrigiditycanalsobeexplainedifthereareothercountriesinvolvedin
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
the“gaschain”.Insuchacase,pricesignalswillnotnecessarilyleadtoinvestment,
production…etc4.
Ofcourse,thereareother“exogenous”factorsthatcontributetothissupplyrigidity.Thelatter
couldbearesultofsupplyrestrictions,suchasenvironmentalpressures(occurringin1990sto
buildpowerplantsthatarefueledbynaturalgasinordertoeconomicallycomplywithnew
sourcereviewregulationsintroducedin1970s),difficultyinpubliclandaccess…etc.Indeed,
therearesomeanalystswhoarguethatregulatorymandatesaretoblamefortheprice
increaseastheyhavepreventedportfoliodiversificationofenergychoices,whichleadsto
marketsthatdonotadapttounanticipatedandchangingconditions.
4ItshouldbenotedthatthismaynotbeagoodexplanationinthecaseoftheUSwheretheimportsofnaturalgas
accountsforamere1%oftotalnaturalgasconsumption
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
TheaboveshowstheGulfofMexicoproductiontrends.Aswecansee,exogenousfactorssuch
naturalcalamitiescanbeinduceproducerstocuttheirsupplies(thethreedipsinproduction
correspondtothethreehurricanes).Itshouldalsobenotedthatduetotherecentcold
weather,arecordamountofnaturalgashasbeenwithdrawnfromstorageinFebruary,
droppinginventoriesbelowthefive‐yearmaximumforthefirsttimeinoverayear(seesection
onstorageandpricing).Also,thehighcostofreplacingnaturalgasproductionacrossallbasins
hasraisedthepricefloor.Thisisworsenedbythegradualreductioninsupplyfrom
conventionalgasbasinsandthesteadyincreasefromunconventionalbasins.Canadaisalso
cuttingitsnaturalgasexportstotheUSduetothehighdomesticdemandthatitisfacing.
Demandrigidityontheotherhand,comesfromtheinabilityofsomeend‐consumersofnatural
gastoswitchtoadifferentfuelwhengaspricesarehigh(seedemandresponses).
Interestinglyenough,highoilpricesmayalso“allow”gaspricestosoardueto
competitivefuelswitching.Thisisexacerbatedbythefactthatthepetroleumsupplyindustry
tendstofavoroildevelopmentoverthatofgaswhenpricesarehigh,becauseoildevelopment
costsandtheleadtimetofirstproductionareusuallyless.
PriceVolatility
Technologicalinnovations(seeappendix)inthediscoveryandtheextractionofnaturalgashas
allowedforagreaterproportionofgasreservestobebroughttothesurface.Forexample,
marketedproductioninWyominghasrisenfrom3.4percentoftotalUSoutputin1996to7.1
percentin2003.Coupledwithtechnologicaladvancesinnaturalgasdrillinghowever,isthe
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
acceleratedrateofdepletionofnewlydiscoveredgasreservoirs(from21%intheearly2000sto
around30%today).Thisincreaseindepletionrateisespeciallyimpactingforconventionally
producedgasbecausetightsandgas(whichcomprisesanincreasingshareofnewlydiscovered
gasfields)exhibitsaslowerdepletionratethanconventionalwells.
Despitethesetechnologicaladvanceshowever,thepriceofUSnaturalgasanditsvolatilityare
stillontherise(itshouldbenotedthatthefirstdoesnotimplythelatter).Whileitistruethat
historically,thepriceofgashasalwaysbeenextremelyvolatile(alargepartofthisisduetoits
sensitivitytoseasonality‐moregasisdemandedduringthewinterandlessduringthesummer,
thisratioisabout2:1,theratioisevenlargefortheresidentialsector7.4:1),sinceearly2008,
naturalgaspriceshittherecordvolatilityof70%.Thereafewspeculationsastowhygas
priceshavebecomeincreasinglyvolatile.Butmostofthemcanbereducedtoatighteningof
suppliesandaspikingindemand.Thelatterhasbeenespeciallyimportantinthepastcoupleof
yearsduetothesuddensurgeof“environmentalconscience”allaroundtheworld(especially
amongtheG20nations),whichisbestcapturedbytheagendaofthe2009CopenhagenClimate
Conference.
Aspricevolatilityisneverdesirableforanyeconomicagent,itshouldbereducedthrough
severalmeans:
1) Aspricevolatilityisintimatelytiedwiththelevelofstorage(ifthestoragecapacityis
sufficientlylargethenmoregascanbepumpedintothemarketwhendemand
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
pressuresareputtingastrainonsupply),improvingstoragewouldhavereducethelevel
ofvolatilityfacedbyUSusers(seesectionon“storage).
2) TheregionalpricedifferentialsofnaturalgasintheUSgenerallyreflectthecostof
transportationfromanotherregion,improvingtheefficiencyoftransportationwillalso
reducethepricevolatility
Ingeneral,commoditieswithrelativelyconstantsupplyandrelativelyvariabledemandtendto
bemorepricevolatile.Itcanalsobeobservedthatthevolatilespotpricesofnaturalgasreflect
thelessdeveloped,pricedampeningglobaltradeofnaturalgas.Oilproducersontheother
hand,haveunlimitedaccesstoworldoilsuppliessooilrefinersintheUScaneasilysmoothen
outpricespikesbyimportingoilfromothercountries.
AnincreaseinthelevelofglobaltrademayreducepricevolatilityofUSnaturalgas.Althoughit
ispossibletoimportLNGfromabroad(infactwedoseeincreasedmarginalsuppliesfrom
abroad),itcanalsomakeUSdependentoninsecureforeignsupply(liketheoilcase),andis
thereforealegitimateareaofconcern.Whilethisissomethingthatisoftenhotlydebatedby
politiciansandeconomistsalike,thefactthatnaturalgasreservesaremorewidelydispersedin
theworldthanthatofoilsourceisoftenoverlooked.Thisisimportantasitlessensthedanger
oftheUSbeingdependentona“solesourceofenergy”.
WiththedevelopmentofmanynewLNGterminalswithintheUS,interregionalpipelines,LNG
swaps(allowingforspotandshorttermcontracts)wearebeginningtowitnesstobeginningof
aglobalnaturalgasmarketinwhichtheUSwillplayasignificantrole.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Conclusions
Itseemsthatinordertostabilizeprices,theUSnaturalgasmarketmustincreasetheir“safety
valve”ofnaturalgassupply.Whetherthisshouldbedonebyincreasingdomesticsupply,or
importingfromforeignsourcesissomethingtobedetermined.Thereisofcourse,alwaysthe
optionofgovernmentinterventionthroughtheuseortax/subsidiesandpricecaps.Thecaseis
weakerforthelatterinterventionduetoCalifornia’sexperienceintheWesternEnergyCrisis.
Recently,theObamaAdministrationhasalsoproposedtolowerenergysubsidies,especiallyin
theoilindustry,withtheaimtolowergreenhousegasemissions.Thismayinfactincreasethe
naturalgas’smarketshareintheenergyindustryasoilpricesrise.
SomeanalystshavealsoarguedthattheabundanceofcoalintheUS(accordingtotheEIA,the
USstillhas250yearsofdomesticsupplies)justifiedthecompensatoryroleofcoalduringthe
timetighteninggassupplies.Itshouldnotnotedhowever,thatalthoughexistingcoalfired
plantsarestillcheaperforbaseloadproductionthanbringingnewgasturbines,manycoal
plantswillreachtheendoftheirusefullivesoverthenexttwodecadesandgasturbineswill
haveastrongadvantagewhennewinstallationsarebeingconsidered.
Asaforecastfor2010,BloomberghaspredictedthatnaturalgaspricesintheUSwillcontinue
todrop.Someanalystshaveshownthatthisdepressingtrendofnaturalgaspricesdoesnot
havemuchtodowiththeincreaseindomesticoutput,whichhasremainedresilientandfellon
amonthlybasissincethelastquartersof2009.Instead,thisdownwardtrendseemstobe
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
causedbyadecreaseindomesticdemand5.Ofcourse,thisdoesnotmeanthattheUSisusing
lessnaturalgasnow.Onthecontrary,theyareusingmorenaturalgasthanever,andwe
predictthatthevolumeofnaturalgasthatwillbeusedintheforeseeablefutureisevenlarger
duetoPresidentObama’svowtocutU.Sgreenhousegasemissionsby17%attheCopenhagen
ClimateConference6.Therootofthisalmosttwofolddecreaseindomesticgasdemandthenis
causedbyanincreaseinvolumeofLNGimports.
NaturalGasStorage
Overview
Naturalgasisextractedfromgasproducingfields,wheretheextractionrateisnearly
constantovertime.Becausenaturalgasissoessentialtopeople’slives,itisveryimportantto
ensureanadequatesupplyofitatalltime.Theindustrycannotproducenaturalgasinlabsto
addressthepossibleshortages.Therefore,storageofnaturalgas,asincommodities,isneeded
tomanagefluctuationsinsupplyanddemand.
Whendemandofgasislow,suchasinsummer,excesssupplyofnaturalgascanbe
savedintostorageratherthandisposed,causingpollution.Inturn,whenthedemandrises
duringwintertime,thestoredgascanbewithdrawntomeettherisingneed.Inaddition,gas
storagealsoaddressesshort‐termfluctuationsinthegasmarketthatareunpredictableasin
naturaldisastersandgasfieldmalfunctions.Thestoragemethodsserveasabufferbetween
5“RussianBearMenacesU.S.GasPrices”WallStreetJournal,Dec12009
6“Top5IssuesattheCopenhagenClimateConference”USNews,Jan192010
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
transportationanddistributiontoensureanadequatesupplyofnaturalatalltimesandatall
locations.
Othersubordinateusesofstorageincludebalancingtheflowinthepipelinesystem;
levelingthecostofnaturalgasbycontrollingthesupplyandmaketheitsfluctuationmore
predictable;supplyinggasforthepowerplantsthatoperateallyearlong;commerciallystoring
gaswhenpriceislowandsellingitwhenpriceishigh;andmeetingvariousregulatory
obligations.
Tomeasureandgradethequalityofstorage,weneedtoknowitsmeasurements.Total
gasstoragecapacityreferstohowmuchnaturalgasthefacilityholdsunderoptimalcondition.
Generally,thebiggerthefacility,thegreaterthecapacitybecomes.Thisisnottobeconfused
withtotalstorage,whichistheamountofgasavailableatparticulartimes.Basegasiskept
permanentlyinthefacilityinordertomaintainitspressure;somefacilitiesrequirelowerbase
gasvolumethanothers,whichmakesthemeconomical.Basegasisdifferentfrombaseload
capacity,whichistheminimumamountofgasstoredtomeetseasonalincreaseindemand.
Workinggascapacityistotalstoragesubtractedfromthebasegasrequirement;itis
totalgasdeliverabletotheoutsidemarket.Thegreatertheworkinggasvolume,themore
usefulthefacilityistotheendusers.Ontheotherhand,infacilitieswithhighbasegastototal
capacityratio,workinggasisthereforeexpectedtobelow,makingthemlessviable.Butthe
constructionandmaintenancecostsoftenoffsetthebenefitofhighworkinggasvolume.
Deliverabilityisaratethatexplainshowmuchgasthefacilitywithdrawsdaily.Itis
measuredinmillionsofcubicfeetperdayorMMcf/day.However,deliverabilityhaslittletodo
withthetypeoffacilitythegasisstored.Itdependsmoreonthetotalstorageatparticular
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
time,workinggastobasegasratio,pressurewithinthefacility,compressioncapability
available,andothers.Therefore,thehigherthestorage,thefasterthedeliverratetendstobe.
Lessimportantlyistheinjectionratethataccountsforthespeedoftransferringgasinto
thefacility.ItisalsomeasureinMMcf/day.Asadirectreverseofthedeliveryprocess,the
injectionisfasterwhenstorageandworkinggasarelow.
DistributionofnaturalgasstoragesintheU.S.:
IntheUnitedStates,workinggascapacityislowestinAprilandhighestinNovember.In
betweenAprilandNovember,thedemandofgasislowwhereexcessivegasinjectsinto
storage.InbetweenNovemberandApril,theconsumptionishighwherethestoredgas
withdrawsandexhausts.Therefore,acycleinnaturalgasstorageisexactlyayear.
AlsointheUnitedStates,thereare120gasstorageoperators,withaworkinggas
capacityofnearlyfourtrillioncubicfeet.However,thedistributionoftheseoperatorsisquite
geographicallyuneven.Mostoperatorsarelocatedinthenortheasternsideofthecountryand
thegulfcoastregion.Thereareveryfewstoragefacilitieslocatedonthewesterncoastand
mountainregions.However,thisdistributionisexplicableinseveralways.Thenortheastern
partofthecountrytendstoexperiencegreaterfluctuationsintemperaturesandcolderwinters
thantherestofthecountry;thisfactindicateshigherdemandintheseregions.Therearealso
abundancedepleted,recyclablereservoirsintheseregionstoconverttogasstorages.By
contrast,thewesternUnitedStatesenjoysgenerallywarmerweatherallyearlong,withlower
demandinnaturalgas.Themountainregionshavelesspopulation,whichindicatesless
demandthanthepopulousregions.Thegulfregions,thoughwithsimilarlylowdemand,arebig
producersandexportersofnaturalgas,wherestoragesarealsoneededtobalancethemarket.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Storagefacilities:
Althoughnaturalgasstoragesservethesamepurposes,therearemanymethodsto
buildthem,witheachhavingitsadvantagesanddisadvantages.Primarily,storedgasisheldin
undergroundformationssuchasdepletedoilorgasreservoirs(themostcommon),innatural
aquifers,orincavitiescreatedinlargeundergroundsaltdeposits.
IntheUnitedStates,gasismostcommonlystoredindepletednaturalgasoroilfields
nearthecenterofconsumption.Thegreatadvantageoftheconversionfieldisitswide
availabilityallaroundthecountry.Theseformationsoffervastspacesthataregeologically
capableofholdingnaturalgasingreatvolumes.Inaddition,theoldreservoirsprovideleftover
equipmentsandextractionnetworksthatcanbereusedtosavethecostofconstruction.These
includeexistingwells,gatheringsystems,andpipelineconnections.Theconversionalsohelps
recycletheoldfieldsratherthanabandoningthem,whichisanenvironmentalbenefit.In
general,thistypeoffacilityisthecheapesttoconstructandmaintain.However,some
reservoirsrequiregreaterbasegasvolumeandexperiencedifficultiesininjectionanddelivery.
Also,depletedfieldsarerareinsomeruralareas.
AnothercommonmethodistheconversionofaquifersfoundprimarilyinMidwestern
UnitedStates.Anaquifermaybeeasilyavailable,however,onlycertainmodifiedaquifersthat
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
hasrockformationoverlaidwithanimpermeablecaprockcanbeusedforstorage.Therealso
needsextramonitoringeffortonaquifers.Aquifersalsotakehighbasegasvolume,atabout
70%.Still,aquifersarebetteralternativeswhenthereisanactivewaterdrivethatenhances
deliverabilityandwhendepletedreservoirsarenotpresent.
Athirdmethodistheuseofsaltcaverns.Theyarecommonlyfoundinthegulfofthe
UnitedStates.Thecaverniscreatedusingfreshwatertodissolvecavitiesinthesaltformation,
whichformslargequantitiesofbrine.Somegreatadvantagesofsaltcavernsarehigh
withdrawalandinjectionratesandlowbasegasrequirements,ataround25%.However,the
constructionofthecaverncanbemoreexpensivethandepletedfieldconversions,especiallyin
regionsoutsideofthegulfcoast.Thebrinesaredifficulttodisposeandcauseenvironmental
damages.
Rarely,abandonedminesandhard‐rockcavernareusedtostorenaturalgas.These
facilitiesmaycostlessoverallbutarehardtofind.Thenaturalgascanalsobestoredintanksas
liquefiednaturalgas(LNG).LNGcondensesthegasandallowsittobecomeportable.
Gasisinjectedandwithdrawnfromthesestoragesusingthesametypeofwelldrilling
andproductionequipmentofnaturalgasfields.Thecapacityofstorage,however,tendsto
declinerapidlyamongthesestorages.Onaverage,gasstoragewellsintheUnitedStateslose
about5percentoftheirabilitytoinjectandwithdrawgaseachyear.Thisproblemiscausedby
thebuildupofcalciumcarbonateandorganicresiduethatclogtheopenings.
Thecostsofstorage:
Theconstructionorconversionofanaturalgasfacilitycanbeextremelyexpensive.For
example,thedevelopmentcostofasaltcavernrangesfrom10to25millionsofdollarsper
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
billioncubicfeetofworkinggascapacity.Thecostofconstructionescalateswiththetypeof
facility(saltcavernisthemostexpensive),thedifficultyinlocatingandtestingastoragesite,
thecomplicatedgeologyofthesite,thepowerneededtooperatethefacility,thedistancefrom
theconsumptioncenter,regulatoryrestriction,andvariousenvironmentalissues.
Themajorcostinrecyclingdepletedreservoirsandaquifersarethebasegasinjection,
whichaccountformorethan50%ofthetotalcapacity.Themajorcostsinsaltcavernsare
leachingandbrinedisposal,whicharebothexpensiveandpolluting.
Othercostsincludetheservicecoststobothdelivergasfromandtomaintainthe
facility.Theycanbeasexpensiveasover10millionsdollarsannuallyperfacility.Theyinclude
thecostofusinginterstatepipelines,tariffs,electricity,andstorageservices.
Lastly,therearealwaysthoseperunitcostsassociatedwithinjectionofnaturalgas,its
storage,itscapacitydepletionthroughleakages,anditsextraction.Again,thesecostscancost
millionsandvarybasedonthenatureofthefacilities.
RegulationandownershipintheU.S.:
Thereareabout80corporateentitiesthatoperatethe400+storagesacrosstheU.S.
Theentitiesareeithersubjecttotheregulationofthestatetheyoperatein,orsubjecttothe
jurisdictionoftheFederalEnergyRegulatoryCommission,theFERC.
Interstateandintrastatepipelinecompaniesownmoststorages.Thesecompaniesuse
storagestoperformloadbalancingandsupplymanagementfortheirpipelines.Theyalsolease
theirstoragestoothersintheindustry.However,interstatecompaniesrarelyservetheend
usersdirectly.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Thelocaldistributioncompanies(LDC)directlyservethecustomersovercertainregions.
Thesecompaniesareownedbyeitherprivateinvestorsorthelocalgovernments.Theycontrol
theflowofgasthroughthepipelinestoindividualhouseholds.Before1992,naturalgasstorage
wasaproductsoldbypipelinestotheseLDCs;itwasheavilyregulatedtomeetthe
transportationanddistributionneeds.
AfterthemarketderegulationthroughFERCOrder636,storagesbecomeavailableto
anyoneforcommercialpurposes.Inotherwords,after1992,manystoragefacilitieshave
becomeprofitablebusinesseswheretheprivateownersinjectgaswhenpriceislowanddeliver
itwhenthepriceishigh.Thisderegulationgavegreaterflexibilitytostoragemanagementsin
recentyears.
Waystoimprovestorage:
Asthedemandofnaturalgasincreasesovertheyears,itisimportantforustoaddress
thepossibilityofgasshortageinthenearfuture.Also,weneedtofigureoutawaytomake
naturalgasstoragemoreenvironmentallycompatibleandeconomicallyefficient.
OneexistingproposalfromtheDepartmentofEnergyistosomehowtomakethe
facilitytochillthenaturalgasandreduceitsvolume,whichreducestheburdensofconstructing
alargestorageandincreasesthetotalcapacity.Thisproposalwouldworkextremewellonsalt
cavernsthatareveryexpensivetoconstructduetodisposingoftheleachedbrine;thiswould
makesaltcavernsmoreaffordabletoareasoutsideofthegulfcoast.
Tochill,onecanfreezethenaturalgasinthepresenceofwater,andturnitinto
hydrates.Thehydratesstorenaturalgasinexceptionallylargecapacity.Itisevenproposedthat
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
anover100cubicfeetofnaturalgascanbestoreinonesinglecubicfootofhydrate.Wecan
suchcreateabetterstoragebymakingministorages.
Also,wecanexpandstoragesbytryingtoconvertotherformationsintogascontainers.
Thisincludeslimestone,granite,andsandstoneformationsthatarefoundatrandomlocations
acrossthecountry.Thesecanbecomegreatsubstitutesforthelocalswhereverthethreemain
formationsareabsent.
Lastly,wemayfurtherinvestinprivatelyowned,portablehomenaturalgastanks.We
canliquidizethenaturalgasimmediatelyfromthegasfieldandstoreitintosteeltanks.These
containerscanservetheusersatanytimetheywant.Theycantakethetanksonvocationsand
usethemwherevertheaccesstogasisotherwiseunavailable.
Investmentinnaturalgas:
Investmentsareneededasthedemandfornaturalgascontinuestorise.Theproduction
ofnaturalgashasbeennearlyflatforthepastdecade.Therefore,weneedtofindwaysto
stimulateandincreasethisrate.
Naturalgasoftencomesincompetitionwithinvestmentinoilandcoal.Therearemany
advantagesininvestinginnaturalgasoveroilandcoal.First,thepriceofnaturalgasismuch
lowerthanthatofoilatabout1to8,yetitisrisingsteadily.Next,thecombustionofnatural
gasiscleanertotheairthanthecombustionsofoilandcoal.Thismakesnaturalgaspolitically
andenvironmentallyfriendlier.Naturalgasisalsolighterthanoilandcoal,whichbearsless
transportationcost.Lastly,thereisalwaysademandinnaturalgasasitisessentialfor
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
householdstocombatwinter,whereasoilandcoalsarenecessarybutnotessentialfor
livelihood.
Generally,thereareseveralareasofinvestmentinthenaturalgasindustry.Theinvestor
caninvestinthesearchandexplorationofproducingsite;investintheconstructionofthesite;
investintheproductionofnaturalgas;investinpipelinesandtransportationofnaturalgas;
investinthestoragefacilitiesandothers.
Onepossiblenewareaofinvestmentisinfuelcells.Thecellsextracthydrogenfromthe
gasandcombineitwithoxygentoproducewater,electricityandheat.Theyareefficientand
convert60%oftheenergyingasdirectlyintoelectricity.Thesefuelcellsbecomegeneratorsto
powerupcarsandprovideenergysourcestohouseholdsandfactories.Ifthistechnologyis
furtherinvested,naturalgaspoweredfuelcellsmayleadtoanenergysystemrunonemission
free,non‐depletinghydrogen.
Asecondnewareaofinvestmentisingasmadefrombiomass.Themassdecaysand
producesmethaneovertime.Wecaninvestinthecaptureofmethanegasproducedbylandfill
andsewage‐‐thisinvestmentwillnotonlyprovidesacheapersourcefornaturalgas,butalso
preventsthespreadofpollutingmethane.
Whynaturalgasstoragemaybecheaperthanoilandcoalstorages
Firstofall,asindicated,naturalgasismuchmorecleanertotheenvironmentand
produceshalftimelessCO2thanoilorcoal.Withthatbeingsaid,theriskofnaturalgasleakage
duringstorageisfarlessthanthespillofoil.Oilspillcausesextremeenvironmentaldamage
especiallytoorganisminwater;inaddition,itisnearlyimpossibletoremovethespillage.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Leakednaturalgas,thoughstillsomewhatpolluting,vaporizesanddisappearsquicklyinthe
atmosphere.
Coalscontainthecompoundmarcasitethatfrequentlyrisksspontaneousfireaccidents
wheninstorage.Thefirecanigniteamajorityofcoalsinstorageatonce.Itwillthenpenetrate
thesurfaceandcreatedevastatingwildfire;evennot,theCO2burningfirewouldcausegreat
pollution.Bycontrast,naturalgaswouldnotcombustonitsown.
Secondly,naturalgasisstoredinundergroundfacilitiesthatcanholdagreatvolumeat
atime.Duetoweightandvolume,naturalgasstorageischeaperthanthestoragesofliquid
andmineralingeneral.Whereasnaturalgascanbestoredinagreatvarietyoffacilities,the
meanstostoreoilandcoalaremuchrestricted.
Crudeoilisgenerallystoredandimportedinmediumsizedtanksandpipes.Itcannotbesealed
withinundergroundformation,asitisadissolvableliquidsubstance.Such,oilinstorageis
muchrestrictedinvolume.Oilisfarmoredifficulttotransportthannaturalgasthatismuch
lighter.Crudeoilalsorequiresmorelabortoinjectandpumpfromthetanksthanitisfor
naturalgasthroughpipelines.
Similarly,coalstorageismoreexpensivethannaturalgasinthatcoalshavetobe
manuallystoredintoanddeliveredfromthestorageusingcartsorothervehicles.
Also,weshouldstoremoregasthanoilandcoalbecausetheunitpriceofnaturalgasis
cheaperthanthepricesofthelattertwo.Such,thedemandfornaturalgasisrisingmuchfaster
thanthatofcoalandoil.Thismeansthatinthenearfuturepeoplewillstartusingmoregas,
wherebyinvestmentsinthestorageofthegasbecomesincreasinglyeconomicallyrewarding.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
NaturalGasPoliticalIssues/Regulation
WhatPeopleAreDoing
ThenaturalgascaseisgainingtractioninWashington,D.C.OklahomaandPennsylvania
representativesDanBorenandTimMurpheyhavecreatedaCongressionalNaturalGasCaucus
tohelpraisepublicawarenessofnaturalgas.Theynotethatnaturalgasisproducedin32
statesandtheindustryprovidesemploymentforapproximately3millionpeopleintheUnited
States.Thesenumberssuggestthat32governors,64senators,and324Congressmembers
fromnaturalgasproducingstatesmaysupporttheefforttoboosttheindustry’sprofile.
AmyMyersJaffe,energyexpertatRiceUniversity,pointsoutthatallthebenefitstothe
coalindustryprovidedbytheWaxman‐Markeybillrecentlypassedmaketheglobalwarming
causeevenworseoff,whatwiththeamountofcarbonemissionsproducedbycoal.Shestated
thatgrandfatheringcoalis“worsethandoingnothing”.Ifitwasn’tforthepoliticalboostsand
benefitsgrantedtothecoalindustry,naturalgaswouldbemorewidelyusedthancoalbecause
itisbecomingevencheaperandemitshalfasmuchcarbon(http://blogs.ft.com/energy‐
source/2009/10/08/us‐natural‐gas‐gaining‐traction‐in‐dc/).
Boxer‐KerryClimateBill
TheBoxer‐Kerryclimatebill,proposedbyBarbaraBoxerandJohnKerry,isanambitious
plantoreducecarbonemissionsby20%bytheyear2020.Thisplanincludesstrongincentives
forthenaturalgasindustry,includingrewardingcompaniesthatswitchfrompowersources
withhighercarbonemissionstothosethatemitlessCO2,suchasgas.Thebillwaspraisedby
SenatorMaryLandrieu–shestatedthatanymovetowardsincreasingnaturalgasuseisavery
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
smartthingtodoandthatleadersarebeginningtohearmorefromdifferentnaturalgas‐
producingregionsofthecountryontheabundanceofnaturalgaswithinourborders.Landrieu
wasoneofninesenatorsthatsentalettertoBarbaraBoxeraskingformoreincentivesforthe
naturalgasindustry.Producersofnaturalgashavealsobeenaggressivelyincreasingtheir
lobbyingeffortstoaskformorenaturalgasincentivesandhavebeguntogainmoresupport.
Naturalgasplantsmaybeeligiblefortheincentivesasafuelthatproduceshalfasmuchcarbon
dioxideascoalandathirdlessthanoil,aswellasabackupsourceforsolar,wind,andother
renewableenergysources(http://www.eenews.net/public/EEDaily/2009/09/30/1).
Policy
• Regulationisgearedtopromotingcompetitionandinvestment
• Governmentsarechangingpoliciestostimulatethelong‐terminvestmentneededinthe
NGindustry
• ExamplesincludeEUCommission’seffortstostimulatecompetitionbetweensuppliers,
eliminationofdestinationclausesongasdeliveredtotheEU,andtheSecondGas
Derivative
• CanadaandUSareimplementingregulationthatencouragesmoreexplorationand
production,andUSpassedlegislationtoencourageLNGimports
Reasons
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
• Thetransportationsectoris70%oftotalUSoilconsumption.TosignificantlyreduceUS
foreignoilimportstheUSmustreduceoil(gasoline)consumptioninthetransportation
sector.
• TheonlyUSdomesticfuelcapableofbeingscaleduptosignificantlyreduceoil
consumptioninthetransportationsectoroverthenext5‐10yearsisnaturalgas.
• Naturalgasvehiclesemit20%lessCO2thandogasolinepoweredinternalcombustion
enginesandnoneofthetoxicparticulates.
• NaturalgasreservesintheUSareabundantandcanpowerUShomeheating,industrial,
electricalgeneration,andtransportationsectorsfordecadesintothefuture.
• VastUSnaturalgasreservesandthenation’s2.2millionmilenaturalgaspipelinegrid
arethebestweaponsinthewaronforeignoilimports.
• Naturalgasisanidealbridgetoarenewableenergyfuture.Naturalgaselectrical
generationisthepreferredbackuppowersupplyforintermittentwindandsolarenergy.
• Naturalgaselectricalgeneratorsaremoreefficientandemit50%lessCO2thancoal‐
firedplantsandnoneofcoal’sverytoxicparticulatewasteandash.
• “Cleancoal”isanoxymoronandamyth.
• Environmentalpuristswhosupportonlyelectricvehiclesovertheshorttermare
shootingthemselvesinthefootbyincreasingdemandoncoal‐firedelectricalgeneration
forrecharging.
• Muchofthenaturalgasinfrastructurecouldbeusedbythefuturehydrogenenergy
basedeconomy.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
• Theworldeconomyisnowridingapeakoildrivenyo‐yo.TheconsequencesfortheUS,
whichuses25%ofworldwideoilsupplyandimports65%ofit,willbegrave.
• Theonlysolutiontothesevereeconomic,environmental,andnationalsecurityissues
facingtheUSisastrategic,long‐term,comprehensiveenergypolicytoreduceforeign
oilimports.Intheshorttomid‐term,USenergypolicyshouldbecenteredonusingUS
producednaturalgasfortransportation.Suchanenergypolicywaspublishedhereon
SA.
Noteveryoneagreeswithallofthesebullets.However,aftermuchconstructivedebateinSA’s
commentsection,noevidencewaspresentedthatanyotherenergypolicycansignificantly
reduceforeignoilimports(say5‐7millionbarrelsaday)overthenext5years.
So,whatnow?Forthoseofuswhobelieveanaturalgascentricenergypolicyshouldbean
urgentandcriticalpriorityforAmerica’sfutureprosperity,howcanwemakeithappen?
PresidentObamaandEnergySecretaryChuobviouslydonothavereducingforeignoilimports
highontheirlistofpriorities.Thisisevidentbythelackoflegislationpresentedtoeffectively
andsignificantlymovetheUSawayfromgasolinepoweredautomobiles.Theelectriccar
solutiondoesn’tworkovertheshorttermbecauseEVswouldbechargedbycoal‐firedpower
plants.Thatisnotanacceptablestrategy.EquallydisturbingisObamaandChurepeatingtheir
oxymoronic“cleancoal”mantrasooftentheyhavebeguntobelieveitisactuallypossible.Itis
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
not.MoreworrisomeisEnergySecretaryChu’srecentcommentthatheis“agnostic”about
naturalgastransportation.Clearlythen,naturalgastransportationsupporterscannotrelyon
theObamaadministrationforastrategicenergypolicyorevenalevelplayingfieldfornatural
gasvis‐à‐viscoalandoil.Wemustthereforeacceptthecurrentpoliticalclimateandtake
mattersintoourownhands.WemustgostraighttotheAmericanpeoplewithpolitical
activism,policyinitiatives,whilepressuringautomobilemanufacturerstodeliverNGVsand
refuelingsolutions.Butexactlyhowshouldweproceed?
PoliticalInitiatives
• SupportH.R.1835–LegislationforNatGasTransportation
HR1835isabi‐partisanbillcontainingrobustsupportfornaturalgastransportationinitiatives.
EveryonewhoworksforanAmericancompanythatmakesautomobilesornaturalgas
compressorsorindustrialequipmentshouldsupportthisbill.Everyonewhoworksinthe
naturalgasproductionorenergyservicesbusinessesshouldsupportthisbill.Everyfarmeror
landownerthathasnaturalgasonhispropertyshouldsupportthisbill.EveryAmericanwhois
tiredoffundingbothsidesofthe“waronterror”shouldsupportthisbill.Andevery
environmentalistthatwantstobreathecleanerairandviewclearerskiesshouldsupportthis
bill.Callorwrite(letterswithstamps,notemail)yourelectedofficials.Lethisorherknowyou
wantthemtosupportthisbillandthatyouwillbewatchingenergypolicyvotingverycarefully.
http://seekingalpha.com/article/135758‐making‐natural‐gas‐transportation‐a‐reality
Policyquestions
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Itseemsthatinordertostabilizeprices,theUSnaturalgasmarketmustincreasetheir“safety
valve”ofnaturalgassupply.Whetherthisshouldbedonebyincreasingdomesticsupply(either
byimprovingstoragecapacity,exploring
‐ShouldtheUSreallyreducecoalusealthoughshestillhas250yearsofdomesticsupply(50%
ofelectricitygeneration)
‐Althoughexistingcoalfiredplantsarestillcheaperforbaseloadproductionthanbringingnew
gasturbines,manycoalplantswillreachtheendoftheirusefullivesoverthenexttwodecades
andgasturbineswillhaveastrongadvantagewhennewinstallationsarebeingconsidered
‐passenergybilllegislationthatcontinuesthetrendtopressuremoreuseofnaturalgaseven
withhigherprices?
‐Challengesposedbytransportinggasinitscryogenicformasaliquidcoupledwith
environmentalandsafetyconcernsthatlimitedtheimportsofLNGinUStoamere1%ofUS
gassupply.Soinordertoaccesstheworldnaturalgasreservesthereneedstobeanexpansion
ofLNGterminalimportcapacityanddevelopmentofneweroffshoreregasification
technologiesAsthetechnologyofliquefactionofshippingofLNGimproves,sodoesthe
possibilityofUSimportingmorenaturalgasfromabroadtostabilizeitspricefluctuations.
‐WhiletheNorthAmericanmarketisstillregional,newglobaldevelopmentsinLNG
transportationisincreasingthepossibilityofaglobalgasmarket
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
‐movinggasbetweenregionsisbecomingincreasinglypossibleduetotheintroductionofLNG
cargoes,interregionalpipelines,andLNGswapswhichallowsforspotandshorttermcontracts,
encouragingspeculativeventuresandnewentrantsintothemarket
NaturalGas–TransportandDistributionCosts
Increaseduseofnaturalgasisafavorablealternativetomanyothersourcesoffuelfora
numberofreasons,andcanresultinsignificantlylowercarbonemissions,lowercosts,and
lowerforeignenergysourcedependency.Withabundantdomesticreserves,thiscanbe
possiblewithoutincreasednaturalgasdrillinginnewlocationsofthediscoveryoffresh
reserves.Investinginimprovingtheefficiencyofthesystemscurrentlyinplacecanbe
significantlymorecost‐effectiveandachievedmuchmorequicklythanincreasingdrillingand
supplies.Thiscanresultinarelativelyspeedyreductionincostsforendusers.
Naturalgastransportinvolvesanetworkofinterstate(acrossstateboundaries)andintrastate
(withinaparticularstate)pipelinesthatcarrygasfromitsareaofproductiontoendusers.
Therearethreemainsystemswithinthenetwork:thegatheringsystem,theinterstate
network,andthedistributionsystem.Thegatheringsystemisasetoflow‐pressure,low‐
diameterpipelinesthattransportrawnaturalgastoprocessingplants,whilethedistribution
systemtransportsready‐to‐usegastolocalregions.Thediameterofthesepipesrangesfrom6
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
to48inches,andduringdistributiongastravelsatpressuresfrom200to1500poundsper
squareinch.Thisreducestheamountofnaturalgasbeingtransportedbyupto600times.
Compressorstationsareplacedat40‐100mileintervalsalonginterstatepipelinestoensurethe
gasremainspressurized,poweredbysmallamountsofthegasbeingtransported
(http://www.naturalgas.org/naturalgas/transport.asp).
Transportationandstorageofnaturalgasarethemajordifficultiesofnaturalgasuse
duetothelowdensityofgas.Naturalgaspipelinesareeconomical,butmanyinNorthAmerica
areclosetoreachingcapacityandthusleavepoliticiansworryingaboutpotentialshortages.In
addition,pipelinetransportisnotpracticalforoverseastransport,andispreferredonlyfor
distances2000kmoverseasandtwicethatoverland.LNGcarriersareusedtocarryliquefied
naturalgas(LNG)overseas,andtanktruckersareusedtoptransportliquefiedorcompressed
naturalgas(CNG)overshorterdistances.LNGtransportrequiresthebuildingofliquification
plants,whichcanbeacapital‐intensiveprocess.
Compressednaturalgasisnaturalgasthatisstoredatpressure.Withincreased
pressurealargervolumeofgascanbecontainedandtransportedwithinaunitofspace.CNG
isnecessaryforpipelinetransport.RefrigeratingCNGreducesthedensityevenfurtherand
allowsforgreatertransportvolumes.
CNGtransportrequiresgenerallyover200barsofpressure,thoughcompressorsand
decompressionequipmentmaybecheaperandthusmoreeconomicalforsmallerunitsizes.
ThedownsideofCNGtransportationistheinvestmentintoandoperatingcostsofCNGcarriers.
Naturalgasisstoredundergroundindepletedgasreservoirs,wells,orintanksasLNG.Gasis
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
injectedintothesestoragefacilitiesduringtimesoflowdemandandextractedwhendemand
increases.(Wikipedia).
FlexibilityandCapitalInvestment
Naturalgaselectricgenerationplantscanrangeinsizefromlargertosmallerscale
microturbines,whereascoalfiredandnuclearpoweredplantsarenotasflexibleandperform
onlylarge‐scalegeneration,forcingthemtoproducemoreelectricitytobeeconomically
efficient.Sincethedemandforelectricityisexpectedtorisemodestlyinthecomingdecades,
electricitysuppliersfaceatoughdecisionindeterminingwhethermakingthelargecapital
investmentnecessaryforcoalornuclearpowergeneratingplants.Lowercapitalcostsare
requiredfornaturalgas‐poweredfacilities,withlowerconstructionandleadtimesmakingit
morepracticaltoincreasegenerationalcapacityasdemandcontinuestogrow.
Inaddition,naturalgaspoweredgenerationplantsareoperationallyflexibleandusedto
meetchangingshorttermpeakdemands,havingtheabilitytobeeasilyturnedonandoff
quicklytorespondtowhether‐relatedorothershort‐termdemandfluctuations.Sinceneither
coalnornucleargenerationplantsdemonstratethisflexibility,naturalgaspoweredgenerators
standasanattractiveoperationallyefficientoptiontomanagedemandvolatility.
Anothercostissuewithregardtonaturalgastransportanddistributionispipeline
infrastructure.Thelimitedcapacityofintrastateandinterstatepipelinesystemsineffect
createsaceilingonhowmuchnaturalgascanbedeliveredtothemarket.Currentpipeline
infrastructureissignificant(therearecurrently220,000milesofpipelineinNorthAmerica,
thoughnaturalgaspipelinecompaniesmustcommitcapitaltocontinuallyexpandthis
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
infrastructuretobeabletomeetprojecteddemands.Thusfar,theindustryhasrespondedwith
relativelyrapidexpansionofinfrastructuretostayinlinewithgrowingsupplies,discoveryof
newresources,anddemandgrowth,with5,000milesofpipelinecompletedinthepastthree
years.
DistributionofNaturalGasandAssociatedCosts
Distributionofnaturalgasdeliversthefinalproducttoendusers,whichincludelarge
industrial,commercialandelectricgenerationcustomersaswellassmallerindividualusers.
Largerconsumersreceivenaturalgasdirectlyfrominterstateandintrastatepipelines,while
smallerusersreceiveitfromlocaldistributioncompanies(LDCs),whichtypicallytakeownership
ofthegasonceitisreceivedandarelocatedaccordingtogeographicregionstoserveas
deliverypointstolocalusers.LDCsareeitherinvestor‐ownedorthepropertyoflocal
governments,andtransportgasfromdeliverypointsalongthelargerinterstateorintrastate
pipelinesystemandintomilesofsmall‐diameterlocaldistributionpipe,ofwhichthereisan
estimatedonemillion‐plusmilesintheUnitedStates.ThedeliverypointstoLCDsarecalled
citygates,andserveasimportantpointsfordeterminingthemarketpriceofnaturalgasbased
onthesupplyanddemandflow.
Duetotheextensiveinfrastructurerequiredinthedeliveryofnaturalgasacrossthe
country,distributioncostsaccountforabulkofnaturalgascostsforsmallerconsumers
receivinggasthroughLCDs.Whilelargerusersofnaturalgassuchasindustrialconsumerscan
takeadvantageoflowerunitcoststhroughthedistributionorlargevolumesthroughwide‐
diameterpipes,distributioncompaniesfacetheexpensesandinefficienciesofdeliveringsmall
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
amountsofgastosmallvolumegasconsumertomanydifferentgeographiclocations.Because
ofthis,thetypicalsmallvolumeconsumerfacesanaturalasbillthatiscomposedofupto47%
ofdistributioncosts,asestimatedbytheEIA,whilephysicalcommoditypricesmakeup
approximately34%ofthebill
andtransmissionandstorage
costscomprise19percent.
Traditionally,rigidsteelpipewas
usedtoconstructdistribution
networks.However,new
technologyisallowingtheuseof
flexibleplasticandcorrugated
stainlesssteeltubinginplaceof
rigidsteelpipe.Thesenewtypes
oftubingallowcostreduction
andinstallationflexibilityforbothlocaldistributioncompaniesandnaturalgasconsumers.
Anotherinnovationinthedistributionofnaturalgasistheuseofelectronicmeter‐reading
systems.Thenaturalgasthatisconsumedbyanyonecustomerismeasuredbyon‐sitemeters,
whichessentiallykeeptrackofthevolumeofnaturalgasconsumedatthatlocation.
Traditionally,inordertobillcustomerscorrectly,meter‐readingpersonnelhadtobedispatched
torecordthesevolumes.However,newelectronicmeter‐readingsystemsarecapableof
transmittingthisinformationdirectlytothelocaldistributioncompany.Thisresultsincost
savingsfortheLDC,whichareinturnpassedalongtocustomers.Theinstallationofnaturalgas
ComponentsofResidentialNaturalGasPrices
(ClickImagetoEnlarge)
Source:EnergyInformationAdministration
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
distributionpiperequiresthesameprocessasforlargerpipelines:theexcavationoftrenches
intowhichthepipeislaid.However,newtrenchingtechniquesareallowingfortheinstallation
ofdistributionpipewithlessimpactontheabovegroundsurroundings.Guideddrillingsystems
areusedtoexcavateanundergroundholeinwhichthepipemaybeinserted,andcanleadto
significantexcavationandrestorationsavings.Thisisparticularlyimportantincrowdedurban
settingsandscenicruralenvironments,wheretheinstallationofnaturalgasdistributionpipe
canbeamajorinconvenienceforresidentsandbusinessowners.
Supervisorycontrolanddataacquisition(SCADA)systems,similartothoseusedbylarge
pipelinecompanies,arealsousedbylocaldistributioncompanies.Thesesystemscanassimilate
gasflowcontrolandmeasurementwithotheraccounting,billing,andcontractsystemsto
provideacomprehensivemeasurementandcontrolsystemfortheLDC.Thisallowsaccurate,
timelyinformationonthestatusofthedistributionnetworktobeusedbytheLDCtoensure
efficientandeffectiveserviceatalltimes.
http://www.naturalgas.org/naturalgas/distribution.asp
Transport
• GasistransportedthroughpipelinesasLNG
• Gasistransportedfromthewell‐headtotheburnertipin2ways:throughpipelinesor
intheformofLNG–bothwaysareexpensiveandinvolvelongconstructiontimes
• Aconsiderableperiodisneededtopaybackinitialinvestment
• Withhighnaturalgasprices,thereismoreincentiveforproducerstocommitcapital
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
• Pipelinesaremorecost‐effectiveovershortdistances,thoughtheytietheconsumerto
theproducerwhichcreatesanegotiatingpositionsandinvolvesaleveloftrust
• LNGisgasthathasbeencooledto‐161degreesCinaliquificationtrain
• AAplantstartswithoneortwotrains,andoncethesetrainshaveshowntobe
successfultechnicallyandcommercially,moretrainscanbeaddedatalowermarginal
cost–gasistransportedinshipsandreturnedtoitsnormalstateupondeliveryinare‐
gasificationterminal
• HighcapitalcostsofLNGproductionandtransporthaveproducedabusinessmodelthat
involveslong‐termtake‐or‐paypurchaseobligations,agreedfarinadvanceofplant
construction–costofLNGproductionislowenoughforittobegloballycompetitive
• LNGdestinationcanbechangedeasilyandreroutedtothemarketwiththehighest
price,whilepipeline‐transportedgasisnotasflexible
TransportCostsofOilandCoal
Thereexistmanythreatstothetransportofoilwhencomparedtonaturalgas,andtherefore
highercosts.OnemajorconcernisthatbecausemuchU.S.oilisimportedandmanyoftheoil
tankersandpipelinesflowthroughsomeofthemostvolatileregionsoftheworld,anational
securitydisruptionorinternationalconflictcanhavesignificantimpactsonthepriceofthefuel.
Forinstance,40%oftheworld’soilflowsthroughthousandsofmilesofpipelinesoftenin
hazardousareasacrosstheglobe,andapuncturetoapipelinecandeemitnon‐operational.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Becauseofthelengthofthesepipelines,theyaredifficulttoprotect,andinsurancepremiums
havebeenrising,andarethusjustasvulnerableastankers.
Martitimeinsurershavebeguntoraiseratesfortankersinriskywaters–forexample,
premiumsfortankerspassingthroughYemeniwaterstripledsincetheattackinYemen.Fora
tankerwithacargooftwomillionoilbarrels,theratejumpedfrom$150,000to$450,000,
consequentlyadding15centstothefinaldeliverycostofoil–andthisonlyincludesthe
insurancefortheshipandnotthecargoonboard.Theriseofterroristattacksandother
disruptionswillincreasethecostsofprotectingtankers,pipelinesandoilterminalsandbe
reflectedinthefinalpriceofoil.
Inaddition,sincemoreheavyoilisbeingpumpedratherthanlightercrude,thefactthat
heaviercrudeflowsmoreslowlythoughpipelinesreducesthevolumebeingtransported,
makingitmoreexpensivetotransport.Totrytospeeduptheoilflow,oilcompanies
sometimesattempttodiluteitorheatit,techniqueswhichcanbeexpensiveandcomplex.
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
PowerGenerationCostsforVariousEnergySourcesin2008[21]
FixedCost(cents/kWh) VariableCost(cents/kWh) TotalCost(cents/kWh)
Coal 4.1 3.3 7.4
Naturalgas 2.8 7.8 10.6
Nuclear 8.0 0.8 8.8
Wind 8.2 0.0 8.2
EnergyReturnbySourcein2008[22]
EnergyreturnonEnergyInvested
Coal‐firedpowerplant 2.5
Nuclearpower 4.5
Hydroelectricpower 10
Windpower 35
Naturalgas 10.3
EconomicsofNaturalGas
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
NaturalGasValueChain
Thenaturalgasvaluechainissimilartothoseofotherfossilfuels‐exploration&production,
processing,transportation,additionalprocessing,marketing/distribution,andultimately,end
userdelivery.Theindustryhasanaturalmonopolybecauseofhighcapitalcostsofpipelines,
problemswithstorageandhighlevelsofregulation,thoughnaturalgashasbenefitedfrom
deregulation.
• Deregulationhasbeenaboontothenaturalgasindustry,encouraginginnovationand
reliabilityofsupply
• Driversoftheend‐userpriceofnaturalgasaretwo‐fold:
• 1)Therawfuelcostsaccountforabout60%offinalcosts
• 2)Transmissionanddistributioncostsaccountfor40%
• Rawfuelpriceismarketdetermined,butisdrivenbymarketdemandandbothcurrent
andfuturesupply
• Naturalgasisdifficulttotransportandtostore,limitingshort‐termflexibilityofsupply
inresponsetodemandshocks
• PredominantmethodoftransportationinNorthAmericaisvianaturalgaspipelines
• IncreasinglypopularmethodisLiquefiedNaturalGas(LNG),whichenablesgastobe
shippedoverseasintankers
• Bothrequiremajorinvestmentstoexpandanddevelop
• Needmajorinvestmentindeep‐water,shelteredportstoharborLNGtankersandin
liquefactionandgasificationplantsonbothendsoftransportroute‐‐asofDecember
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
2008,theU.S.hadonly8LNGterminals,butplanstonearlydoublecapacityoverthe
next3‐5years
• Thestateofstoragecapacityandtechnologyhasasignificantimpactonnaturalgas
pricesinboththeshort‐term(accesstoreserves)andthelong‐term(asincreased
storagecapacitygivesopportunitytobuildupmoresubstantialreservesofeasily
accessiblenaturalgas)
• Althoughexistingcoalfiredplantsarestillcheaperforbaseloadproductionthan
bringingnewgasturbines,manycoalplantswillreachtheendoftheirusefullivesover
thenexttwodecadesandgasturbineswillhaveastrongadvantagewhennew
installationsarebeingconsidered
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
(naturalgas.org)
Sourceforaboveinformation:
http://www.resourceinvestor.com/News/2009/4/Pages/What‐is‐the‐breakeven‐price‐for‐
natural‐gas‐producers.aspx
Transport
• GasistransportedthroughpipelinesasLNG
• Gasistransportedfromthewell‐headtotheburnertipin2ways:throughpipelinesor
intheformofLNG–bothwaysareexpensiveandinvolvelongconstructiontimes
• Aconsiderableperiodisneededtopaybackinitialinvestment
• Withhighnaturalgasprices,thereismoreincentiveforproducerstocommitcapital
• Pipelinesaremorecost‐effectiveovershortdistances,thoughtheytietheconsumerto
theproducerwhichcreatesanegotiatingpositionsandinvolvesaleveloftrust
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
• LNGisgasthathasbeencooledto‐161degreesCinaliquificationtrain
• AAplantstartswithoneortwotrains,andoncethesetrainshaveshowntobe
successfultechnicallyandcommercially,moretrainscanbeaddedatalowermarginal
cost–gasistransportedinshipsandreturnedtoitsnormalstateupondeliveryinare‐
gasificationterminal
• HighcapitalcostsofLNGproductionandtransporthaveproducedabusinessmodelthat
involveslong‐termtake‐or‐paypurchaseobligations,agreedfarinadvanceofplant
construction–costofLNGproductionislowenoughforittobegloballycompetitive
• LNGdestinationcanbechangedeasilyandreroutedtothemarketwiththehighest
price,whilepipeline‐transportedgasisnotasflexible
• Thoughbuildingoutinfrastructurehashighinitialcosts,itwillcutcostsinthelongrun
andbeenvironmentallycleaner
• Oiltransportfacesthreatsandmajorpricefluctuationsbecauseitisimported
• Coaltransportisdoneprimarilybytrainandisexpensiveandhighincarbonemissions
InvestmentisNeeded–PastProjectsHaveShownSuccess
• Example:USisleadingthecharge‐operationsinPennsylvaniaandTexashavealready
beensufficienttocutUSimportsofliquefiednaturalgas(LGN)fromTrinidadandQatar
toalmostnil,withknock‐oneffectsfortheglobalgasmarket–andcrudeoil.Itisone
reasonwhyspotpricesforsomeLNGdeliverieshavedroppedto50pcofpipeline
contracts
ComparetoCostsofCoalandOilTransport
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
CostEstimateBreakdown:
Fromwellheadtopipelinegrid:$.30
Fromgridtoprocessingplant:$.50
Processingandcompression:$.90
Royalties:$.70
Operatingcosts:$.20
Interestondebt:$.50
Finding,developmentandacquisition:$2.00
(http://www.resourceinvestor.com/News/2009/4/Pages/What‐is‐the‐breakeven‐price‐for‐
natural‐gas‐producers.aspx)
ThepricinginformationaboveisbasedoninterviewswithmanagementfromaCanadian
naturalgascompany,buttheprocessisverysimilarintheUnitedStates.Theseconservative
pricingestimatesshowthatthebreak‐evenfornaturalgascompaniesisnear$5forlow‐cost
producers(for$3.40/mcfgas).Transportcostsalonemakeup$.80oftotalcosts,andthiscost
risessignificantlywithfurtherdistancebetweenwellheadandgridandbetweengridsto
processingplant.Finding,development,andacquisition,oftentermedFD&A,alsomakesupa
significantportionofcosts,andthisareainparticularisinneedofsignificantinvestmentif
drillingnaturalgasistobeanattractivepotentialinvestment.
Thetransportofnaturalgasismuchcheapersincetheprimarytransportmethodisviapipeline
acrossdomesticregions.TheabundanceofnaturalgaswithintheUnitedStatesthusallowsfor
cheapertransportcostsofCNGwithindomesticborders,whereasthetransportcostsofoilare
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
muchhigherandhavehighvolatilityduetocostlyandtime‐consumingtransportacrosslong
distancesviaships.
Thechartbelowsummarizesthebreak‐evenestimatesforoilindifferentoil‐producing
countries.Itisclearthatsincethebreak‐evenpointsaremuchlowerintheoilindustrythanin
thenaturalgasindustry,oiliscurrentlyamuchmoreprofitableinvestmentarea,andwill
continuetobesounlessincentivesforinvestmentintonaturalgasareincreased.
(http://seekingalpha.com/article/58322‐oil‐price‐predictions‐and‐break‐even‐prices).
OilfieldsEstimatedProduction/sourceCosts($2008)Mideast/N.Africaoilfields6‐28Otherconventionaloilfields6‐39CO2enhancedoilrecovery30‐80Deep/ultra‐deep‐wateroilfields32‐65Enhancedoilrecovery32‐82Arcticoilfields32‐100Heavyoil/bitumen32‐68Oilshales52‐113Gastoliquids38‐113Coaltoliquids60‐113
(http://www.reuters.com/article/idUSLS12407420090728)
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
AccordingtotheInternationalEnergyAgencyWorldEnergyOutlook’sstudydonebyanalystsin
2008regardingoilproductioncostsbycountry,operatingandcapitalcostsofoilrangefrom$6
abarreltoabout$40abarrel,whicharesignificantlyhighercomparedtooperatingandcapital
costsofnaturalgas.
BarrierstoExpandingtheUseofNaturalGas–SummaryGasTransit
• Manyutilitiesdonotprovidenecessarymeansfortransportinggasfromwellheadtogatheringsystem.Also,ownersofgatheringsystems(theinterconnectingutility)oftendonothavethenecessaryincentivestomaintainorexpandsystems
InfrastructureFinance
• Potentialinvestorstofinancenewgasinfrastructureshouldbeencouraged–thiswillimproveflowsandremovebottlenecks
• Currently,disincentivesincludeutilityclaimsthattheoperationofaproprietarypipelineisaviolationanda“sham”thatdeprivestheutilityofrents,andincludefines
• UnclearrulespreventinvestorsfromfreelyfinanceinfrastructureprojectsRegulatoryClarity
• Oilandcoallobbieshavethusbeenmuchmorepowerfulandinfluential,beingabletofundmorelobbyingeffortssincecoalandoilespeciallyisamoreprofitableresources(withextremelyhighroyaltycostsandprofit‐makingopportunities),thuscreatingaregulatorydisadvantageforthenaturalgasindustry,expansionofinfrastructure,andinvestmentsinprojectstoexpanduse
• Itshouldbemandatedthatutilityownersofgas‐gatheringfacilitiesexpandandmaintainthemtomaximizegasproduction,anditshouldbemadeclearthatthesefacilitiesaredifferentfromthosethatcatertoretailcustomers
• Theuseofthesefacilitieswillhelptomaximizetheflowofdomesticgastothemarketplace
• Ifautilityisunabletoreceivegasintoitssystem,regulationshouldallowtheproducertobringgasdirectlytostoragefacilitiesorotherpipelinestospeedupthetransportprocessandallowstrandedgasintothemarketplace
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
• Clearrulesshouldbecommunicatedtoallowpotentialnaturalgasinfrastructureinvestorstofundprojectswithoutlegalrestrictions,challenges,orfees
(http://www.powermag.com/issues/departments/legal_and_regulatory/Barriers‐continue‐to‐crimp‐natural‐gas‐supplies_262_p3.html)AdditionalBarriers:
• Greaterinvestmentopportunitieselsewhere• Highergaspricesmaymakeprospectsmoreattractive• Carbonmarketsmayalsoenhanceattractiveness• UnitedStatesPublicUtilityCommissionsdonotcurrentlyprovideincentiveforreducing
emissionofmethane• Lackofextensivetechnicalknowledgeofthemarketandexistingopportunities• Governmentsinsomecasesthroughmonopolygascompaniescreateabarriertoaccess
thismarket
http://www.ipieca.org/activities/climate_change/downloads/workshops/26sept_06/Session_3/Robinson.pdf
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Appendix:TechnologyNewtechnologyinNaturalGasDistributedPowerGenerationMicroturbines‐operatesathundredsofthousandsofrevolutionsperminatoperatingpressureof60psig‐Currentlyweareaimingtoproduce30kW‐300kW‐installationcost:USD1000‐massproductioncost:400‐600USD‐electricalefficiency:30%‐compact,light,andquietwithoutneedforliquidcooling‐lownitrogenoxidecombustion‐lowmaintenanceattractiveforon‐sitepowergenerationforcertainresidentialandcommercialapplications‐costofpowerproductionbetween1/3‐1/7oflocalelectricityprices!Companiesproducingthese:AlliedSignalPowerSystems,RollsRoyce‐AllisonMobilePowerSystems…etcFuelCellsPhosphoricAcidFuelCells‐3000USDperkilowatt‐electricalefficiency:35%*However,upto80%thermalefficiencyispossibleifco‐generationsteamcanbeproducedfromthewasteheatgeneratedfromthe200C⁰operation‐costofPAFCmustbereducedtoabout1000‐1500USDperkWtocompetewith0.05‐0.06prtkWhourelectricity‐atpresent,totalofabout170200kWPAFCunitsareusedcommerciallyinhospitals,nursinghomes,officebuildings,hotels,banksandavarietyofpowerplants
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
MoltenCarbonateFuelCells(MCFC)‐operateat600C⁰andgenerallytargetedformodularsystemsof250kWcapacity‐powerproductionefficiency:50%*HoweveradvancedintegratedMCFCco‐generationsystemscouldapproach70%‐installedcostneedstobereducedto1500‐2000USDtocompetewithelectricitypricesMajordevelopers:EnergyResearchCorporation,IHIIshikawajima‐HarimaHeavyIndustriesCompanyLtd.HitachiSolidCarbonateFuelCellsThisgeneratespowerelectrochemicallyusingnaturalgas,cleancoalderivedfuelgas,coalbedorcoalminemethane,andlandfillorwastewaterdigestiongases.Unlikethemoltenone,thesolidoxideconceptuseszirconiaceramics,whichmustbeoperatedathighertemperatures(1000C⁰)‐aunitgenerates200kWelectricity‐powerproductionefficiency:55%*However,withcogenerationitcouldreach80%‐SOFCcaneasilyfollowchangingdemandsforelectricity‐thesolidstatecompositionofSOFCallowsmanyoftheroboticmassproductiontechniquesthathavereducedcostsintheelectronicsindustrytobeappliedtothepowersector‐Disadvantage:needscostlysuperalloysandexoticceramics,gasleakagecrackingandproblemsassociatedwithhightemperatures‐Installationcostbelow700USDPolymerElectrolyteMembraneFuelCells(PEMFC)Withthistechnology,naturalgasisreformedwithsteamand/orbypartialoxidationinafuelprocessorandtheresultingsynthesisgasisfurtherprocessedtoproduceahydrogen‐richgaswhichisfedasfueltothePEMFC‐operatesatthelowesttemperature(60‐80C⁰)‐Efficiency:20%‐Advantages:suitableforbothstationaryandpropulsionapplications‐PEMFCstackswith3‐5kWcantargetresidentialapplications,whilemodularsystemswith100skWcantargetmulti‐floorapartmentcomplexesandlessthan100kWforsmallcommercialbusinessDevelopment:Daimler‐Chrsler,Siemens,NuPower,MosaicEnergy‐Costofproductionpotentiallybereducedto200USDperkW(itneedstobebelow0.05perkWhourtobecompetitive)InnovativeNaturalGasUsageTheseexamplesaresupposedtodemonstratehowflexiblenaturalgascanbe!‐Harley‐DavidsonMotorCompanyusesnaturalgasfiredregenerativethermaloxidizertodestroytheorganiccompoundsreleasedfrompaintingoperations‐TheCaliforniaMedicalCentergenerateselectricityformostofthefacilityfromtwo800kWeengines.Wasteheatfromgasenginesusedtosupplyhotwater,operateabsorptionchillersandsterilizemedicalsuppliesandequipment.Butco‐generationsystemisolatessystemfromgrid.Surpluspowerwasputonthegridtogeneraterevenueforthemedicalcenter
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
‐BrachandBrock(fourthlargestcandymakerinChicago)installedaKathapac1600FVdesiccantdehumidifiertodeliverairat15‐35%humiditytopansofcandyinordertoensureinterruptedproductionofcandiesOtherdevelopments…DevelopmentsatIGT(InstituteofGasTechnology)‐forcedinternalrecirculation(FIR)‐METHANEde‐NOX‐Oxygen‐enrichedairstagednaturalgascombustionthiswillhelpgasindustrymeetstringentairqualityregulations‐MORPHYSORB(newwayof‘refining’gastopipelinequality)reducedcapitalcostby20%,operatingcost20%‐60%
Appendix:DeregulationNaturalGasContractinginNorthAmericaBeforeMandatoryOpenAccess AfterRestructuringAtWellhead Producerscontractedtosellgastopipelines
Producerscontracttosellgasto:‐Endusers‐LDCs‐Marketers,includingpipelineaffiliateswhoselltoendusersandLDCs
PricesregulatedbyFERC NopricecontrolsPipelinecompaniesaggregatedsupplyforcustomers
Customersaggregatesuppliesoncontractwithproducersormarketersforthisservice
Pipelinesresponsibleforsupplyreliability Customersresponsibleforsupplyreliability
Downstream Gascustomersobtainedgasfrompipelinecompaniesthroughbundledsalesandtransportationservice
Customerscontractseparatelyforgasfromanysellerandtransportationfrompipelinecompanies.Customerscanbuyabundledservicefrommarketers.
Transportationtypicallyalongonepath,ofteninvolvingasinglepipelinecompany.Interconnectionsusedmainlyforemergencies.
Customersdeterminetheleast‐costcombinationoftransportationrouteandsourceofgassupply
SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao
Operationaladjustmentstomaintainsystemintegrityhandledentirelybypipelinecompanies
Customersareliableforpenaltiesiftheydonotmeetscheduledvolumesandmatchreceiptsanddeliverieswithintolerances.Servicesavailabletoavoidorreducepenalties
Pipelinescompaniescontrolledmoststorageforseasonalloadbalancingandoperationcontrol
Customersareresponsibleforreservingadequatestoragetomeetpeakdayrequirements
Pipelinecompaniesofferedinterruptibleservicewhencapacitynotfullyutilized
Firmshipperscanreleaseexcesspipelinecapacityandrecoupoartotallofreservationscosts
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