Natural Gas Conveyance and Restructuring

1
Natural Gas Conveyanceand Restructuring

• Barbara Mariner-Volpe
• February 2001
• Bangladesh Ministry of Energy and Mineral
  Resources
• barbara.marinervolpe_at_eia.doe.gov

2
Scope of Presentation

• Transportation market
• Retail restructuring - international
• Information analysis tools

3
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.

4
U.S. Natural Gas Pipeline Profile

• Interstate vs Intrastate Pipelines
• Gathering System -- Gas Processing Plant --
  Mainline Pipeline System -- Underground Storage
  -- Local Distribution System
• Size of pipelines range from 16-42 inches on
  mainlines, 2-16 inches for LDCs
• Hubs or Market Centers provide interconnections
  among pipelines

5
Natural Gas Market Centers Serve As Major Trading
and Transshipment Points
Sumas Hub
Chicago Center
Iroquois Center
PGT Center
Western Center
New York Center
Golden Gate Center
Ellisburg-Leidy Center
Columbia Gas Center
CNG/Sabine Center
California Energy Center
Mid-Continent Center
Blanco Center
Buffalo Wallow Center
Mojave Center
Waha (Lone Star) Hub
Perryville (NORAM) Center
Waha (TECO)Hub
Carthage Hub
Equitable Resources Hub
Waha (Delphi) Hub
Katy (TECO) Hub
PGE Waha Hub
Texaco Gulf Star Center
Katy (Western) Hub
Henry Hub
Houston Hub
Egan Hub
Louisiana Center
Aqua Dulce Hub
Moss Bluff Hub
6
Local Distribution Companies are the Connection
Between Interstate Pipelines and End Users
7
Local Distribution Company Rates

• Represents the costs of moving gas from the
  "citygate" to the consumer
• Generally cost based rates, but performance based
  rates are seen.
• Depending on the state, transportation and
  merchant functions may be separated.
• The cost of gas is a simple pass-through to the
  consumer

8
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

9
Average Transmission and Distribution Costs Have
Declined for Most End-Use Sectors
10
Financial Transactions are no Longer Closely
Tied to the Flow of the Commodity
11
Restructuring of Pipeline Services - Order 637

• Removed price cap on short-term capacity releases
• Encouraged differentiated peak and off-peak rates
• Requires parking and lending services as a way to
  avoid imbalances
• Pipeline should minimize operational flow orders
• Revised rules of right of first refusal

12
Current Pipeline Policy Issues

• Negotiated rates and terms and conditions of
  service
• Rate design
• Capacity turnback
• Mergers and affiliate relationships

13
To Obtain Transportation Services

• Step 1. Reserve capacity (via contract) with the
  pipeline or a releaser of capacity
• Types of contracts
• Long-term firm transportation (FT)
• Short-term firm service
• Interruptible (IT)
• Capacity release (firm or recall)
• Step 2. Nominate to use capacity
• Step 3. Confirmation of nomination by the
  pipeline company
• Step 4. Gas flows are scheduled by the pipeline
  company

14
Capacity Turnback Defined
Shipper action of reducing or returning of firm
transportation capacity to the pipeline company
at the expiration of the contract.
15
Shippers ReassessedTransportation Requirements
in the Late 1990s
16
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 - capacity turnback
• Regulation v. Competition -- Whats the right
  balance?
• Encourage addition of capacity without excessive
  cross customer class subsidization

17
Market Changes Affected Physical System
Utilization
18
Trends in Firm 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
• However, pipeline construction has outpaced
  contracted capacity
• The average length and size of long-term
  contracts have decreased
• Market concentration varies by region

19
Most Firm Transportation Capacity is Held Under
Long-term Contracts
20
Interruptible (Non-Firm) Service for Natural Gas

• Increases system load and utilization
• Efficient use of pipeline facility
• Price of interruptible (Non-Firm) service for
  natural gas is typically heavily discounted
  because service is not guaranteed
• When heating load is light due to mild winter
  weather, interruptible service may not be
  interrupted. The service may appear to be firm.

21
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.

22
Advantages of Using the Release Market
For the releasing shipper

• Allows shippers to respond quickly to market
  changes.
• Includes flexible terms re amount of capacity
  and duration of release.
• May set specific pricing terms, subject to
  regulated cap.
• May reserve the right to recall the capacity.

23
Advantages of Using the Release Market - Cont.
For the replacement shipper

• Moderate lead time required
• Flexible terms re duration of contract
• Ability to obtain capacity - even though the
  pipeline may be fully reserved
• Rates for released capacity are often heavily
  discounted

24
Drawbacks of the Capacity Release Market

• Coordination of multiple contracts can be
  difficult.
• Revenues may provide only a partial offset for
  the high cost of reserving capacity.
• Released capacity may be unavailable.
• Only limited price discovery is possible.
• Interruptible transportation may have competitive
  edge.

25
Average Utilization Rates into States Varied in
2000
26
As of Sept. 2000, Proposed Pipeline Expansions
2001-2003 (70 projects, 20 Bcf/d)
27
Interstate Pipeline Companies Serving the
Northeast
28
Natural Gas Transportation Nomination Schedule
Shippers Last Opportunity to Submit Intraday
Nomination (4 hrs before gas flows)
Shipper Nominates Next Days Gas (1130 am)
Natural Gas Begins to Flow (900 am)
Shipper Receives Confirmation of Scheduled
Quantities (430 pm)
Gas Day 900 am to 900 am Central Clock Time
1 Day
29
E- business Speed is Key

• Auctioning pipeline capacity via the internet
• Bids need to be made, offers accepted and
  contracts finalized - QUICKLY
• Submit nominations, perform scheduling
• Facilitate communication - reduce costs of
  information and price discovery
• Key Question Should on-line auctions be
  administered by a third party?
• Identify alternative routes

30
Retail Restructuring
31
Issues in Retail Restructuring

• 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 costs?
• Marketers and local distributors - a level
  playing field?
• Reliability
• Business Standards

32
Restructuring of U. S. Retail Markets

• Residential and small commercial consumers are,
  to varying degrees by state, acquiring choice of
  supplier.
• Electric generators, industrial and large
  commercial customers have effectively had supply
  choice for a number of years.

33
Over Half of the States Have Residential Retail
Restructuring Programs
About 22 Percent of Eligible Customers are
Participating
34
Retail Restructuring Varies Across the U.S. for
Several Reasons

• States Act Independently of Each Other
• Political/Economic Objectives Differ
• Regulatory Structures Differ
• Market Size to Attract Energy Providers

35
Pros and Cons of Customer Choice

• PROS
• Increases competition
• Potential for customer cost savings
• Encourages new services
• Leads to greater market efficiency, as market
  signals are conveyed more directly

• CONS
• May result is reduced supply reliability
• Increased price volatility
• Customer burden - some don't want choice
• May reduce supply reliability
• May lead to higher prices
• Retail market may not be a "level playing field"

36
Retail Unbundling - May Include More than Supply
Acquisition

• Retail unbundling may evolve to include the
  following traditional distributor services
• Storage
• Metering
• Balancing
• Standby service - "supplier of last resort"

37
Residential Customers Can Benefit From Effective
Information Programs
38
Canadian Regulators Expect the Following
Developments in Canada

• Increased reliance on market solutions
• Competitive pipeline projects
• Pipeline capacity shifting to marketers
• Light-handed regulation
• Market-based tolls
• Continued growth in exports to the U.S.

39
European Natural Gas Markets

• Gas service is often combined with other services
  - water, electricity, telephone, cable
• Regulation is extensive and varies by country
  from government legislation, public ownership,
  regulatory agencies and taxation
• Concession or franchise giving the service
  provider the exclusive right to operate in a
  specific area in return for the obligation to
  serve in that area.
• Prices generally set by the market value of
  competing fuels. In some cases the costs of
  providing the service are also determining
  factors.
• Distinction between transmission and distribution
  not always clear
• Current debate (and some steps toward) third
  party access

40
Similarities Between the U.S. and U.K. Gas Markets

• Heavy reliance on domestic sources of supply
• Open access (third party access) prevalent
• Federal regulations but private ownership
  throughout the gas chain
• Retail unbundling underway

41
The Following Policy Objectives are Incorporated
to Varying degrees in European Gas Markets

• Economic efficiency
• Security of Supply
• Social Objectives
• Environmental and climate protection

42
The Reform Process in Europe The Gas Directive

• Opens-up European gas markets, both within and
  across geographic boundaries
• Enable large gas consumers to select their
  supplier.
• Sets minimum levels, implementation is determined
  by each country
• To date on transmission access, but movement to
  open distribution is underway, but varies by
  country.

43
Unbundling of Gas Services in Europe

• Great Britain - retail choice is underway both at
  transmission and distribution level
• Germany - taking steps toward retail choice by
  abolishing exclusive concessions for gas service
• Italy, Austria, Switzerland - limited unbundling
  at the transmission level
• Spain - limited unbundling (third party access)
  is being implemented
• Ireland, Netherlands - moving toward unbundling

44
European Gas Markets

• LDCs currently have limited choice of gas
  suppliers
• Most countries are dominated by one transmission
  company
• Demand is highly seasonal and access to storage
  facilities for third party providers is needed to
  successfully enter the market
• Residential sector accounts for the largest share
  of gas consumption (26-45)
• Current structure is based on exclusive
  arrangements between supplier and customer.
• Most pipelines are merchants
• Ownership of LDCs is mostly public, but private
  ownership is becoming more widespread

45
Incentives May Be Different in Public vs. Private
Ownership of Transmission or Distribution

• Private Ownership - may be interested in
  maximizing profits
• Public Ownership - may be interested in lowering
  consumer prices or, may be inclined to maximize
  profits in order to cross-subsidize other areas
• Alliances, affiliations and other corporate
  combinations can reduce risk and exposure to
  changing markets - also may be benefits, e.g.
  economies of scale in obtaining gas supplies.

46
International Energy AgencyMember Countries

• Australia, Belgium, Canada, Denmark, Finland,
  France, Germany, Greece, Hungary, Ireland, Italy,
  Japan, Luxembourg, Netherlands, New Zealand,
  Norway, Portugal, Spain, Sweden, Switzerland,
  Turkey, U.K., United States

47
International Energy AgencyGoals

• Energy diversity, efficiency, flexibility
• Environmentally acceptable
• Technology development and application
• Free and open trade, promote investment
• Responsive to energy emergencies
• Undistorted energy prices

48
Japanese Natural Gas Market

• Goals
• Energy security
• Economic growth
• Environmental protection
• Hurdles to Market Expansion
• Developing the network
• Reducing the cost of LNG

49
Japanese Natural Gas MarketCharacteristics

• Fragmented into many regional companies (245 but
  3 dominate)
• Exclusive service areas (franchises)
• Virtually no third party access
• Little competition and market entry is difficult
• Large consumers can negotiate prices

50
Restructuring of Gas Market in Japan

• Moving toward partial retail liberalization (for
  both gas and electricity market)(petroleum market
  is decontrolled)
• Large customers can negotiate supply prices and
  terms
• Government is encouraging market flexibility and
  expansion (co-generation, trigeneration) as well
  as load balancing
• Encouraging market based pricing - moving to
  expand to more customers

51
Countries are Establishing Independent
Regulatory Bodies as Part of Restructuring

• Australia
• Finland
• Italy
• Norway
• Netherlands
• Spain

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

52
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

53
Example of EIA Tools to Analyze the
Transportation Market
54
Examples of Analytic Tools EIA Uses In Analyzing
Infrastructure Issues

• Deliver Model
• EIA Natural Gas Geographic Information System
  (EIAGIS)

55
DELIVER Features

• Linear programming model
• Objective minimize costs of supplying gas
• Demand is differentiated by customer class
• Explicit representation of pipeline capacity and
  production availability
• PC-based model

56
DELIVER Capabilities

• Examine issues related to system ability to meet
  demand on a state-by-state basis
• Scenario analysis potential supply disruptions,
  severe weather, transportation disruptions,
  natural disasters
• Analyze pipeline and supply availability

57
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.

58
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.

59
Mapping Selection Menu

• A mapping selection menu allows the user the
  flexibility to
• Choose by pipeline or state
• Request specific types of points to map
• Alter the level of geographic detail desired

60
EIAGIS-NG Mapping

• Upon display of the requested map the user may
  select from a number of options
• Alter Map display, e.g., Zoom in/out.
• Identify (label) points according to type.
• Perform statistical summarization and graphing
• Execute and produce hardcopy reports of selected
  data
• Display information on selected point(s)
• More ...

61

• Adding Data Points and Pipelines

62
Information Tool Example
EIAGIS-NG MAPPING SYSTEM
Example of how the user may select on a
particular point and have information on it
displayed. Example shown is Compressor Station
on the Texas Eastern system.
63
EIAGIS-PPApplications

• Provide maps to management
• Identify specific infrastructure for FEMAs
  damage estimates
• Visually perform emergency impact assessments
• Visually develop remedial plans
  
  
• Aid in analytical endeavors

64
The Lower 48 Pipeline System in DELIVER
65
A Major Pipeline Disruption Leads To Re-Direction
of Pipeline Flows and Some Delivery Curtailments
BLUE indicates States experiencing curtailments
RED designates pipeline corridors at maximum flow
66
Why Are Analysis Tools of Natural Gas
Infrastructure Needed?

• Industry and others want to how natural gas
  marketing and transmission has been impacted by
  restructuring.
• Market participants must now make their own
  arrangements for shipping gas.
• Want to know about available transportation
  options
• What services are available to them from whom.
• Pipelines are interested in capacity levels on
  existing routes on which they might propose
  expansions.
• Knowing the current infrastructure is necessary
  for planning for demand projections of 32 Tcf
  demand by 2020.
• Assessing impact of infrastructure bottlenecks
  and disruptions.

67
Examples of Infrastructure Analysis

• The capabilities of the various interstate
  pipeline systems that make up a large part of the
  U.S. natural gas pipeline network.
• Usage levels on these pipelines. To what degree
  has it changed since the start of the decade and
  why.
• Pipeline expansions - completed since 1990 and
  proposed through 2000. Driving forces?
• Factors that have had a major impact on how the
  natural gas pipeline network now operates, i.e.
  FERC Order 636, Market Centers, Electronic
  trading, etc.

68
Components of the Analysis of Infrastructure
Adequacy

• 1. Production capabilities and the ability to
  move supplies onto the interstate network
• 2. Transmission of gas along the major natural
  gas transportation corridors
• 3. Deliverability into major natural gas end-use
  markets

69
Production Capabilities and the Ability To Move
Supplies Onto The Interstate Network

• Identification of the major producing areas
• Recent levels of development and production
• Expansion possibilities
• What interstate pipeline systems access the area?
• What are their capabilities (capacity) to receive
  supplies?
• Indications of capacity constraint?
• Measures being taken (if any) to resolve the
  problem
• To what degree are storage and support facilities
  integrated?

70
Transmission of Gas Along The Major Natural Gas
Transportation Corridors

• Major corridors delineated (e.g. within the U.S.
  and Canada)
• For each corridor
• Major expansions and new pipelines since 1990?
• Identify pipeline systems that ply the corridor
• Current capabilities and utilization levels
• Indications of service bottlenecks
• Amount and type of underground storage serving
  shippers
• Market centers/hubs and their role within the
  corridor
• Expansion possibilities
• For the network as a whole Overall
  capacities/usage growth.

71
Deliverability Into Major Natural GasEnd-use
Markets

• Major market areas examined
• For each market area
• Major expansions and new pipelines
• Identify pipeline systems that feed into the
  market
• Current capabilities and utilization levels
• Integration of underground and LNG storage
  deliverability
• How end-use customer usage shifts have
  influenced expansions and utilization of
  available capacity
• Expansion possibilities
• Comparison of recent growth among regions and why
  capacity into certain markets is expanding