Evaluation of US Natural Gas Industry Research Paper

The use of natural gas in the United States has experienced dramatic growth since late 20^th century. In most of the period, natural gas which saw massive production was a by-product of crude oil production. Long-lived reserves and easy target have since been provided by the large reservoirs of dry natural gas production.

“On April 1992, the Federal Energy Regulatory Commission (FERC) issued an order requiring a comprehensive natural gas restructuring, which was meant to enhance a more competitive ground into the natural gas industry.

Subsequently, the order enhanced the unbundling of pipelines’ gas sales and transportation services, thus the natural gas producers and the shippers could engage in arms-length transactions.” More importantly, the order made it possible for natural gas buyers to do this with an equitable and fair access to pipeline transportation from the sellers (Dahl, 112).

The main focus of the order was to create a capacity reallocation program, known as “capacity release.” This was to enable the shippers who had the capacity right of firms to release large amount of capacity through the pipeline for sale.

In addition, there were requirements on the pipe release, which required posting of information necessary to provide the interested parties with an opportunity to bid on the release capacity. This created a bidding competition, which saw the bidders with the largest value to become the acquiring shipper.

In 1993, the FERC commenced evaluating pipeline’s conformity filings, also putting in place the ‘capacity release’ enactment. All pipelines were to be approved and their operations were to be as per the requirements of the Order. The FERC aimed at ensuring that there was a well functioning capacity release to the market and a more competitive ground for natural gas delivery by the natural gas industry.

While on the same time, enhancing the efficiency of cost distribution and mitigating rate increases to firm gas customers, which were achievable since the firm shippers of natural gas paid for the fixed costs of transportation (Lautzenhiser & MacDonald, 253).

Having analyzed the main focus concerning the industrial requirements according to the order, let us look at the industry at a glance. Natural gas which is almost composed of methane entirely is a useful fuel used for commercial purpose as well as residential purposes. Its production, transportation and consumption is measured in cubic feet, which is equivalent to an area measuring one foot in regard to all three dimensions.

“The energy of one cubic feet can be estimated to hold energy equivalent to around one million British thermal units (Btu), however this energy does fluctuate due to different chemical composition of a gas.” In the twenty-first century, the use of natural gas is increasingly been used to generate of electricity, with many production industries embracing use of natural gas in place of nuclear energy as it shows effectiveness in the speed of electric generation as well as it contributed to cleaner environment.

This enabled the natural gas production to take over other energies such as coal and other fossil fules, and its role was expected to be extended further by the Clean Air Act effect. The natural gas is also used more due to its efficiency in retaining and distributing the heat energy produced through electricity generation (Dooley, 453).

The origin of the natural gas industry is traceable back in 1859 in Titusville, Pennsylvania. During this time, the first pipeline transportation was established in United States when oil was struck 69 feet below the ground by Edward Drake, a former railroad conductor.

It was however used to light street lights as there was no easy way of transporting the gas into people homes. Later on, natural gas was established in domestic usage through water warming and cooking food by gas producers.

However, during this period, its usage remained constricted until the end of the Second World War when some metallurgy advancements, pipes making rolling and welding processes contributed to improvement of distribution channels. There was expansion in layout of pipelines and widened usage of natural gas in America industry (Hackworth, Koch & Rezaiyan, 193).

“The first Natural gas Regulation Act was passed on 1938 which was the first government regulation of the industry”. The Act’s aim was to protect the consumers from the emerging monopolies in the natural gas industry through price regulation of the natural gas (Lautzenhiser & MacDonald, 153).

In the 1970s and 1980s there were acute outages of the gas which contributed to the eventual change from price regulation thus heightening the demand for the natural gas supply and decreasing the prices. Gradually, innovation and technology improvement started to be realized in natural gas industry as a result of competition.

In 1990, the “Clean Air Act Amendment” boosted the natural gas demand as it argued that natural gas was the cleanest energy source and by late 1990s, the natural gas industry was leading the supplier of energy with more than a half of the nation’s energy and indications showing that the reliance on natural gas was increasing.

The consumption of natural gas as energy had risen up to 70 percent of energy needs by 1999. According to Lautzenhiser & MacDonald (363), “there were more than 1.3 million miles of natural gas transmission and distribution pipelines traversing the nation, delivering supplies to 60 million commercial and residential customers.”

In early 2000, there have been proposals on pipeline projects which were estimated to boost the capacity of gas delivery by 23.2 billion cubic feet per day. As a result, a significant number of coal burning power and nuclear plants were shut down while other was being converted to natural gas facilities.

“In the beginning of 2000’s, the natural gas industry suffered from the sluggish market impacts, incoherent market deregulations and from the upheavals in the general energy industry, which were attributed greatly to the 2000 energy crisis in California together with the collapse of energy giant, Enron. This led to downsizing operations, large scale sell-offs, and a drastic decrease in shareholder’s equity in several firms”.

According to Dahl (341), “although natural gas makes up just one-third of the entire energy industry, because most energy companies have diversified interests that span the market, the beginning of the twenty-first century saw the industry weather a difficult storm of customers and investor distrust.” This saw declining capability of production, despite the fact that the usage of natural gas was expected to increase.

As mentioned earlier, the state regulation and myriad of federal are the core determinant of the distribution and transportation of natural gas.

This has categorized the two practices by putting the “interstate pipeline under FERC jurisdiction” and local distribution companies under the domain of their state’s public utility commission. Although historically oligopolies have directed the distribution chain of the natural gas from the producers to the consumers, deregulation during 1980’s and 1990’s enhanced by the fragmentation and competitiveness in the industry.

Before the deregulation, the chain of the gas distribution involved transporters who relied on the gas producers for supply, and were required by the wholesale agreement to provide the gas to distributors. The distributors under retail chain then delivered the gas to the end users.

However, on the employment of the deregulation, the natural gas industry experienced an expansion and extension of the traditional roles. In addition, there were new entrants in the distribution chain; these were “consultants, brokers, marketing affiliates and independent marketers”.

“The natural gas industry has trade associations, which represent the numerous segments”, for instance the demands of local-distributing firms are represented by “American Gas Association”, “The Natural Gas Supply Association” represents the giant gas producers, and “The Interstate Natural Gas Association of America” which represents pipelines’ firms.

“Other related organizational representations include; small independent gas producers who are represented by Independent Petroleum Association of America, gas producers who are represented by Domestic Petroleum Council, and local distributors who are represented by the Natural Gas Council”. The deregulation has increased the accessibility and consistency of the supply of natural gas and has also enhanced increase the gas’ demand.

Focusing on the current industry conditions, the early years of 2000 have seen the industry experiencing serious setbacks. California for instance experienced a significant power shortage and outages in 2001. In 2002, there was an artificial shortage of the natural gas which was attributed to El Paso Corp intention of heightening the gas price in its greed intention of acquiring vast amounts of profits.

Following this scenario, the Enron Corp was faced by severe losses due to withdrawal of support by the Wall Street investors due corruption allegations, which lead to a drop by 90% in the shareholder’s wealth.

As a result, the natural gas industry was faced by tailspin of downsizing, lay-offs, and sell-offs. The industry therefore lost its credibility and went on a hard track of obtaining bankers and investors an attempt which remained wary of the volatile industry (Dahl, 290).

While the natural gas supply remained above average in 2002 with regard to previous five years, the natural gas storage supplies showed poor records in 2003 contributing to higher prices. However, as the U.S economy started recovering from the economic downturn as at the end of 2003, it was projected that that natural gas demand would rise by about 4% and would be consistent.

On the other hand, the production was not expected to increase regardless of the low level of storage. However the deregulation gradually revised the trend of both the production and distribution of the natural gas and the usage in commercial and domestic area. This was accompanied by increased demand of the natural gas.

However, the natural gas industry emphasizes more on market efficiency. “Under the pipeline maintenance investigation, the U.S Department of Transport reported that more than 800,000 leaks in service line and gas main is experienced every year”. This is significant representation of earning through gas loss beside a clear presentation of a potential disaster (Dahl, 284).

According to the Energy Information Administration, “it is projected that the use of natural gas as an electricity generating fuel would grow by 30% in year 2010 in comparison to 1992 levels. The increasing reliance of the natural gas has called for regulations that will ensure that the markets dealing with this product are exercising efficient operations. The recent years have seen the natural gas industry transforming from strict regulations to increasing competition”.

This is a change has been attributed to the whole distribution chain from the wellhead sources to the burner tip end user. However, the competition has affected the industry strategic choices which have become complicated due to the “expansion of pipeline services, natural gas derivative markets which have been successfully developed, and the North American market integration” (Dooley, 173).

According to Dooley (317), “any explanation of capacity release transactions must begin with an overview of the regulation that created the mechanism, thus the legislation creating the mechanism needs to be overviewed”. This will enable one to realize that natural gas pipelines, unlike others, were not designed as common carriers, however according to Order No. 636 and 636 the FERC has the mandate to change natural gas pipelines into common carriers.

The FERC attempted to change the pipelines transformation into common carrier in 1992 through revolutionizing the natural gas industry by authorization of pipelines unbundling their services to natural gas end users. In capacity release, the determination that the capacity will be utilized over a certain period of time enables determination of period of release, quantity to be released, whether or not the release is recallable among others.

The capacity release is transacted through pipeline’s ebb and though it is initiated by the seller, buyers also have the potential of triggering them (Dooley, 213).

There are important variables which are the key determinants of the prices for release capacity. According to Dahl (372), “the price of release capacity of natural gas industry is influenced by several factors which include; the distance over which the capacity release is effective, amount of capacity release, the number of releasing shippers on a given pipeline, the discounted interruptible rate of transportation on pipelines where the release is undertaken and the time length under which the release operation is effective, the capacity utilization degree on the pipeline, the specified minimum rate in posting of the release capacity, consideration whether deals contain recall right or not and whether the deal was prearranged or not among others.”

Natural gas industry has developed research and technology where development programs, research and designs were appropriated $246 million in 1999 at the Department of Energy. Adoption of intensive natural gas technology were also announced by Gas Research Institute which aimed at implementing natural gas cooling technology and natural gas micro turbines among other.

This saw “Enron Gas Pipeline Company being awarded in 1999 for surveying fugitive emission compressor stations which was a promising undertaking in helping the industry to secure co-funding and consortium for testing natural gas such like methane”.

The overall effort in improving the research and technology of the natural gas industry is aimed at enhancing expansion of natural gas market as well as improving natural gas conveyance. The evolution of natural gas fueled vehicle contributed to an increase of natural gas consumption by 26 percent despite the fact that it accounted for a minimal fraction of U.S natural gas consumption (Hackworth, Koch & Rezaiyan 413).

In addition, the industry have been able to introduce a residential natural gas dehumidifier which have since replaced air conditioning units which used electricity in private homes, industrial and commercial applications. Notably, United Technologies manufactured “natural gas fuel cells which could produce heat and electricity by combining oxygen and hydrogen”.

The low emission by these cells has made the technology look more suitable when used inside buildings. These natural gas fuel cells have been used in various industries such as food processing, hospitals and mass transit agency.

Works Cited

Dahl, Carol. “International Energy Markets.” Understanding Pricing, Policies and Profits. 2004.

Dooley, John. “Unintended consequences: energy R&D in a deregulated energy market.” 27^th August 1998.

Hackworth, John, Koch Robert, & Rezaiyan, John. “Economic Evaluation and Market Analysis for Natural Gas Utilization.” April 1995.

Lautzenhiser, Stephen & MacDonald Scott. “Evaluation of Capacity Release Transactions in the Natural Gas Industry.” June 1994