Natural Gas Production and Distribution
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Industry Overview
About 10,000 companies in the US explore, produce, transmit, and locally distribute natural gas, with combined annual revenue of $100 billion. Exploration and production are conducted by large, vertically integrated petroleum companies like ConocoPhillips and Chevron, by large independents such as Anadarko and Devon Energy, and by thousands of smaller exploration companies. Transmitting gas from production to consumption areas is handled by about 1,000 pipeline operators. Local distribution is handled by thousands of utilities. Regional energy companies like KeySpan and Dominion Resources combine transmission, storage, and distribution operations. The US consumes about 20 trillion cubic feet (tcf) of natural gas annually.
Competitive Landscape
Demand for natural gas depends partly on the health of the US economy and partly on the price of crude oil, a competitive product. The profitability of natural gas companies depends largely on the efficiency of their operations. There are large economies of scale in the production, processing, and distribution of gas, but small companies can effectively compete with large ones in exploration, where technical ability is more important than size.
Products, Operations & Technology
Raw natural gas is a mixture of methane, ethane, propane, butane, and other hydrocarbons, along with various contaminants such as nitrogen compounds, sulfur compounds, and water. Processed natural gas is mainly methane, with a small amount of ethane and other components. Because it is mainly methane, processed natural gas burns very cleanly and efficiently. Natural gas is found in various geological formations, often along with crude oil. Natural gas is used by consumers and businesses to provide heat and hot water, by utilities to power turbines that produce electricity, and by industrial users to power furnaces and as a feedstock to produce other chemicals.
Gas exploration is conducted by large and small companies, usually on leased land. Leases specify an expiration period and a royalty rate to be paid on any gas produced. Small companies often sell production from their wells to larger companies that have invested substantial capital in processing and pipeline facilities. Exploration involves various seismic (sound wave) techniques to visualize the geological formations underground, and the drilling of "wildcat" wells in promising locations.
The success rate of exploratory wells may be no better than 20 percent, although new seismic techniques can improve the odds. Development wells drilled into an existing field have a much higher success rate. The US has about 300,000 production wells. Gas extracted with crude oil from oil wells (called "associated" gas) must be separated at the wellhead. A bit more than 25 percent of natural gas production in the US comes from oil wells. State excise taxes on extracted gas are sizable.
The amount of gas exploration activity varies with the price of gas. The number of rotary drilling rigs increases or decreases as gas prices are up or down. Producers are very concerned about acquiring new gas sources to add to reserves, often describing additions to reserves as a percentage of annual sales. Producers also report the amount of developed and undeveloped lease acreage they hold. Large, vertically integrated producers refer to their operations as "upstream" (exploration and production) and "downstream" (marketing, transportation, and storage).
Production from gas wells is routed via a system of small pipelines to one of about 600 processing plants in the US, where most of the components other than methane are removed. Many of these components have economic value, especially ethane, propane, and butane, called "natural gas liquids" (NGL). Ethane is an important feedstock for the production of ethylene, a basic industrial chemical.
Once processed to a suitable level of purity, natural gas can be moved by pipeline from production to consumption areas. Transmission companies move natural gas via large underground pipelines. There are about 300,000 miles of large-diameter gas transmission pipeline in the US. Compressing stations are located every 70 to 100 miles along a pipeline to keep the gas flowing. Gas transmission companies don't own the gas they deliver. Acquiring rights-of-way and local permits for new construction is often difficult.
In addition to transmission pipelines, many transmission companies also own and operate natural gas storage facilities - usually underground depleted gas fields or salt caverns. Storage facilities are especially important in the Midwest and Northeast, where demand for natural gas in winter exceeds the daily delivery capacity of existing pipelines. Most transmission companies have long-term contracts with buyers, like local distribution companies, gas marketers, electricity generators, and industrial users, that specify transportation volumes and whether delivery is "firm" or "interruptible" during periods of high volume use.
Local distribution companies (LDCs) buy gas directly from producers or gas marketers and distribute it to local customers generally classified as residential, commercial, or industrial. The "penetration" of a local distributor is the percentage of homes in its territory that use natural gas. Large industrial users and electricity generators often bypass the local distributor and deal directly with pipeline companies and marketers. Gas is supplied to residential and small commercial users on a "firm" basis, and to large commercial and industrial users on a "firm" or "interruptible" basis, with different price structures. Distributors measure delivery capacity in terms of "peak-day capability" (usually expressed as thousand cubic feet per day - mcfd), which is a combination of contracted pipeline capacity, underground storage release capacity, and peaking supplies (generally LNG in storage containers).