Industry 101 | Participants in the Energy Sector: Gas Market

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Since the move towards deregulation in the 1990s, the natural gas market has undergone an evolution shaping and changing participant’s roles. The gas market is subject to influencing factors such as technological changes and seasonal weather fluctuations, which requires gas market participants to find solutions to meet demands while simultaneously taking into account safe provisioning and costs. Roles in the natural gas market are also influenced by the fact that the majority of the natural gas consumed in the United States is produced within the U.S. Only a small amount of natural gas used comes from Canada and Mexico.

Natural Gas ConsumptionIn general, over the last three decades, natural gas consumption has declined across all end-use sectors, with the exception of electric power generation.  Approximately 1/3 of all natural gas produced and transmitted is ultimately used by the electric power generation sector in order to create electricity.


Natural Gas Production and DeliveryOver the past twenty years, the government has worked to remove regulations and rely upon competitive market forces to shape standards. However, regulation over transmission and distribution serve a functionary purpose to protect consumers against the monopolies that exist in those sectors of the gas market. Specifically, interstate pipelines are regulated through the Federal Energy Regulatory Commission (FERC) and local distribution companies (LDCs) are regulated through state utility commissions. These regulatory bodies ensure fair pricing and prevent preferential servicing.

As a flexible natural resource consumed by end customers as well as a method of generation for electric utilities, natural gas is processed through a delivery infrastructure that consists of producers, transmission, distribution, and retail.


Natural gas production began millions of years ago with the decay of organic material subjected to heat and pressure. As time progressed, this process created subterranean pocket deposits of coal, oil, and natural gas. Today, geologists use seismic surveys, the creation and study of vibrations on rocks, to find and develop the best approach to collecting these deposits.

Collection or gathering involves the placement of wells above deposits to harvest the upwelling resource once the surface rock is drilled. The raw, initial state of natural gas is known as wet natural gas due to the mixture containing gas hydrocarbons, liquid hydrocarbons, and gas nonhydrocarbons. After purification from a natural gas processing plant, the finalized product is referred to as dry or consumer grade natural gas. Processing Plants

Generalized Natural Gas Processing Schematic 1.2 Gas MarketThe principal service provided by a natural gas processing plant to the natural gas mainline transmission network is the production of pipeline quality natural gas. Natural gas mainline transmission systems are designed to operate within certain tolerances. Natural gas entering the system that is not within certain specific gravities, pressures, Btu content range, or water content level will cause operational problems, pipeline deterioration, or even pipeline ruptures.

Natural gas refinement involves several complex steps, which may vary depending on the composition of the natural gas retrieved at the wells. Some of the steps in the table and image below may be done in one processing plant, delegated out to multiple processing plants, or omitted based on the makeup of the unrefined resource. The steps for producing consumer grade natural gas are essential to safe storage, transportation, and use.



Gas-Oil-Water Separator Single or multiple-step removal of oil or water impurities by manipulating pressure
Condensate Separator Removes condensates and places them in separate storage tanks
Dehydration Completely removes all trace water and hydrates
Contaminant Removal Removal of all nonhydrocarbon gases (hydrogen sulfide, carbon dioxide, water vapor, helium, nitrogen, and oxygen) usually through amine solutions
Nitrogen Extraction Removal of nitrogen gas
Methane Separation Separates methane from natural gas (may occur with nitrogen extraction)
Fractionation Separates natural gas liquids (NGL) into its component hydrocarbons


Natural gas is delivered via high-pressure, long-distance major pipeline networks. These pipelines can be classified into three types of transmission pipelines:

  • Interstate Pipelines transport across state borders.
  • Intrastate Pipelines transport within state borders.
  • Hinshaw Pipelines receive from interstate pipelines and deliver within state borders to consumers.

From these large pipelines, natural gas flows through smaller pipelines called mains. Pipes directly connected to resident or commercial service points, called services, receive gas from mains.

Natural gas is highly pressurized as it travels through an interstate pipeline. To ensure the natural gas flowing through any one pipeline remains pressurized, compression of the natural gas is required periodically along the pipe. This is accomplished by compressor stations, usually placed at 40 to 100 mile intervals along the pipeline. The natural gas enters the compressor station, where it is compressed by either a turbine, motor, or engine. Storage

Natural gas storage allows inventory management to ensure steady and consistent delivery to consumers in spite of fluctuations due to changes in usage or production. Traditionally, natural gas has been a seasonal fuel. That is, demand for natural gas is usually higher during the winter, partly because it is used for heat in residential and commercial settings. Stored natural gas plays a vital role in ensuring that any excess supply delivered during the summer months is available to meet the increased demand of the winter months. Three main types of natural gas storage are:

  • Depleted Natural Gas or Oil Fields
  • Salt Caverns
  • Aquifers

Natural gas in storage facilities is used for two main purposes: meeting base load requirements and meeting peak load requirements. As mentioned, natural gas storage is required for two reasons: meeting seasonal demand requirements and acting as insurance against unforeseen supply disruptions. Base load storage facilities are used to meet seasonal demand increases, because they are capable of holding enough natural gas to satisfy long-term seasonal demand requirements. Typically, the turn-over rate for natural gas in these facilities is a year; natural gas is generally injected during the summer (non-heating season), which usually runs from April through October and is withdrawn during the winter (heating season), usually from November to March. These reservoirs are larger, but their delivery rates are relatively low, meaning the natural gas that can be extracted each day is limited. Instead, these facilities provide a prolonged, steady supply of natural gas. Depleted gas reservoirs are the most common type of base load storage facility.

Peak load storage facilities, on the other hand, are designed to have high deliverability for short periods of time, meaning natural gas can be withdrawn from storage quickly. Peak load facilities are intended to meet sudden, short-term demand increases. These facilities cannot hold as much natural gas as base load facilities, but they can deliver smaller amounts of gas more quickly and can be replenished in a shorter amount of time. While base load facilities have long-term injection and withdrawal seasons, turning over the natural gas in the facility about once per year, peak load facilities can have turn-over rates as short as a few days or weeks. Salt caverns are the most common type of peak load storage facility, although aquifers may also be used to meet these demands.


Natural Gas Distribution SegmentMore than 1,500 companies provide natural gas distribution services, these companies include local distribution companies (LDC) and mainline natural gas pipeline companies. LDCs account for 60% of natural gas delivery, mainly to residential end users. Mainline pipe companies account for the remaining 40% to large volume users such as electric power generation facilities. The diagram below outlines flows to and from LDCs and mainline companies along with end-user distributions. Local Distribution Companies

Local distribution companies typically transport natural gas from delivery points located on interstate and intrastate pipelines to households and businesses through thousands of miles of small-diameter distribution pipe. The delivery point where the natural gas is transferred from a transmission pipeline to the local gas utility is often termed the citygate, and is an important market center for the pricing of natural gas in large urban areas. LDCs can be organized into four types of business organizations:

  • Investor-Owned organizations have stock that is publicly traded, and the company functions through territorial contracts.
  • Privately-Owned organizations are owned by private investors and stock is not publicly traded.
  • Municipal organizations are owned and operated by a municipal government.
  • Cooperative organizations operate on a cooperative nonprofit for member benefit.


Natural gas marketing is a relatively new addition to the natural gas industry, beginning in the mid-1980’s. Prior to the deregulation of the natural gas commodity market and the introduction of open access for everyone to natural gas pipelines, natural gas marketers had no role.

Natural gas marketing is defined as the selling of natural gas. Marketers may be affiliates of producers, pipelines, and local utilities or may be separate business entities unaffiliated with any other players in the natural gas industry. Essentially, marketers are primarily concerned with selling natural gas, either to resellers (other marketers and distribution companies) or end users. On average, most natural gas can have three to four separate owners before it actually reaches the end user. In addition to the buying and selling of natural gas, marketers use their expertise in financial instruments and markets to both reduce their exposure to risks inherent to commodities and earn money through speculating as to future market movements. Customer Choice Programs

Natural Gas Consumer Rates By StateIn an effort to increase competition and level of service for end users, customer choice programs began in the 1990s. These programs allow customers to purchase natural gas from a supplier, who arranges delivery from a local natural gas utility. Since inception, participation across eligible states has increased steadily over the years. Large commercial and industrial consumers have had the option of purchasing the natural gas commodity separately from delivery services for many years. Participation in residential programs, which increased in the early 2000s, has largely leveled off in recent years.


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