SIC 4922
NATURAL GAS TRANSMISSION



This industry classification includes establishments engaged in the gathering, transmission, and storage of natural gas. Establishments involved in natural gas exploration and drilling are classified under oil and gas exploration industries. Establishments involved in both the transmission and distribution of natural gas are classified in SIC 4923: Natural Gas Transmission and Distribution. Establishments involved in natural gas distribution to end users are classified in SIC 4924: Natural Gas Distribution.

NAICS Code(s)

486210 (Pipeline Transportation of Natural Gas)

Industry Snapshot

Natural gas, as it exists in the ground, is not a single kind of gas, but rather a mixture of hydrocarbons, molecules made up of hydrogen and carbon, existing naturally in a gaseous state. The hydrocarbon gases include methane, ethane, propane, butane, and, frequently, impurities such as water, hydrogen sulfide, nitrogen, and helium. Methane, the lightest of the gases, is the most important gas for the energy industry. The heavier gases (ethane, propane, and butane) are sometimes included in the natural gas mixture transported by a pipeline, but usually they are removed for use in other industries, such as in the manufacture of industrial chemicals.

Traditionally, the natural gas industry has consisted of three primary activities: exploring for and producing natural gas; transporting the gas from production centers to market regions; and distributing gas to end users. Throughout the development of the industry, some companies have been involved in all three areas, while others have focused their efforts on only one or two.

The natural gas transmission segment of the industry includes gathering lines, storage facilities, and pipeline systems. In 2001, the United States had 206,000 miles of interstate mainline transmission pipeline with a daily delivery capacity of 119 billion cubic feet (bcf). Gathering lines transport gas from producing wells to facilities, where impurities are removed, and to processing plants that separate methane from other types of natural gas. Methane can then be injected into storage or sent through transmission pipelines.

The gas pipeline segment of the natural gas industry has changed little since the 1992 enactment of the Federal Energy Regulatory Commission's (FERC) Order 636, which "unbundled" pipeline operations from the sale of natural gas thus allowing customers to purchase the use of the pipelines independent of the purchase of natural gas. Because of the squeeze on the availability of capital for new investments, the industry saw little growth during the early years of the twenty-first century.

Organization and Structure

Within the United States, gas flows primarily in a northeasterly direction toward the eastern states and the Midwest from four major producing areas based in Texas, Oklahoma, Louisiana, and the Gulf of Mexico. A smaller, but increasing, amount of gas is transported from Texas and Canada into California. Most of the natural gas is transported through interconnected webs of underground pipelines. Individual pipes vary in size from about five feet in diameter to less than an inch. The largest pipes collect gas in producing areas; the smallest pipes deliver gas to individual households. By the latter 1990s, more than 256,000 miles of pipeline transported the gas to 47 of the contiguous states (Vermont imported its gas from Canada).

Long-distance pipelines transport gas under pressure, usually about 1,000 pounds per square inch. The gas travels through the pipeline at a rate of about 15 miles per hour. As it moves through the system, local gas utilities and large individual users, such as industrial customers or electricity-generating power plants, make withdrawals. To keep the gas moving, compressor stations along the pipeline restore gas pressures, which otherwise would drop because of withdrawals and friction.

One advantage to natural gas as an energy source is that it can be stored. Natural gas usage fluctuates seasonally, typically showing slack demand during the summer months and dramatic increases during the winter when it is used for space heating. During times of low use, inexpensive gas can be purchased and injected into storage for use during times of high demand when the price usually is higher. Some companies meet more than half of their winter deliveries with gas from storage.

Not all gas in storage is available for use, however. In order to maintain adequate pressure in a storage reservoir, a quantity of gas, referred to as "base gas," must be maintained. The gas available to be withdrawn is called "working gas."

Background and Development

The natural gas supplied in the United States comes from two basic kinds of sources, referred to as conventional and unconventional. Conventional gas is recovered from gas fields, both onshore and offshore. According to a traditionally held belief, conventional natural gas deposits were formed through long geological processes in combination with the decay of biological material. Under appropriate conditions, the gas became trapped in permeable rock and was covered by an impermeable cap.

Gas reservoirs consist of areas where the gas is contained within porous rocks and between the pieces that make up rocks. The amount of gas a rock formation can hold is based on how many of these tiny holes exist within the structure. Natural gas within a porous rock formation is prevented from migrating to the surface and into the atmosphere when a nonporous cap covers it.

Unconventional gas reservoirs have different geological characteristics. Some types of unconventional gas resources include: "tight gas" or "tight sands gas," which is found in low-permeability rock; "Devonian shale gas," which is found in shale deposits from the Devonian geological period, approximately 350 million years ago; "coal-bed methane," which is natural gas that has been formed along with the geological processes that formed coal; "natural gas from geopressurized aquifers," which refers to gas dissolved under high pressure and at high temperatures in brines located deep beneath the earth's surface; "gas hydrates," which are ice-like structures of water and gas located under the permafrost; and "deep gas," which is found at levels much deeper than conventional gas. Although there is no scientific consensus, some believe deep gas originated from inorganic sources and that it exists everywhere as a result of the geological processes that formed the earth. Of the unconventional gas sources, the one most important to the gas transportation industry was coal-bed methane.

Recorded use of natural gas dates back thousands of years. The ancient Chinese used natural gas, piped through bamboo poles, to boil water to make salt. In the seventh century, natural gas transported through secret pipes fueled "eternal fires" in temples near the Caspian Sea, where people came to see the mystery and to worship.

In the United States, natural gas discoveries date back to 1775. George Washington reportedly saw flames rising from water near the location of present-day Charleston, West Virginia. That same year, other gas discoveries were made by French missionaries in the Ohio Valley.

In 1821 the discovery of natural gas in a well in Fredonia, New York, led to the nation's first pipeline. William Aaron Hart piped gas from a 27-foot-deep well to provide lighting for nearby buildings. Two other major developments occurred in 1872. The nation's first long pipeline (25 miles) was completed and provided natural gas to Rochester, New York. Also, the first iron pipeline transported natural gas, carrying it 5.5 miles to serve about 250 customers.

Toward the end of the nineteenth century, natural gas fields in Ohio, Pennsylvania, and West Virginia yielded nearly 80 percent of the natural gas produced in the United States. The National Transit Co., a subsidiary of John D. Rockefeller's Standard Oil Co., transported the largest share of the nation's gas. In 1898, Standard founded the Hope Natural Gas Co. to serve the West Virginia area, and the East Ohio Gas Co. to serve residential and industrial users in Ohio.

At the turn of the century, large gas fields were discovered in Texas, Louisiana, and Oklahoma. As a result of their discovery, national production doubled between 1906 and 1920. By 1925, approximately 3.5 million customers used natural gas, most of them living within a few hundred miles of the producing sites. Lack of pipelines and other means of transportation thwarted efforts to fully utilize the resource.

Seamless, electrically welded pipe developed in the late 1920s enabled pipeline companies to carry gas at higher pressures. This meant that large quantities could be transported over longer distances. The world's first high-pressure, thin-wall, large-diameter gas transmission line was constructed in 1930 by the Natural Gas Pipeline Co. It transported gas produced in Texas, Oklahoma, and Kansas to the Chicago area. The nation's first all-welded, high-pressure natural gas pipeline was constructed by the Hope Natural Gas Co. in 1936.

The development of pipeline technologies made long-distance gas transmission feasible, and the 1930s brought an increased awareness of the product's potential as an important energy resource. Until that time, gas was discovered almost incidentally as the nation searched for oil reserves. If a company drilled for oil and found nothing, it could simply walk away from the dry well. Gas wells, on the other hand, were considered a nuisance, because if a company struck gas, the well had to be capped. If gas was discovered along with oil, the gas was routinely burned off, a procedure called "flaring."

The mid-1930s marked a time of changes in governmental regulation of the gas industry. In 1935, the Public Utility Holding Company Act required holding companies to divest themselves of public utility subsidiaries. As a result, ownership of many local distributing companies changed.

In 1938, in response to Federal Trade Commission reports that pipeline companies were employing monopolistic price setting practices, Congress passed the Natural Gas Act, under which natural gas became a regulated commodity. The Federal Power Commission, given the responsibility of administering the Natural Gas Act's provisions, assumed control over pipeline rates. Actual price controls on gas were not instituted until after World War II.

World War II played an important role in the development of the U.S. natural gas pipeline industry. During the war years, the Axis powers sank tankers transporting fuel oil from Texas to the eastern seaboard. To help transport oil for the war effort, the government built two large-diameter oil pipelines between 1942 and 1944. Following the war, these pipelines were sold and became part of the nation's transcontinental natural gas pipeline grid. The result was that by 1947 gas from Texas could be piped to both U.S. coasts.

Offshore drilling technologies also were developed during the late 1940s. The first offshore lease sales were held by the state of Louisiana on August 14, 1945. The first successful offshore Gulf of Mexico production began in 1947.

Technological advances proceeded as methods for underground storage were created. In 1951, Consolidated Natural Gas and Texas Eastern Transmission Corp. opened one of the world's largest underground gas storage facilities at Oakford Field in southwestern Pennsylvania. At the facility, natural gas was stored in an existing, but depleted, gas field.

In 1954, the U.S. Supreme Court's Phillips decision expanded the federal government's jurisdiction by granting the Federal Power Commission the authority to regulate the interstate gas market and control gas prices. This decision created a division between interstate and intrastate sales. The division between interstate and intrastate markets, which had begun to affect the availability of natural gas as early as the mid-1960s, became more profound. Because pipeline companies could get higher prices in intrastate markets, nationwide supplies began to dwindle. In 1975, the Federal Power Commission issued Order 533, which permitted pipeline companies to transport gas on behalf of end users who purchased it directly from producers. The order was intended to help large users avoid supply cuts because of declining gas supplies on the interstate market.

Low price ceilings also affected the rates at which new gas fields were discovered. Exploration began declining during the late 1960s, and as the discovery rate dropped, some industry watchers concluded that the nation was running out of natural gas reserves.

In 1973, however, production of natural gas in the United States was at its highest at 21.7 trillion cubic feet. Increases in natural gas production helped offset reductions in oil imports due to the OPEC oil embargo. U.S. natural gas consumption also peaked in the early 1970s. During 1972, the nation consumed 22.1 trillion cubic feet and set record usage levels in the residential, industrial, and electric utility sectors.

A cold winter during the 1976-1977 heating season highlighted supply problems within the natural gas industry. Some large companies, like Consolidated Natural Gas, were forced to cut deliveries to industrial customers holding "interruptible" contracts. Typically, gas had been sold under "interruptible" or "noninterruptible" agreements. Interruptible contracts, primarily sold to industrial users with the ability to switch to other types of fuel when necessary, called for the delivery of gas when supplies were available. Noninterruptible contracts, which were more expensive, called for a guaranteed amount of gas to be delivered.

Localized gas shortages during the late 1970s caused concerns about its availability and led to increased interest in expanding storage capacities. The gas shortages also led to the Power Plant and Industrial Fuel Use Act of 1978, which placed restrictions on the use of natural gas for generating electricity and for industrial uses. Congress also passed the Natural Gas Policy Act of 1978, which called for price deregulation and increased exploration and development, especially of potential nonconventional gas supplies. The act attempted to correct the price distinctions between interstate and intrastate markets by setting different prices on different categories of gas for both types of markets. It also made provisions to phase out wellhead price controls and to make pipelines more accessible to gas users wishing to purchase transportation services only.

Until the creation of the U.S. Department of Energy (DOE) in 1977, statistical information regarding the natural gas industry was compiled by the Bureau of Mines under the auspices of the U.S. Department of the Interior. Thereafter, the Energy Information Administration, an agency within the DOE, assumed responsibility for collecting information regarding the natural gas industry. Also during this time, the duty of regulating interstate natural gas markets was transferred from the Federal Power Commission to the Federal Energy Regulatory Commission (FERC), an independent office of the DOE.

FERC launched its restructuring efforts in the mid-1980s, and the process was completed with the issuance of Orders 636 and 636A in 1992. The new regulations were intended to promote competition within the industry and to restructure interstate pipelines by requiring them to offer their services separately rather than bundled together. Formerly, pipelines bought and sold gas at unit prices that included associated charges for transportation and storage. Without the ability to access pipeline delivery services separately from gas purchases, customers were unable to buy gas from other suppliers.

The new regulations required pipeline companies to "unbundle" services. This meant that they could not exclusively sell packages combining sales, transportation, and storage services. The restructuring orders dictated that all services be offered and priced separately. As a result, customers were allowed to buy gas from sources other than the pipeline. Consequently, many pipeline companies abandoned their customary merchant function, turning their attention toward selling gas transportation services and leasing storage capacity.

The unbundling of pipeline services brought open access to gas transportation service. Large end users and local distribution companies increasingly made separate agreements under which gas purchases were arranged with producers or brokers, and transportation services were purchased from pipeline companies.

Also, as part of its Order 636, FERC identified four types of costs pipeline companies could recover from their customers, including gas utilities, as they sought to comply with the new regulations. The costs pipeline companies were permitted to pass on were: the cost of purchased gas that would have been recaptured under previously existing bundled contracts; the cost associated with reforming or canceling remaining contracts to buy gas; the cost of abandoning facilities or contracts rendered unnecessary; and the cost of installing new facilities required to comply with the regulations.

The gas transportation industry began responding to these legislative initiatives in the 1980s. Additional FERC orders issued during 1983 and 1984 addressed questions surrounding access to natural gas transportation systems. In January 1985, under the deadline set by previous regulations, most price controls on gas expired.

The environmental advantages of natural gas remain significant, especially when compared to coal, which still fuels the bulk of the electricity generated in the United States. Used as a fuel in a power plant, natural gas produces 100 percent less sulfur pollution than a coal plant; 100 percent less ash, sludge, or solid waste; 95 percent less particulate emissions; and 81 percent less nitrogen oxide emissions. According to one natural gas company, substitution of natural gas for coal globally on a 50/50 basis by the year 2010 would result in a 35 percent decrease in the volume of global carbon emissions.

1n 1999, natural gas was the leading source for heating energy in the United States, holding more than 50 percent of the market. Heating oil still controlled 30 percent of the market, and electricity controlled 10 percent. The remaining 10 percent was divided among miscellaneous heat energy sources such as coal, wood, and propane. By 2010, government analysts predict annual consumption of natural gas to be near 30 trillion cubic feet. To satisfy that anticipated market, as much as $32 billion will be needed for new pipelines, and more than $2 billion for storage facilities.

Notwithstanding, in December 1999, FERC voted 3 to 2 to refuse certification of the proposed $678 million, 401-mile Independence Pipeline intended to carry natural gas from the western United States and Canada to the East Coast. FERC also issued a hold on the $528 million Transco Market Link project connecting Pennsylvania and New Jersey, as well as the $125 million ANR Supply Link Project between Chicago and Ohio. FERC's hold was intended to address not only environmental concerns for the high-pressure pipelines, but also to address objections to the ostensible need. Meanwhile, American Natural Resources Corp. (ANR) proposed in December 1999 to build a 130-mile pipeline under Lake Michigan to connect Milwaukee, Wisconsin, with northern Indiana. Its competitor, Wicor, Inc., concurrently proposed a 150-mile Guardian Pipeline from Joliet, Illinois, to Ixonia, Wisconsin. ANR remained the top company nationally in 1999, when ranked by total gas throughput (4,511,426 Mmcf).

Current Conditions

Natural gas transmission is being affected by two related conditions. First, supply and demand of natural gas shifts based on the location of resources and the location of increasing demands in growth areas of the United States. New pipelines are needed to carry natural gas from the source to customers. Second, the lack of available capital for new investments has stymied pipeline expansion. The result is a shortage of transmission capabilities in numerous U.S. locations. At the same time, these shifts provide new opportunities for future pipeline expansion.

The region of the Rocky Mountains produces more natural gas than it uses, driving prices down and lowering the incentive for new exploration and drilling. However, new efforts are being made to increase the flow of product from the Rockies into California, which continues to require more energy than it produces. Other projects have been proposed to move natural gas from the Rockies eastward. Areas of the Northeast, including New York, as well as the Southeast, have experienced some pipeline capacities strains during the early 2000s, which may eventually require the installation of additional pipeline flow capacities to meet growing demands.

Another concern for the industry is aging pipelines that suffer from deterioration and corrosion. According to the "Gas and Liquid Transmission Pipelines" sector of the Federal Highway Agency's Cost of Corrosion Report, published in 2003, corrosion-related costs associated with the transmission pipeline industry is estimated to run between $5.4 billion and $8.6 billion annually, with a total cost of $541 billion to replace the 484,000 miles of pipelines.

Industry Leaders

El Paso Energy Corp., based in Houston, Texas, is the largest gas transmission company (by pipeline miles) in the United States, controlling an acquired 60,000 miles of U.S. and international pipeline. The company, which has assets of $48.2 billion, reported a net loss of $1.5 billion on revenues of $12.2 billion in 2002.

Another leading gas transmission enterprise, The Williams Companies Inc., operated 14,000 miles of coast-to-coast pipeline in 2002, as well as its own reserve containing 2.8 trillion cubic feet of natural gas, and had assets of $35.2 billion. The company is involved in gathering, processing, and transporting natural gas, and it also operates a 20,000-mile communications field made by installing fiber-optic cable inside unused pipelines. In 2002 the company reported a net loss of $755 million on revenues of $5.6 billion.

In 2000 Duke Energy joined Phillips Petroleum's GPM Gas Corp. to create Duke Energy Field Services. The company, a subsidiary of Duke Energy, controls 57,000 miles of pipeline and produces 400,000 barrels of natural gas liquids per day in 71 processing plants across the country, making it one of the nation's largest midstream natural gas operators.

Once the world's largest energy trader, the Houston-based Enron Corp.'s energy kingdom crashed in the autumn of 2001 when fraudulent accounting practices were discovered, revealing huge gaps in the company's books. The Enron scandal made national headlines for months, and the company's bankruptcy was the largest in U.S. history at the time. After selling off its main energy trading unit, the scaled down company continues to own some 15,000 miles of gas pipelines in North American as well as in Central and South America.

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 (including nearly 7,000 positions for pipe layers and pipe fitters); 19 percent were installation, maintenance, and repair occupations; and 9 percent were production-related occupations.

America and the World

Imports and exports both played an important role in U.S. natural gas markets. During the 1990s imports from Canada and exports to Mexico were at their highest levels in history. Net imports of natural gas from Canada were 3 trillion cubic feet in 1998, constituting 14 percent of overall 1998 U.S. gas consumption. The United States also imported liquefied natural gas from Algeria (69 billion cubic feet in 1998). The liquefied natural gas, transported by special tanker ships and kept in liquid form through refrigeration and pressure, entered U.S. pipeline systems after being re-gasified at special facilities in Louisiana.

Canadian gas, however, accounted for the bulk of U.S. imports. The North American energy giant TransCanada controls 13,888 miles of pipeline in its Alberta System, 9,176 miles of the Canadian mainline, and 110 miles of ANG Pipeline. In 1999, TransCanada also had partnership interests in 7,100 miles of North American pipelines.

In terms of natural gas production, the United States ranked second in the world, averaging about 17 trillion cubic feet per year. The world's top producer, the former Soviet Union, produced about 26 trillion cubic feet per year. Canada ranked third, producing about 3.5 trillion cubic feet annually. The world's fourth largest producer, the Netherlands, supplied about 3 trillion cubic feet per year. The Netherlands obtained gas from both onshore and offshore facilities, exporting it through pipelines to Germany, Belgium, France, and Italy.

One of the longest international gas pipeline systems, the Trans-Mediterranean Pipeline, stretched more than 1,500 miles from the Sahara Desert in Algeria (on the north African coast) to northern Italy. The Trans-Mediterranean was designed to transport gas under the Mediterranean Sea, deliver it to markets in Italy, and eventually link to a European pipeline grid.

In the latter 1990s, worldwide demand for natural gas stood at approximately 77 trillion cubic feet. By 2015, demand was expected to more than double, reaching 135 trillion cubic feet. In North America, natural gas usage for industry and electric power generation was expected to lead growth in gas demand with U.S. energy consumption expected to increase by 30 percent over the 1995 to 2015 time frame. On a worldwide basis, consumption of natural gas was growing at a rate of nearly 3 percent annually, compared to 1 percent for other fossil fuels, and another 355,000 miles of natural gas pipelines were to be added to the world gas grid by 2015—mostly in Asia, Europe, the Middle East, and Africa. This growing demand coupled with the trend toward privatization brought on by the FERC's deregulatory measures, as well as easier access to foreign markets, boded well for U.S. gas transmission companies. Companies like Enron and Williams moved quickly to establish themselves in international markets and to consolidate their positions at home.

Further Reading

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.

Griffin, Jeff. "Pipeline Growth Potential Viewed With Cautious Optimism." Underground Construction, November, 1999, 34.

Haferd, Laura. "Federal Regulators Delay Plans for Pipeline Through Ohio." Akron Beacon Journal, 16 December 1999.

Hoover's Company Profiles. Hoover's, Inc., 2003. Available from http://www.hoovers.com .

Lander, Greg. "A Few Technology, Business Rule Changes Might Create Major Opportunities." Pipeline & Gas Journal, January 2003, 48-52.

"Let Guardian Proposal Sink or Swim on its Own." Business Journal Serving Greater Milwaukee, 17 December 1999, 46.

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

Thompson, Neil G., and Patrick H. Vieth. "Corrosion Cost U.S. Transmission Pipelines as Much as $8.6 billion/year." Pipeline & Gas Journal, March 2003, 28-31.

Tobin, James. "Natural Gas Transmission: Infrastructure Issues and Operational Trends." Energy Information Agency, Department of Energy, October 2001. Available from http://www.eia.doe.gov .

Tubb, Jeff. "P&GJ's 19th Annual 500 Report." Pipeline &Gas Journal, November 1999, 42.

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 .

U.S. Dept. of Transportation, Transportation Statistics Annual Report 1999. Washington, D.C.: 1999.



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