The U.S. Natural Gas Markets and Industry

1. The U.S. Natural Gas Markets and Industry Energy Information Administration 13 May 2003 Barbara Mariner-Volpe, Barbara.marinervolpe@eia.doe.gov William Trapmann, william.trapmann@eia.doe.gov

2. Presentation Coverage • Background on U.S. gas market • Regulations • Market Restructuring • Competition • Infrastructure • Storage

3. U.S. Gas Industry at a Glance

4. Major Natural Gas Producing Basins and Pipeline Transportation Corridors to Market Areas Source: Energy Information Administration, GasTran Gas Transportation Information System

5. U.S. Gas Regulations

6. Regulations/Laws Affect the Production/Supply Segment • State • Conservation Laws - well spacing, mineral rights, environmental impact, production rates, draining • Federal • Environmental Protection Agency (EPA) - emissions • U.S. Department of Energy - authorizes import/exports, Strategic Petroleum Reserve • Bureau of Land Management, Minerals Management Service - leasing • Other • U.S. Coast Guard, U.S Dept. of Transportation, Natural Gas Act, Energy Policy Act, Laws affecting access to wilderness areas and offshore

7. Regulations/Laws Affect Natural Gas Pipeline Companies • State • Regulate intrastate pipeline companies • Federal • Federal Energy Regulatory Commission (FERC) regulates interstate pipeline rates, construction and certain operations • U.S. Department of Transportation - pipeline safety, inspections • EPA - emissions • Treasury Department

8. Regulations/Laws Affect Local Distribution Companies • State • Regulate local utility rates, certain operations, siting, construction, emissions • Federal • Environmental regulations - emissions, ground water impact • Local Jurisdictions • Regulate municipal utilities rates and operations

9. Overarching Goal of Federal Energy Regulators in the U.S. • Maximize consumer and economic benefits • Minimize the need for future regulatory intervention

10. Regulatory Developments • Federal • Encourage competitive markets, remove barriers, streamline processes, encourage responsible infrastructure development • State • Unbundling programs stalled in some areas • Evaluating programs and impacts • Issues: reliability, consumer prices, standards

11. GAS MARKET RESTRUCTURING

12. The Paradigm for the Gas Market Changed in the 1990s • 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

13. U.S. Gas Market Changes over the Last Decade • Physical Changes: • increase in pipeline capacity • development of high-deliverability storage • new pipeline routes, more interconnections • technology advances • Development of market centers • Structural Changes: • regulations -- encourage competition, protect environment • role of pipelines -- transporters only • open access to suppliers • Development of futures market • deregulation of wellhead prices, spot market • emergence of a secondary market for trading pipeline capacity

14. Daily Prices Can Fluctuate Significantly

15. Natural Gas Futures Trading Market Is Used to Hedge Against Price Volatility • New York Mercantile Exchange (NYMEX) for • deliveries at Henry Hub • Allows a buyer to lock-in a price for an amount of gas (10,000 MMBtu) that will be delivered at some time in the future (36 consecutive months). • Trading for the next month’s deliveries stop three business days prior to the first day of the delivery month.

16. 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-volume commercial customers have effectively had supply choice for a number of years.

17. As of December 2002, Twenty States and the District of Columbia Have a Residential Choice Program

18. 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

19. 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"

20. COMPETITION

21. What Are the Signs of a “Sufficiently” Competitive Market? Competitive Markets generally possess one or more of the following characteristics: • Many buyers and sellers • Many product options • Relative ease of entry and exit • Risk, on the part of the service provider, of losing money if they do no operate efficiently

22. Elements of a Well Functioning Gas Market • Unconcentrated market structure • Grid integration • Supply/Demand responsiveness • Risk management tools – hedging and forward contracting • Accurate scheduling, system reliability • Access to information – market monitoring • Capacity expanding in response to market signals

23. PIPELINE INFRASTRUCTURE

24. U.S. Interstate and Selected Intrastate Natural Gas Pipeline Systems 2002 Source: Energy Information Administration, Office of Oil & Gas , EIAGIS-NG Geographic Information System

25. Gas Market Centers Serve As Major Trading and Transshipment Points Sumas Center Chicago Center PGT Center Iroquois Center Columbia Gas Center New York Center Western Center Golden Gate Center Ellisburg-Leidy Center Cheyenne Hub California Energy Center Mid-Continent Center Dominion/Sabine Center Blanco Center Ouachita Hub Mojave Center Perryville Center Carthage Hub Waha (Lone Star) Hub Houston Hub Waha EPGT Hub Waha Hub The Exchange Center Nautilus Hub Katy Hub Louisiana Hub Aqua Dulce Hub Henry Hub Moss Bluff Hub Egan Hub Source: Energy Information Administration, GasTran Gas Transportation Information System, Natural Gas Market Centers Database.

26. Wheeling Parking Loaning Storage Peaking Balancing Gas Sales Title Transfer Electronic Trading Administration Compression Risk Management Hub-to-Hub Transfers Market Center and Hub Services

27. There is No Centralized Planning of Additions to Gas Pipeline Capacity • Need determined by estimates of future gas demand • Pipelines obtain approval of FERC: - demonstrate need for capacity - minimize adverse environmental and cultural impact

28. STORAGE

29. Natural Gas Storage • Critical supply component during heating season • Smoothes the production of gas throughout the year • Withdrawals help satisfy sudden shifts in demand and supply caused by weather • Supports hub services (parking, loaning…)

30. Natural Gas Consumption Varies Widely by Month Source: EIA, Natural Gas Division

31. There are Over 400 Storage Facilities in the U.S. Working Gas 3.9 Tcf Deliverability 78 Bcf per day

32. Changes in Storage Operations Over the last five years • More emphasis on inventory management • Significant growth in deliverability • Commodization of storage – risk management tool: price hedge • Emergence of third party operators • Increased capital investment by local utilities and large consumers • Supports hub services and intra-day services • Linkage between storage and spot prices • Supports market liquidity

33. Peak Day Storage Facilities • Liquefied natural gas – typically more expensive than underground storage. Used mostly in areas where other storage not available. • Peak-shaving facilities (propane) – typically used during brief periods when demand spikes. • Pipeline Line pack – through increased compression, uses the pipeline as a temporary storage facility

34. Natural Gas Supply, Consumption, and Imports Are Projected to Expand Through 2025(1970-2025, trillion cubic feet)

35. TO OBTAIN MORE ENERGY INFORMATION www.eia.doe.gov

36. BACKGROUND Information

37. Federal Energy Regulatory Commission • Independent regulatory agency that regulates aspects of the electric, natural gas and oil pipeline and nonfederal hydropower industries. • Ensures that rates, terms and conditions of service are just and reasonable • Authorizes construction of natural gas pipeline facilities • Ensures hydropower licensing, admin. and safety actions are consistent with the public interest.

38. U.S. Bureau of Land Management – U.S. Dept. of Interior • Administers 262 million acres of public lands, primarily in 12 Western States • Responsible for leasing oil/gas resources on all federal-owned lands • Review and approval of permits and licenses to explore, develop and produce oil/gas • Inspection and enforcement of lease requirements and operations

39. U.S. Dept. of TransportationOffice of Pipeline Safety • Ensures the safe, reliable and environmentally sound operation of interstate natural gas pipelines • Responsible for compliance, inspection and enforcement procedures of pipeline safety procedures

40. Federal Agencies Affect the U.S. Gas Market • Department of Interior • Bureau of Land Management • Minerals Management Service • Bureau of Indian Affairs • U.S. Geologic Survey • Department of Agriculture * U.S. Forest Service • Department of Energy * Office of Fossil Energy • Department of Commerce • Department of Treasury • Environmental Protection Agency • Department of Transportation * Office of Pipeline Safety • FERC • Federal Trade Commission, CFTC