From Wellhead to Burner Tip:
An Overview with Emphasis on Natural Gas Marketing
Natural gas marketing, as we know it today, is a relatively new phenomenon in the oil and natural gas industry. In fact, it was only back in the 1980s that natural gas marketing was fully regulated by governmental agencies, allowing zero options for the end-user. Since that time, the business of natural gas marketing has continued to evolve with our ever-changing regulatory and geo-political environment.
To better understand the natural gas industry, we must first recognize what natural gas is and how it is produced. Webster defines natural gas as a combustible mixture of methane and other hydrocarbons, used chiefly as a fuel or raw material, issuing from the earth’s crust through natural openings or bored wells. However, natural gas does not typically come out of the ground in the form of pure methane. In fact, the substance emerging from thousands of feet below the earth’s surface is typically a combination of various gases, water and sediment. Exploration and production companies spend large amounts of time and money determining where the natural gas is and how to get to it. Over time, as technology has advanced, companies have developed procedures to reach natural gas that was previously either undetected or thought to be unobtainable.
Finding and drilling for the gas is not the only problem facing production companies. They must also determine how much treating the gas needs, at what pressure the gas can flow and most importantly, how to get natural gas to the market. The transporting network of pipelines, either gathering systems or mainlines, regulates the types of gasses it allows in its system and at what pressure. For example, if a natural gas well is too high in sulfur compounds, the producer must find a way to treat the gas and remove the toxins before it enters the pipeline. Also, many producers are forced to place compression units between the well and the pipeline to regulate pressure and flow. The companies, who own the network of pipelines that transport the gas from the wellhead to the market, charge transport fees and fuel charges for their services. This service operates similar to a toll roadway where the toll is the transport fee and the gasoline in your car serves as the fuel.
For about twenty years, in many markets across the country, the end-user has had a choice that he or she can make about his or her natural gas purchases. Depending upon the rules and regulations on the LDC, or local distribution company, the end-user may choose to purchase natural gas from a natural gas marketer. Unlike a consultant, a natural gas marketer has physical ownership of the natural gas in the pipeline, and sells it to the end-user.
It is cost effective to purchase natural gas from a marketer for several reasons. First, in most cases, the LDC is legally bound not to make a profit from the sale of natural gas – they make money from the transport of the natural gas on their pipeline and meter fees. In this case, the LDC and natural gas marketer, by proxy, act in partnership to serve the end-user. The LDC still maintains the pipeline and meters, but the marketer provides the natural gas. Secondly, the marketer price will be based off of a regulated and published index, or pricing point. When purchasing natural gas from the LDC, the price is not as transparent and could be based off a combination of several indexes unknown by the end-user. Thirdly, the end-user has the opportunity to take advantage of financial tools not available with the LDC. One of the more popular financial tools is the ability to lock-in fixed prices for the cost of gas over a period of time. Many end-users will lock-in fixed prices during volatile hurricane and winter seasons to avoid major price increases due to weather. Many other end-users will lock-in fixed prices for an entire fiscal year for budgeting purposes. In this example, the end-user is able to determine his or her budget well in advance. By using a natural gas marketer, the end-user can potentially save thousands of dollars annually on the cost of gas.
The natural gas industry is somewhat complex and often misunderstood. However, due to deregulation, a flood of information has become available for those interested in learning. Moreover, deregulation has provided a tremendous opportunity for end-users to properly manage energy expenditures with the help of the natural gas marketer.