us-china oil and gas industry forum (ogif) 2017 gas ... focus on natural gas... · upstream...

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

Gas Pipeline Development in the United StatesA Discussion on the Regulatory Framework and Lessons Learned

15 November 2017 | Ningbo

Xizhou Zhou

Managing Director, Head – Asia Power, Gas, Coal & Renewables

+86 10 6533 4536, [email protected]

IHS Markit | Power, Gas, Coal & Renewables

US-China Oil and Gas Industry Forum (OGIF) 2017

mailto:[email protected]


Numerous players in every segment of gas value chain

Key players along the North American gas value chain

© 2017 IHS MarkitSource: IHS Markit

UPSTREAM MIDSTREAM DOWNSTREAM

Suppliers – E&P

companies deliver raw

production into the

gathering and processing

facilities.

Gas Processors – provide

gathering and processing

services to deliver pipeline

quality gas into interstate

pipeline grid.

Pipelines – common

carrier transporters per

regulated tariff and

contractual terms.

Storage – generally

provided by interstate

pipelines but 3rd party

providers exist in

interstate and intrastate

markets.

Marketing Companies –

provide marketing and trading

services as core profit center or

as service to affiliate E&P

division.

Distributors – provide bundled

retail service (residential,

commercial, industrial) and

wholesale services to industrials

and power companies.

OGIF_Ningbo_2017_IHSM


Plenty of infrastructure in different parts of the gas business

North American gas infrastructure




Common misconceptions about the North American gas market

Cost only provides a

loose sense of direction for prices in the

long run

Local market

versus

Integrated continental market

Long-term fixed-price or oil-indexed take-or-pay

contracts

versus

Flexible spot contracts

Pricing on cost

versus

Pricing on supply/demand



27%

44%

16%

5%

1%7%Daily index

Monthly index

Fixed pricing next day delivery

Fixed pricing next month delivery

NYMEX trigger

Physical basis

Transaction volume breakdown by pricing mechanism

Source: IHS Markit, FERC

Note: Breakdown of FERC From 552 Reportable volumes for calendar year 2012, 123.9 Tcf or 339.4 Bcf per day.

© 2017 IHS Markit

Gas is priced by trades

• Gas prices are set in real time by a combination of short-term fundamentals, expectations and market psychology.

• The market is liquid, supported by numerous players and universal access of pipeline service.

• But the liquidity is geographically diffuse because of transmission constraints.

Gas prices are determined by supply/demand fundamentals



Massive pipeline system supports the spot market and interregional gas flow


• The interstate pipelines in aggregate operate more than 300,000 miles (480,000 km) of pipeline.

• The huge increase in production from the Marcellus play in the Appalachian Basin has greatly affected

pipeline flows.

• Between 2011 and 2015 the largest increases in flows were North to South. The largest declines in flows

were from South to North.

Pipeline system in North America


Gas flows in North America


Marcellus

Gulf Coast /

Mid-Continent

Rockies

British Columbia

Shales


Gas market reform occurred at a time when transmission pipeline network

matured

100

150

200

250

300

350

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

U.S. gas transmission pipeline mileage

Source: IHS Markit, U.S. Department of Transportation © 2017 IHS Markit

Th

ou

san

d m

iles

US gas market

deregulation

(1979-1992)



Gradually policies over three decades enabled gas market liberalization and

unbundled pipeline service

Heavily regulated in all aspects of the value chain

Supply shortages in the 1970s created crises and raised political concerns

Natural Gas Policy Act of

1978

Removal of wellhead price controls

FERC* oversight of inter- & intra-state trade

FERC Order 380

Removal of take-or-pay (“minimal bill”) obligation

Gas producer competition facilitated

FERC Order 436

Partial transmission capacity open access

Start of transportation function separation

FERC Order 636

Full sales and transportation unbundling

Non-discriminatory transportation services

Prior to 1979

1979 1984 1985 1992

*FERC = Federal Energy Regulatory Commission



Pipeline transmission service is separated from commodity delivery, and

regulated by government in an effective and transparent manner

Transmission pipeline service

• Transportation services: firm (FT), interruptible (IT), and no-notice

• Park and Loan service (PAL)

• Balancing service

• Storage service

Transmission pipeline regulation

• Regulated by the Federal Energy Regulatory Commission (FERC)

• Provides a catalog of transportation-related services pursuant to the approved Terms and Conditions and rates specified in their tariff

• Does not take title to the gas commodity but provide transportation, balancing, storage, and park and loan services



Cost-based mechanism is mainstream for setting transmission tariffs


FERC sets and approves just and reasonable rates

Cost-of-service ratemaking

Rate Base ×Overall Rate of Return = Return

Return + Operation & Maintenance Expenses + Administrative & General Expenses + Depreciation Expense + Non-Income Taxes + Income Taxes - Revenue Credits = Total Cost-of-Service

Selective discounting

Market-based rates

Negotiated rates

• FERC Order 636 requires that pipeline rates be designed according to the straight fixed-variable

methodology.

• Rate structures may be further adjusted to reflect any costs related to the distance gas is transported.


The pipeline pricing system also allows for scarcity pricing (in a secondary

market) based on market demand to create incentives for pipeline

investment


The relationship between basis and pipeline load factor


Short Run Marginal Cost

(Minimum commodity plus fuel)

Long Run

Marginal Cost

Scarity

Pricing

Fixed Cost

Recovery

4.00

Basis

Dollars

per

MMBtu

80% 100%0.00

3.50

0%

3.00

2.50

2.00

1.50

1.00

0.50

20% 40% 60%

Pipeline Load Factor

Scarcity

Pricing

Fixed Cost

Recovery

Long Run

Marginal Cost

Short Run Marginal Cost

(Minimum commodity plus fuel)

• Pipeline capacity transacts in an active secondary market.

• Prices for pipeline capacity reflect – but are not necessarily

tied to – basis OR basis reflect the price of pipeline capacity

in the secondary market.

• Basis is often set based on short run variable cost but may

reflect constraints and risk of supply scarcity.


Most gas storage facilities are also regulated


• 385 underground gas storage

fields throughout the US Lower 48,

with a total of 4,658 Bcf (132 Bcm)

of design working capacity—80%

in depleted reservoirs, 10% in

aquifers, and 10% in salt caverns.

• FERC regulates the rates charged

for the storage services of

interstate pipeline companies.

• Transmission supporting

operations—costs are classified

and allocated in the same manner

as transmission costs.

• Separately contracted storage

services—fixed costs are divided

equally between “Deliverability”

and “Capacity” classifications

while all variable costs are

classified as “Injection/Withdrawal”

costs.

Underground natural gas storage facilities in the United States


• Market-based rates may also be approved if the applicant can demonstrate that it has no market power.


Lessons learned

Numerous players in every part of the value chain help ensure that no single player can sway the market.

Developed pipeline network paved the way for market reform and midstream liberalization.

Open and transparent third-party access to infrastructure is a prerequisite for competition in upstream and downstream.

Deregulation could lead to high prices as well as high volatility, but adequate storage and pipeline capacity serve as an important tool to optimize seasonality in gas supply.


IHS Markit Customer Care

[email protected]

Americas: +1 800 IHS CARE (+1 800 447 2273)

Europe, Middle East, and Africa: +44 (0) 1344 328 300

Asia and the Pacific Rim: +604 291 3600

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us-china oil and gas industry forum (ogif) 2017 gas ... focus on natural gas... · upstream...

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