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Natural Gas Conveyance and Restructuring Barbara Mariner-Volpe February 2001 Bangladesh Ministry of Energy and Mineral Resources

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Presentation on theme: "Natural Gas Conveyance and Restructuring Barbara Mariner-Volpe February 2001 Bangladesh Ministry of Energy and Mineral Resources"— Presentation transcript:

1 Natural Gas Conveyance and Restructuring Barbara Mariner-Volpe February 2001 Bangladesh Ministry of Energy and Mineral Resources barbara.marinervolpe@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 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

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 Reassessed Transportation Requirements in the Late 1990s Note: Data are for 27 Pipeline Companies.

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 Firm Transportation Capacity Under Contract at the Beginning of January Each Year 89.8 93.1 94.6 12.2 10.5 10.4 0 20 40 60 80 100 120 199719981999 Capacity (TBtu/d) Long-Term Short-Term

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) 10 Projects - 1.2 Bcf/d10 Projects - 2.7 Bcf/d 9 Projects - 3.8 Bcf/d 21 Projects - 5.3 Bcf/d 13 Projects - 4.1 Bcf/d 7 Projects - 2.4 Bcf/d

27 Interstate Pipeline Companies Serving the Northeast

28 Natural Gas Transportation Nomination Schedule 9:00 AM 10:00 AM11:00 AM 12:00 PM 1:00 PM 2:00 PM 3:00 PM 4:00 PM5:00 PM6:00 PM7:00 PM8:00 PM9:00 PM 10:00 PM11:00 PM 12:00 AM 1:00 AM 2:00 AM 3:00 AM 4:00 AM5:00 AM6:00 AM 7:00 AM 8:00 AM 9:00 AM Natural Gas Begins to Flow (9:00 am) Shippers Last Opportunity to Submit Intraday Nomination (4 hrs before gas flows) Gas Day: 9:00 am to 9:00 am Central Clock Time Shipper Receives Confirmation of Scheduled Quantities (4:30 pm) Shipper Nominates Next Days Gas (11:30 am) 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 Statewide unbundling - implementation phase Statewide unbundling - active programs Pilot programs/partial unbundling No unbundling - considering action No unbundling VT NH MA RI CT NJ DE MD DC 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 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

47 International Energy Agency Goals 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 Market Characteristics 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-PP Applications 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 Gas End-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


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