SIC 4923
NATURAL GAS TRANSMISSION AND DISTRIBUTION



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.

NAICS Code(s)

221210 (Natural Gas Distribution)

486210 (Pipeline Transportation of Natural Gas)

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 one 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 turn 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 were expected to expand its role even farther. 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 2000s, the natural gas industry was suffering 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 makes up just one-third of the entire energy industry, because most energy companies have diversified interests that span the market, the beginning of the twenty-first century saw the industry weather a difficult storm of consumer and investor distrust. As a result, even though natural gas usage was expected to increase, production capabilities were declining.

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, the natural gas industry saw the expansion and extension of traditional roles as well as the introduction of new participants such as brokers, independent marketers, marketing affiliates, and consultants.

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 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 is consists of industrial gas users. The Natural Gas Council represents producers, pipelines, and local distributors. It works to increase gas availability and the reliability of natural gas supplies as well as to promote increased consumption.

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.

Natural gas was not, however, 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 American 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, it was up to 70 percent. According to the American Gas Association (AGA), there were more than 1.3 million miles of natural gas transmission and distribution pipelines traversing 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 is provided in all 50 states by 1,200 gas distribution companies, pulling from about 288,000 natural gas wells. In 1999, American users consumed approximately 20 trillion cubic feet of natural gas. By 2010, that figure is expected to reach 30 trillion cubic feet. The largest percentage of consumption goes to residential users, who account for about 50 percent. U.S. industry uses about 40 percent. A small amount, equal to approximately 0.0004 trillion cubic feet, has been used to fuel natural gas vehicles. As the industry continues to deregulate, prices to end-users continue downward. Between 1987 and 1997, prices dropped an average of 14 percent, while the industry grew annually by approximately 2 percent.

Between 1999 and 2000, 84 new pipeline projects were proposed which would increase delivery capability by 23.2 billion cubic feet per day. Year 2000 expenditures for pipeline development and expansion were estimated at $6 billion. There were 410 underground natural storage sites in the United States as of the end of 1998, with the largest number of them located in the Midwest (128).

The latter 1990s saw many nuclear power plants and coal-burning power facilities shut down or convert to natural gas facilities. This trend was particularly true in the eastern half of the nation, in highly-industrialized areas.

Current Conditions

Once a thriving part of the U.S. economy, the energy industry suffered some serious setbacks during the first years 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 producing outof-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, as well as exiting trading activities. Kristin Domanski noted in The Oil and Gas Journal in December 2002, "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."

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. If the U.S. economy began to move out of recession during the latter half of 2003 and into 2004 as predicted, natural gas usage was expected to increase approximately 4 percent and prices should remain steady. Despite the low storage levels, production was not expected to increase. The average number of gasdirected drilling rigs in the United States declined from 939 in 2001 to 691 in 2002.

Workforce

According to the U.S. Department of Labor, Bureau of Labor Statistics, the industries involving gas production and distribution employed 124,280 people in 2001. Among the occupations listed, one-third of the jobs were in secretarial and clerical occupations; 8 percent were in management positions; 11 percent were in construction and extraction; 19 percent were in installation, maintenance, and repair occupations; and 9 percent were production-related occupations.

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, with 6.1 million customers. Sempra reported revenues of $6 billion in 2002. Pacific Gas & Electric Co. (PG&E), which had four million gas customers, 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 revenues of $12.5 billion, down from a net income of $719 on nearly $20 billion in sales in 1998.

Another multifaceted natural gas enterprise was Consolidated Natural Gas Company (CNG), which merged with Dominion Resources in 2000. Dominion has assets totaling nearly $38 billion, including 6.1 trillion cubic feet equivalent of gas and oil reserves, 7,900 miles of pipeline, and a natural gas storage system with a capacity of 960 billion cubic feet, the nation's largest. Its 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 a net income of nearly $1.4 billion on revenues of $10.2 billion in 2002.

While traditional transmission and distribution gas companies like CNG and Pacific Enterprises have been reorganizing to adapt to industry-wide changes, nontraditional entities called GTMs (gatherers, transporters, and marketers) have been emerging. GTMs operate in a more flexible environment because they are not tied to pre-existing, long-term contracts. Two of the nation's leading GTMs are Associated Natural Gas Corporation and Western Gas Resources, Inc. Both are headquartered in Denver.

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, controls 57,000 miles of pipeline, with a daily production in the early 2000s of 5 billion cubic feet of natural gas and 400,000 barrels of natural gas liquids per day, in 71 plants across the country. One of the largest midstream natural gas operators in the United States, Duke Energy Field Services, a subsidiary of Duke Energy, reported a net loss of $47 million on revenues of $5.5 billion in 2002.

Research and Technology

In 1999, Congress appropriated $246 million for natural gas research, design, and development programs at the Department of Energy (DOE). Priority projects included natural gas turbines and microturbines, natural gas cooling technologies, and natural gas vehicles and fuel cells. The Gas Research Institute also announced its 1999 Pacesetter Awards to member companies who help promote adoption of new natural gas technologies. The 1999 winners included Enron Gas Pipeline Company for surveying 160 compressor stations for fugitive emissions, using the Hi-Flow Sampler for leak detection and measurement, and the City of Richmond, Virginia, for helping to secure a gas industry consortium and co-funding for testing Methane de-NOX reburn technology at a 240-MW coal-fired plant.

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 1999, about 60,000 NGVs were in operation in the United States, increasing in number by about 10,000 annually. Although the amount used for NGVs accounted for only a small fraction of U.S. natural gas consumption, it represented a 26 percent increase over 1990. Four states—Arizona, Indiana, Ohio, and Washington—made up approximately 60 percent of the nation's demand for natural gas for vehicle use. Advanced NGVs have been proven to reduce carbon monoxide and nitrogen oxide emissions by as much as 90 percent. As of 1999, the AGA announced that 13 states had 30 or more compressed natural gas (CNG) vehicle fueling stations, and usage was expected to increase.

Another emerging technology involved gas-powered cooling for refrigeration and air conditioning. Although large air conditioning systems have already been developed for use in industrial and commercial applications, air conditioning units small enough for private home use have been typically electric. That trend began to reverse in the 1990s, and the industry expected to introduce its first residential model natural gas dehumidifier in 2000. 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 were experimenting with first generation natural gas fuel cells, manufactured by United Technologies Corporation (Connecticut) and by 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 of 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 then 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 poly-ethylene piping that can withstand higher pressures, from 100 to 125 psig. Other developments include new devices for detection of natural gas leaks. Overall, the industry spent $4 billion in 1999 for safety, with reportable incidents dropping from 290 in 1988 to 206 in 1998.

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 such as 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 cost effective in urban areas where excavation costs were substantial.

Further Reading

"Association News." Pipeline & Gas Journal, October 1999.

Banker, Bernadette. "Energy Stocks Recharging." Research, April 2002, 56-57.

Cook, Linda, Sheila M. Darnell, and Ann M. Ducca. "U.S. Natural Gas Imports and Exports-1998." Natural Gas Monthly Report, U.S. Dept. of Energy, Energy Information Administration, August 1999.

"Deal of the Century." Philips Business Information Highlights, 27 December 1999.

Domanski, Kristin. "Uncertain Future Looms for North America's Intertwined Natural Gas and Power Markets." The Oil and Gas Journal, 2 December 2002, 20-25.

Donovan, Dan. "Dominion Resources, CNG Set Anticipated Merger Closing Date of January 28, 2000." CNG Press Release, December 17, 1999. Available from http://www.shareholder.com .

"Gloom Settles Over Much of Atlantic Basin Power Sector." World Gas Intelligence, 30 October 2002, 7.

Griffin, Jeff. "Pipeline Growth Potential Viewed with Cautious Optimism." Underground Construction, November 1999.

"Interview With American Gas Association Chairman Dick Terry." Pipe Line & Gas Industry, April 1999.

McDowell, Bruce. "Natural Gas Utilities Deliver Natural Gas—and Broader Choices—to Residential Customers." Pipeline & Gas Journal, November 1999.

Radler, Marilyn. "U.S. Energy Demand to Rebound in 2003 as Production Slides." The Oil and Gas Journal, 27 January 2003, 67-76.

Reed, Ted. "Energy, Phillips Petroleum Plan Natural-Gas Venture." The Charlotte (NC) Observer, 18 December 1999.

"Resources: Keeping Natural Gas Vehicles on the Go?" Government Procurement, December 1999.

"Shifting Natural Gas Supply and Demand Challenge Infrastructure Planning." Electric Light & Power, February 2003, 19.

"Six Gas Companies Receive '99 GRI Pace Setter Awards." Pipe Line & Gas Industry, June 1999.

Tubb, Jeff, et al. "PG&J's 19th Annual 500 Report." Pipeline & Gas Journal, November 1999.

U.S. Department of Energy, Natural Gas Statistics. Available from http://www.eia.doe.gov .

U.S. Department of Labor, Bureau of Labor Statistics. 2001 National Industry-Specific Occupational Employment and Wage Estimates, 2001. Available from http://www.bls.gov .

Vanderwater, Bob. "Phillips Petroleum, Duke Energy Enter Natural Gas Venture." The Daily Oklahoman, 21 December 1999.

Ware, Andrew. "U.S. Natural Gas Storage Hits Record Lows." The Oil Daily, 21 March 2003.



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