Natural Gas Transmission and Distribution

SIC 4923

Companies in this industry

Industry report:

This industry classification includes establishments engaged in both the transmission and distribution of natural gas. Establishments involved in natural gas transmission, but not its distribution to end users, are classified in SIC 4922: Natural Gas Transmission. Establishments involved in natural gas distribution, but not its transmission from supply regions to market areas, are classified in SIC 4924: Natural Gas Distribution.

Industry Snapshot

Composed almost entirely of methane, natural gas is a combustible gaseous fuel used in residential and commercial applications. It is produced, transported, and consumed in measures associated with cubic feet. One cubic foot is equal to the volume of gas that could be contained in a cubic area measuring one foot in all three dimensions under a pressure of 14.73 pounds per square inch at 60 degrees Fahrenheit. Although the energy content of natural gas can vary depending on its precise chemical composition, 1,000 cubic feet of natural gas has the energy equivalent of approximately 1 million British thermal units (Btu). A Btu is a standard unit used to measure the amount of heat produced by an energy source.

By the beginning of the twenty-first century, natural gas usage was becoming increasingly important in generating electricity. Much safer than nuclear energy and significantly cleaner for the environment than coal, natural gas took over as the energy source of choice in power generation plants and many industrial complexes. The effects of the Clean Air Act helped further expand its role. In addition, natural gas played a significant role in industrial cogeneration retaining and distributing the heat energy produced by generating electricity.

During the early years of the first decade of the 2000s, the natural gas industry suffered from the effects of a sluggish economy, inconsistent deregulation, and upheaval in the energy industry as a whole, caused in part by the California energy crisis during 2000 and the demise of energy giant Enron after that company's fraudulent bookkeeping practices came to light. The situation led to large-scale sell-offs, downsizing, and a sharp decline in many companies' equity. Although natural gas made up just one-third of the entire energy industry, because most energy companies had diversified interests that span the market, at the beginning of the twenty-first century the industry weathered a difficult storm of consumer and investor distrust. As a result, although natural gas usage was expected to increase, production capabilities were declining.

Nevertheless, in 2010 a total of 26.8 trillion cubic feet of natural gas was drawn from approximately 487,000 wells throughout the United States. Pipeline companies then transported the natural gas through 278,000 miles of pipeline. According to the Energy Information Administration, 75 trillion cubic feet of natural gas was transported interstate in 2010. Electrical generation accounted for 30 percent of natural gas demand, followed by industrial uses, 27 percent; residential use, 20 percent; commercial use, 13 percent; and other uses comprised the remainder.

Organization and Structure

Natural gas is transported and distributed under a myriad of federal and state regulations. Interstate pipelines fall under the jurisdiction of the Federal Energy Regulatory Commission (FERC). Local distribution companies (called LDCs or gas utilities) fall under the domain of their state's public utility commission.

The complete natural gas distribution chain, from the point of production to the point of use, was historically controlled by monopolies. During the 1980s and early 1990s, deregulation brought increased competition and fragmented the industry. Before deregulation, producers supplied gas to transporters. Transporters provided gas, primarily under wholesale agreements, to distributors. Distributors delivered gas, primarily under retail agreements, to end-users. Following deregulation, traditional roles in the natural gas industry were expanded and extended, and new participants like brokers, independent marketers, marketing affiliates, and consultants were introduced.

Various segments of the natural gas industry are represented by trade associations. The American Gas Association represents the interests of local distributing companies. The Natural Gas Supply Association represents major gas producers. The Interstate Natural Gas Association of America (INGAA) represents pipelines. Some other related organizations are the Independent Petroleum Association of America, representing small independent gas producers; the Domestic Petroleum Council, representing some large independent gas producers; and the Process Gas Consumers, which consists of industrial gas users.

Background and Development

The natural gas industry originated in Titusville, Pennsylvania, in 1859. Former railroad conductor Colonel Edwin Drake struck oil 69 feet below the ground surface in the small town. The spot marked the first transportation pipeline in the United States, running just over five miles.

Because there was no easy way to transport natural gas into homes, it was used primarily to light city streets in the nineteenth century. The 1885 invention of the Bunsen burner, which mixed air with natural gas, allowed the use of the fuel's thermal properties. Gas producers responded to the discovery by promoting natural gas as a heating fuel for use in warming water or cooking food.

However, natural gas was not widely used until after World War II, when metallurgy advances, welding techniques, and pipe rolling greatly improved the methods of transporting the fuel. Thousands of miles of pipeline were laid from the post-war period through the 1960s, when natural gas began to be widely used in U.S. industry as well.

Congress passed the Natural Gas Act of 1938, marking the first governmental regulation of the industry. This act sought to protect consumers from the monopolies that were forming in the industry by regulating the price of natural gas. The gas shortages in the 1970s and 1980s caused the eventual move away from price regulation, which resulted in increased demand for gas supply and decreased prices. Marketplace competition led to innovation and technological improvements. The deregulation of segments of the industry has, overall, had positive results with regard to pricing and demand. Because natural gas is often thought of as the cleanest source of energy, the Clean Air Act Amendments of 1990, which called for cleaner fuel sources, boosted the demand for natural gas.

Domestic demand for natural gas hit its peak in 1972 when consumption was 22 trillion cubic feet. In succeeding years, questions about gas availability and climbing prices led to shrinking demand. Consumption fell to 16 trillion cubic feet in 1986 before beginning to grow again. By the early 1990s, natural gas was making a sustained comeback, which continued into the millennium. Natural gas gained popularity as a favored fuel because of its environmental advantages and its availability as a domestic resource.

By the end of the 1990s, natural gas supplied about one-half of the nation's energy needs. Industry watchers noted several trends indicating increased reliance on natural gas. For example, in 1990 natural gas was used in 59 percent of new single-family home construction, up from 43 percent in 1985. By 1999 this figure had increased to 70 percent. According to the American Gas Association (AGA), more than 1.3 million miles of natural gas transmission and distribution pipelines traversed the nation, delivering supplies to 60 million commercial and residential customers. The U.S. imported about 14 percent of its natural gas in 1998, primarily from Canada. That same year, the United States exported natural gas to Japan (66 billion cubic feet) and Mexico (53 billion cubic feet).

Gas service was provided in all 50 states by 1,200 gas distribution companies in the late twentieth century. In 1999 Americans consumed approximately 20 trillion cubic feet of natural gas. The largest percentage of consumption was by residential users, who accounted for about 50 percent. U.S. industry used about 40 percent. A small amount, equal to approximately 0.0004 trillion cubic feet, was used to fuel natural gas vehicles. As the industry continued to deregulate, prices to end-users continued downward. Between 1987 and 1997, prices dropped an average of 14 percent, while the industry grew annually approximately 2 percent.

During the late 1990s many nuclear power plants and coal-burning power facilities shut down or were converted to natural gas facilities. This trend was particularly true in the eastern half of the nation in highly industrialized areas. Between 1999 and 2000, 84 new pipeline projects were proposed to increase delivery capability by 23.2 billion cubic feet per day. Expenditures for 2000 for pipeline development and expansion were estimated at $6 billion. There were 410 underground natural storage sites in the United States at the end of 1998, with the largest number of them (128) located in the Midwest.

Once a thriving part of the U.S. economy, the energy industry suffered some serious setbacks during the early years of the first decade of the 2000s. First, during 2001, California suffered serious power shortages and outages. By 2002 fingers were being pointed at several major energy providers, including El Paso Corp., as being responsible for creating artificial shortages to drive up prices in the ill-conceived, greedy attempt to make huge profits from the newly deregulated energy sector. On the heels of the California crisis, Enron Corp., then the nation's largest energy company, imploded after being pinned with fraudulent and corrupt accounting practices. The result was a sudden and severe withdrawal of support from Wall Street investors, causing some companies' equity value to drop as much as 90 percent. The industry went into a tailspin of sell-offs, lay-offs, and downsizing. Credit, once readily available to the energy industry, was nearly impossible to obtain as investors and bankers alike remained wary of the volatile industry.

Deregulation shouldered at least part of the blame for the sorry state of the energy industry. Inconsistent deregulation policies led to confusion, as well as to producing out-of-control market-driven policies implemented by energy companies such as Enron. One result was the attempt to re-regulate the industry, which put energy companies on edge. Many companies cancelled or postponed any growth projects, in addition to exiting trading activities. In the December 2002 issue of The Oil and Gas Journal, Kristin Domanski noted that "As trading operations have been scaled back or disappeared altogether over the last 12 months, the critical mass that once made up the vibrant wholesale natural gas and electricity community has turned off the lights and gone home." By 2004 FERC commissioners unanimously adopted a rule requiring pipeline and utilities firms to submit quarterly financial and operational reports instead of annual ones.

Although supplies stood above the five-year average at the beginning of 2002, in March 2003, natural gas storage supplies hit a record low, which supported natural gas prices into the spring and summer months, past the peak winter months. Despite the low storage levels, production was not expected to increase. The average number of gas-directed drilling rigs in the United States declined from 939 in 2001 to 691 in 2002.

In 2005 FERC passed guidelines on how companies could tap into Alaska's planned 3,500-mile North Slope natural gas pipeline. Drilling eventually began at the end of the first decade of the 2000s, after passage of the Alaska Gasline Inducement Act.

In another part of the country, approximately a decade after it was first proposed, FERC approved the Millennium Pipeline Project, a pipeline that would extend 187 miles from across the southern tier of New York from Corning to Ramapo. The Millennium Pipeline, which began service in early 2009, served markets along its route and in the lower Hudson Valley, as well as New York City markets through pipeline interconnections. Likewise, in 2007 Dominion announced it would receive natural gas supplies from a new pipeline, Rockies Express, and deliver it to markets in the Northeast and Atlantic.

Current Conditions

According to the U.S. Census Bureau, 1,640 establishments operated natural gas pipelines in 2009. These firms employed 24,283 people who earned a total payroll of around $2.2 billion. The 2,369 natural gas distribution companies in operation employed 84,720 workers and generated a total of $95.8 billion in revenues.

In 2010 the natural gas industry began to benefit from the economic recovery following the recession at the end of the first decade of the 2000s. Although prices had been low due to abundant supplies and high rates of production, demand was up slightly in 2010, increasing 6 percent in the industrial area and 7 percent in the electricity production sector. Prices increased marginally as well, 1 percent in industrial and 6 percent in electrical, although they still remained low by historical standards.

According to the Energy Information Administration (EIA), marketed production of natural gas in the United States reached 22.6 trillion cubic feet in 2010, the highest recorded annual total since 1973. Much of this product was exported. Although pipeline exports increased only 3 percent in 2010 (with a large majority of exports going to Canada), liquified natural gas (LNG) exports almost doubled, increasing 97 percent from 2009. According to the EIA, "Growth in LNG exports . . . was driven entirely by increased purchases of re-exports, or exports that originate outside the United States and pass through a U.S. terminal before reaching their final destination." Imports of natural gas, on the other hand, reached a 16-year low.

The future of the natural gas industry seemed secure, as industry participants continued to publicize its environmental and cost benefits. In addition, the industry was entering what Kevin Horn in Workboat called "the age of shale." The EIA affirmed that "increases in production were the result of more efficient, cost-effective drilling techniques, notably in the production of natural gas from shale formations. Additionally, shale gas has been the primary source of recent growth in technically recoverable natural gas resources in the United States."

Industry Leaders

Southern California Gas Co., a subsidiary of Sempra Energy (one of the largest natural gas transmission and distribution holding companies) was the leading LDC in the early 2010s, with 20.9 million customers and 2010 revenues of $3.8 billion. SoCalGas owned and operated 97,000 miles of mains and services pipelines, as well as 4,000 miles of transmission and storage pipeline. SoCalGas also owned gas transmission compressor stations and underground storage facilities.

Pacific Gas & Electric Co. (PG&E) filed for Chapter 11 bankruptcy in 2001 after suffering significant damage to its business during the California energy crisis. In 2002 PG&E reported a net loss of $874 million on revenue of $12.5 billion, down from a net income of $719 on nearly $20 billion in sales in 1998. The company emerged from bankruptcy in 2004, and by 2010 the company served 4.3 million gas customers and garnered annual revenues of more than $13.3 billion

Another multifaceted natural gas enterprise was Consolidated Natural Gas Company (CNG), which merged with Dominion Resources in 2000. Dominion Transmission oversaw 11,000 miles of natural gas pipelines and operates one of the nation's largest underground natural gas storage systems, with approximately 947 billion cubic feet of storage capacity. Dominion subsidiaries operate in all segments of the gas industry, including exploration, production, transportation, storage, purchasing, reselling, and distribution. The gas storage fields receive injections of gas during low demand periods to help meet high demand during the winter heating season. Dominion reported sales of $15.1 billion in 2010.

While traditional transmission and distribution gas companies like CNG and Pacific Enterprises have been reorganizing to adapt to industry-wide changes, non-traditional entities called GTMs (gatherers, transporters, and marketers) were emerging. GTMs operate in a more flexible environment because they are not tied to preexisting, long-term contracts. Two of the nation's leading GTMs at the end of the first decade of the 2000s were Associated Natural Gas Corp. and Western Gas Resources Inc., both of which are headquartered in Denver. Western's gas gathering network included 10,800 miles of pipeline. It marketed natural gas and natural gas liquids. In 2005 Western's wholly owned subsidiary, Mountain Gas Resources, completed the purchase of natural gas gathering and processing assets in the eastern Green River Basin of Wyoming from Duke Energy Field Services (DEFS).

In early 2000, Phillips Petroleum's GPM Gas Corp. joined Duke Energy in a major joint venture. The spin-off company, Duke Energy Field Services (DEFS), controlled 58,000 miles of pipeline and 56 processing plants across the country. Duke Energy reported revenues of $14.2 billion in 2010.

Research and Technology

Overall, research efforts undertaken by transmission and distribution companies focused primarily in two areas: expanding natural gas markets and improving natural gas conveyance. One of the most popular technologies under investigation was the evolution of natural gas fueled vehicles (NGVs). In 2007 about 150,000 NGVs were in operation in the United States, and more than 5 million operated worldwide. At that time, there were over 1,500 NGV fueling stations in the country, more than half of which were available for public use.

Another emerging technology involved gas-powered cooling for refrigeration and air conditioning. Large air conditioning systems already had been developed for use in industrial and commercial applications. However, air conditioning units small enough for private home use typically have been electric. That trend began to reverse in the 1990s, however. In 1999 gas-powered appliances were typically about 10 percent more expensive to purchase than their electric counterparts, but were less expensive to operate. In addition to expanding markets for natural gas, gas-cooling technologies were expected to help reduce summer peaks in demand for electricity.

During the 1990s, several gas distribution companies experimented with first generation natural gas fuel cells, manufactured by United Technologies Corporation (Connecticut) and Westinghouse. Natural gas fuel cells produce electricity and heat by combining hydrogen in the gas with oxygen in the air. Brooklyn Union Gas Company, for example, installed a 200-kilowatt fuel cell at a health care facility in New York, and Southern California Gas Company installed fuel cells for diverse customers including hospitals, food-processing facilities, and a mass transit agency. Because natural gas fuel cells yield low emissions at their point of use, the technology looked promising for densely populated areas and for use inside buildings. Under early gas fuel cell agreements, fuel cells were installed and maintained by local utilities that charged for the electricity and heat used.

In the arena of natural gas conveyance, one area under investigation was pipeline maintenance. According to estimates by the U.S. Department of Transportation, approximately 800,000 to 900,000 leaks in gas mains and service lines occur every year. In addition to presenting a potential disaster, lost gas represents lost earnings. In order to make gas line repairs, utilities must find the precise location of defective pipe segments, remove soil or pavement at the site, repair or replace the pipe, and restore the site. However, in 1999 the Gas Research Institute announced a joint venture with Germany's Karl Weiss GmbH & Company to bring to North America the new "trenchless" technologies for pipeline maintenance (requiring only two digging holes) and installation of the cured-in-place (CIP) liners to service lines and mains. New technology has increased the development of polyethylene piping that can withstand higher pressures, from 100 to 125 psig. Other developments included devices for detection of natural gas leaks.

A pipe repair technique jointly developed by Consolidated Natural Gas Company, East Ohio Gas Company, and PLS International (a company specializing in robotics technology), the PLS 3000, used a sealed probe to examine low-pressure gas lines while they were still in use. The probe was expected to help identify specific problems like water infiltration, pipeline distortions, cracks, or other problems in the pipes, and pinpoint their locations. Although early models proved expensive, initial users judged the PLS 3000 to be cost effective in urban areas where excavation costs were substantial.

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