the role of natural gas as a primary fuel in the near future,...

SaraSayeed,MartaRyvak,Fang‐YuLiang,NickZhao

TheRoleofNaturalGasasaPrimaryFuelintheNearFuture,IncludingComparisons

ofAcquisition,TransmissionandWasteHandlingCostsofGaswithCompetitive

Alternatives


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.


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


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


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.


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.


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%


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.


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.


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+


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


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.


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.


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.


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


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


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.


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


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


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).


DemandResponsetochangesinnaturalgasprices

Conventionaleconomictheorytellsusthatinthelongrun,consumerswillreacttopricesand

whatremainsforusisexploreiswhetherthishappensinthemarketfornaturalgas.

Asenergypriceshaverisensteadilyoverthepastcoupleofyears,therehasbeenanobserved

tendencytolowerammoniaandmethanoloutputandswitchesproductiontositesnearcheap

sourcesofgas.However,sincetheNorthAmericanpricesarenotindexed,asupplyshock/price

spikewilldecreaseconsumption,regardlessofwhethertheconsumerbuyspotpricesorfixed


pricegas.Inthecaseofthelattertheconsumerwilljuststopbuyingifthesportpricebecomes

toohigh,inthecaseofthelattertheconsumersmighthavetosellbacktothemarketfora

profitandtherebyinterruptinghis/herownconsumption.

SupplyintheUSmarket

TheUnitedStateshavethebiggestgasmarketinworld.Provengasreservesamountedto7.8

tcmatthebeginningsof2002,whichis4%ofworldgasreserves.

BelowareEIAestimatesofnaturalgasreservesintheUnitedStates.

NaturalGasTechnicallyRecoverable

Resources

NaturalGasResource

Category

(TrillionCubicFeet)

AsofJanuary1,

2007


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


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.


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


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


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


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


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.


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


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


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


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.


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


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


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.


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


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


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.


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.


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


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


• 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.


• 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


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


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


‐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


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


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


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


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


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


• 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.


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.


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


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


2008,theU.S.hadonly8LNGterminals,butplanstonearlydoublecapacityoverthe

next3‐5years

• Thestateofstoragecapacityandtechnologyhasasignificantimpactonnaturalgas

pricesinboththeshort‐term(accesstoreserves)andthelong‐term(asincreased

storagecapacitygivesopportunitytobuildupmoresubstantialreservesofeasily

accessiblenaturalgas)

• Althoughexistingcoalfiredplantsarestillcheaperforbaseloadproductionthan

bringingnewgasturbines,manycoalplantswillreachtheendoftheirusefullivesover

thenexttwodecadesandgasturbineswillhaveastrongadvantagewhennew

installationsarebeingconsidered


(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


• 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


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


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)


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


• 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


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


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


‐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


Operationaladjustmentstomaintainsystemintegrityhandledentirelybypipelinecompanies

Customersareliableforpenaltiesiftheydonotmeetscheduledvolumesandmatchreceiptsanddeliverieswithintolerances.Servicesavailabletoavoidorreducepenalties

Pipelinescompaniescontrolledmoststorageforseasonalloadbalancingandoperationcontrol

Customersareresponsibleforreservingadequatestoragetomeetpeakdayrequirements

Pipelinecompaniesofferedinterruptibleservicewhencapacitynotfullyutilized

Firmshipperscanreleaseexcesspipelinecapacityandrecoupoartotallofreservationscosts

the role of natural gas as a primary fuel in the near future,...

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