# Presentation: 010660

## The Evolution of Gas Markets in the United States

**Barbara Mariner-Volpe**
**May 2000**
**Bangladesh Ministry of Energy and Mineral Resources**** **

**Barbara.Marinervolpe@eia.doe.gov**

## Scope of this Presentation

**Market and Regulatory Development**
**Regulatory Reform and Industry Restructuring**
**Market Trends**
**Current Issues**
**Outlook**

## The U. S. Natural Gas Industry At A Glance

**The U. S. Natural Gas Industry At A Glance**

## A Vast Network of Pipelines Provides Interstate Transportation

## Regulatory - Market Continuum Within the Natural Gas Industry

## Evolution of the 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**

## Era of Development: 1910 - 1950

**Era of Development: 1910 - 1950**

**Supply sources**
**Transportation technology/Infrastructure**
**Demand**

## Era of Regulation: 1950 - 1970’s

**Era of Regulation: 1950 - 1970’s**

**Concern about monopoly power**
**Federal, state and local regulations**
**Significant market growth**
**Gas still considered an oil by-product**

## 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**

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

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

**Period of transition - policy and market changes**
**Wellhead prices deregulated - spot, futures markets develop**
**Restructured transmission industry - emergence of marketers**
**Market centers, hubs, storage expand**
**Retail Market regulatory changes**

## Key Federal Decisions/Regulation of the Gas Industry

**Natural Gas Act of 1938: regulation of interstate pipelines**
**Supreme Court Decisions (Phillips, 1954): Interstate Gas **
**Natural Gas Policy Act of 1978: Response to curtailments in mid 1970’s**
**Led to market dislocations, gas “bubble” **
**Orders 436, 500, 636 (1985 - 1993) **
**restructured interstate market**
** ****Natural Gas Decontrol Act**
**decontrol of wellhead prices**
**Others: PUHCA repeal, Energy Policy Act**

## Changes over the Last Few Years:

**Physical Changes:**
**significant increase in pipeline capacity**
**development of high-deliverability storage**
**new pipeline routes, more interconnections **
**technology advances**
**Structural Changes:**
**regulations -- encourage competition, protect environment**
**role of pipelines -- transporters only**
**open access to suppliers -- development of new supplies**
**deregulation of wellhead prices**
**emergence of a secondary market for trading pipeline capacity**

## Effects of Physical and Structural Changes: Pipeline Companies

**Shifting risk/cost**
**Increased competition**
**Customer oriented**
**New business strategies:**
**	****	****consolidate**
**	****	****“****spin-off”**
**	****	****diversify**
**	****	****enter unregulated business areas**

## New responsibilities and risks
More Choices - for services and providers
More transparent price information
Changes to delivery system utilization
		strategic use of storage
		more inventory management
		shedding unused capacity
Financial instruments (e.g. future market)

**More Choices - for services and providers**
**More transparent price information**
**Changes to delivery system utilization**
**	****	****strategic use of storage**
**	****	****more inventory management**
**	****	****shedding unused capacity**
**Financial instruments (e.g. future market)**

**Effects of Physical and Structural Changes: Shippers**

## Effects of Physical and Structural Changes: Industry

**New industry players: Marketers**
**Increased competition**
**Development of hubs and market centers**
**Efficiency Gains: Increased throughput, decreased unit costs**
**Technology advances**
**Market signals communicated**
**Corporate combinations & convergence**
**Spot Market Development**
**More opportunities and risks (volatility)**

## Pre Restructuring Paradigm:
heavy regulation 
efficiency not rewarded
 Post Restructuring Paradigm: 
principles of competition and choice, while recognizing a continuing, although greatly reduced role for regulation

**heavy regulation **
**efficiency not rewarded**
** ****Post Restructuring Paradigm: **
**principles of competition and choice, while recognizing a continuing, although greatly reduced role for regulation**

**The Paradigm for the Gas Market Has Changed**

##  Financial transactions are no longer closely tied to the flow of the commodity

*** *****Financial transactions are no longer closely tied to the flow of the commodity**

## Current Market Developments

## Trends in Natural Gas Consumption and Supply

**Trends in Natural Gas Consumption and Supply**

## Consumer Prices Declined Substantially From 1980’s Peak Prices

**$0.00**

**$1.00**

**$2.00**

**$3.00**

**$4.00**

**$5.00**

**$6.00**

**$7.00**

**$8.00**

**$9.00**

**$10.00**

**1973**

**1975**

**1977**

**1979**

**1981**

**1983**

**1985**

**1987**

**1989**

**1991**

**1993**

**1995**

**1997**

**1999**

**1999 Dollars per **

**Thousand Cubic Feet**

**Residential**

**Commercial**

**Industrial**

**Electric Utilities**

**Wellhead**

## Supply Reliability

**Ownership of assets equated to control of supply**
**Market system relies on diversification and flexibility**
**alternate transportation routes**
**transportation and storage are both substitute and complementary services**
**commercial arrangements**
**Supplier performance / Supplier of last resort**

## The Restructured Interstate Pipeline

** ****Market**

## Interstate Transportation Market in 2000

**Pipelines -- Transporters, Not Merchants **
**More Choices for Shippers**
**Improved Pricing Information**
**Increased Competition**
**New Services**
**New Challenges**

## Choices of Pipeline Services Have Changed in the 1990’s

**Released Capacity**

**Interruptible Transportation**

**Sales**

**No-Notice Service**

**Firm Transportation**

## Capacity Release

**Order 636 ordered pipelines to establish release programs (EBBs).**
**Shippers are now able to “release” or resell their firm capacity rights.**
**Referred to as the “secondary market” in pipeline capacity.**
**Holders of firm capacity initiate the release and specify terms.**
**Competes with interruptible transportation service offered by the pipeline.**
**The rate structure in Order 636 increased the cost of reserving capacity.**

## Released Capacity Has Increased

## Natural Gas Transmission Markups have Declined as Deliveries Increased

**Natural Gas Transmission Markups have Declined as Deliveries Increased**

## Trends in Transportation Contracts

**LDCs hold the bulk of contracted capacity.**
**Contract expirations are significant**
**Shippers want flexibility and reliability **
**In the aggregate total commitments have increased slightly.**
**The length and size of long-term contracts have decreased.**
**Market concentration varies by region**

## Marketers Have Increased Their Share of the Transportation Market

**Notes:**
Observations: the non-heating season was chosen due to the fact that there is less of a chance for weather variation to impact the data.
Over the two years the percent of total for LDCs decreased from 59% to 52%.  The Marketers increased from 22% to 27%, and other increased from 3% to 5%.  The total capacity also increased from 92.7 to 96.7 TBtu/d.

This is most likely due to the fact that Marketers are taking over natural gas contracts due to retail unbundling.  This is most likely happening with the “Others” category too.

## Emerging Issues for Interstate Transportation Market

**Does the current formula for computing regulated rates send the ‘right’ market signals?**
**How, when or will the pricing structure change from cost of service rates to market based rates?**
**Shifting risk - How will the industry deal with capacity that shippers don’t want on a long-term basis (capacity turnback, decontracting)?**
**Regulation v. Competition -- What’s the right balance?**

## Total Firm Capacity Under Contract Has Generally Increased Each Quarter

**Note: Data are for 60 interstate pipeline companies****.**

**Notes:**
Observations: generally capacity is increasing.  Except for in april when it has a huge spike in 1997 and then settles down in 1998.  This is most likely linked to the fact that in 1997 there was a huge spike in new contracts, (seen in previous slide), the new contracts came about in April.

## Firm Transportation Capacity by Year for Contract Expiration, 1999 - 2025, 

**as of July 1, 1999**

**Notes:**
Observations: There is a decreasing trend over the years.  This could mean that there are not that many extremely long-term contracts.

There is a huge peak in 2023.  There was the large about of contracts that were started in April of 1997, and there were many of them that had the 2023 expiration date.

## Volatility of Natural Gas Prices has Increased 

**Volatility of Natural Gas Prices has Increased **
**Over the Last Several years**

## In Recent Years Natural Gas Prices Show Greater Volatility

**Economic/business conditions **
**Stock levels**
**Pipeline capacity**
**Operational difficulties**
**Lack of  timely,**
**reliable information**

**Affects Supply       Affects Demand**

**What Are The Main Drivers Of Short-term Price Volatility?**

## High Prices Do Not Always Coincide With High Volatility

**Monthly Variations**
** ****in Daily Prices **
** ****(Volatility Index)**

**Wholesale gas price in Henry, LA**

## Natural gas is second only to electricity in energy futures price volatility

**Natural gas is second only to electricity in energy futures price volatility**

## Spot Distillate & Crude Oil Prices(Prices through March 3, 2000)

**Notes:**
Retail distillate prices follow the spot distillate markets, and crude oil prices have been the main driver behind distillate spot price increases until recently. Crude oil rose about $17 per barrel or 40 cents per gallon from the beginning of the latest “up cycle” in mid February 1999 to mid-January, 2000. 

Over this same time period, New York Harbor spot heating oil rose about 42 cents per gallon, reflecting both the crude price rise and the beginning of a return to a more usual seasonal spread over the price of crude oil.  

The week ending January 21, distillate spot prices in the Northeast spiked dramatically to record levels, closing on Friday at $1.26 per gallon -- up 50 cents from the prior week.  Gulf Coast prices were not spiking, but were probably pulled slightly higher as the New York Harbor market began to draw on product from other areas.  The Gulf Coast heating oil spot price closed at 83 cents per gallon, an increase of 11 cents from the prior Friday.  Crude oil rose about 4 cents from the prior week.

Since then, New York Harbor spot distillate prices have been volatile.  Prices initially peaked on Tuesday, January 25 at almost $1.36 per gallon before a brief weather respite and signs of cargoes coming to the East Coast encouraged buyers to begin to relax.  By January 31, they fell to 82 cents, only to rebound again as cold weather and supply delays continued, peaking February 4 at $1.77 as weather continued to hinder re-supply.  By Friday, February 11, prices had fallen below 80 cents per gallon, and remained below that level ever until February 25, when rising crude oil prices began to pull them upward again.

What happened the week ending January 21 to set off this price spike?

## Retail Unbundling

**Retail Unbundling**

## Developments in Retail Markets

**Many states are promoting consumer choice**
**More than half of the states have choice programs**
**States are taking different approaches**

## Status of Retail Unbundling in the US as of February 2000

**Status of Retail Unbundling in the US ****as of February 2000**

## Issues in Retail Unbundling:

**Do the benefits of choice outweigh the cost?**
**Should all services be offered competitively? How should services be priced?**
**“****Obligation to serve.”**
**Who should pay for the transition?**
**Marketers and local distributors -- a level playing field?**
**Reliability**
**Business Standards**

## Infrastructure Development

**Infrastructure Development**

## Demand Growth Has Led to Expanded Pipeline Capacity

**Options:  **
**	****- New pipelines**
**	****- Additional compression**
**	****- Looping**
**	****- A combination of each **

## Between 1990 & 1998, 18 new natural gas pipeline systems were built in the U.S. 

**Between 1990 & 1998, 18 new natural gas pipeline systems were built in the U.S. **

- Destin Pipeline 1998
-       (1,000 Mmcf/d)

- PNGTS/Maritime 1998
-         (632 Mmcf/d)

- Northern Border Extn 1998
-             (650 Mmcf/d)

## The expanding development of deep-water production in the Gulf of Mexico.
The growing production capacity in western and offshore eastern Canada.
Shippers seeking greater access to alternate sources of supply.
Capacity constrained production seeking greater access to Non-traditional markets.

**The growing production capacity in western and offshore eastern Canada.**
**Shippers seeking greater access to alternate sources of supply.**
**Capacity constrained production seeking greater access to Non-traditional markets.**

*** *****Pipeline Expansion Projects Reflect: **

## Except for 1994-96, the amount of added capacity each year has been above 4 Bcf/d

**Except for 1994-96, the amount of added capacity each year has been above 4 Bcf/d**

- Additions to Capacity

**(Announced **
**   ****and/or **
** ****Approved**
** ****Projects)**

**Notes:**
Highlights:

During the past decade, except for 1994-96, the amount of added capacity each year has been above 4 Bcf/d. In the early years, new pipeline system, such as the Kern River Transmission, Mohave pipeline and Iroquois Pipeline systems were installed, the former two to feed the expanding California market and the latter the first time substantial volumes of natural gas were imported into the Northeast from Canada.
The large growth in new capacity between 1997 and 1999 reflects the substantial development of new capacity supporting the expansion of deep-water production in the Gulf of Mexico (e.g. the Natutilis and Discovery pipelines). In addition, growth in Canadian import capacity (the expansion of the Northern Border and Great Lakes Transmission systems to name but two) continued unabated.

## The Outlook for Natural Gas

**The Outlook for Natural Gas**

## What is the Big Picture for the Natural Gas Industry?

**Answer:  Many Opportunities for Growth.**

**Natural gas is a clean burning fuel.**
**Natural gas is an abundant source of energy.**
**The existing pipeline network could support market growth.**
**Capital investments continue to be made.**

- <footer>

## Natural Gas Market Outlook:  Through 2020

**Continued optimism about market growth (32 Tcf in 2020)**
**Increasing wellhead prices to $2.81 Mcf ($98) in 2020 **
**Declining margins/prices to small customers **
**Imports increase to 5.1 Tcf in 2020**
**Rising prices and  lower drilling costs increase reserve additions and production**
**Centralized technology improvements limit cost increases**

## U.S. Natural Gas Production, Consumption, and Imports,

**1970 - 2020 (trillion cubic feet)**

## U.S. Natural Gas Production by Source, 1970-2020

**U.S. Natural Gas Production by Source, 1970-2020**
**(trillion cubic feet)**

## Natural Gas Consumption is Expected to Increase for Each Consumer Group

## Electricity Generation by Fuel

**1990-2020 (billion kilowatthours)**

**1990**

**1995**

**2000**

**2005**

**2010**

**2015**

**2020**

**Reference Case**

**Renewable **

**Hydropower **

**Nuclear**

**Petroleum**

**Natural Gas **

**Coal **

## Projections for Wellhead Prices are Influenced by Technology Assumptions

## New Technologies and Initiatives Could Improve the Environment

**Government/industry partnership: best practices**
**Gas-to-Liquids technology**
**Developments in fuel cell technology**

## SUPPLY  MAY BE AFFECTED BY NUMEROUS ASPECTS OF THE PROJECTION

**Conditions in competing fuel markets, such as world oil prices**
**Projected foreign trade volumes:  both imports and exports**
**Resource assumptions:  both the geology base and the costs of discovery and recovery**
**Technology--impacts demand and supply side conditions**

**SUPPLY  MAY BE AFFECTED BY NUMEROUS ASPECTS OF THE PROJECTION**

## Technically Recoverable U.S. Natural Gas Resources

**Technically Recoverable U.S. Natural Gas Resources**
**as of January 1, 1998 (trillion cubic feet)**

## 1997

**1997**

**1997**

**5.1**

**3.3**

**9.1**

**2.1**

**2.9**

**22.5**

**21.0**

**36.9**

**14.3**

**33. 1**

**25.6**

**47.6**

**12.3**

**6.0**

**3.8**

**10.0**

**10.1**

**3.2**

**2020**

**2020**

**Total Energy Consumption **

**Total Energy Consumption **

**Natural Gas Consumption**

**Natural Gas Consumption**

- Residential

- Commercial

- Industrial

- Electric  Utility

- Other

***94.7 Q***

***94.7 Q***

***22.5 Q***

***22.5 Q***

***118.6 Q***

***118.6 Q***

***33.0 Q***

***33.0 Q***

*(Quadrillion Btu)*

*(Quadrillion Btu)*

- Natural Gas

- Coal

- Petroleum Products

- Other

## A Competitive Market......

**Allows consumers and service providers to make individual decisions about managing and allocating risks and associated costs.**
**Can benefit informed customers who may choose the terms and prices that best meet their needs.**

## The Information Revolution...

**How far we’ve come**** **

**Transparent wholesale natural gas prices**
**Weekly storage ‘estimates’**
**Futures market information**
**Electronic access to capacity information**
**Electronic gas trading systems**

**Information that was not available prior**
** ****to the industry restructuring**

## In the Future Information Needs May Include

**Transparent retail natural gas and electricity prices**
**Wide dissemination of daily price and quantity information on exchanges of gas**
**(Maybe even daily storage estimates) **
**Gas/electric convergence (and developing Btu markets) may lead to additional information needs**

## To allow competitive markets to develop and function effectively, actions may be needed that:

**Foster choices that serve the public interest**
**promote system efficiencies**
**reduce regulatory uncertainty**
**support development and commercialization of technologies that reduce costs and increase  choices available to consumers**

## In Summary:  The Gas Industry is Dynamic

**and Faces Opportunities and Challenges...**** **

**Continued volatility of prices**
**Significant market growth (to 32 Tcf by 2020)**
**Domestic production and imports will increase significantly in the future**
**Natural gas is an abundant resource**
**Continuing surplus of U.S. productive capacity in the short term**
**Increased competition in retail markets**

- <footer>