Natural Gas Conveyanceand Restructuring

Barbara Mariner-Volpe

February 2001

Bangladesh Ministry of Energy and Mineral Resources

barbara.marinervolpe@eia.doe.gov

Scope of Presentation

• Transportation market

• Retail restructuring - international

• Information analysis tools

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.

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

Natural Gas Market Centers Serve As Major Trading and Transshipment Points

California Energy Center

Golden Gate Center

PGT Center

Sumas Hub

Waha (Delphi) Hub

PG&E Waha Hub

Mojave Center

Western Center

Waha (Lone Star) Hub

Blanco Center

Katy (Western) Hub

Waha (TECO)Hub

Katy (TECO) Hub

Carthage Hub

Aqua Dulce Hub

Houston Hub

Buffalo Wallow Center

Mid-Continent Center

Egan Hub

Moss Bluff Hub

Henry Hub

Louisiana Center

Equitable Resources Hub

Chicago Center

Columbia Gas Center

Texaco Gulf Star Center

CNG/Sabine Center

Ellisburg-Leidy Center

New York Center

Iroquois Center

Perryville (NORAM) Center

Local Distribution Companies are the Connection Between Interstate Pipelines and End Users

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

Supply ReliabilitySupply 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

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

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2000

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Residential

CommercialIndustrial

Electric Utility

Wellhead

Financial Transactions are no Longer Closely Tied to the Flow of the Commodity

Physical Flow of Natural Gas Remain Much the SamePhysical Flow of Natural Gas Remain Much the Same

More Market Participants Involved in Financial TransactionsMore Market Participants Involved in Financial Transactions

Transportation Commodity Bundled

= Transactions captured by current data collectors.= Transactions not captured by current data collectors.

Producers Pipelines LDC’s End Users

Producers(Wellhead Prices)

Pipelines

LDC’s

MarketersOff-SystemEnd Users

On-SystemEnd Users

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

Current Pipeline Policy Issues

• Negotiated rates and terms and

conditions of service

• Rate design

• Capacity turnback

• Mergers and affiliate relationships

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

Capacity Turnback: Defined

Shipper action of reducing or returning of firm transportation capacity to the pipeline company at the expiration of the contract.

Shippers ReassessedTransportation Requirements in the

Late 1990’s

A p r Ju l Oc t Jan A p r Ju l Oc t Jan

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80

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R el ea se d C a pa c ity H el d by R e p lace m e n t S hipp e rs

1997 19981996

Note: Data are for 27 Pipeline Companies.

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 -- What’s the right balance?

• Encourage addition of capacity without excessive cross customer class subsidization

Market Changes Affected Physical System Utilization

Firm ContractedCapacity (100 TBtu/d)

ReleasedCapacity (20 TBtu/d)

UnsubscribedCapacity (27 TBtu/d)

Total

Capability(127 TBtu/d)

Uncommitted and Unusedby Firm Shippers

Capacity Used by IT

by Firm Shippers

Committed but Unusedby Firm Shippers

Available Capacity

Utilization

Released CapacityUsed by Firm Shippers

Firm Contracted CapacityUsed by Firm Shippers

Capacity

Estimated

Utilized

(80 TBtu/d)Capacity

(47 TBtu/d)

Released but Unused

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

Most Firm Transportation Capacity is Held Under Long-term Contracts

Firm Transportation Capacity Under Contractat the Beginning of January Each Year

89.8 93.1 94.6

12.2 10.510.4

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120

1997 1998 1999

Cap

acit

y (T

Btu

/d)

Long-Term

Short-Term

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.

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.

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.

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

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.

Average Utilization Rates into States Varied in 2000

=

= Less than 100 MMcf/d Capacity

Capacity (in Million Cubic Feet per Day)

9,0006,000

12,00015,000

03,000

Average Utilization(Flow into State)

=81 to 100%=71 to 80%=61 to 70%=51 to 60%=50% or Less

NortheastMidwestCentralWestern

Southwest

Southeast

As of Sept. 2000, Proposed Pipeline Expansions 2001-2003 (70 projects, 20 Bcf/d)

10 Projects - 1.2 Bcf/d 10 Projects - 2.7 Bcf/d 9 Projects - 3.8 Bcf/d21 Projects - 5.3 Bcf/d

13 Projects - 4.1 Bcf/d

7 Projects - 2.4 Bcf/d

Algonquin Gas Trans (ALGN)Brooklyn Union Gas (BRKL)CNG Trans Corp (CNGT)Columbia Gas Trans (CGTC)Eastern Shore Natural Gas (ESHR)EnergyNorth Natural Gas (ENNG)Granite State Gas (GRST)Iroquois Pipeline (IROQ)Maritimes\Northeast Pipeline (MNEP)

National Fuel Gas Dist (NAFD)National Fuel Gas Sup (NFGS)Northern Utilities (NUTL)Portland Natural Gas (PORT)St. Lawrence Gas (STLW)Tennessee Gas Pipeline (TENN)Texas Eastern Trans (TETC)Transcontinental Gas (TRAN)Vermont Gas (VERM)

CNGT

TETC TRAN

TENNCGTC

STLW

ENNGIROQ

GRST

BRKL

VERM

Interstate Pipeline Companies Serving the Northeast

Natural Gas Transportation Nomination Schedule

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Natural Gas Begins to Flow

(9:00 am)

Shipper’s Last Opportunityto Submit Intraday Nomination

(4 hrs before gas flows)

Gas Day: 9:00 am to 9:00 am Central Clock Time

Shipper Receives Confirmationof Scheduled Quantities

(4:30 pm)

Shipper NominatesNext Day’s Gas

(11:30 am)

1 Day

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

Retail Restructuring

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

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.

Statewide unbundling - implementation phaseStatewide unbundling - active programs

Pilot programs/partial unbundlingNo unbundling - considering action

No unbundling

VTNHMARICTNJDEMDDC

Over Half of the States Have Residential Retail Restructuring Programs

About 22 Percent of Eligible About 22 Percent of Eligible Customers are ParticipatingCustomers are Participating

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

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"

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"

Residential Customers Can Benefit From Effective Information Programs

Columbia Gas of Ohio Current Gas Plan $744.50

Columbia Energy Services(888)224-6622

Fixed at $.348 per Ccf one year $702.71

Commonwealth Energy(800)928-0636

a) 10% less than the total monthly Columbia Gas of Ohio bill

b) Fixed at $.335 per Ccf

one year

one year

$670.05

$668.96

ENRON(888)913-6766

20% lower than Columbia Gas of Ohio's expected gas cost

one year $679.20

FSG Energy Services(888)367-4493

a) Variable Rate

b) Fixed rate for Winter and Variable for Summer

6 months

6-12 months

$661.42

Can not determine

Miami Valley Resources(800)431-8723

a) Fixed at $.340 per Ccf

b) Variable Rate

one year

monthly

$693.22

Can not determine

Stand Energy Corp.(800)598-2046

Variable but no more than $.370 per Ccf one year $693.92

MARKETER MARKETER PRICE OPTIONS PRICE OPTIONS TERMS OF CONTRACT TERMS OF CONTRACT AVERAGE ANNUAL COST AVERAGE ANNUAL COST

DurationDuration

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.

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

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

The Following Policy Objectives are Incorporated to Varying degrees in

European Gas Markets:

• Economic efficiency

• Security of Supply

• Social Objectives

• Environmental and climate protection

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.

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

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

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.

International Energy Agency:Member 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

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

Japanese Natural Gas Market

• Goals – Energy security

– Economic growth

– Environmental protection

• Hurdles to Market Expansion– Developing the network

– Reducing the cost of LNG

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

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

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

Example of EIA Tools to Analyze the Transportation

Market

Examples of Analytic Tools EIA Uses In Analyzing Infrastructure Issues

• Deliver Model

• EIA Natural Gas Geographic

Information System (EIAGIS)

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

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

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.

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

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 ...

Adding Data Points and Pipelines

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 isCompressor Station on the

Texas Eastern system.

EIAGIS-PPApplications

• Provide maps to management

• Identify specific infrastructure for FEMA’s damage estimates

• Visually perform emergency impact assessments

• Visually develop remedial plans

• Aid in analytical endeavors

The Lower 48 Pipeline System in DELIVER

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

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.

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.

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

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?

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.

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