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Marketing impact on the natural gas industry
Marketing impact on the natural gas industry Carol Freedenthal
The purpose of this paper is to review marketing changes in the US natural gas industry and the impacts that these changes have had on the structure of the industry, especially natural gas prices. Further, the paper will review and discuss the economic analysis required to meet current business needs.
to marketing groups. Proliferation of the marketing groups, all competing for market share, has resulted in economic and financial conditions causing major relocations and changes in the industry in all sectors, from exploration and production to the consumer.
Keywords: USA; Natural gas; Marketing
The natural gas industry as we know it today started in the 1930s, when the technology for making large, seamless pipe was developed. The ability to make strong, safe pipe for transporting natural gas from the producing areas of the southwest to the major consuming parts of the country in the northeast, north central, and western USA was the start of the natural gas industry. Because natural gas replaced what was known as 'water gas' or 'city gas' in many metropolitan areas, the industry was regulated from the start. Added to this was the transportation of the gas from the producing states across state lines to the consuming states, so that federal agencies became the regulators for the new industry. At the same time, as the production was mainly in the southwest USA, but the markets were in the other parts of the country, the producers had no desire to go 'north' to sell their merchandise. Conditions were ripe for the interstate pipelines to become the natural gas merchants on a nationwide basis. In 1938, the Natural Gas Act was passed and, in 1954, the Supreme Court in the Phillips decision ruled that natural gas going into the interstate market should be price-controlled at the wellhead. Gas in the intrastate market (gas consumed in the same state as that in which it was produced) was exempt from federal wellhead controls. When, in the early 1970s, the price of crude oil went from a few dollars per barrel to $11-$14/barrel, natural gas prices went in two directions. Gas going into the intrastate market reflected the increased value of crude oil, while gas in the interstate market was artificially kept low because of the federal wellhead price regulations.
Change is continuing in the natural gas industry as it goes f r o m a tightly c o n t r o l l e d , g o v e r n m e n t regulated business to a market-sensitive, competitive industry. Initiatives to remove natural gas wellhead price controls started with passage of the Natural Gas Policy Act ( N G P A ) in 1978. A series of rules and orders were issued by the Federal Energy Regulatory Commission (FERC), the federal agency responsible for regulating the natural gas industry under the N G P A . More important than the regulatory action were the changes in the industry coming from the market itself. The increase in natural gas prices in the early stages of the N G P A in the early 1980s, and the increase in gas supplies because of the higher economic value of natural gas, played a major role in the metamorphosis of the natural gas industry. Market conditions in the mid-1970s, when natural gas supplies could not meet the demand in the interstate market, fostered the change in the industry, culminating in the N G P A . Over a dozen years have elapsed since passage of the N G P A to correct the economic unfairness of the two markets and bring plentiful supplies to both markets. As wellhead controls on the price of natural gas have diminished, structural changes in the marketing of natural gas have occurred also. The market changes along with the various regulations coming from the F E R C have resulted in the moving of the merchant function from the pipelines Carol Freedenthal is with the JOFREE Corporation, 1100 Louisiana Street, Suite 3610, Houston, TX 77002, USA. 0957-1787/94/010065-07© 1994 Butterworth-HeinemannLtd
Prices reflect market
65
Marketing impact on the natural gas industry
L
UTILITIES
PIPELINE
TREATMENT~-~ GATHERING]_ SYSTEM i PRODUCER
--II~
T
INDUSTRY
LDC
1~1 MARKETI!G [ COMPANY
~""~lRESIDENTIAL1
Figure l. Natural gas marketing system. The result was that by the mid-1970s producers were not producing sufficient gas for interstate needs. The country had severe natural gas shortages in the mid-1970s through to the end of the decade. Natural gas reserves were sufficient for the interstate m a r k e t to meet its demand, but the incentives for operators selling in the interstate m a r k e t to drill and produce gas were not! At the same time, natural gas produced for the intrastate m a r k e t was plentiful; as, prior to the N G P A , gas in the intrastate m a r k e t was not price-regulated, intrastate producers enjoyed much higher prices for their gas supplies. Economic incentives were the key to surplus gas in the intrastate m a r k e t and insufficient suppliers in the interstate market. The N G P A was passed in late 1978 and started the change in the industry. The avowed purpose of Congress in the development of the N G P A was to free natural gas from wellhead price controls and
PROCESSING~ b
thus m a k e natural gas market-sensitive at the wellhead. The feeling was that if natural gas could react at the wellhead to the marketplace, there would be no gas shortages in the country, as the incentives of a free m a r k e t would be sufficient to increase the gas supply as needed. Congress sought a controlled turnaround of the industry in making natural gas market-sensitive at the wellhead. In the N G P A , there were over 20 different pricing categories of natural gas based strictly on when and where the reserves were found, when the wells were drilled and when the gas was produced. The final step in the g o v e r n m e n t ' s decontrol of wellhead pricing occurred on 31 D e c e m b e r 1992 when all controls were finally removed. Even though the government had a plan for the controlled release of wellhead pricing, the market took its own action in the early 1980s when gas supplies increased beyond demand. The result was
PIPELINE
UTILITIES
T LDC AI
INDUSTRY
II ="~ TREATI~ TREATMENT~ 1
GATHERING SYSTEM
A I
PRODUCER
MARKETING i COMPANY
['iI ill~ COMMERCIALil
\J
~tl~ RESIDENTIAL
Figure 2. New natural gas marketing system. 66
UTILITIES POLICY January 1994
Marketing impact on the natural gas industry
4
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Figure 3. Natural gas wellhead and burner-tip prices. for buyers to begin to offer less for gas supplies and to force sellers to accept market-sensitive pricing. As gas supplies became surplus, the previous long-term contracts held by the other major pipelines were breached, and producers and others sought new means for selling gas to recover exploration and production expenses. Out of this reorganization of the industry (Figures 1 and 2) has come a totally new marketing and pricing system for natural gas. In the period prior to the NGPA, the interstate and large intrastate pipelines were the merchants for the natural gas industry. They were the supply 'aggregators', who collected gas from various producers and gatherers and transported the supply to the consuming sector. The pipelines not only owned the gas in transport but, by having long-term con-
tracts with the producers, also controlled the reserves of natural gas. Now, the pipelines have been regulated to the single task of transporting gas only. No longer are they responsible for aggregating the supply. In addition, auxiliary functions long associated with gas transportation, such as storage and balancing, are now accounted for separately instead of being lumped in with the transportation charges. As a result of the transformation of the merchant and marketing function from the pipelines to the new 'marketers', various marketing entities have developed. These might be independent marketing companies with no affiliation to other sectors of the industry, or they might be subsidiaries or affiliates of natural gas producers, pipelines and local distribu-
1.9
1.7
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. . . . . . . . . . . . . . . .
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1.5
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1988
I 1989
I 1990
i 1991
l 1992
spot wellhead
Figure 4. Natural gas prices: average wellhead versus spot wellhead.
UTILITIES POLICY January 1994
67
Marketing impact on the natural gas industry 23
22
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88
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90
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Figure 5. US natural gas consumption. tion companies. A major change because of the new structure is the increased number of marketing entities. Under the system prior to the NGPA, when the pipelines were the merchants, there were 26 major interstate pipelines and maybe a dozen major intrastate pipelines acting as merchants and supply aggregators. Today, for the natural gas industry, there are countless marketing groups well into the hundreds vying and competing for the business. Yet the market is essentially only a little larger than during the early 1980s when the transformation started. As an adjunct to the marketing changes are the changes in supply as producers absorbed the loss in value from the decreased prices for gas. The reduction in total revenues has resulted in declining
participation in gas exploration and production activities by producers and even the threat by many of the major producers to stop activities in the USA in favour of offshore business. Many of the foreign production companies that came into the USA in the early to mid-1980s have already packed and left to go home because US business provided such small margins. Figure 3 shows the average prices for natural gas at the wellhead and for the burner tip for the period 1975-1991. Weighted average prices for the major consuming sectors were used to develop the average burner tip price. As seen in the figure, looking at the period from 1980 to 1991, the producers have given up some of their margin (economic rent) as natural gas wellhead prices have drifted lower. US total
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Figure 6. Employment in the natural gas and petroleum extraction sector. 68
UTILITIES POLICY January 1994
Marketing impact on the natural gas industry 120,000
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Figure 7. Capital expenditures in the USA for exploration, development and production. natural gas wellhead prices along with spot wellhead prices for new supplies are shown in Figure 4. Much of the decline in prices is a result of the increased supplies of gas and the lack of sufficiently increased demand (Figure 5). In addition, hot competition in the industry from the drastically increased number of marketing entities selling essentially the same supply and to the same markets has contributed to lower prices. Finally, a considerable amount of the decline in gas price is due to the intrinsically lower value of gas because of cheaper finding and developing costs and lower production expenditures. The decline in value of the industry can be seen in the total dollar volume of the industry starting at the wellhead and going through to the consumer. As the producers have lost value, the industry has de-
creased in manpower as well as in capital expenditures (Figures 6 and 7). The economic value of the exploration and production sectors hit an all-time low when new gas contracts on the spot market had gas selling for under a dollar a million Btu in late January/early February 1992. The seriousness of this caused the major oil and gas producers to rethink their participation in the US gas markets, and many have claimed to be shutting down their US operations for the next four to five years. When the prices dropped to this all-time low for newly contracted gas, the industry took steps to bring supplies in line with demand. Within six months, prices increased almost 100% and, by August 1992, prices for newly contracted short-term purchases of gas were in the $1.70-$1.90/MMBtu
2.5
:~ I-. 1.5
1
1990 A V G . = $ 1 . 6 0 / M M B t u 1991 AVG. = $1.38/MMBtu 1 9 9 2 E AVG. = $ 1 . 6 1 / M M B t u
0.5
1990
1991
1992
Figure 8. Spot and short-term natural gas wellhead prices. UTILITIES POLICY January 1994
69
Marketing impact on the natural gas industry 3
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a ill
20 ~
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Figure 9. Natural gas prices and demand in the USA. range (Figure 8). H o w far the gas prices will increase has to be of concern. T o o little payment for gas means that at s o m e time there will not be sufficient gas as exploration and production activities cannot be afforded. T o o high a price for gas will only accentuate the surplus, as demand will fall as supplies increase!
there is a point where crude prices do begin to impact gas prices. Additionally, coal prices also form a cap for gas prices and, when gas prices exceed a certain point, market share will be lost to coal. While coal has certain environmental and transportation limitations, sheer economics will determine the extent of coal participation in the energy markets. Technology is available for making coal a clean-burning fuel; economics will determine the extent of penetration by the newer technology. Going back to the previous figure showing the relationship between wellhead prices and burner-tip prices, the question becomes how much of the economic rent available to producers, transporters and merchants will be lost. Besides the market itself, the enforcement of FERC Order No. 636 will have a
Natural gas markets are price-sensitive
The natural gas industry is highly price-sensitive. Figure 9 shows historical data for consumption and prices. Without question, rapidly increasing prices mean loss of market share for natural gas. Even though natural gas prices have essentially decoupled from crude oil or crude product prices (Figure 10) $/MMBTU $7.00
$6.00
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67
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"~" 73
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I 79
~ 81
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, 85
, 87
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61
WTI NATUPAL GAS
Figure 10. West Texas Intermediate and natural gas wellhead price. 70
UTILITIES POLICY January 1994
Marketing impact on the natural gas industry
START WELLHEAD I
END ;
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F,ELDS
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NATURAL GAS MARKETING COMPANIES Figure 11. How natural
gas is moved from the field to the consumer.
major impact on the industry. Part of this impact will decide whether the lost economic rent will come from which sector of the industry. As the industry changes to meet the market demands and the regulatory demands, a new merchant group will have to emerge. Figure 11 is a schematic of the industry from wellhead to consumer. Previously, as discussed earlier, the merchant function was almost the sole responsibility of the major pipelines. Today, the merchant function is apparently moving to the marketing companies that have developed over the last decade.
Summary Restructuring of the natural gas industry to make gas prices market-sensitive at the wellhead have resulted
UTILITIES POLICY January 1994
in major changes in the industry. Changes have occurred in all sectors, from exploration and production to local distribution companies, and have resuited in major shifts in responsibilities and operations. Marketing companies, whether independent or affiliated with others in different sectors, are now the merchants and supply aggregators in the industry. The large number of marketing companies competing for business is part of the reason gas prices have declined until recently. In addition to the surplus supplies compared with demand, the intense competition between marketing companies and the increased efficiencies in natural gas exploration and production have resulted in lower wellhead prices. Prices were so low in early 1992 at the wellhead that some producers have terminated any new exploration and production activities and even curtailed existing operations to maximize profitability.
71
The purpose of this paper is to review marketing changes in the US natural gas industry and the impacts that these changes have had on the structure of the industry, especially natural gas prices. Further, the paper will review and discuss the economic analysis required to meet current business needs.
to marketing groups. Proliferation of the marketing groups, all competing for market share, has resulted in economic and financial conditions causing major relocations and changes in the industry in all sectors, from exploration and production to the consumer.
Keywords: USA; Natural gas; Marketing
The natural gas industry as we know it today started in the 1930s, when the technology for making large, seamless pipe was developed. The ability to make strong, safe pipe for transporting natural gas from the producing areas of the southwest to the major consuming parts of the country in the northeast, north central, and western USA was the start of the natural gas industry. Because natural gas replaced what was known as 'water gas' or 'city gas' in many metropolitan areas, the industry was regulated from the start. Added to this was the transportation of the gas from the producing states across state lines to the consuming states, so that federal agencies became the regulators for the new industry. At the same time, as the production was mainly in the southwest USA, but the markets were in the other parts of the country, the producers had no desire to go 'north' to sell their merchandise. Conditions were ripe for the interstate pipelines to become the natural gas merchants on a nationwide basis. In 1938, the Natural Gas Act was passed and, in 1954, the Supreme Court in the Phillips decision ruled that natural gas going into the interstate market should be price-controlled at the wellhead. Gas in the intrastate market (gas consumed in the same state as that in which it was produced) was exempt from federal wellhead controls. When, in the early 1970s, the price of crude oil went from a few dollars per barrel to $11-$14/barrel, natural gas prices went in two directions. Gas going into the intrastate market reflected the increased value of crude oil, while gas in the interstate market was artificially kept low because of the federal wellhead price regulations.
Change is continuing in the natural gas industry as it goes f r o m a tightly c o n t r o l l e d , g o v e r n m e n t regulated business to a market-sensitive, competitive industry. Initiatives to remove natural gas wellhead price controls started with passage of the Natural Gas Policy Act ( N G P A ) in 1978. A series of rules and orders were issued by the Federal Energy Regulatory Commission (FERC), the federal agency responsible for regulating the natural gas industry under the N G P A . More important than the regulatory action were the changes in the industry coming from the market itself. The increase in natural gas prices in the early stages of the N G P A in the early 1980s, and the increase in gas supplies because of the higher economic value of natural gas, played a major role in the metamorphosis of the natural gas industry. Market conditions in the mid-1970s, when natural gas supplies could not meet the demand in the interstate market, fostered the change in the industry, culminating in the N G P A . Over a dozen years have elapsed since passage of the N G P A to correct the economic unfairness of the two markets and bring plentiful supplies to both markets. As wellhead controls on the price of natural gas have diminished, structural changes in the marketing of natural gas have occurred also. The market changes along with the various regulations coming from the F E R C have resulted in the moving of the merchant function from the pipelines Carol Freedenthal is with the JOFREE Corporation, 1100 Louisiana Street, Suite 3610, Houston, TX 77002, USA. 0957-1787/94/010065-07© 1994 Butterworth-HeinemannLtd
Prices reflect market
65
Marketing impact on the natural gas industry
L
UTILITIES
PIPELINE
TREATMENT~-~ GATHERING]_ SYSTEM i PRODUCER
--II~
T
INDUSTRY
LDC
1~1 MARKETI!G [ COMPANY
~""~lRESIDENTIAL1
Figure l. Natural gas marketing system. The result was that by the mid-1970s producers were not producing sufficient gas for interstate needs. The country had severe natural gas shortages in the mid-1970s through to the end of the decade. Natural gas reserves were sufficient for the interstate m a r k e t to meet its demand, but the incentives for operators selling in the interstate m a r k e t to drill and produce gas were not! At the same time, natural gas produced for the intrastate m a r k e t was plentiful; as, prior to the N G P A , gas in the intrastate m a r k e t was not price-regulated, intrastate producers enjoyed much higher prices for their gas supplies. Economic incentives were the key to surplus gas in the intrastate m a r k e t and insufficient suppliers in the interstate market. The N G P A was passed in late 1978 and started the change in the industry. The avowed purpose of Congress in the development of the N G P A was to free natural gas from wellhead price controls and
PROCESSING~ b
thus m a k e natural gas market-sensitive at the wellhead. The feeling was that if natural gas could react at the wellhead to the marketplace, there would be no gas shortages in the country, as the incentives of a free m a r k e t would be sufficient to increase the gas supply as needed. Congress sought a controlled turnaround of the industry in making natural gas market-sensitive at the wellhead. In the N G P A , there were over 20 different pricing categories of natural gas based strictly on when and where the reserves were found, when the wells were drilled and when the gas was produced. The final step in the g o v e r n m e n t ' s decontrol of wellhead pricing occurred on 31 D e c e m b e r 1992 when all controls were finally removed. Even though the government had a plan for the controlled release of wellhead pricing, the market took its own action in the early 1980s when gas supplies increased beyond demand. The result was
PIPELINE
UTILITIES
T LDC AI
INDUSTRY
II ="~ TREATI~ TREATMENT~ 1
GATHERING SYSTEM
A I
PRODUCER
MARKETING i COMPANY
['iI ill~ COMMERCIALil
\J
~tl~ RESIDENTIAL
Figure 2. New natural gas marketing system. 66
UTILITIES POLICY January 1994
Marketing impact on the natural gas industry
4
ito "-;3
2
i
m
m
m
a
m
m
m
~
~
WEIGHTED
AVG.
BURNERTIP
~
m
m
m
m
m
m
~
~
a
WELLHEAD
Figure 3. Natural gas wellhead and burner-tip prices. for buyers to begin to offer less for gas supplies and to force sellers to accept market-sensitive pricing. As gas supplies became surplus, the previous long-term contracts held by the other major pipelines were breached, and producers and others sought new means for selling gas to recover exploration and production expenses. Out of this reorganization of the industry (Figures 1 and 2) has come a totally new marketing and pricing system for natural gas. In the period prior to the NGPA, the interstate and large intrastate pipelines were the merchants for the natural gas industry. They were the supply 'aggregators', who collected gas from various producers and gatherers and transported the supply to the consuming sector. The pipelines not only owned the gas in transport but, by having long-term con-
tracts with the producers, also controlled the reserves of natural gas. Now, the pipelines have been regulated to the single task of transporting gas only. No longer are they responsible for aggregating the supply. In addition, auxiliary functions long associated with gas transportation, such as storage and balancing, are now accounted for separately instead of being lumped in with the transportation charges. As a result of the transformation of the merchant and marketing function from the pipelines to the new 'marketers', various marketing entities have developed. These might be independent marketing companies with no affiliation to other sectors of the industry, or they might be subsidiaries or affiliates of natural gas producers, pipelines and local distribu-
1.9
1.7
..°._
. . . . . . . . . . . . . . . .
.°.-
ira
1.6
1.5
1..t.
1.3
! 1987
1988
I 1989
I 1990
i 1991
l 1992
spot wellhead
Figure 4. Natural gas prices: average wellhead versus spot wellhead.
UTILITIES POLICY January 1994
67
Marketing impact on the natural gas industry 23
22
21
20
17
15 70
71
72
73
74
75
76
77
~
i
78
79
80
i
I
I
,
81
82
83
84
85
86
!
:
:
:
'
I
87
88
89
90
91
92
Figure 5. US natural gas consumption. tion companies. A major change because of the new structure is the increased number of marketing entities. Under the system prior to the NGPA, when the pipelines were the merchants, there were 26 major interstate pipelines and maybe a dozen major intrastate pipelines acting as merchants and supply aggregators. Today, for the natural gas industry, there are countless marketing groups well into the hundreds vying and competing for the business. Yet the market is essentially only a little larger than during the early 1980s when the transformation started. As an adjunct to the marketing changes are the changes in supply as producers absorbed the loss in value from the decreased prices for gas. The reduction in total revenues has resulted in declining
participation in gas exploration and production activities by producers and even the threat by many of the major producers to stop activities in the USA in favour of offshore business. Many of the foreign production companies that came into the USA in the early to mid-1980s have already packed and left to go home because US business provided such small margins. Figure 3 shows the average prices for natural gas at the wellhead and for the burner tip for the period 1975-1991. Weighted average prices for the major consuming sectors were used to develop the average burner tip price. As seen in the figure, looking at the period from 1980 to 1991, the producers have given up some of their margin (economic rent) as natural gas wellhead prices have drifted lower. US total
800
700 O3 a
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,
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Figure 6. Employment in the natural gas and petroleum extraction sector. 68
UTILITIES POLICY January 1994
Marketing impact on the natural gas industry 120,000
100,000 80,000 60,000 40,000 20,000
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Figure 7. Capital expenditures in the USA for exploration, development and production. natural gas wellhead prices along with spot wellhead prices for new supplies are shown in Figure 4. Much of the decline in prices is a result of the increased supplies of gas and the lack of sufficiently increased demand (Figure 5). In addition, hot competition in the industry from the drastically increased number of marketing entities selling essentially the same supply and to the same markets has contributed to lower prices. Finally, a considerable amount of the decline in gas price is due to the intrinsically lower value of gas because of cheaper finding and developing costs and lower production expenditures. The decline in value of the industry can be seen in the total dollar volume of the industry starting at the wellhead and going through to the consumer. As the producers have lost value, the industry has de-
creased in manpower as well as in capital expenditures (Figures 6 and 7). The economic value of the exploration and production sectors hit an all-time low when new gas contracts on the spot market had gas selling for under a dollar a million Btu in late January/early February 1992. The seriousness of this caused the major oil and gas producers to rethink their participation in the US gas markets, and many have claimed to be shutting down their US operations for the next four to five years. When the prices dropped to this all-time low for newly contracted gas, the industry took steps to bring supplies in line with demand. Within six months, prices increased almost 100% and, by August 1992, prices for newly contracted short-term purchases of gas were in the $1.70-$1.90/MMBtu
2.5
:~ I-. 1.5
1
1990 A V G . = $ 1 . 6 0 / M M B t u 1991 AVG. = $1.38/MMBtu 1 9 9 2 E AVG. = $ 1 . 6 1 / M M B t u
0.5
1990
1991
1992
Figure 8. Spot and short-term natural gas wellhead prices. UTILITIES POLICY January 1994
69
Marketing impact on the natural gas industry 3
r
23 22 21
a ill
20 ~
1.5
19Z 0 1811 0 I-" 17
1
0.5 16
0
~
i
!
l
I
15
DEMAND PRICE
Figure 9. Natural gas prices and demand in the USA. range (Figure 8). H o w far the gas prices will increase has to be of concern. T o o little payment for gas means that at s o m e time there will not be sufficient gas as exploration and production activities cannot be afforded. T o o high a price for gas will only accentuate the surplus, as demand will fall as supplies increase!
there is a point where crude prices do begin to impact gas prices. Additionally, coal prices also form a cap for gas prices and, when gas prices exceed a certain point, market share will be lost to coal. While coal has certain environmental and transportation limitations, sheer economics will determine the extent of coal participation in the energy markets. Technology is available for making coal a clean-burning fuel; economics will determine the extent of penetration by the newer technology. Going back to the previous figure showing the relationship between wellhead prices and burner-tip prices, the question becomes how much of the economic rent available to producers, transporters and merchants will be lost. Besides the market itself, the enforcement of FERC Order No. 636 will have a
Natural gas markets are price-sensitive
The natural gas industry is highly price-sensitive. Figure 9 shows historical data for consumption and prices. Without question, rapidly increasing prices mean loss of market share for natural gas. Even though natural gas prices have essentially decoupled from crude oil or crude product prices (Figure 10) $/MMBTU $7.00
$6.00
$5.00
$4.00
$3.00
$2,00
,s
~
$1.00
$0.00
?' . . . . . . . . . . i. 65
67
66
71
"~" 73
P 75
I 77
I 79
~ 81
83
, 85
, 87
r 89
61
WTI NATUPAL GAS
Figure 10. West Texas Intermediate and natural gas wellhead price. 70
UTILITIES POLICY January 1994
Marketing impact on the natural gas industry
START WELLHEAD I
END ;
~
;
F,ELDS
~
~
T
~
~
~
;
NATURAL GAS PROCESSOF]S
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II PIPELINES
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CONSUMEIq
~
NATURAL GAS MARKETING COMPANIES Figure 11. How natural
gas is moved from the field to the consumer.
major impact on the industry. Part of this impact will decide whether the lost economic rent will come from which sector of the industry. As the industry changes to meet the market demands and the regulatory demands, a new merchant group will have to emerge. Figure 11 is a schematic of the industry from wellhead to consumer. Previously, as discussed earlier, the merchant function was almost the sole responsibility of the major pipelines. Today, the merchant function is apparently moving to the marketing companies that have developed over the last decade.
Summary Restructuring of the natural gas industry to make gas prices market-sensitive at the wellhead have resulted
UTILITIES POLICY January 1994
in major changes in the industry. Changes have occurred in all sectors, from exploration and production to local distribution companies, and have resuited in major shifts in responsibilities and operations. Marketing companies, whether independent or affiliated with others in different sectors, are now the merchants and supply aggregators in the industry. The large number of marketing companies competing for business is part of the reason gas prices have declined until recently. In addition to the surplus supplies compared with demand, the intense competition between marketing companies and the increased efficiencies in natural gas exploration and production have resulted in lower wellhead prices. Prices were so low in early 1992 at the wellhead that some producers have terminated any new exploration and production activities and even curtailed existing operations to maximize profitability.
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