MARKET STRUCTURE

The natural gas industry is large, capital intensive and highly concentrated. Since natural gas exploration and production are closely linked to oil exploration and production, major oil companies are involved in the natural gas sector. On the other hand, transmission and distribution of gas are more similar to electricity transmission and distribution.

Traditionally, in a highly regulated natural gas market, natural gas producing companies explored and produced the gas, which was then sold to pipeline companies and transported to local distribution firms who, in turn, put the natural gas in the market for final consumers. The industry was generally vertically integrated and natural gas and transportation services were provided as a "bundle" to end-users. Natural gas industry was a natural monopoly, dominated by State-owned utilities. However, natural gas markets liberalization is changing this situation in many countries, leading to a process of "unbundling" supply from transportation of natural gas and enlarging the choice of consumers. Pipeline or transporting companies are increasingly independent from producers or distributors, although sometimes sell gas directly to large customers.

The structure of the natural gas markets is experiencing challenging mutations in the age of liberalization. The natural gas sector is undergoing fundamental restructuring, which is linked to the opening up of world gas markets to giant multi-energy companies, for whom natural gas will play a key role. There is fierce competition among energy companies for entering the market and operating resources and markets. The industry is witnessing mergers and acquisitions, restructuring and regrouping, with the creation of multi-utilities and services businesses as well as re-focused gas enterprises with international extension of gas companies' participations and activities and the arrival of newcomers across borders and across sectors. Vertical integration has therefore been reduced and there has been increasing horizontal integration in the energy sector

In the US market, for example, where the liberalization process of natural gas markets has gone further, there has been a move away from a market of stable but controlled prices and long-term contracts. The natural gas is now a dynamic, highly competitive business with flexible pricing, an active spot market, and widespread use of short- to medium-term contracts. This is causing a fundamental change in the way each of the traditional participants of the industry operates: producers, pipelines, gas utilities, and industrial users. New market participants as the natural gas marketers, who link buyers and sellers of natural gas, have emerged.

Delivery of natural gas to customers is normally made by local distribution companies (LDCs), which may be owned by investors or by municipalities (public gas systems). For many years they have had exclusivity on distribution to specific areas. However, reforms in natural gas markets are opening them to competition. End users are allowed to buy gas directly from producers, pipelines, marketers and other LDCs. They can also have different contracts for storage and other services as well as get discounts if they gather with others. Most large natural gas users tend to buy gas directly from producers or marketers, while residential, commercial and industrial customers continue with LDCs.

NATURAL GAS CHAIN

PROCESSING OPERATIONS

The process of natural gas is simple and similar to that of oil. Gas is extracted from the earth or the oceans by drilling from a well and then moved by pipeline or tankers to a cleaning and processing plant and then to a gas grid or storage facility.

Exploration

Searching for natural gas is a very important stage of production. In the early years of the natural gas industry, when there was little understanding of natural gas, wells were dug only by intuition. However, at present, since costs of extraction are extremely high, companies cannot risk drilling in the wrong place. Geologists now play a central role in identifying natural gas formations. In order to find an area where natural gas is most likely to be discovered, they evaluate the structure of the soil and compare it with other areas where natural gas has been found. Later, they carry out specific tests as studying above ground rock formations where natural gas traps may have been formed. Prospecting techniques have evolved through the years in order to provide valuable information on the possible existence of deposits of natural gas. The more accurate these techniques get the higher the probability of finding gas when drilling.

Extraction

Natural gas is captured by drilling a hole into the reservoir rock. Drilling can be onshore or offshore. Equipment used for drilling depends on the location of the natural gas trap and the nature of the rock. If it is a shallow formation a cable drilling can be used. It raises and drops repeatedly a heavy metal bit into the earth's surface. In deeper formations rotary drilling rigs are used. Drilling rigs are used in most of the wells at present. This method consists of a sharp bit to drill through earth and rock layers.

Once natural gas has been found it has to be recovered efficiently. The most efficient recovery rate is characterized by the maximum quantity of gas that can be extracted during a period of time without damaging the formation. Several tests must be taken at this stage.

Most often, the natural gas is under pressure and will come out of the hole on its own. In some cases, pumps and other more complicated procedures are required to remove the natural gas from the ground. The most common lifting method is rod pumping.

Processing

Natural gas processing implies the gathering, conditioning and refining of raw natural gas in order to convert it in useful energy for its different applications. This processing involves first the extraction of the natural gas liquids from the natural gas stream and then the fractioning of the natural gas liquids into their separate components.

Transport and Storage

Once natural gas is processed it goes into a transmission system in order to be transported to the area where it will be used. It can be transported by land through pipelines, which are normally made of steel piping and measure between 20 and 42 inches of diameter. Since gas is moved at high pressures, there are compressor stations along the pipeline in order to maintain the level of pressure needed.

Compared to other energy sources, natural gas transportation is very efficient because the portion of energy lost from origin to destination is low. Pipelines are one of the safest means of distribution of energy because the pipeline system is fixed and underground.

Natural gas can also be transported by sea in tankers. In this case, it is transformed into liquefied natural gas (LNG). The liquefaction process removes oxygen, carbon dioxide, sulphur compounds and water. A full LNG chain consists of a liquefaction plant, low temperature and pressurized transport ships and a regasification terminal

Before natural gas reaches consumers it can be stored in underground reservoirs so that the natural gas industry can meet seasonal demand fluctuations. They are usually located close to market areas. Thus, natural gas distribution companies can rely on stored gas in peak demand periods and service their customers continuously and on time. They can also sell natural gas in the spot market during off-peak periods.

* For detailed information on the natural gas line: http://www.naturalgas.org