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Natural Gas Markets

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Its importance has grown since the mid-1990s. Natural gas is an attractive fuel because it is clean burning and efficient, and because ample supplies of natural gas have been available from domestic resources and from Canada. Throughout the 1990s, these factors and the low cost of natural gas helped lead to increased investment in facilities using natural gas. For example, the vast majority of new electricity generation capacity built in the United States in the past decade has been natural gas-fired. However, for the last five to seven years, the price of natural gas has been trending upward (Figure 1). Of course, the result of increasing natural gas prices has been increased residential heating bills, increased fuel costs to electric generators using natural gas, and decreased competitiveness of U.S. industries that rely on natural gas. Given the effect of higher natural gas prices on consumers’ budgets and on firms’ competitiveness, consumers, business people, and policymakers are asking what has led to the increase in North American natural gas prices.
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Understanding
Natural Gas Markets


Table of Contents
Overview
1
The North American Natural Gas Marketplace
3
Understanding
Natural Gas Markets
Natural Gas Demand
9
Natural Gas Supply
12
Summary
25
Glossary
26

Overview
Natural gas
is an important source
of energy for the United States.
Its importance has grown since the mid-1990s. Natural gas
Addressing these questions requires an understanding of three
is an attractive fuel because it is clean burning and efficient,
important points:
and because ample supplies of natural gas have been available
from domestic resources and from Canada. Throughout the
N North American prices for natural gas are driven by the
1990s, these factors and the low cost of natural gas helped
interaction of natural gas supply available from North
lead to increased investment in facilities using natural gas.
American natural gas and oil fields and demand. Demand
depends, in large part, on the relative prices of other fuels,
For example, the vast majority of new electricity generation
economic growth, and weather, which drives heating
capacity built in the United States in the past decade has been
demand in the winter and demand for gas-fired generation
natural gas-fired. However, for the last five to seven years,
for cooling in the summer.
the price of natural gas has been trending upward (Figure 1).
Of course, the result of increasing natural gas prices has
N The U.S. natural gas market is highly competitive.
been increased residential heating bills, increased fuel costs
Natural gas market prices are determined competitively
to electric generators using natural gas, and decreased
on spot and futures* markets reflecting current and
competitiveness of U.S. industries that rely on natural gas.
expected supply and demand conditions. The market
Given the effect of higher natural gas prices on consumers’
price is determined through the actions of thousands
budgets and on firms’ competitiveness, consumers, business
of well-informed buyers and sellers.
people, and policymakers are asking what has led to the
increase in North American natural gas prices.
N Natural gas consumed in the United States is primarily
produced domestically or imported from Canada. Planned
increases in U.S. imports of liquefied natural gas (LNG)
would, if realized, begin to integrate the United States
into a growing world market for natural gas.
* Italicized words appear in the glossary.
1

1
Average Natural Gas Spot Prices at Henry Hub, July 1996 - August 2006
Source: Platts
As described in this brochure, North America’s demand for
age of existing natural gas fields. Furthermore, significant
natural gas is strong as a result of continued economic growth
natural gas resources are currently off-limits to development.
and other factors. In addition, high oil prices have made
Political and market responses to high prices can include
natural gas a relatively more attractive fuel because fewer
increased conservation of natural gas, increased access
industrial natural gas users can profitably switch from natural
to currently restricted resources, improved extraction
gas to oil products for their energy needs. However, on
technology, expansion of infrastructure to bring Alaskan
the supply side, despite increased drilling activity, North
natural gas to the lower 48 states, and importation of natural
American natural gas supply has leveled off due to the mature
gas, both via pipeline from Canada and LNG from overseas.
2

The North American Natural Gas Marketplace
U.S. energy
counts natural gas as an
important part of its portfolio.
Natural gas provides 23 percent of the marketable energy
Transportation
consumed in the United States.1 Oil products and coal
Natural gas is transported in high-pressure pipelines from
are the other two major sources of energy. Natural gas is
producing areas to industrial end users, storage areas, and
a valued source of energy because it is versatile and burns
local distribution companies.
cleanly. As a result, natural gas use is commonplace in
applications including cooking, residential and commercial
Storage
heating, industrial process feed stocks, and electric generation.
The natural gas production and delivery system is not
designed to produce and transport the full amount of
Physical Structure of the U.S. Natural Gas Industry
natural gas consumers want during periods of peak demand.
Figure 2 is a schematic illustration of the physical structure
In order to meet peak demand, large customers and
of the natural gas industry and illustrates the principal
distribution companies put gas into underground storage,
activities required to bring gas to consumers. The primary
mostly near final consumers. The stored gas is withdrawn
activities are:
to meet consumers’ needs during times of peak demand,
such as a cold winter day.
Exploration and Production
Exploration and production include finding and producing
Local Distribution
natural gas from natural gas fields or associated gas that is
Local distribution companies own and operate the network
produced with crude oil.
of pipes that carry natural gas from high-pressure trunk lines
to final consumers. These consumers include residential,
Processing
commercial, and industrial customers.
Natural gas processing removes impurities and the higher-
valued products and prepares a dry gas stream that meets
Liquefied Natural Gas
industry standards for transportation in high-pressure
The United States currently imports about three percent
pipelines.
of its natural gas from overseas producers in the form of
liquefied natural gas. LNG can also be stored and used
1
Energy Information Administration, “Energy Basics 101,”
www.eia.doe.gov/basics/energybasics101.html.
to meet peak demand.
3

2
Physical Flow of Natural Gas
4

The North American Natural Gas Marketplace
3
Selected U.S. Natural Gas Producing Regions and Pipeline Flows
Source: EIA, Platts, State of Alaska Department of Natural Resources
Figure 3 shows some of the primary areas where natural
gas is produced in the United States. As the figure shows,
natural gas is found in a large number of states. Major
onshore production areas include the Rocky Mountains,
Texas, and Louisiana. In addition, significant natural gas
comes from offshore production in the Gulf of Mexico.
5

6

The North American Natural Gas Marketplace
4
U.S. Natural Gas Resources Subject to Access Restrictions (TCF)
Source: EIA, Platts, National Petroleum Council
As shown in Figure 4, offshore areas on both coasts and the
TCF of the natural gas off the western coast of Florida is
Alaskan Peninsula are off-limits to exploration. In addition,
unavailable for exploration and production.2 As shown in
approximately 125 trillion cubic feet (TCF) of the natural gas
the figure, it is estimated that approximately 225 TCF of
underlying federal lands in the Rocky Mountains is off-limits
U.S. natural gas reserves are off-limits to exploration, equal
or under some type of restriction (such as species habitat
to approximately ten times the total amount of natural gas
restrictions or no surface occupancy) and approximately 25
consumed in the U.S. in 2005 (22 TCF).3
2
National Petroleum Council, Balancing Natural Gas Policy: Fueling the Demands of a Growing
Economy, Vol. 2 at 127 (September 2003).
3
http://tonto.eia.doe.gov/dnav/ng/ng_cons_sum_dcu_nus_a.htm.
7

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