# Presentation: 010663

## U.S. Natural Gas Markets

- Dr. Mark Rodekohr
- Presented to the Philippines Department of Energy
- February 2001

## Organization

-  Infrastructure
-  Regulatory Structure
-  Trends and Projections
-  Regulatory Status
-  Other

## Overview of U.S. Natural 

- Gas Pipeline Network

**There are more than 160 large natural gas pipeline systems in the U.S.**
**These systems represent over 200,000 miles of transmission lines and over 100 trillion cubic feet per day of transport capacity.**
**There are more than 1,500 local distribution companies in the U.S. that deliver gas directly to the consumer**
**There are over 3,000 natural gas producers, 500 of which account for 90 percent of natural gas reserves in the U.S.**
**There are over 1,500 compressor stations on the network**
**and 600+ Natural Gas Processing Plants**
**and 410 Underground Storage Facilities**
**and 100 Liquefied Natural Gas Storage (LNG) facilities.**

## Evolution of the U.S. Natural Gas Industry

**Era of Development: 1910 - 1950**

**Era of Regulation: 1950 - 1970’s**

**Era of Market Inefficiency: late 1970’s - mid 1980’s**

**Era of Adjustment/Restructuring/Deregulation: **
**late 1980’s - 2000**

## Slide 5

## U.S. Natural Gas Consumption

- Tcf

## Slide 7

## Slide 8

## Storage Services Can Play a Critical Role Spot Market

## Slide 10

## Natural Gas Prices Can Vary Between Hubs

## Regulations/Laws Affect Natural Gas Pipeline Companies

**State**
**Regulate intrastate pipeline companies**
**Federal**
**Federal Energy Regulatory Commission (FERC) regulates interstate pipeline rates, construction and certain operations**
**U.S. Department of Transportation - pipeline safety, inspections**
**EPA - emissions**
**Treasury Department**

## Regulations/Laws Affect Local Distribution Companies

- State
- Regulate local utility rates, certain operations, siting, construction, emissions
- Federal
- Environmental regulations - emissions, ground water impact
- Local Jurisdictions
- Regulate municipal utilities rates and operations

## Federal Energy Regulatory Commission

- Independent regulatory agency that regulates aspects of the electric, natural gas and oil pipeline and nonfederal hydropower industries.
- Ensures that rates, terms and conditions of service are just and reasonable
- Authorizes construction of natural gas pipeline facilities
- Ensures hydropower licensing, admin. and safety actions are consistent with the public interest.

## Regulations/Laws Affect the Production/Supply Segment of the Gas Industry

**State**
**Conservation Laws - well spacing, mineral rights, environmental impact, production rates, draining**
**Federal**
**Environmental Protection Agency (EPA) - emissions**
**U.S. Department of Energy - authorizes import/exports, Strategic Petroleum Reserve**
**Bureau of Land Management, Minerals Management Service - leasing**
**Other**
**U.S. Coast Guard, U.S Dept. of Transportation, Natural Gas Act, Energy Policy Act, Laws affecting access to wilderness areas and offshore**

## Countries are Establishing  Independent Regulatory Bodies as Part of Restructuring

- Australia
- Finland
- Italy
- Norway
- Netherlands
- Spain

- Sweden
- U.K
- U.S.
- Germany
- New Zealand

## Features of Independent Regulatory Bodies

- Independence from regulated companies
- Legal mandate separating regulators and regulatory body from political control
- Organizational autonomy
- Obligations for transparency and accountability

## Average Transmission and Distribution Costs Have Declined for Most End-Use Sectors 

## U.S. Natural Gas - Working Gas in Underground Storage

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, January 2001.**

**U.S. Natural Gas -**** Working Gas in Underground Storage**

**Notes:**
Working gas in storage is estimated to have been about 2,425 billion cubic feet at the end of November, 14% below the previous 5-year average.  The current outlook for winter demand and supply suggests that storage is headed for record lows this winter if weather is normal or colder than normal.  In the base case, we project that gas storage will fall to about 640 billion cubic feet at the end of the heating season (March 31, 2001).  The previous record low was 758 billion cubic feet at the end of the winter of 1995-1996.  If summer gas demand next year is as strong as we currently expect it to be, the low end-winter storage levels will present a strong challenge to the North American gas supply system to maintain flexibility and provide additional gas in preparation for the subsequent winter season.

Based on the latest data relating to planned additions to U.S. electric generating capability over the next year (additions which will primarily consist of gas-fired units), we have increased our expected level of gas demand by the electric power sector from previous outlooks to 6.65 trillion cubic feet in 2001.  That level is 3.4 % above the estimated level of 6.43 trillion cubic feet in 2000.  The higher gas demand for power generation presumes a limited incremental propensity for switching to other fuels, including coal and oil, mainly due to environmental concerns.  At the same time, we expect gas production in the United States to increase to 19.46 trillion cubic feet, about 3.6% above 2000 levels.

## Recent Years Have Seen More Price Volatility 

## Current Natural Gas Spot Prices:

**Notes:**
The surge in spot prices at the Henry Hub since April has taken prices well above a typical range for 1998-1999  (in this context, defined as the average,  +/- 2 standard deviations) 

The upper bound on the typical range for 1998-99 is less than one-third of recent spot prices.

The Henry Hub spot price spiked at $10.53 per MMBtu on December 29.

Reasons for the price run-up include:
relatively flat natural gas production for several years
increased demand for natural gas as the economy has grown, especially from the electricity generating sector
expectations for a colder winter than experienced in the last few years (generally borne out so far this heating season)
low levels of natural gas in storage
high prices for oil limiting the economic incentive to switch to petroleum-based fuels

Natural gas spot prices have dropped in the past few weeks, with Henry Hub falling under $7 per MMBtu on January 24.

## Why Have Natural Gas Prices Surged in 2000?

**Supply Tightness**
**Storage Stocks - lower than average**
**Consumption increases**
**Oil Price Increases**
**Market Perceptions**

## Energy Prices Are More Volatile Than Other Commodities

**Energy Prices Are More Volatile Than Other Commodities**

**Natural Gas**

**Crude Oil**

**COB Electricity**

**Wheat**

**T Bonds**

## The Gap Between Crude Prices and 

**The Gap Between Crude Prices and **
**Gas Prices Widened in Early 2000 **
**and Has Narrowed Since Spring 2000**

## Natural Gas Spot Prices:

**Natural Gas Spot Prices****:**
**Base Case and 95% Confidence Interval**

**Sources: History: Natural Gas Week;  Projections: Short-Term Energy Outlook, January 2001.**

**Notes:**

We expect to see peak monthly spot wellhead prices this winter of over  $8.40, the monthly average reported for December 2000.  Recently, concern about cold weather and low stocks pushed daily spot gas prices over $10.50  per mcf.  However, in early January of this year, forecasts of warm weather pushed the price down by more $1.00 per mcf in one day, indicating the extraordinary volatility in the current U.S. market.

The gas storage situation in the United States has not improved over the last few months, a sign that demand remains strong.  We believe that the 30-year records for (seasonally adjusted) storage lows may be challenged throughout the heating season.

## 1998 Gas Reserve Additions Did Not Replace Production For The First Time in 5 Years

## Gas Discoveries Per Exploratory Gas Well Have Been Trending Up Since The Mid-1980’s

## Era of Market Inefficiency: late 1970’s - mid 1980’s

**Era of Market Inefficiency: late 1970’s - mid 1980’s**

- Market signals not transmitted - prices not market driven
- Curtailments, followed by market restrictions
- Growing perception of supply scarcity, then supply “bubble”
- Disincentives to efficiency improvements

## About 22 Percent of Eligible Customers are Participating

**Over Half of the States Have **
**Residential Retail Restructuring Programs**

## Natural Gas Market Development

##      EIA Natural Gas Geographic  Information System 

**EIAGIS-NG**  - geographic information system (GIS) centered on the natural gas industry.
**EIAGIS-NG  **- being developed by DOE/EIA as an analytical and tracking tool to expand our capabilities to study an industry undergoing rapid and significant changes.

## EIAGIS

**Includes Maps For:**** **
**53 Interstate Pipeline Systems**
**45 Intrastate Pipelines and Local Distribution Companies**
**Includes Point Locations for:**
**More than 1100 Compressor Stations**
**Over 7500 Delivery Points**
**Over 800 Receipt Points**
**Over 1000 Interstate Interconnections**
**77 Proposed Storage Projects**
**390 Existing  Underground Storage Sites**
**360 State Border Crossings**
**as well as for Electric Power Plants, Cogeneration Facilities**
** ****and other energy facilities.**