Richard Meyer A New Year and the Gas Market is Setting New Records

On New Year’s Day 2018, the US natural gas market consumed more natural gas than ever before.

The new record has been made possible by a strong natural gas supply position that, coupled with an extensive production and delivery system, ensures reliable supplies for consumers.

On January 1, 2018, the US lower-48 consumed a total of 144.7 billion cubic feet (Bcf) of natural gas as record cold temperatures drove heating demand across much of the country, per preliminary data from Bentek/S&P Global.

The new record reflects the structural changes in the natural gas market, including increased use of natural gas for power generation, industrial manufacturing, pipeline exports to Mexico, and feedgas for LNG exports.

Total demand for the 2017-2018 winter has been well above average and set new records on New Year’s Day 2018  Image courtesy of S&P Global

Total demand for the 2017-2018 winter has been well above average and set new records on New Year’s Day 2018
Image courtesy of S&P Global

 

 

 

 

 

 

 

 

Residential and commercial demand neared an all-time high on January 1. Driven by the intense cold, heating demand helped push residential and commercial natural gas consumption to 76.4 Bcf for the day, just shy of the record 77.5 Bcf established in January 2009.

Supplies remain strong. Production, which is still flowing at high levels, has been affected somewhat by the cold as well freeze-offs have led to some shut-ins. Dry gas flows across the lower-48 fell from 77.2 Bcf to 71.9 Bcf between December 27, 2018, and January 1, 2018. These events are temporary, and production will recover when temperatures finally ease.

Despite this, the supply portfolio has been strong. Natural gas storage has been critical in meeting requirements, serving 43 percent of the gas delivered. Imported natural gas via pipeline from Canada and even imported LNG bolstered the US supplies.

Monday demonstrates not only the reliability and affordability of natural gas but also the sheer scale of energy delivered to consumers when they need it. Let me illustrate.

How much natural gas was delivered on New Year’s Day? About 134 billion cubic feet of natural gas was delivered to end-use customers Monday (excludes exports and pipeline losses).

The rate at which this amount of natural gas flows chemical energy to homes and businesses is equivalent to 1,700 gigawatts. By comparison, the entire US electrical grid today is only 1,000 gigawatts.

This back of the envelope calculation is meant to show the relative scale of how much energy the US natural gas system delivers and how important gas infrastructure is to provide the heat for homes during the worst of winter cold.

Monday’s record is impressive, no doubt. With much of the 2017-2018 winter still ahead of us, I wonder if new records await.

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Lori Traweek Winter Is Coming

giphyThose are the three simple words that capture why natural gas should be a significant part of our energy portfolio today and in the future. And it is not just because December 21 is the first official day of winter and there is nothing like natural gas to heat your home. In “Game of Thrones” there are several families vying to be king of all kingdoms. But what Jon Snow realizes is that instead of fighting each other, they need to be together fighting a common enemy, the White Walkers, who threaten all their existences.

And much like in the lands of the Westeros, there is a common misconception that the many sources of energy in the United States should be fighting for supremacy. That is unproductive and unrealistic. Rather, our focus should be on working together towards our mutual interest for a cleaner energy economy. Reliable, resilient, efficient, safe and affordable energy is core to Americans’ quality of life and we should all combine forces to work against anything that threatens that end. Winter is coming. And if we do this right, with the ability to make environmentally friendly choices that do not sacrifice reliability, resiliency, safety and affordability, it is the customer who should end up in the throne.

Natural gas is a foundation fuel and has been the key to unlocking the most substantial greenhouse gas emissions reductions in the nation’s history by reducing the use of coal for making electricity and facilitating growth in renewables. Electricity generators have chosen natural gas for its affordability and reliability, often replacing coal-fired power plants and emitting up to 56 percent less greenhouse gases than coal for the same amount of electricity. Between 2007 and 2015, the amount of electricity generated at coal-fired power plants declined more than 30 percent. Natural gas and renewables have filled that gap, with natural gas providing about two-thirds of the electricity to plug the hole left by coal; renewables made up the other third.

But the direct use of natural gas for heating, cooking and clothes drying is even cleaner. From the place where it is extracted from the ground, to appliances in your home, natural gas achieves 92 percent energy efficiency. When you factor in energy use and emissions along the full fuel cycle, households with natural gas versus all-electric appliances produce 37 percent lower greenhouse gas emissions.

More homes and businesses use natural gas today than ever before: 177 million Americans, due in large part to its affordable and stable prices. Those that use natural gas for heating, cooking and clothes drying save an average of $874 per year compared to homes using electricity for those applications. Low domestic natural gas prices have led to savings of almost $50 billion for customers who have used natural gas for heating, cooking and clothes drying over the past four years.

Not to mention, the natural gas delivery system is remarkably resilient and natural gas utilities plan throughout the year to prepared for the coldest days. Even during the Polar Vortex natural gas customers remained warm and toasty.

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Richard Meyer How well-functioning natural gas markets provide safe, reliable, and cost-effective service to customers.

Natural gas is a primary energy source utilized by more customers than ever before.

The US natural gas market—itself comprised of extensive infrastructure and systems, customers served, state and federal regulatory frameworks and industry practices—continues to perform safely, reliably, and cost-effectively for all customers.

But some argue that gas and electricity markets have not kept pace with the needs of power generators.

With increasing volumes of gas delivered for power generation, and the need for additional flexibility to balance variable renewable resources, some groups contend that we need new approaches to the rules and regulations governing how pipelines deliver natural gas supplies to these customers.

To be clear, dialogue about market rules and system operations are a healthy exercise in maintaining a safe and reliable gas delivery system. However, any dialogue about changes to existing rules and regulations must take the broader market needs, and obligations, into consideration.

In that vein, I want to use this post to share some facts about how natural gas is delivered to consumers to provide some needed context for this gas-electric harmonization dialogue.

Are Rules Not Keeping Pace with the Evolving Markets?

In a recent op-ed in the Wall Street Journal, Fred Krupp, the President of the Environmental Defense Fund attempts to establish his case that natural gas pipelines aren’t properly serving electric generators:

“New England regulators have assumed the region’s natural gas pipelines were being used efficiently. Not so. Valuable space was going unused on the busy Algonquin Pipeline, which supplies gas for electricity and heating, even during the coldest days when demand is highest. There was also a persistent gap between the amount of gas scheduled in advance, and the volume that flowed.”

Mr. Krupp references an unpublished study in which researchers examined the gas scheduling practices of two companies in the Northeast.

The study alleges that two companies routinely held capacity that other customers could not access. In other words, gas capacity was artificially constrained.

In response, the companies have called the report “a complete fabrication,” noting that scheduling practices are “to help protect customers from interruptions—including during unpredictable, extreme weather conditions.” The merits of the study’s allegations will be worked through official processes.

Digging deeper, there’s a larger context missing in Mr. Krupp’s op-ed, and EDF’s broader message.

In a letter to the editor of the Wall Street Journal, AGA’s President Dave McCurdy responds to Mr. Krupp’s comments:

Natural gas pipelines provide services to many customers, including electric generators and natural gas utilities represented by AGA. Gas utilities are obligated under state regulations to meet their customers’ needs—delivering gas directly to homes and businesses for heating, hot water and cooking. Gas utilities plan diligently to help ensure gas is always there when customers need it.

Mr. Krupp observes there is a “persistent gap between the amount of gas scheduled in advance, and the volume that flowed.” This reflects a misunderstanding of how the natural gas system works. Weather can’t be perfectly predicted. Pipelines and utilities must maintain safe operating margins, and gas utilities contract for firm interstate pipeline capacity to ensure reliability and flexibility, especially for the coldest days.

Mr. McCurdy also notes some statistical maneuvering in the way the problem is framed:

Mr. Krupp misleadingly presents this margin in terms of power generation demand, inflating its apparent significance. The economic paper he cites itself states that, over the 37 cold days analyzed for the statistic, the unutilized capacity was only 7% of the pipeline’s overall capacity. By necessity, pipeline systems are designed to meet demand that peaks on just a handful of days each winter. This means the margin on capacity constrained pipelines, such as those in New England, on those few peak days is likely much lower still.

It’s important to note that Mr. Krupp raises issues that are specific to the Northeast and not indicative of a systemic problem across the US.

The Northeast is unique primarily because the construction of new natural gas pipeline infrastructure has been limited. In other parts of the country, where pipeline infrastructure has kept pace with load growth, the natural gas market has not experienced the same persistent constraints.

Dovetailing on Mr. McCurdy’s letter, and by way of emphasis, I’d like to call out some additional key ideas going forward as we continue to discuss gas-electric harmonization:

1. Gas utilities are obligated under state regulations to reliably meet the natural gas supply needs of millions of Americans.

Natural gas utilities have a regulatory mandate or obligation to serve their core customers. These core customers are residential households and businesses, hospitals and nursing homes, schools, grocery stores, police and fire stations.

Importantly, gas utility systems are designed to meet peak demand requirements of their core customers on the coldest days of the year. Guided by past experiences and state regulatory oversight, gas utilities develop comprehensive plans to reliably deliver natural gas to their core customers.

Gas utility distribution systems are often the final step in a delivery chain of moving natural gas from areas of production to customers. After natural gas is produced, much of it is transported through long-haul interstate and intrastate pipelines before arriving at distribution pipeline systems for delivery to households and businesses.

To meet their obligations, gas utilities build and manage a portfolio of supply sources, storage and transportation services—which include a diverse set of physical and contractual assets—to help ensure they can reliably meet anticipated peak-day demand.

The last thing any gas utility wants is not to have enough gas to meet its customer needs. A loss of pressure during a peak winter month could be catastrophic. Supply management practices help ensure an event like this doesn’t happen.

2. To meet supply obligations, pipelines and gas utilities must maintain safe operating margins.

Weather can’t be predicted perfectly. Even a small change in temperatures could push customer gas demand higher than anticipated. In response, a gas utility will often call for more natural gas supplies, which may necessitate the use more interstate pipeline transportation capacity to move those supplies.

As such, flexibility is a key requirement in maintaining pipeline integrity and supply reliability. Many aspects of the current scheduling and nomination process support this critically-needed flexibility on pipeline systems.

Requirements for flexibility do not preclude pipelines from exploring innovative strategies. Indeed, pipelines continually offer new flexible service offerings, especially to meet the needs of new customers, like electric generators.

Importantly, gas utilities do not control the supply price of natural gas, and they do not earn a profit on the gas they deliver. Instead, utilities earn a profit on the delivery service they provide to customers, rates which are set by public utility regulators.

3. Market rules have evolved to meet changing needs.

In 2015, FERC concluded a major industry review of its regulations to better coordinate the scheduling of wholesale natural gas and electricity markets given increased reliance on natural gas for electric generation. FERC looked into providing additional scheduling flexibility to all shippers on interstate natural gas pipelines.

Following this activity, FERC adopted certain scheduling modifications, stating it expected that the changes would provide significant benefits to both the natural gas and electricity industries and would improve coordination between the industries.

More recently, throughout 2016, the North American Energy Standards Board held a forum on Gas-Electric Harmonization issues to further explore the potential for faster, computerized scheduling. In short, regulated gas utilities are already advancing strategies to build on efficiency and evolving market strategies.

4. The gas industry has evolved to meet changing needs too.

Under today’s market rules, unused capacity does not simply go unused. It is often released to other shippers who can then repurpose that capacity for their needs.

When gas utilities, or other shippers, do not need the firm pipeline capacity that they have under contract, FERC’s regulations allow for the capacity to be temporarily released for use by others in a secondary capacity release market.

FERC’s rules for capacity release programs are set up to avoid discrimination in the control of access to interstate pipeline capacity and to allocate the available capacity to pipeline system users who value it the most. FERC actively monitors the pipeline capacity release program to ensure compliance with its regulations.

Additionally, FERC’s regulations allow gas utilities and other firm shippers to enter into Asset Management Arrangements under which firm interstate pipeline capacity may be released to entities with expertise in managing supply and delivery arrangements—so-called asset managers.

While they can be structured in many of ways, here’s how a typical Asset Management Arrangement works: The unused firm interstate pipeline capacity is released to an asset manager, usually a marketer, who then uses the capacity to serve the releasing shipper’s gas supply requirements and, when it is not needed, it may be further released or used to make bundled gas commodity sales to other third parties.

FERC has found that these Asset Management Arrangements:

  • Result in an overall increase in the use of interstate pipeline capacity;
  • Facilitate the use of capacity by different types of customers;
  • Benefit the natural gas market by creating efficiencies through more load-responsive gas supply and an increased utilization of transportation capacity; and
  • Provide significant benefits to a variety of participants in the natural gas and electric marketplaces, and to the secondary natural gas market itself.

These are just a couple of examples of how the natural gas market and FERC policy have evolved to work efficiently and optimize unused interstate pipeline capacity, avoid unnecessary duplication of pipeline facilities, and allow gas utility and other pipeline customers the ability to contract to meet their reliability needs.

5. The natural gas market has provided economic signals that efficiently channel investment for new pipeline infrastructure.

The natural gas market, in many geographic areas, continues to function well with established practices that send market participants signals indicating a need for new pipeline capacity.

Prices and transportation cost differentials, detailed market analyses, open-season commitments from shippers, investor commitments, and regulatory oversight all send signals to market participants that additional pipeline construction may be needed.

The market’s well-functioning behavior is evidenced by the significant amount of new pipeline capacity being built.

Growing production and demand in Northeast markets has necessitated the construction of a significant amount of new pipeline capacity, although the process is often difficult and strewn with opposition. New pipeline takeaway capacity associated with the Appalachian basin is set to increase more than 70 percent between 2017 and 2018, according to March 2017 estimates by Bloomberg New Energy Finance.

From January to August 31, 2017, seventeen new US natural gas projects amounting to a capacity of 7 Bcf per day and 482 miles of pipeline have been placed into service. More are expected through the end of 2018.

Reliability of service for customers is an overarching priority for both the gas and electric industries. The foundation for providing reliable supplies in many instances is adequate infrastructure, where needed, as well as pipeline scheduling practices that preserve and enhance, but not decrease, reliability for all gas pipeline system customers.

Gas-electric harmonization is an onion with never-ending layers to peel. The above points are neither comprehensive nor definitive. However, I hope they add some needed facts and context to an important dialogue underway.

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Richard Meyer Natural Gas Market Indicators: November 15, 2017

Cold has arrived, and with it, surging demand. U.S. natural gas consumption hit 98 Bcf per day on November 10, an increase of 33 percent from five days prior. Heating requirements for homes and businesses provided the main thrust as residential/commercial consumption jumped 93 percent during those five days. Power generation climbed eight percent over that period; exports, while strong, ticked up a mere 2.7 percent.

How much energy is 98 Bcf? The rate at which 98 Bcf per day flows chemical energy into the economy is equivalent to 1,230 GW. By comparison, the U.S. power grid boasts a little more than 1,000 GW of net summer capacity. In other words, natural gas, as it does every winter, supplies a lot of our energy needs.

Visit this link to download the full Natural Gas Market Indicators report. Topics covered in this week’s report include: Reported Prices, Weather, Working Gas in Underground Storage, Natural Gas Production, Shale Gas, Rig Counts, Pipeline Imports and Exports, and LNG Markets.

Please direct questions and comments to Chris McGill at cmcgill@aga.org or Richard Meyer at rmeyer@aga.org.

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