WHOLESALE NATURAL GAS MARKETS

Natural gas markets have a significant effect on the economy and on the individuals who rely on the fuel for electric
generation, manufacturing, heating, cooking, and other purposes. The Department of Energy’s (DOE) Energy
Information Administration (EIA) estimates that natural gas supplies approximately 32 percent of the energy used in
the U.S.1 Under the Natural Gas Act (NGA), the Federal Energy Regulatory Commission (FERC) has jurisdiction over the
transportation and sale of natural gas in interstate commerce and the companies engaged in those activities.

The natural gas market is an amalgamation of a number of subsidiary markets. There is a physical market, in which
natural gas is produced, transported, stored, and consumed. There is also a financial market that focuses on the
purchase and sale of financial instruments whose price is linked to the price of natural gas in the physical market,
but that rarely result in the physical delivery of natural gas. Additionally, natural gas markets are regional, with prices
for natural gas varying with the demand characteristics of the market, the region’s access to different supply basins,
pipelines, and storage facilities.

FERC Jurisdiction highly combustible, giving off a great deal of energy and
FERC is responsible for the regulation of the siting, fewer emissions than fuels such as coal and oil. Natural
construction and/or abandonment of interstate gas occurs in geological formations in different ways: as
pipelines, gas storage facilities, and Liquified Natural a gas phase associated with crude oil, as a gas dissolved
Gas (LNG) terminals, regulation of the transmission and in the crude oil, as a gas phase not associated with any
sale of natural gas for resale in interstate commerce, significant crude oil, or as a supercritical fluid. Natural
establishing rates for pipeline and storage services gas is “rich” or “wet” if it contains significant amounts
and assessing the safe operation and reliability of LNG of natural gas liquids (NGL) – e.g., ethane, propane and
facilities. We explain FERC’s jurisdiction over natural gas pentane2– mixed with the methane. In contrast, natural
related activities in more detail throughout this chapter. gas is “lean” or “dry” if it consists of mostly methane.3
Excess NGLs are separated from the methane and sold
separately. Natural gas reservoirs often contain other
elements and compounds, such as carbon dioxide,
Natural Gas hydrogen sulfide, nitrogen, helium, water, dissolved
Natural gas is primarily methane, which is a molecule salts, and other dissolved gases. The natural gas is
made of one carbon atom and four hydrogen further processed to remove the impurities from the
atoms (CH4), and is among the materials known as methane to make the natural gas suitable for sale. While
hydrocarbons. Natural gas is colorless and odorless in its natural gas is typically a gas, it can be cooled to a liquid
natural pure form, but is often odorized with mercaptan and transported in trucks or ships. In this form, it is
or other odorants to allow for easy detection. It is also referred to as liquefied natural gas, or LNG.

1 Derived from EIA, Monthly Energy Review, Primary Energy Consumption by Source, Table 1.3 (accessed August 2022), https://www.eia.gov/
totalenergy/data/monthly/pdf/mer.pdf.
2 Natural gas liquids (NGLs) are hydrocarbons—in the same family of molecules as natural gas and crude oil— composed exclusively of carbon and
hydrogen. Ethane, propane, butane, isobutane, and pentane are all NGLs. There are many uses for NGLs, including inputs for petrochemical plants,
burned for space heat and cooking, and blended into vehicle fuel.
3 Dry gas contains “insufficient quantities of hydrocarbons heavier than methane to allow their commercial extraction or to require their removal
in order to render the gas suitable for fuel use.” Society of Petroleum Engineers, Glossary of Terms Used in Petroleum Reserves and Resources
Definitions (n.d.), https://www.spe.org/en/industry/terms-used-petroleum-reserves-resource-definitions/.

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Natural Gas Industry where production or transportation and storage are
The markets of the natural gas industry are both physical limited and demand is high, such as New England
and financial. This chapter focuses on the physical natural and Southern California. Transportation costs and
gas markets, but it should be noted that financial markets limitations in pipeline capacity from supply to demand
can have a significant influence on the physical natural areas are generally the major factors driving regional
gas market. price differentials.

The natural gas industry has three major segments, Various factors have shifted the dynamics of natural
the upstream (supply), the midstream (transportation), gas supply and demand since 2007, when shale gas
and the downstream (consumption). The upstream production began to grow significantly. These include,
segment includes exploration, which is the process but are not limited to:
of attempting to find accumulations of natural gas 1. Development of modern hydraulic fracturing and
resources, production, which includes recovering horizontal drilling techniques that have enabled
natural gas resources through drilling and extraction producers to access unconventional resources,
at the wellhead, and finally gathering. Gathering entails such as those in shale formations. These
using small diameter pipeline systems to transport techniques have expanded the amount of available
the gas from the wellhead to local pooling points or economically accessible natural gas reserves and
to natural gas processing facilities, where impurities have increased domestic natural gas production.
and NGLs are removed to create pipeline-quality natural These newer resources are located closer to eastern
gas. The midstream segment includes transportation population centers and have provided those regions
on intrastate and interstate pipeline systems that move with access to lower cost natural gas supplies and
natural gas through large-diameter pipelines to storage transportation costs.
facilities and a variety of consumers. The downstream 2. Natural gas demand for power generation has
segment includes large gas consumers, such as power expanded considerably over the past decade.
plants and industrial facilities, and local distribution Power plant demand for natural gas reflects the
companies (LDCs), which deliver the natural gas to operating flexibility of natural gas-fired generators
retail consumers. and the environmental benefits of the fuel. Natural
gas-fired power plants emit less air pollution than
Each component of the supply chain is critical in serving power plants using coal or oil. These plants are also
customers. The quantity of reserves and production relatively easier to site, can be built in a range of
can affect market participants’ expectations about sizes, and can increase or decrease output flexibly.
current and future supply, and thus can affect prices. The ability to quickly change output provides
Similarly, the availability of pipeline and storage capacity electric system grid operators with the flexibility
determines which supply basins are used and the to support variations in output from renewable
amount of gas that can be transported from producers energy resources, changes in demand from
to consumers. All of these factors affect the supply customer load, as well as unexpected power
chain, but they also affect the supply-demand balance, system events and disruptions.
both nationally and regionally. More specifically, the 3. Pipeline expansions linking the new supply regions
differences in supply and demand result in different to markets have enabled regions such as the
prices for natural gas at various locations. Prices have Northeast and Mid-Atlantic to access new supply
historically tended to be lower in regions supplied sources, expanding the amount of natural gas
by multiple production areas with robust pipeline that can flow from traditional supply sources, and
infrastructure, such as the Gulf Coast, Southwest, and enhancing the amount of natural gas that can flow
Midwest. In contrast, prices tend to be highest in areas to markets.

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4. Rising natural gas production combined with via pipeline and globally via LNG shipping, have also had
increasing international natural gas demand has a significant effect on aggregate demand.
led to the construction of several LNG export
terminals. As a result, U.S. LNG export capacity Daily and weekly economic activity creates cyclical
and international cargo deliveries have grown demand patterns. During the work day, demand rises
significantly since 2016. as people get up and go to work or school. Similarly,
it declines as they go to sleep. On the weekend, demand
tends to vary less over the course of the day.

Natural Gas Demand PRICES OF NATURAL GAS AND COAL

Natural gas is the fuel of choice for many sectors of the Just as a homeowner may decide to invest in a furnace
U.S. economy. Over the long-term, natural gas use is and associated piping to use natural gas for heating, so,
driven by overall economic and population growth, too, a power producer may decide to make long-term
environmental policy, energy efficiency, technological investments in natural gas-fired generators. Decisions
changes and prices for natural gas and substitute energy requiring long-term capital investments are easiest to
sources such as oil, coal and electricity. In the short- make at the time a home or power plant is being built
term, natural gas demand can fluctuate substantially and are more complicated to changelater. Thus, over
due to weather, economic activity, and competition from the long term, demand for natural gas can be affected
other fuel sources such as coal and oil. by the expected costs of alternative energy sources: the
cost of a natural gas furnace versus an electric one; the
WEATHER cost of a coal-fired generating plant versus one fueled by
Weather is the most significant factor affecting seasonal natural gas.
natural gas demand, which can swing considerably
within a given day, especially during periods of extreme In the short-term, the opportunity for fuel switching
temperatures. Short-term changes in weather, such as has been significant in power generation. Electric
heat waves and winter storms, can send demand and grid operators have choices as to which power plant
prices soaring – or dropping – within the course of a day, to dispatch to meet electric demand. As explained in
sometimes unexpectedly. The weather’s unpredictability greater detail in the electric chapter, dispatch is often
challenges suppliers and pipelines, especially when based on the marginal cost of generation at each
demand is high and pipelines are full. available plant in the generation fleet. While the degree
to which these fuels are used varies regionally, plants
ECONOMIC ACTIVITY AND GROWTH with lower marginal costs, such as nuclear plants, are
Economic growth can increase the amount of natural gas typically dispatched before plants with higher marginal
used by industry, power plants, and commercial entities costs, such as natural gas plants. As natural gas prices
as consumers want more of their products and services. drop relative to coal prices, natural gas-fired generation
During a recession, natural gas use typically declines. may be dispatched ahead of coal-fired generation,
increasing natural gas demand from the power sector.
Structural changes in the economy can also affect natural
gas demand, such as varying levels of manufacturing DEMOGRAPHICS AND SOCIAL TRENDS
and service sector activity. Additionally, new domestic Long-term demand can also be affected by shifting
markets for products and services may increase the demographics and social trends. Population growth
consumption of natural gas, whereas movement of in warmer climates and population declines in certain
manufacturing overseas may reduce demand. Lastly, areas of the North have affected natural gas use. So
demand for exports of natural gas, to Mexico and Canada has the trend toward larger houses, which have greater

2024 ENERGY PRIMER n 4 n FEDERAL ENERGY REGULATORY COMMISSION

heating and cooling needs, yet are generally more air conditioning has created robust summer demand,
energy efficient. which competes with natural gas supply that traditionally
would flow into underground storage for later use.
ENVIRONMENTAL CONCERNS Industrial demand is fairly constant year-round.
AND ENERGY EFFICIENCY
Natural gas emits much fewer pollutants than other In the short term, residential and commercial natural gas
competing fossil fuels, including carbon and other use tends to be inelastic – consumers use what they need,
greenhouse gases, which has been an important regardless of the price. Power plant demand, on the other
factor in some decisions to use natural gas for power hand, is more price-responsive as natural gas competes
generation. This is particularly significant in states and with other fuels, especially coal. Price inelasticity implies
regions that have experienced challenges in meeting air that a potential for price spikes exists during periods of
quality standards. supply constraints. In the longer term, residential and
commercial natural gas use can change, with changes
The natural gas emissions profile has also encouraged in space heating or cooking from fuel oil to natural gas
some urban mass transit bus systems, West Coast port (increasing demand for natural gas) or from natural gas to
operations, and other vehicle fleets to shift to natural electric (decreasing demand for natural gas).
gas from gasoline or diesel fuel.
Consequently, the mix of customers in a region can
CUSTOMER SECTORS AND DEMAND affect system operations and costs. Pipelines and other
On an annual basis, power generation makes up about equipment are sized to account for peak demand.
37 percent of total U.S. natural gas demand.4 Industrial, Load that has fairly constant demand presents fewer
residential, and commercial consumers represent operational challenges to suppliers and usually enjoys
approximately 27 percent, 15 percent, and 11 percent lower prices. Highly variable demand will result in
of total U.S. natural gas demand, respectively.5 An pipelines and equipment being used at less than full
additional 6 percent is used for lease and plant fuel capacity for much of the year. As a result, the cost to
operations and 3 percent is used for pipeline and provide service may be higher because the pipelines may
distribution activities.6 See FERC’s State of the Markets become constrained during peak times and because the
Report and Seasonal Assessments for analyses on recent capacity is not consistently utilized.
natural gas demand sector trends.7
POWER GENERATION
Each customer sector has a unique demand profile, both Natural gas-fired generators can flexibly manage
in the amount that the demand varies over a season their output and are frequently called on to respond
and whether its peak demand coincides with the overall to changes in demand or when called upon by power
system peak. Residential demand, for example, can be grid operators. Seasonally, generating plants tend
highly variable in colder climates, and its peak coincides to consume more natural gas in the summer to meet
with the overall system peak. Power generation’s peak air conditioning loads, but also increase output in
does not coincide with the overall winter gas-demand the winter to provide electric heating and lighting.
peak, but the use of natural gas to produce electricity for Generation demand can also be influenced by the

4 Derived from EIA, Natural Gas Consumption by End Use, U.S., Annual (accessed October 2022), https://www.eia.gov/dnav/ng/ng_cons_sum_dcu_
nus_a.htm.
5 Id.
6 Id.
7 See FERC, Reports & Analyses (n.d.), https://www.ferc.gov/reports-analyses.

2024 ENERGY PRIMER n 5 n FEDERAL ENERGY REGULATORY COMMISSION

relative prices for natural gas and other fuels, especially Natural Gas Supply
coal. Since late 2008, natural gas-fired generators
generally have been dispatched before many of the NATURAL GAS RESOURCES,
less efficient coal plants because of the relatively low RESERVES AND PRODUCTION
natural gas prices seen over the past decade. In 2016, The amount of natural gas in the ground is estimated by
electricity generation from natural gas overtook coal a variety of techniques, including seismic studies and
generation for the first time on an annual basis.8 drilling exploration wells. Estimating the technically
recoverable oil and natural gas resources in the U.S. is
INDUSTRIAL an evolving process. Analysts use different methods
Natural gas as a fuel is used to produce items such and systems to make natural gas estimates. Natural gas
as steel, glass, paper, clothing and brick. It also is supplies are broadly characterized as resources, proved
an essential raw material for paints, fertilizer, plastics, reserves, and production.
antifreeze, dyes, medicines, and explosives. As noted
earlier, industrial load tends to show the least seasonal Resources, the largest category of supply, refers to
variation of natural gas use. the quantity of a natural resource that is known to
exist with a reasonable degree of certainty and can
RESIDENTIAL be extracted using existing or feasibly commercial
Despite population growth, natural gas used in the technology. Proved reserves are a subset of resources
residential sector has remained fairly flat over the past which are known to exist with a reasonable degree
decade. This has primarily occurred because homes and of certainty and can be economically extracted under
appliances like furnaces, water heaters, and clothes dryers current or assumed prices. Resources and proved
have become more energy efficient. Slightly more than reserves are dynamic as both change when new natural
half of the homes in the U.S. use natural gas as their main resources are discovered via exploration, as natural
heating fuel.9 Separately, much of the year-to-year demand resources are extracted, and as prices fluctuate. All
variation in this sector can be attributed to the weather estimates of proved reserves involve some degree of
during a particular year. A year with a long, cold winter uncertainty, which depends primarily on the amount
will see higher gas demand than a year with a mild winter, of reliable geologic and engineering data available
especially in cold-winter regions where demand soars at the time of the estimate. According to the Society
during winter months as consumers turn on their furnaces. of Petroleum Engineers, “proved reserves are those
quantities of petroleum which, by analysis of geological
COMMERCIAL and engineering data, can be estimated with a
Like the residential sector, commercial consumption reasonable certainty to be commercially recoverable,
experiences year-to-year variation based on weather. from a given date forward, from known reservoirs and
Commercial consumers include hotels, restaurants, under current economic conditions,operating methods,
wholesale and retail stores, and government agencies, and government regulations.”10 Lastly, production
which use natural gas primarily for heat. Consequently, describes the amount of a natural gas that is actually
its demand varies over the seasons, weeks, and days. extracted over a period of time.

8 See EIA, Total Energy, Electricity, Table 7.2b Electricity Net Generation: Electric Power Sector (accessed October 2022), https://www.eia.gov/
totalenergy/data/browser/?tbl=T07.02B.
9 EIA, Natural gas explained (May 24, 2022), https://www.eia.gov/energyexplained/natural-gas/use-of-natural-gas.php.
10 Probabilistic reserves are often used, for instance a P90 reserve figure indicates there should be at least a 90 percent probability that quantities
actually recovered will equal or exceed the estimate. Society of Petroleum Engineers, World Petroleum Congresses, and American Association
of Petroleum Geologists, Guidelines for the Evaluation of Petroleum Reserves and Resources, at 45 (2001), https://www.spe.org/industry/docs/
Guidelines-Evaluation-Reserves-Resources-2001.pdf.

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Figure 1-1: Schematic Geology of Natural Gas Resources

Land Surface

Conventional
Non-Associated
Gas Coalbed Methane

Conventional
Associated Gas

Seal Oil

Sandstone Tight
sand gas

Gas rich shale

Source: U.S. Energy Information Administration and U.S. Geological Survey11

FERC Jurisdiction UNCONVENTIONAL AND

Section 1(b) of the Natural Gas Act (NGA) exempts CONVENTIONAL NATURAL GAS
production and gathering facilities from FERC Natural gas is a fossil fuel. It has historically been found
jurisdiction. Moreover, the Wellhead Decontrol Act in underground reservoirs formed when organic material
of 1989 completely removed federal controls on new was buried and pressurized. The remains of that
natural gas and eventually all wellhead price controls, organic material were trapped in the surrounding rock
except sales for resale of domestic natural gas by as oil or natural gas, and the two fuels are often found
interstate pipelines, LDCs, or their affiliates.12 In Order together. The depth of the organic materials and the
No. 636, FERC required interstate pipelines to separate, temperatures at which they are buried often determine
or unbundle, their sales of gas from their transportation whether the organic matter turns into oil or natural gas.
service, and to provide comparable transportation Oil is generally found at depths of 3,000 to 9,000 feet,
service to all shippers whether they purchase natural gas while organic materials at greater depths and higher
from the pipeline or another gas seller. temperatures result in natural gas.

11 EIA, Today in Energy, The geology of natural resources (February 14, 2011), https://www.eia.gov/todayinenergy/detail.php?id=110.
12 Pub. L. No. 101-60 (1989); 15 U.S.C. § 3431(b)(1)(A). The Natural Gas Wellhead Decontrol Act of 1989 amended the Natural Gas Policy Act of 1978 to
declare that the price guidelines for the first sale of natural gas do not apply to: (1) expired, terminated, or post-enactment contracts executed after
the date of enactment of this Act; and (2) certain renegotiated contracts. Specifically, as of May 15, 1991, the act, decontrolled natural gas produced
from newly spudded wells and also repealed permanently wellhead price controls beginning on January 1, 1993.

2024 ENERGY PRIMER n 7 n FEDERAL ENERGY REGULATORY COMMISSION

Natural gas basins are frequently referred to as
unconventional or conventional basins or plays. These Horizontal and
basins differ in the geology of the basin and the depth at Directional Drilling
which gas can be found. The schematic illustrates differing with Hydraulic Fracturing
geologic formations in which natural gas can be found.
The presence of natural gas in
UNCONVENTIONAL NATURAL GAS unconventional plays had been common
Innovations in exploration and drilling technology have knowledge for decades. Historically,
led to rapid growth in the production of unconventional the lower permeability of rock in shale
natural gas. The majority of unconventional natural gas formations typically yielded too little natural
production in the U.S. comes from shale and tight sands. gas for a company’s investment when using
traditional drilling methods. In the early
Unconventional natural gas is a found in shale, and 1990s, after years of experimenting in the
tight, low-permeability rock formations (also referred Barnett Shale in Texas, George Mitchell
to as tight sands) and coal seams (also referred to as and Mitchell Energy Co. developed new
coal beds). The National Petroleum Council (NPC) techniques that made production from these
defines unconventional gas as “natural gas that cannot types of formations more economically
be produced at economic flow rates nor in economic feasible. The new techniques combined
volumes unless the well is stimulated by a large horizontal drilling with slickwater hydraulic
hydraulic fracture treatment, a horizontal wellbore, or by fracturing (slickwater hydraulic fracturing
using multilateral wellbores or some other technique to fluids are water-based fluids, generally
expose more of the reservoir to the wellbore 13 containing a friction reducer, that facilitate
rapid pumping of the fluid into the well),
SHALE AND TIGHT SANDS allowing Mitchell to drill into specific target
Shale gas is natural gas found in fine-grained sedimentary areas and release the natural gas trapped
rock with low permeability, including mudstone, clay in the formation. Horizontal drilling allows
stone, and what is commonly known as shale. Natural producers to target the specific cross-
gas in shale formations tends to concentrate in natural sections of rock formations where the
fractures and the rock adjacent to them. Historically, natural gas is trapped, greatly improving the
extraction of natural gas from shale formations has been likelihood of a productive well.
difficult to achieve. Growth in shale resources is discussed
further below (see “The Shale Revolution”).

Tight sands gas is natural gas contained in sandstone,

siltstone, and carbonate reservoirs of such low
permeability that it will not naturally flow at economic
production rates when a well is drilled. There are about
20 shale and tight sands basins in the U.S. (see map).

13 See National Petroleum Council Global Oil & Gas Study, Topic Paper
#29 Unconventional Gas, at 5 (July 18, 2007), http://www.energybc.
ca/cache/naturalgas/www.npc.org/Study_Topic_Papers/29-TTG-
Unconventional-Gas.pdf.

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Figure 1-2: Natural Gas Exploration contact with formations and successful new natural
and Development Process gas production. Improved exploration techniques,
coupled with improved drilling and production methods,
have lowered the cost of finding and producing
Geologic Basin shale gas, and have resulted in a significant increase
in production.
Resource Base

The largest gas producing unconventional shale plays in

Land and Lease
the U.S. are the Appalachia, Permian, Haynesville, Eagle
Exploration
Geological and Geophysical Ford, Anadarko, Niobrara, and Bakken basins (see map
• Seismic below for shale locations).15 Other shale formations have
New Field Discovery
experienced heavy exploration activity and depending
Land and Lease on economic conditions may become major contributors
Development Delineation Wells of natural gas supply.

Production
Reserve Extensions THE SHALE REVOLUTION
and Revisions The estimated resources, proven reserves, and
production of shale gas has risen rapidly since 2005,
Production and the development of shale gas has transformed
gas production in the U.S. Shale gas continues to be
Source: FERC staff, 2012 the dominant source of domestically produced gas,
providing 70 percent of the gross production of natural
gas. By comparison, coalbed methane accounts for
Growth in shale gas in particular has been substantial about 2 percent of production, while nearly 11 percent
since 2007 and has contributed to a significant increase of the natural gas came from oil wells and 17 percent
in U.S. proved natural gas reserves. Proven shale reserves was produced from conventional natural gas wells.16
are approximately 13 times larger than 2007 levels.14
Production from shale gas plays is 13 times larger
Shale and tight sands require a special technique known than 2007 levels.17 According to the EIA, shale gas
as hydraulic fracturing (fracking) to release the natural and production from tight formations will account for
gas. This technique involves fracturing the rock in the greater than 92 percent of U.S. natural gas production
horizontal shaft using a series of radial explosions and by 2050.18
water pressure. Since 2007, the processes for finding
geological formations have improved, and producers SHALE GAS PRODUCTION BY REGION
have accumulated knowledge of subsurface oil and gas Shale gas well productivity improved considerably
deposits over that span of time. As a result, most wells since 2007, with technological advances in drilling
targeting shale and tight sands formations result in drill and fracking technology reducing exploration, drilling,

14 Derived from EIA, U.S. Shale Proved Reserves, Annual (accessed October 2022), https://www.eia.gov/dnav/ng/hist/res_epg0_r5301_nus_bcfa.htm.
15 See EIA, Drilling Productivity Report, Production by Region (accessed October 2022), https://www.eia.gov/petroleum/drilling/#tabs-summary-2.
16 Derived from EIA, Natural Gas Gross Withdrawals and Production, U.S., Annual-Million Cubic Feet (accessed October 2022), https://www.eia.gov/
dnav/ng/ng_prod_sum_dc_NUS_mmcf_a.htm.
17 Derived from EIA, Natural Gas Gross Withdrawals and Production, Gross Withdrawals from Shale Gas, Annual-Million Cubic Feet (accessed October
2022), https://www.eia.gov/dnav/ng/NG_PROD_SUM_A_EPG0_FGS_MMCF_A.htm.
18 See EIA, Annual Energy Outlook 2022, Table 14. Oil and Gas Supply (March 3, 2022), https://www.eia.gov/outlooks/aeo/tables_ref.php.

2024 ENERGY PRIMER n 9 n FEDERAL ENERGY REGULATORY COMMISSION

Figure 1-3: Lower 48 States Shale Plays

Source: U.S. Energy Information Administration19

and production expenses. Rising well productivity and NGLs tend to trade at higher prices than natural
falling costs resulted in larger amounts of shale gas gas. Thus, there may be an incentive to drill from
production at lower costs to the producers. wet shale gas wells even when natural gas prices
are relatively low because of the relatively high
The presence of NGLs, or natural gas liquids, in addition value of the associated NGLs that are also produced
to natural gas in many shale gas plays, may add to shale when drilling.
gas well profitability. NGL prices are more closely linked
to oil prices than natural gas prices, and natural gas The Marcellus Shale formation in Appalachia is
wells with high liquids content are often more profitable particularly noteworthy because of its location, size
than wells producing natural gas alone. A typical barrel and resource potential. The formation extends from
of NGL might contain 40-45 percent ethane, 25-30 West Virginia to New York, near the high population
percent propane, 5-10 percent butane and 10-15 centers of the Northeast and Mid-Atlantic. Although
percent natural gasoline (gasoline derived from natural the Marcellus Shale has produced gas for decades,
gas).20 This can make the production of NGLs from so- it has produced significant amounts of gas only since
called “wet shale gas wells” less sensitive to natural 2008, where production has been prolific, with high
gas prices than wells solely producing natural gas, as initial well pressures and high production rates.

19 EIA, Maps: Exploration, Resources, Reserves, and Production (June 2016), https://www.eia.gov/maps/images/shale_gas_lower48.pdf.
20 See EIA, NGL 101 – The Basics (June 6, 2012), https://www.eia.gov/conference/ngl_virtual/eia-ngl_workshop-anne-keller.pdf.

2024 ENERGY PRIMER n 10 n FEDERAL ENERGY REGULATORY COMMISSION

The growth in production in the Marcellus Shale has
significantly affected U.S. natural gas transportation. Rig Count and Rig Productivity
As more natural gas has flowed out of Marcellus, less The rig count is used to measure exploration
has been needed from the Rockies or the Gulf Coast to activity by assessing the number of rotary
serve the eastern U.S. This has resulted in changing flow drilling rigs actively drilling for oil and gas.
patterns of natural gas on pipelines that traditionally Historically, rig counts were used as a rough
served eastern and midwestern markets. In some predictor of future production. However,
instances, pipelines that transport natural gas into improvements in drilling technology and
northeastern markets and have relied on production practices have caused a decoupling between
from outside of the region, have reversed flow direction rig count and production. The adoption of
to export natural gas produced in the Marcellus and horizontal drilling significantly increased
Utica to markets across the U.S. production per rig, making historical
comparisons of rig counts problematic
COALBED METHANE as horizontal rigs are considerably more
Coalbed methane (CBM) is natural gas trapped in coal productive than vertical rigs. Within the total
seams. Coalbeds are usually filled with water that rig count, the use of horizontal drilling rigs,
naturally enter coal seams through fractures in the used in the production of natural gas and oil
formation; the deeper the coalbed, the less water is in shale formations, has been growing for
present. To release the gas from the coal, pressure years, while the traditional vertical rig count
in the fractures is created by removing water from the has steadily declined.
coalbed. While the venting of methane from coal mines
had been in practice for years, commercial production of
this resource began in earnest in the 1980s. According to
a U.S. Geological Survey released in October 2000, there
is more than 700 Tcf of domestic CBM, but less than
100 Tcf of it may be economically recoverable.21 Most
CBM production in the U.S. is concentrated in the Rocky
Mountain area, although there is also some activity in
the Midcontinent and Appalachian area.

CONVENTIONAL NATURAL GAS

Natural gas has been historically produced from what is
traditionally known as conventional natural gas resources.
These supplies are found in geologica basins or reservoirs
made of porous and permeable rock, holding significant
amounts of natural gas in spaces in the rock.22 For more

21 See U.S. Geological Society, Coal-Bed Methane: Potential and

Concerns (October 2000), https://pubs.usgs.gov/fs/fs123-00/fs123-00.
pdf.
22 Permeability refers to the ability of a porous medium to transport
a fluid. The natural gas found in permeable rock formations
contains trapped or slowly migrating natural gas molecules, where
the migration of the gas molecules takes place over the course of
millions of years.

2024 ENERGY PRIMER n 11 n FEDERAL ENERGY REGULATORY COMMISSION

Figure 1-4: Coalbed Methane Fields, Lower 48 States

North Central
Coal Region
Williston
Basin
Coos Bay
Field Powder River
Big Horn Basin
Wind River Basin Basin
Michigan
Wyoming Basin
Overthrust Northern
Appalachian
Hannah-Carbon Basin
Greater Green Basin
River Basin Park Basin Forest City
Basin
Uinta Basin
Denver n
Basin Illinois ia
h
Basin ac
Piceance Basin al
A pp in
SW Colorado Cherokee Platform l s
Kaiparowits ra Ba
Coal Area nt Deep River
Basin Ce
Basin
Raton
Basin
Black Mesa San Juan
Arkoma
Basin Basin Basin Black Warrior
Basin
Southwestern
Coal Region

Gulf Coast
Coal Region Miles
Terlingua
Field

±
0 100 200 300 400

! Coalbed Methane Fields

Coal Basins, Regions & Fields

Source: U.S. Energy Information Administration23

than a century, up until the early 2000s, nearly all of the total U.S. production.24
country’s production of natural gas was obtained from
conventional sources. Federal offshore natural gas wells are drilled into the
ocean floor off the coast of the U.S. in waters that are
Conventional resources have been found both on land jurisdictional to the federal government. Most states
and offshore (see map below), with the major fields in have jurisdiction over natural resources within three
an arc from the Rocky Mountains to the Gulf of Mexico nautical miles of their coastlines; Florida and Texas
to Appalachia. The largest conventional fields reside claim nine nautical miles of jurisdiction.25
in Texas, Wyoming, Oklahoma, New Mexico, and the
federal offshore area of the Gulf of Mexico. In 2000, Roughly 1,650 oil and gas platforms are producing in
offshore natural gas production represented 24 percent federal waters at water depths approaching 7,500 feet (at
of total U.S. production; it has since fallen to 3 percent of total well depths of 25,000-30,000 feet) and at distances

23 EIA, Maps: Exploration, Resources, Reserves, and Production (April 8, 2009), https://www.eia.gov/oil_gas/rpd/coalbed_gas.pdf.
24 Derived from EIA, U.S. Natural Gas Gross Withdrawals and Production (accessed October 2022), https://www.eia.gov/dnav/ng/ng_prod_sum_a_
EPG0_FGW_mmcf_a.htm.
25 Florida and Texas were provided an exemption to the federal government’s jurisdiction over natural resource beyond three nautical miles of state
coastlines, up to a 9 nautical mile limit, because each state proved the further boundary based on its constitution or laws prior to when it came
into the Union or was approved by Congress. See Submerged Lands Act of 1953. 43 U.S.C. § 1301-1315 at § 1312 (2002).

2024 ENERGY PRIMER n 12 n FEDERAL ENERGY REGULATORY COMMISSION

Figure 1-5: Gas Production in Conventional Fields, Lower 48 States

Montana
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Belt
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N. Central
!

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Montana Area
Williston
! !

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Powder Basin
!
!!

Bighorn
!

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River
!
!
!

Basin
!

Basin !
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Wind River Basin

! !

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Hanna-Carbon
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Wyoming
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Appalachian
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Thrust Belt
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Basin
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Michigan
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Basin
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Greater Green
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Denver
! ! ! !!!!!!!!!!!!!!!!!!!!!!!!! ! ! !!
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! ! ! ! ! ! ! !!!!! !!!!!!!!!!!!!!!!!!!!!
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!! ! ! ! ! ! !!!!!!!!!!!!!!!!!!!!!!!! !
!! ! ! ! ! ! !!! !!!!!!!!!!!!!!!!!! !

River Basin
!!! ! ! ! !!!!!!!!!!!!!!!!!!!!!!! ! !!!
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! ! ! !!!!!!!!!!!! !!! !!! !!!! ! !!!
! ! ! ! ! ! !!!!!!!!!!!!!!!!!!!!!!!!! !!!
!!

Forest City
!!!!!!!!!!!!!!!!!!!!!! !! !!! !!!
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!! ! !!!!!!!!!!!!!!!!!!!!!!! !! !!!!!!!! ! !
!

Illinois
! ! !!!!!!!!!!!!!!!!!!!!!! !! !!!!!!!!!

Basin
!! !!!!!!!!!!!!!!! !!!!!!!!!! ! !!!!! ! ! !! !
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Sa c

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Basin
! ! ! ! !!!!!!!!!!! !!! !!!!!!!!!!!! !!!!!!!!!!!!!!!! ! ! !
! ! ! ! ! !!!!!!!!!!!!!!!!!!!!!! !!!!!!!!!!!! !!!!!!! ! !

Uinta
! ! ! !!!! !!! !!!!!!!!!!!!!! ! !! !!!!!!!!!!!!!! !!!! ! !
! ! ! ! ! ! !! !!! !! !!! !! !!!!!!!!!!!!!!!!!!!!! !
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Basin
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r am

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! !! !! ! !! !!!!!! !!!!!!! !

Basin
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Anadarko
! ! !!!! !!!!!! !!!!! !
! ! !!!! ! ! ! ! ! ! !
ent

! ! ! ! ! ! !! !!! !!! !!!!!

! !!! !!!!! !!!
! ! ! !!!! !!!!!!! !! !! !
! ! !! !!!!!!!! !!!! ! !

Piceance
! ! ! !! !! ! ! !!!! !!!!! !! !
! ! !!!! !!!! ! !!!! !!! !!!!!!! !
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! !! ! ! ! ! ! !!!!!!! !!!!!! !! !
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!! ! ! !!!! ! !! !! !!!!!! !!!!!!!

Shelf
! ! ! ! !!! !!!!! ! ! !! ! !!!!!!!!!!!!!!
! ! ! !!!! !! ! !!!!! !!!!!!!!!!!
!!! !!! !! ! !!!!! ! !!!!!!!!!
! !! ! ! ! !!!!!! !!!!!!!!
! ! ! ! ! !!!!!!!!!!!!!!!!!
! !!!!! !!! !!!!!!
oB

! !! !!!! !!!!! ! !
! ! ! ! ! !!!!!!!!!!! !!
! !!!!!!!!!!! !!!

Basin Raton
! ! !
! !!!! ! !!! !!!!!!!!!!
! ! !!! ! !! !! !!!!!!!!!!!!

Paradox
! ! ! !! !! !!!!!!!!!!!!!!!
! ! !!!!!!!!!!!!!
! !!!!!!!!!!!!
!! !

Cherokee Platform
! ! ! !!!!!!!!!!!!
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asin

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Basin
! ! ! !

Basin
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Ventura
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!! !! !! !!!!! ! !! !! !! !!! !!!! ! !! !! ! ! !!! !! !!!!
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Basin
!! ! ! ! ! ! ! ! !!!! !!! !! !! !! !!! ! !! ! !!!! ! ! !! !!!!!!!!!!
! ! ! ! ! !!! !! !! ! !! !! !!! !!!!! ! ! !!!! ! ! !!! ! !!!!!!!!
! ! !!! ! ! !! !! !! !! !!! !!!!!!!! ! !!! ! !!!!!!!
! ! ! ! !!! !!!!!!!! ! ! ! !! ! ! ! !!!!!!!

Arkoma Basin
! ! ! ! ! ! !!!!!!!! ! ! ! !! ! !!!!!!!
!!! ! ! !!!!!!! !! ! !!! ! ! !! !!!!!!!

San Juan
!! ! !! !!!!! ! !! !! !! !!!!!!
!

Anadarko
! ! ! ! !! ! ! ! !!! !!
! ! ! ! ! ! ! !! ! !!!! !! !
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!!!!!!! ! !!!!!! ! !! !! !!!!
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!! !!!! !!!! ! ! !!! !!! ! !!!!!! ! !!!! !!! !!!! !!

Basin
!! ! !!! ! !! !! ! ! ! ! ! ! ! !!!!!! ! !!! !! !! !

Basin
! ! ! !!!! !! ! ! !! !! !! ! ! ! ! ! ! !
!!!!! !! ! !! ! ! ! ! ! ! ! !! ! !

Los Angeles
!!!!! !! !!!! ! ! ! !! !!!! !! !! ! ! !!
! !!! ! !! ! !!! !!! ! ! ! ! !! ! !!!!! ! ! !!! !
! !! !! ! !! ! ! !! ! !! ! !! !!
!!!!! ! !! !! !! ! ! !! ! !! ! ! ! ! !!
!!!!!! ! !!!! ! ! ! !!!! ! ! ! !!! !!! ! ! ! !!! ! !
!!! !!! ! !!! !! ! ! ! ! !! ! !!!! ! !! !! !!!! !! ! ! !!! !
!!!! !! !! ! !! !! !! ! ! ! !! !!! ! !!! ! ! !! !!! ! !!
!!!!!! ! !!! ! !!! ! ! ! !!!!!!!! !!!!!!!!! ! !!! !!
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!!!!!!! !! !!!!!!! ! !!! !!!!!!! !! !!!!!!!!!!! !!!!!!
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!! !!! ! ! ! ! ! !! !!!!!!!!! !! ! !!!!!!!! !

Basin
! ! ! ! ! ! ! !! !!!!!!!! !!!!!!!!! !! !!!!!!!!
!!!!! ! !! ! ! !!!!!! ! !! !!! ! !!!
!! !!!! !! !! ! !!!!!!!!!! ! !!!! !!
! !! ! !!!!!!! ! !!!!!!!!!!!!! !!!!!! !

Palo Duro Basin

! !! ! !! ! !!!!!!! !!!!!!!! !!!! !
! ! !!! ! ! !!!!!!! ! !!!!! ! !
! ! ! !! !! !!!! !!!!! !! ! !!
!!! !! ! ! ! !!! !!!! !!!
! ! ! ! !! !!!!!!! !!! !
!!!!!!!! !! ! !!!! ! ! !!!! !!!!

Black Warrior
! !!!!!!!! !! !!!!!!! !! !
!!!!! !!! ! ! ! !!!! ! !

Ardmore Basin
!
!!!!!!! !!! !! ! ! ! !!
! !! ! !!! ! ! !
! !! ! ! !!! ! !!
!! !!!
! ! !! ! !
! ! ! !! !! !
!!! ! !
!!! !
! ! ! ! !
!! ! ! ! ! !
!!!! ! !! ! ! !
!!!! !! !! ! ! !!
! ! !! ! ! ! !

Basin
! !!! !! !

NW
! !!
!!
! !! !!
!

! !
!

!
!
!
! ! ! !
!

Permian Shelf
! !
!!

!! ! !
! ! !
! ! !!
! !
! ! ! ! ! ! !

TX-LA-MS Salt Basin

! ! !
!! ! !! !
!! ! ! ! !
! ! ! !! ! !
! !
! ! ! !! !!
!! ! ! ! ! !

Basin
! ! ! ! !
! ! !!
! ! ! ! !

Ft.
!!
! ! ! ! ! ! ! !
! ! ! ! ! ! ! !
! ! !
! !! ! !
! ! ! ! !
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! ! ! ! ! !! !!! !
! ! !!! ! ! ! ! !!! ! ! !!!
! ! ! ! ! ! ! ! ! ! !
!! ! ! ! !
! ! ! ! ! ! !
!! ! !!! ! ! !
! ! !!! ! ! ! !

Miles
!

Worth
! ! !! !!!! ! !
! !!! ! ! !
! ! !! ! !! ! ! !
! ! ! !! !
! ! !! ! ! ! ! !! ! ! !
! !! !
!! ! ! ! !!!
! ! !
! ! !
! ! !!
! ! !! !

! ! !! ! !
! ! !!! ! !! !

Basin
! !! !!! ! ! ! !! !!! ! !
!!!! ! !!! !
! !! ! !!!!! !!!!
! ! ! ! ! !!
! ! !
! !
! !
!

±
!!

Eastern 0 100 200 300 400

!
! !!

!
!
! !

!
!! !

Shelf
!!
! ! !

!
!

Gulf Mesozoic
!

rn
!
!

s te
! !
!!! !
! !! ! !
! ! !
! !!

We B asin
! ! !
!

OCS Area
!
!

Gas Production,
! ! !

!
!
! !

lf
! ! !

Gu
!! !
!
!
!
!

Last Reported Year

!
! ! !
!

!
!
!
!
!

(Billions of Cubic Feet)

!
!
!

!
!
! ! !

0-5
!

!
! !

Gulf Cenozoic OCS Area

!

5.1 - 20
!
!
!

!
!!
!!
!
!!

20.1 - 50
50.1 - 290

Basins and OCS Areas

Inter-Basin Areas

Source: U.S. Energy Information Administration26

as far as 200 miles from shore.27 Most of these offshore pipeline capacity-constrained regions during periods
wells are in the Gulf of Mexico. of peak natural gas demand. However, the increase
in U.S. natural gas production, spurred by the shale
Offshore wells have produced natural gas for decades. revolution, has reduced the need for imports and
As close-in, shallow-water wells became less economic enabled greater exports.
to produce, companies looked to reserves at greater
water depth. Technological improvements contributed Net natural gas imports peaked in 2007, when natural
to continuing production from deep offshore wells. gas imports represented approximately 20 percent
of the natural gas used in the U.S.28 Since then, imports
IMPORTS AND EXPORTS have declined and now represent approximately 9
The U.S. has historically been a net importer of natural percent of total U.S. consumption.29 The vast majority
gas by pipeline from Canada, with shipments of LNG of imports are delivered by pipeline from Canada,
from foreign nations playing an important role in serving with additional waterborne shipments of liquefied

26 EIA, Maps: Exploration, Resources, Reserves, and Production (April 8, 2009), https://www.eia.gov/oil_gas/rpd/conventional_gas.pdf.
27 Derived from Bureau of Safety and Environmental Enforcement, Offshore Statistics by Water Depth, Totals table (accessed October 2022), https://
www.data.bsee.gov/Leasing/OffshoreStatsbyWD/Default.aspx.
28 Derived from EIA, Natural Gas Summary, Imports and Exports, U.S., Annual (accessed October 2022), https://www.eia.gov/dnav/ng/ng_sum_lsum_
dcu_nus_a.htm.
29 Id.

2024 ENERGY PRIMER n 13 n FEDERAL ENERGY REGULATORY COMMISSION

Figure 1-6: Major Tight Gas Plays, Lower 48 States

Bowdoin-
Greenhorn
Williston
North-Central Basin
Montana Area
Judith River-
Bighorn Basin Eagle
Cretaceous

Greater Green Wind River Basin

River Basin Cretaceous-Lower Tertiary
Mesaverde- Denver Basin
Lance-Lewis Sussex-Shannon Berea-Murrysville Appalachian
Codell-Niobrara Bradford-Venango-Elk Basin
Wasatch- Muddy J
Mesaverde Medina/Clinton-Tuscarora
Niobrara Chalk
Uinta Basin
Mancos- Piceance
Dakota Basin Mesaverde Cleveland
Red Fork
Mesaverde
Pictured Cliffs Granite Wash
Dakota San Juan
Anadarko
Basin
Basin
Travis Peak
NW Shelf Bossier
Cotton Valley
Abo Gilmer Lime
Permian Davis
Penn-Perm Carbonate Texas-Louisiana-
Basin Ft Worth Mississippi
Morrow
Basin Salt Basin Miles
Thirty- Austin Chalk
One Eastern
Shelf W. Gulf Coast Basin
0 100 200 300 400

±
Ozona Canyon

Wilcox Lobo
Olmos
Stuart City-Edwards Tight Gas Plays Basins
Stacked Plays
Shallowest / Youngest
Vicksburg
Deepest / Oldest
Inter-Basin Areas

Source: U.S. Energy Information Administration30

natural gas from Trinidad and Tobago and other gas- Liquefied Natural Gas
exporting nations.31 Liquefied natural gas (LNG) is natural gas cooled to
minus 260 degrees Fahrenheit to liquefy it, which
Although the U.S has flowed natural gas through pipelines reduces its volume by 600 times. The volumetric
to Canada and Mexico for decades, total exports only reduction makes it possible to economically transport
began to rise following the first large scale exports of LNG natural gas in ships and trucks to locations not
that started in 2015 and ramped up in 2016 (see discussion connected by a pipeline network.
on LNG following). Since then, exports have risen by nearly
4 times its 2016 levels.32 As a result of these developments, FERC JURISDICTION
the U.S. became a net exporter of natural gas in 2017 for FERC has exclusive authority under section 3 of the
the first time since 1957.33 FERC staff provides locations for NGA, 15 U.S.C. § 717b, to authorize applications for
existing, FERC-approved and proposed LNG Import and the siting, construction, expansion, and operation
Export terminals on FERC’s website.34 of facilities for imports or exports of LNG. This

30 EIA, Maps: Exploration, Resources, Reserves, and Production (June 6, 2010), https://www.eia.gov/oil_gas/rpd/tight_gas.pdf.
31 Derived from EIA, U.S. Natural Gas Imports by Country, Annual (accessed October 2022), https://www.eia.gov/dnav/ng/NG_MOVE_IMPC_S1_A.htm.
32 See EIA, U.S. Natural Gas Exports and Re-Exports by Country, Annual (accessed October 2022), https://www.eia.gov/dnav/ng/ng_move_expc_s1_a.htm.
33 Derived from EIA, Natural Gas Summary, Imports and Exports, U.S., Annual (accessed October 2022), https://www.eia.gov/dnav/ng/ng_sum_lsum_
dcu_nus_a.htm.
34 See FERC, Existing and Proposed Terminals (October 26, 2022), https://www.ferc.gov/natural-gas/lng.

2024 ENERGY PRIMER n 14 n FEDERAL ENERGY REGULATORY COMMISSION

authorization, however, is conditioned on the greater flexibility to LNG suppliers, by enabling them to
applicant’s meeting of other statutory requirements deliver cargoes to the highest-priced markets.
not administered by FERC for various aspects of the
project. In addition, the DOE has authority over the The cost of the LNG process is $2-$10 per million
issuing of permits to import and export the commodity. British thermal units (MMBtu), depending on the costs
The U.S. Coast Guard (USCG) 35 and Department of of natural gas production and liquefaction and the
Transportation’s Pipeline and Hazardous Materials distance over which the LNG is shipped. Liquefaction
Safety Administration (PHMSA)36 also have regulatory and shipping form the largest portion of the LNG supply
authority over LNG facilities. Under NGA section 3, FERC chain costs, while regasification is the least of any of the
shares ongoing oversight over the safety of LNG facilities cost components. The cost of a regasification facility
in operation. varies considerably; however, the majority of these costs
arise from the development of the port facilities and
THE LNG SUPPLY CHAIN the storage tanks. A 700 MMcfd regasification terminal,
Natural gas is sent through the pipeline network to which converts methane from a liquid to a gas, may cost
liquefaction facilities for conversion to LNG. These $500 million or more.39
liquefaction facilities, which convert methane from a
gas to a liquid, are major industrial complexes, typically LNG IN THE UNITED STATES
costing $10 billion or more, with some costing as much The U.S. was historically an importer of LNG, with
as $50 billion.37 Once liquefied, the LNG is typically greater regasification capacity than any other country
transported by specialized ships with cryogenic, or except Japan. As of 2022, there were 10 LNG receiving
insulated, tanks. or regasification terminals in the continental U.S., with
approximately 18 Bcfd of import capacity.40 All of these
When LNG reaches an import (regasification) terminal, facilities are on the Gulf or East coasts, or just offshore.
it is unloaded and stored as a liquid until ready for Additionally, the U.S. can import regasified LNG via
sendout. To send out the gas, the regasification terminal pipeline into New England from the Saint John LNG
warms the LNG to return it to a gaseous state and then terminal (formerly Canaport) in New Brunswick, Canada.
sends it into the pipeline transportation network for The Energia Costa Azul LNG terminal in Baja California,
delivery to consumers. Currently, global regasification Mexico, which became operational in 2008, provided for
is approximately 2.15 times the amount of liquefaction the flow of re-gasified LNG from Mexico into Southern
capacity.38 Excess regasification capacity provides California. In 2019, Energia Costa Azul received DOE

35 The USCG exercises regulatory authority over LNG facilities which affect the safety and security of port areas and navigable waterways. Specifically,
the USCG is responsible for matters related to navigation safety, vessel engineering and safety standards, and all matters pertaining to the safety
of facilities or equipment located in or adjacent to navigable waters up to the last valve immediately before the receiving tanks. The USCG also has
authority for LNG facility security plan review, approval, and compliance verification and siting as it pertains to the management of vessel traffic in
and around the LNG facility.
36 PHMSA has exclusive authority to establish and enforce safety regulations for onshore LNG facilities. PHMSA inspects LNG facilities and operators
to enforce compliance with the safety standards for LNG facilities used in the transportation of gas by pipeline.
37 See, for example, Cheniere Energy Partners, L.P., Annual Report, SEC Form 10-K, at 4 (February 24, 2017), https://www.sec.gov/Archives/edgar/
data/1383650/000138365017000011/cqp2016form10-k.htm#s569b7029a90e4dd19894f10c84a51e70.
38 Derived from International Group of LNG Importers, The LNG Industry: GIIGNL Annual Report 2022, Key Figures 2021, at 4, https://giignl.org/wp-
content/uploads/2022/05/GIIGNL2022_Annual_Report_May5.pdf.
39 EIA, Understanding Natural Gas and LNG Options, at 218 (November 2016), https://www.energy.gov/sites/prod/files/2016/12/f34/
Understanding%20Natural%20Gas%20and%20LNG%20Options.pdf.
40 See FERC, North American LNG Import Terminals – Existing, Approved not Yet Built, and Proposed (October 26, 2022), https://www.ferc.gov/natural-
gas/lng.

2024 ENERGY PRIMER n 15 n FEDERAL ENERGY REGULATORY COMMISSION

authorization to export natural gas from the U.S. to formerly an import terminal, from which the developers
Mexico and re-export LNG to Free Trade Agreement (FTA) utilized common facilities like docks and storage tanks
and Non-FTA countries. to add liquefaction trains.

Between 1999 and 2012, the U.S. met between 1 to LNG export capacity continues to grow. FERC staff tracks
3 percent of its natural gas demand through LNG existing and proposed LNG export terminals. As of 2022,
imports.41 LNG imports to the U.S. peaked at about there were seven export terminals operating in the
99 Bcf/month in the spring of 2007.42 Subsequently, continental U.S., with approximately 14 Bcfd of export
competition from relatively low-cost U.S. shale gas capacity. See FERC’s website for up-to-date information
production has trimmed imports, affecting Gulf Coast on LNG export terminal projects.46
terminals the most. Currently, less than 1 percent of
U.S. natural gas demand is met through LNG imports.43
Roughly 90 percent of the total LNG delivered to the Natural Gas Processing
United States and Puerto Rico was under long-term and Transportation
contracts in 2021.44 The remainder of the LNG enters the Most natural gas production must be transported via
U.S. under short-term contracts or as spot cargoes. The pipeline to natural gas consumers. To get gas from
cost for the natural gas commodity to be liquified and the wellhead to consumers requires a vast network of
exported is generally tied to the closest trading hub to processing facilities and a national network of the more
where the terminal is located. For instance, the cost of than 2.6 million miles of pipelines.47
natural gas feeding into the Sabine Pass export terminal
may be priced off of the Henry Hub trading point.45 Efficient markets require this network to be robust
and allow consumers to access gas from more than
Starting in 2010, numerous proposals to export one production center. Supply diversity tends to
domestically produced LNG were prompted by improve reliability and moderate prices, while supply
increased U.S. natural gas production, largely due to constraints have the effect of increasing prices during
shale gas. No large-scale liquefaction facilities existed peak demand periods.
in the continental U.S. at the time, though the now
non-operational Kenai LNG plant in Nikiski, Alaska had FERC JURISDICTION
produced small volumes since the late 1960s. Cheniere’s The NGA gives FERC comprehensive regulatory
Sabine Pass LNG was the first LNG export terminal in authority over companies that engage in either the sale
the lower 48 US states, shipping its first cargo in 2015. in interstate commerce of natural gas for resale or the
The facility is a large LNG terminal which is capable of transportation of natural gas in interstate commerce.
processing over 4.55 Bcfd of natural gas. Sabine Pass was FERC regulates entry into the transportation market by

41 Derived from EIA, Natural Gas Summary, Imports and Exports, Consumption, U.S., Annual (accessed October 2022), https://www.eia.gov/dnav/ng/
ng_sum_lsum_dcu_nus_a.htm.
42 Derived from EIA, Natural Gas Summary (accessed October 2022), https://www.eia.gov/dnav/ng/ng_sum_lsum_dcu_nus_a.htm.
43 Derived from EIA, Natural Gas Summary, Imports and Exports, Consumption, U.S., Annual (accessed October 2022), https://www.eia.gov/dnav/ng/
ng_sum_lsum_dcu_nus_a.htm.
44 Derived from Department of Energy, Office of Fossil Energy and Carbon Management, LNG Monthly 2021 (accessed December 2021), https://www.
energy.gov/fecm/articles/lngmonthly-2021.
45 The Sabine Pass export terminal is located along the coast of the Gulf of Mexico in Cameron Parish, Louisiana. The Henry Hub trading point
represents natural gas shipped from the distribution hub in Erath, Lousiana.
46 See FERC, North American LNG Export Terminals – Existing, Approved not Yet Built, and Proposed (October 26, 2022), https://www.ferc.gov/natural-gas/lng.
47 See U.S. Department of Transportation, Pipeline and Hazardous Materials Safety Administration, 2010+ Pipeline Mileage and Facilities, Gas Pipeline
Miles by System Type table (January 28, 2020), https://www.phmsa.dot.gov/data-and-statistics/pipeline/pipeline-mileage-and-facilities.

2024 ENERGY PRIMER n 16 n FEDERAL ENERGY REGULATORY COMMISSION

Figure 1-7: Natural Gas Production and Delivery

Source: U.S. Energy Information Administration48

issuing certificates of public convenience and necessity graphic above. This involves gathering the gas from
under section 7 of the NGA, 15 U.S.C. § 717f, subject to the wellhead, processing the gas to remove liquids and
such conditions as FERC deems appropriate. To this impurities, and moving the processed (dry) natural
end, FERC reviews applications for the construction and gas to pipelines. The composition of raw, or wellhead,
operation of interstate natural gas pipelines. FERC has no natural gas differs by region. Consequently, processing
jurisdiction over pipeline safety or security, but actively will differ depending on the quality of the natural gas.
works with other agencies (such as USCG and PHSMA)
with safety and security responsibilities, particularly Once a well is constructed and production starts, the
when FERC is overseeing restoration efforts along the natural gas moves into gathering pipelines, typically
pipeline right-of-way which may take years after a small-diameter lines that move the gas from the
pipeline goes into service. Applicants for a certificate wellhead to either a processing plant or a larger pipeline.
must certify in their applications that they will comply Natural gas may also be dissolved in oil underground,
with PHMSA safety standards. The USCG provides but separates out from the oil as it comes to the surface
FERC with a recommendation on the suitability of the due to reduced pressure. In these instances, the oil
waterway to support marine traffic associated with the and natural gas are sent to separate processing
proposed LNG facility. FERC also regulates market exit facilities. Where it does not separate naturally,
through its authority to abandon certificated service and processing is required.
facilities, 15 U.S.C. § 717f(b).
At the processing plant, various products (NGLs) and
PROCESSING contaminants (e.g., sulfur and carbon dioxide) are
The midstream segment of the natural gas industry, removed from the incoming wet natural gas stream
between the wellhead and pipelines, is shown in the and the gas is dehydrated. The extracted NGLs are then

48 EIA, Natural Gas Explained: Delivery and Storage of Natural Gas (February 18, 2020), https://www.eia.gov/energyexplained/natural-gas/delivery-
and-storage.php.

2024 ENERGY PRIMER n 17 n FEDERAL ENERGY REGULATORY COMMISSION

 separated into individual components by fractionation,
Natural Gas Infrastructure which uses the different boiling points of the various
The United States natural gas market relies hydrocarbons to separate them. The extracted liquids
on extensive infrastructure: are high-value products used by the petrochemical
industry, refineries, and other industrial consumers.
• Roughly 303,000 miles of large-diameter, Once processing is completed, the natural gas is
high-pressure inter- and intrastate of pipeline quality and is ready to be moved by
pipelines make up the mainline pipeline intrastate and interstate pipelines. There were about
transportation network, run by more than 480 natural gas processing plants operating in the
210 companies. U.S. in 2017.50

• More than 1,400 compressor stations NATURAL GAS TRANSPORTATION

maintain pressure on the natural gas Interstate pipelines account for approximately two
pipeline network. thirds of the natural gas pipeline miles in the U.S. and
carry natural gas across state boundaries. Intrastate
• More than 5,000 receipt points, 11,000 pipelines account for the remaining one third, and
delivery points, and 1,400 interconnection have similar operating and market characteristics.51
points implement the flow of gas across
the United States. The interstate network moves dry natural gas from
producing areas to LDCs, large industrial customers,
• More than 20 hubs or market centers electric power plants, and natural gas storage facilities.
provide additional interconnections. The pipelines, which generally range in diameter from
16 inches to as large as 48 inches, move gas between
• Over 400 underground natural gas storage major hubs to lateral lines. Smaller diameter delivery
facilities increase the flexibility of the laterals then transport gas to end-users and LDCs.
system.
The large pipelines are known as mainline transmission
• 49 Pipeline border crossings enable natural pipelines and typically consist of steel sufficient to
gas to be imported or exported. meet standards set by PHMSA. These pipes are also
coated to reduce corrosion. Smaller distribution lines,
• There are 10 LNG import facilities and 100 which operate under much lower pressures, may be
LNG peaking facilities (stored gas held for made of plastic materials, which provide flexibility
peak demand periods). and ease of replacement.

• More than 1,300 local distribution 49 EIA, About U.S. Natural Gas Pipelines (2007/2008), https://www.eia.
companies deliver natural gas to retail gov/naturalgas/archive/analysis_publications/ngpipeline/index.html.
50 Derived from EIA, Natural Gas Annual Respondent Query System,
customers.
EIA-757 data through 2017 (January 2019), https://www.eia.gov/
Source: U.S. Energy Information Administration49 cfapps/ngqs/ngqs.cfm?f_report=RP9&f_sortby=&f_items=&f_year_
start=&f_year_end=&f_show_compid=&f_fullscreen.
51 See U.S. Department of Transportation, Pipeline and Hazardous
Materials Safety Administration, 2010+ Pipeline Mileage and
Facilities, Gas Distribution Pipeline Miles, Gas Gathering Pipeline
Miles, and Hazardous Liquid Pipeline Miles and Tanks tables (January
28, 2020), https://www.phmsa.dot.gov/data-and-statistics/pipeline/
pipeline-mileage-and-facilities.

2024 ENERGY PRIMER n 18 n FEDERAL ENERGY REGULATORY COMMISSION

Compressor stations are typically located every 50-100 There are dozens of natural gas hubs in the country,
miles along the pipe to add or maintain the pressure with over 20 major hubs. The dominant benchmark
of the natural gas, propelling it through the pipeline. point in the physical natural gas market is the Henry
Natural gas travels through pipelines at high pressures, Hub, which is strategically located in the Gulf Coast’s
ranging from 200 pounds per square inch (psi) to 1,500 producing area at a series of pipeline connections to
psi. The natural gas is compressed by turbines, motors, the East Coast and Midwest consumption centers. It
or engines. Most facilities power the compressors with is located in south central Louisiana, in the town of
turbines and reciprocating natural gas engines that use Erath, and comprised of 12 delivery points and 4
some of the gas from the line to fuel their operations, major receipt points. More than a dozen major
while others rely on very large electric motors. natural gas pipelines converge and exchange gas
at the Henry Hub.
See the EIA’s website52 for a map of interstate and
intrastate pipelines and the Interstate Natural Gas In addition to market hubs, other major pricing
Assocation of America’s (INGAA) website53 for an interactive locations include citygates. Citygates are the locations
map of major interstate natural gas pipelines in the U.S. at which distribution companies receive gas from
a pipeline. Citygates at major metropolitan centers
Metering stations are placed along the pipelines to offer another convenient point at which to price
measure the flow of natural gas as it moves through natural gas.
the system. Movement of natural gas along a pipeline
is controlled in part by a series of valves, which can be Physical natural gas can be bought and sold at the Henry
opened to allow the gas to move freely or closed to stop Hub or other hubs around the country in daily and
gas flow along a section of pipe. Large valves may be monthly markets. In addition, the New York Mercantile
placed every 5 to 20 miles along the pipeline. Exchange (NYMEX) established a natural gas futures
contract54 centered at the Henry Hub in 1990 that gained
Pipeline operators and engineers use supervisory widespread acceptance and is generally used as the
control and data acquisition (SCADA) systems to track reference price for natural gas in the U.S.
and control the natural gas as it travels through the
system. SCADA is a centralized communication system Distribution lines typically take natural gas from the
that collects, assimilates, and manages the meter and large transportation pipelines, reduce the pressure,
compressor station data. odorize the gas, and deliver the gas to retail customers.
While some large consumers – industrial and electric
HUBS AND CITYGATES generation, for example – may take service directly off
A key element of the pipeline transmission and a transmission pipeline, most receive their natural gas
distribution network is the natural gas hub. Typically, a through their local gas utility, or LDC. These companies
hub is a specific point where pipeline interconnections typically purchase natural gas and ship it on behalf of
allow the transfer of gas from one pipeline to another. their customers, taking possession of the natural gas
Hubs also provide a convenient location to establish from the pipelines at local citygates and delivering it to
natural gas prices. customers at their meters.

52 See EIA, Natural gas explained, Natural gas pipelines (November 5, 2021), https://www.eia.gov/energyexplained/natural-gas/natural-gas-pipelines.php.
53 See INGAA, Natural Gas Pipelines (n.d.), https://custom.envisionmaps.net/ingaa/default.html.
54 Futures contracts allow market participants to manage price risk and to protect against price volatility. See Chapter 5: Trading and Capital Markets
for more information on futures contracts.

2024 ENERGY PRIMER n 19 n FEDERAL ENERGY REGULATORY COMMISSION

Figure 1-8: Sabine Pipe Line LLC., Henry Hub

Acadian Bridgeline Columbia Gulf Jefferson NGPL

Gulf South Island

Sabine Mainline
Texas & Louisiana

Sea Southern Texas Trunkline Trunkline

Robin Natural Gas High Low

NOTE: Arrows indicate direction of flow  Source: EnLink Midstream55

Some states allow competition in natural gas service basis. This service may not be available during periods
at the local level. In these circumstances, natural gas of peak demand. Due to the interruptible nature of
marketers purchase the natural gas and arrange for it the service, customers pay lower rates than those that
to be shipped over both the interstate pipeline network contract for firm service.
and the LDC system.
A secondary market for firm transportation rights
PIPELINE SERVICES enables shippers to sell their pipeline capacity to a
Customers or shippers have a choice between a variety of third party through FERC’s capacity release program.56
services on interstate pipelines. One is firm transportation Services offered in the primary market can be offered
service in which an agreement is executed directly in the secondary market by the holder of the primary
between the pipeline and a customer, providing the service. Released capacity offers market participants the
customer with rights to transport natural gas from primary opportunity to buy and sell from each other as well as
receipt point(s) to delivery points. Shippers with firm from the pipeline. Holders of firm capacity can release
transportation service receive priority to use their capacity segments rather than their full holdings, provided
over those customers without firm capacity. segmentation is operationally feasible on the interstate
pipeline’s system. In addition, firm capacity holders can
A shipper can also contract for interruptible transportation also make deliveries on their own to secondary points
service, which is offered to customers on an as-available on the pipeline system to the extent capacity is available.

55 See https://sabinepipeline.enlink.com/wp-content/uploads/2019/12/Sabine-Pipe-Line-LLC-Henry-Hub-Schematic-PDF.pdf.
56 See Order No. 636, FERC Stats. & Regs. ¶ 30,939 at P 88 (1992).

2024 ENERGY PRIMER n 20 n FEDERAL ENERGY REGULATORY COMMISSION

Some interstate pipelines also provide “no-notice to file rate schedules with FERC and to notify FERC
service” which enables pipeline customers to receive of any subsequent changes in rates and charges. On
delivery of natural gas on demand up to their firm submission of a pipeline tariff revision, FERC may hold
entitlements on a daily basis without incurring daily a hearing to determine whether the pipeline has met its
balancing and scheduling penalties. No-notice service burden to show that the amended rates and charges are
enables customers to receive natural gas volumes just and reasonable.
that have not been scheduled and thereby helps meet
unexpected requirements caused, for example, by Under sections 4 and 5 of the NGA, 15 U.S.C. §§ 717c and
unexpected changes in temperature.57 This service 717d, FERC regulates the rates, terms, and conditions
is especially helpful to LDCs that must serve their of jurisdictional transportation and sales, ensuring that
load without knowing their exact load level each day. rates and charges for such services, as well as all rules,
No-notice service is generally priced at a premium to regulations, practices, and contracts affecting those rates
firm transportation service and is provided through a and charges, are just and reasonable and not the product
combination of storage and transportation services. of undue discrimination (15 U.S.C. §§ 717c(a) and (b)).
Shippers may temporarily release this service to other
parties, using FERC-approved capacity release guidelines. INTERSTATE TRANSPORTATION RATES
Pipeline transportation rates can be priced on zones or
Finally, natural gas pools are points on a pipeline’s system miles, or be a fixed postage stamp rate. In zonal pricing,
where natural gas suppliers aggregate supplies for sale the price of transportation varies by the location of the
to buyers. They can be physical points on the pipeline receipt and delivery points across a series of geographic
system, such as the Henry Hub in Louisiana, but they zones, and the rate is fixed within each zone and across
are most often “paper” points, such as the TCO Pool on different zones. Transco Gas Pipe Line is an example of
Columbia Gas Transmission’s system. A paper pool (also a pipeline that uses zonal pricing. Under postage stamp
called a virtual point) is not a physical point but is used rates, shippers pay the same rate for transportation
solely for nomination and scheduling purposes. Pooling is regardless of how far the natural gas is moved, similar
an administratively efficient process that allows suppliers to the way a postage stamp costs the same amount
to aggregate supply together at one location on the regardless of whether a letter is sent to New York or
pipeline system, rather than having to tie each individual California. Pipelines using postage stamp rates include
well or receipt point to a buyer, and deliver from the pool Northwest Pipeline, Colorado Interstate Gas, and
to multiple delivery points. Each interstate pipeline is Columbia Gas Transmission.
required to have a pooling service and the service is often
free. Natural gas prices are often set for the market at the With mileage-based rates, shippers pay based on the
major pooling points on the interstate pipeline systems. distance between where the gas enters the pipeline and
Thus, adding capacity to enable additional volumes to where it is taken out of the pipeline. The rate is designed
access pooling points benefits and enhances the efficiency to reflect the distance involved in transporting the gas.
of the domestic natural gas market. Gas Transmission Northwest (GTN), for example, uses
mileage-based rates.
FERC JURISDICTION
The NGA requires that interstate natural gas pipelines Other pipelines use hybrid or mixed-rate systems.
charge just and reasonable rates for the transportation Northern Natural Gas, for example, uses both a zonal
and sale of natural gas. To promote compliance with rate for upstream receipts and a postage stamp rate for
this mandate, the NGA requires natural gas pipelines market area deliveries.

57 Id.

2024 ENERGY PRIMER n 21 n FEDERAL ENERGY REGULATORY COMMISSION

Figure 1-9: Pipeline Capacity Scheduling

9 a.m.
7 a.m. 1 p.m. 6 p.m. 10 a.m. 2:30 p.m. 7 p.m.
DAY 1 DAY 2
Requirement

Trade

Schedule (Timely
Cycle Nomination)

Re-Schedule(Evening
Cycle Nomination)

Begin Gas Flow

Re-Schedule (Intraday 1
Cycle Nomination)

Re-Schedule (Intraday
2 Cycle Nomination)

Re-Schedule (Intraday 3
Cycle Nomination)
Daily Gas
Trading Period

Cycle Cycle Description

Timely: Nomination sent by 1 p.m. (Central Clock Time), to be confirmed by 4:30 p.m., and to be effective for gas flow starting
T
at 9 a.m. next gas day.

E Evening: Nominations sent by 6 p.m., to be confirmed by 8:30 p.m. for gas flow at 9 a.m.

ID1 Intraday 1: Nominations sent by 10 a.m., to be confirmed by 12:30 p.m. for gas flow at 2 p.m.

ID2 Intraday 2: Nominations sent by 2:30 p.m. to be confirmed by 5 p.m. for gas flow at 6 p.m.

ID3 Intraday 3: Nominations sent by 7 p.m. to be confirmed by 9:30 p.m. for gas flow at 10 p.m.

Source: FERC58

Although pipelines are required to have a cost-based PIPELINE USAGE OR LOAD FACTOR
transportation rate stated in their tariff, many pipelines Load factor measures the use of a pipeline network.
offer shippers service at negotiated rates. These It is the average capacity used at a given point or
negotiated rates are generally below the pipeline’s segment relative to a measurement of maximum
cost-based rates, and pipelines are required to file these or peak available capacity. Customers with a 100
negotiated rate contracts with FERC percent load factor use their maximum capacity
every day; one with a 50 percent load factor uses
SCHEDULING its capacity only half the time. Different types of
Pipelines have rigorous schedules that shippers customers use pipeline capacity differently.
must follow. Typically, shippers nominate natural gas Historically, industrial customers have exhibited
deliveries in the day-ahead market, and may update high load factors and residential customers that
their nominations at various points during the day primarily rely upon seasonal natural gas to heat
in which the natural gas flows. The Pipeline Capacity homes have had lower load factors.
Scheduling graphic illustrates a particular schedule.

58 FERC, Coordination of the Scheduling Processes of Interstate Natural Gas Pipelines and Public Utilities, Order No. 809, FERC Stats. & Regs. ¶ 31,368,
at Appendix (2015).

2024 ENERGY PRIMER n 22 n FEDERAL ENERGY REGULATORY COMMISSION

Pipelines are accustomed to serving different demands, natural gas pipeline network has expanded significantly,
which can affect how much of their capacity is used at which has removed many bottlenecks and enabled
various times. For example, Kern River Gas Transmission access to previously unreached supply areas.
has operated at around 86 percent of capacity since
2005, while Algonquin Gas Transmission’s (Algonquin) This development includes a considerable amount
load factor can be considerably less at times. Algonquin’s of new pipeline capacity in the Northeast, where
pipeline is used more seasonally than Kern River’s, with natural gas production has increased significantly.
Algonquin’s pipeline utilization averaging 90 percent of New pipelines have also increased the flow of Barnett
the pipeline’s capacity during the winter (nearing full Shale gas into the interstate network and have reduced
utilization on very cold days) and averaging 77 percent congestion across the Texas-Louisiana border.
during the summer, spring, and fall. This utilization
pattern reflects the seasonal demand in the Northeast.59 New England, on the other hand, experiences pipeline
constraints on peak demand days during the winter
PARK AND LOAN SERVICE months. Most of the year, there is excess pipeline
Park and loan service (PAL) is a way for shippers to balance capacity into New England. However, when high
their takes of natural gas with their supply, by providing a demand from the power sector coincides with peak
short-term load-balancing service to help shippers meet heating demand from LDC customers, customers
their load. Using the PAL service, shippers can take less without firm (priority) pipeline service compete for the
natural gas than scheduled, thus parking their excess scarce remaining pipeline capacity. This can lead to
supply in the pipeline at times when the demand is lower substantial price volatility in the natural gas spot market.
than anticipated. If demand is higher than expected,
shippers can adjust their take upward, in effect borrowing The Florida Panhandle and Northern California were
natural gas from the pipeline. also some of the most frequently constrained regions
of the country, but each region constructed significant
PAL characteristics include: new pipeline capacity. Conversely, since 2018, natural
• Park and loan services typically generate low revenue gas production has outpaced pipeline capacity in the
and are offered with the lowest service level priority Permian Basin, the second largest shale gas-producing
among all pipeline services. region in the U.S., due to associated natural gas
• Market centers, or hubs, routinely offer these services. production rising with increasing crude oil production.60
• Charges are usually commensurate with interruptible In addition, technological advancements in drilling and
service rates. completion techniques have continuously increased
productivity of new wells in the Permian Basin since
PIPELINE CONSTRAINTS 2010.61 The lack of available infrastructure to transport
AND CAPACITY GROWTH the abundant natural gas to high-demand regions has
Pipeline capacity limits the amount of natural gas supply frequently contributed to prices at the local Waha Hub
that can be delivered to a specific region and, therefore, falling below prices at the Henry Hub.62 To help reduce
is a key factor in regional prices. In recent years, the pipeline constraints, two new intrastate pipeline projects

59 Derived from S&P Global Platts Natural Gas Pipeline Flow data (October 2022).
60 See EIA, The Waha Hub natural gas price continues to fall below the Henry Hub price (Sep. 20, 2022), https://www.eia.gov/todayinenergy/detail.
php?id=53919#.
61 See EIA, Advances in technology led to record new well productivity in the Permian Basin in 2021 (Sep. 30, 2022), https://www.eia.gov/todayinenergy/
detail.php?id=54079.
62 See EIA, The Waha Hub natural gas price continues to fall below the Henry Hub price (Sep. 20, 2022), https://www.eia.gov/todayinenergy/detail.
php?id=53919#.

2024 ENERGY PRIMER n 23 n FEDERAL ENERGY REGULATORY COMMISSION

Kinder Morgan Energy Partners’ Permian Highway the Rockies, while at the same time providing needed
Pipeline and WhiteWater’s Whistler Pipeline, and one supplies into the East. When REX first went into service,
interstate pipeline project, Summit Midstream Partners’ Rockies producers saw a rise in prices. The Rockies gas
Double E Pipeline came online in 2021. The additional flowing eastward displaced natural gas from the Permian
pipeline capacity in 2021 increased the amount Basin. Permian natural gas, in turn, began moving to
of natural gas flowing out of the basin into nearby the Southern California market. Consequently, regional
consuming regions and narrowed the price difference price differences moderated. However, the rapid
between the Waha Hub and the Henry Hub.63 All three increase in Marcellus Shale production pushed Rockies
pipelines have announced expansion projects intended supplies away from the Northeast and caused flows on
to further expand pipeline capacity.64 In addition, Kinder REX to decrease sharply, putting the pipeline at financial
Morgan’s Gulf Coast Express Pipeline Expansion, and risk. In 2014, REX began the process of reversing flows on
EnLink Midstream’s Matterhorn Express Pipeline will parts of the pipeline to move natural gas from the East
likely add additional takeaway capacity in 2023 and to the Midwest. This development makes more Rockies
2024, respectively.65 The Oasis Pipeline Modernization natural gas available to western markets, and more
Project was completed in early 2023 will also add Midcontinent production available for the Gulf Coast and
additional capacity.66 The additional pipeline capacity Southeast states.
in the Permian Basin would allow producers to flow
additional natural gas to demand centers in Mexico and LOCAL DISTRIBUTION
along the Texas Gulf Coast.67 Distribution lines typically take natural gas from the
large interstate pipelines and deliver the natural gas
Building a pipeline project requires careful planning, to retail customers. While some large consumers –
as the projects typically entail significant costs that industrial and electric generators, for example – may
must be recovered over years of operations. However, take service directly off an interstate pipeline, most
unanticipated changes in supply and demand patterns receive their natural gas through their LDC. The LDCs
can have unexpected effects on even the best-planned typically purchase natural gas and ship it on behalf of
projects. For example, one of the largest additions to their customers, taking possession of the natural gas
the natural gas infrastructure came when the 1.8-Bcfd from interstate pipelines at local citygates and deliver
Rockies Express Pipeline (REX) was completed in 2009.68 the natural gas to their customers at the customer’s
REX was designed to move natural gas from Wyoming to meter. According to PHMSA, this distribution involves
eastern Ohio in order to relieve pipeline constraints that a network of smaller pipelines, as well as smaller scale
bottled up production and depressed prices in compressors and meters.

63 Id.
64 Summit Midstream Partners’ Double E Pipeline’s Red Hills Lateral was approved in February 2023.
65 See EIA, EIA expects that natural gas production in the Permian Basin will increase in 2022 and 2023 (May 26, 2022), https://www.eia.gov/naturalgas/
weekly/archivenew_ngwu/2022/05_26/#itn-tabs-0.
66 See EIA, Pipeline Projects announced to expand Permian Natural gas capacity (August 4, 2022), https://www.eia.gov/todayinenergy/detail.
php?id=53319.
67 See EIA, EIA expects that natural gas production in the Permian Basin will increase in 2022 and 2023 (May 26, 2022), https://www.eia.gov/naturalgas/
weekly/archivenew_ngwu/2022/05_26/#itn-tabs-0.
68 Tallgrass Energy and Phillips 66, Rockies Express Pipeline (REX), Rockies Express System Map (n.d.), https://pipeline.tallgrassenergylp.com/Content/
REX/REX_FERC_Web_Map.pdf.

2024 ENERGY PRIMER n 24 n FEDERAL ENERGY REGULATORY COMMISSION

Natural Gas Storage new storage capacity, even though the company cannot
Although natural gas production has risen steadily demonstrate it lacks market power (15 U.S.C. § 717c(f)).
since 2005 because of the increase in shale gas To make this authorization, FERC must determine that
production, day-to-day production remains relatively market-based rates are in the public interest and are
steady throughout the year. Demand, however, changes needed to encourage the construction of new capacity,
considerably with the seasons. Natural gas storage and that customers are adequately protected.
enables producers and purchasers to store gas during
periods of relatively low demand – and low prices – then STORAGE FACILITIES
withdraw the natural gas during periods of relatively The bulk of the storage capacity in the U.S. is below
higher demand and prices. ground. Differing cost and operational characteristics
affect how each facility is used:
Working gas storage capacity, as tracked by EIA, totaled • Deliverability rate is the rate at which inventory
more than 4,844 Bcf in 2020.69 The amount injected or can be withdrawn. The faster the natural gas
withdrawn is the difference between production and can be removed from storage, the more suitable
demand. Storage capacity adds flexibility to pipeline the storage facility is to helping serve rapidly
and distribution systems and helps moderate prices changing demand.
by providing an outlet for excess natural gas during • Cycling capability is the ability of the resource
periods of low demand. Storage facilities also provide to quickly allow injections and withdrawals,
a readily accessible supply in periods of high demand. which is useful for balancing supply and demand.
Some natural gas can also be stored in the pipelines as Salt caverns tend to have high withdrawal and
linepack, in which more molecules of gas are held in a injection rates, enabling them to handle as
segment of pipeline under greater-than-normal pressure. many as a dozen withdrawal and injection
cycles each year. LNG storage also demonstrates
EIA’s weekly storage report provides a high-level these capabilities.
snapshot of the natural gas supply and demand balance.
EIA releases its storage report at 10:30 a.m. eastern Natural gas in an underground storage facility is divided
time (ET) on Thursdays. The price for natural gas into two general categories, base gas and working gas.
futures can change dramatically within seconds of the Base gas is the volume of natural gas, including native
report’s release. If the reported injection or withdrawal gas70, needed as a permanent inventory in a storage
significantly differs from market expectations, the price reservoir to maintain adequate reservoir pressure
for natural gas futures may rise or fall. and deliverability rates throughout the withdrawal
season. Working gas is the volume of natural gas in the
FERC JURISDICTION reservoir above the designed level of base gas and
The underground storage of natural gas has historically that can be extracted during the normal operation of
been critical in assuring that the needs of natural gas the storage facility.
customers are met. The Energy Policy Act of 2005
added a new section to the NGA stating that FERC may Most of the nation’s natural gas storage is in depleted
authorize natural gas companies to provide storage reservoirs (former oil and gas fields). These facilities
and storage-related services at market-based rates for reuse the infrastructure – wells, gathering systems,

69 See EIA, Underground Natural Gas Storage Capacity, Total Working Gas Capacity, Annual (October 2022), https://www.eia.gov/dnav/ng/ng_stor_
cap_a_EPG0_SACW0_Mmcf_a.htm.
70 Native gas refers to natural gas found in its original or natural state in underground reservoirs. Native gas is not associated with crude oil or other
hydrocarbon resources.

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Figure 1-10: Underground Natural Gas Storage Facilities in the Lower 48 States

Source: U.S. Energy Information Administration72

and pipeline connections – originally created to Salt cavern formations exist primarily in the Gulf
support the field when it was producing. About 50 Coast region. These air- and water-tight caverns
percent of total capacity goes to base gas used to are created by removing salt through solution-
maintain operating pressure at the facility, and mining, leaving a cavern that acts as a pressurized
inventory usually turns over once or twice a year.71 vessel. Little basegas is required, which allows
inventory to turn over as many as a dozen times
Other storage facilities reside in aquifers that have during the year, and results in high injection and
been transformed into natural gas storage facilities. withdrawal rates. Salt caverns generally hold smaller
These are mostly in the Midwest. These aquifers consist volumes than depleted-reservoir or aquifer gas
of water-bearing sedimentary rock overlaid by an storage facilities.
impermeable cap rock. Aquifers are the most expensive
type of natural gas facility because they do not have Natural gas may also be stored in above-ground
the same retention capability as depleted reservoirs. tanks as LNG. There is LNG storage at all of the
Therefore, base gas can be well over 50 percent of the onshore LNG-receiving terminals, and there are
total natural gas volume. This makes the facility more about a hundred standalone LNG storage facilities in
sensitive to withdrawal and injection patterns, so the U.S., as well. LNG ships can also serve as storage,
inventory usually turns over just once a year. depending on timing and economics. LNG storage is

71 See EIA, Map of Storage Facilities (2020), https://www.eia.gov/naturalgas/ngqs/images/storage_2020.png.

2024 ENERGY PRIMER n 26 n FEDERAL ENERGY REGULATORY COMMISSION

Figure 1-11:Types of Underground Storage Facilities previous winter, and the temperatures over the injection
season, U.S. working gas in storage will typically be
between 80 and 90 percent full when the official winter
season begins on November 1.

STORAGE SERVICE AND USES

Approximately 133 entities – including interstate and
intrastate pipeline companies, LDCs, and independent
storage service providers – operate the approximately
412 underground storage facilities active in the
continental U.S.75 Facilities operated by interstate
pipelines and many others are operated on an open-
access basis, with much of the working gas capacity
available for use on a nondiscriminatory basis.
A. Salt Caverns D. Depleted Reservoirs
B. Mines E. Hard-Rock Caverns The ability to store large quantities of natural gas
C. Aquifers improves reliability and usually has a moderating
influence on natural gas prices. Storage inventory
Source: U.S. Energy Information Administration72 augments natural gas supply during the winter, and
acts as an additional demand component during the
summer injection season. The storage injection season
highly flexible, allowing multiple inventory turns per typically starts April 1 and continues through October 31,
year with high injection and withdrawal rates. when demand for natural gas heating is lowest. Storage
withdrawals generally start in November and last
REGIONAL STORAGE throughout the winter.
The EIA divides the U.S. into five storage regions:
East, Midwest, South Central, Mountain, and Pacific.73 The ability to use storage to provide for winter peaks
Currently, about a third of the underground storage creates an intrinsic storage value. This is the value from
in the U.S. sits in the South Central region in a mix of buying during cheaper periods of the year for use during
depleted reservoirs, aquifers, and high-deliverability higher-cost seasons. Depleted reservoirs or aquifers –
salt caverns. Close to one third of the South Central with limited ability to turn over inventory – support this
region’s working gas capacity is in these purpose-built type of use. Local distribution companies or pipelines
salt caverns. The East and Midwest each represent store their natural gas in these facilities to ensure
about a quarter of working gas capacity, generally adequate supplies for peak seasons, balance load, and
near major population centers. The remaining diversify their resources.
roughly 1/5 of working gas capacity is located in
depleted fields throughout the Mountain and Pacific Storage may be priced at cost-based or market-based
regions.74 Depending on storage levels at the end of the rates. FERC may approve market based rates for storage

72 See EIA, The Basics of Underground Natural Gas Storage, Figure 1 (November 16, 2015), https://www.eia.gov/naturalgas/storage/basics/.
73 EIA, Weekly Natural Gas Storage Report, Notes and Definitions (n.d.), http://ir.eia.gov/ngs/notes.html.
74 Derived from EIA, Underground Natural Gas Working Storage Capacity, data for November 2021 (August 31, 2021), https://www.eia.gov/naturalgas/
storagecapacity.
75 Derived from EIA, Natural Gas Annual Respondent Query System, EIA-191 data through 2021 (accessed October 2022), https://www.eia.gov/
naturalgas/ngqs/#?report=RP7&year1=2021&year2=2021&company=Name.

2024 ENERGY PRIMER n 27 n FEDERAL ENERGY REGULATORY COMMISSION

operators that lack market power.76 Pricing mechanisms account the prices at which the NYMEX futures contracts
for low-cycling depleted fields and aquifers may use a are trading. They may also reflect the storage volume,
traditional cost-of-service structure, including: the number of times the natural gas will be cycled, the
• Capacity charges for firm contract rights to length of the contract and the timeframe it covers and
physical storage capacity the maximum daily quantity that may be injected or
• Deliverability charges for transportation to and withdrawn. Energy marketers have increasingly used
from the storage facility these facilities as they try to profit from price volatility. It
• Withdrawal charges for the removal of natural gas is also attractive to shippers, industrial consumers with
from storage uncertain loads, and natural gas-fired generators whose
• Injection charges for the injection of natural gas needs change rapidly.
into storage
Pipelines also offer storage service, both firm and
A salt cavern, with its ability to turn over inventory interruptible, as part of their open access transportation
frequently and quickly, allows for additional uses, service under FERC rules. Rates are rarely market-based.
enabling users to capture extrinsic value. Many salt Instead, prices are based on cost of service, with rates
dome facilities can cycle between injection and containing reservation and usage components for firm
withdrawal at almost a moment’s notice, giving users service and a usage component for interruptible.
greater flexibility. Entities contracting for storage
capacity may move natural gas in and out of storage MARKET EFFECTS
as prices change in attempts to maximize profits Storage can mitigate large seasonal price swings by
or minimize costs. Storage may be a component in absorbing natural gas during low demand periods and
producer or consumer hedging strategies, helping them making it available when demand rises.
to manage the risk of price movements. Further, storage
helps shippers avoid system imbalances and associated Further, storage levels can affect the market’s
penalties, and supports swing gas supply services, which expectations about prices during the coming winter
are short-term contracts that provide flexibility when high-demand season. The amount of natural gas in
either the supply of gas from the seller, or the demand storage in November is a key benchmark of the natural
for natural gas from the buyer, are unpredictable. gas industry’s ability to respond to changes in winter
Storage also facilitates title transfers and parking and weather. Higher storage levels tend to reduce natural
lending services. This helps shippers balance daily gas futures prices; lower storage levels tend to increase
receipts and deliveries, manage their overall supply them, all other market conditions being equal.
portfolio, or take advantage of price movements.
Consequently, storage operators have begun offering Although the Shale Revolution has added significant
a more varied menu of services, and users have begun supplies to the U.S. natural gas market, it has also
using storage as a commercial tool and as part of a reduced the seasonal value of natural gas somewhat.
comprehensive supply portfolio strategy. The price differentials between winter and summer have
been reduced and this has had an impact on storage
Merchant storage, frequently using salt caverns, uses development in the U.S. Several storage developers that
market-based prices, recognizing the dynamics affecting received a certificate from FERC have elected not to build
value at any given point in time. Prices often take into their storage facility due to this development.

76 See Order No. 678, Rate Regulation of Certain Natural Gas Storage Facilities, 18 CFR Part 284 (2006).

2024 ENERGY PRIMER n 28 n FEDERAL ENERGY REGULATORY COMMISSION

Natural Gas Markets and Trading Marketers can be producers of natural gas, pipeline
The natural gas industry in the U.S. is highly competitive, marketing affiliates, LDC marketing affiliates,
with thousands of producers, consumers, and independent marketers, financial institutions, or large-
intermediate marketers. Some producers have the volume users of natural gas. Some marketing companies
ability to market their natural gas and may sell it directly may offer a full range of services, marketing numerous
to LDCs, to large industrial buyers and to power plants. forms of energy and financial products, while others
Other producers sell their natural gas to marketers may be more limited in their scope. For instance, most
who aggregate natural gas into quantities that fit the marketing firms affiliated with producers do not sell
needs of different types of buyers and then transport natural gas from third parties; they are more concerned
the natural gas to their buyers. with selling their own production and hedging to protect
their profit margin from these sales.
Most residential and commercial customers purchase
natural gas from a LDC. In contrast, many industrial Generally speaking, there are five categories of
customers and most power plants have the option marketing companies: major nationally integrated
to purchase natural gas from a marketer or producer marketers, producer marketers, small geographically
instead of from the LDC, thereby avoiding any focused marketers, aggregators, and brokers.
LDC charges. • Nationally integrated marketers offer a full range of
services, and market numerous different products.
Historically, natural gas pipelines served as natural They operate on a nationwide basis and have large
gas merchants, buying natural gas at the wellhead amounts of capital to support their trading and
and selling the transportation and commodity as a marketing operations.
bundled product directly to consumers. However, in • Producer marketers are those entities generally
1992, FERC Order No. 636 restructured the natural gas concerned with selling their own natural gas
market by regulating interstate pipelines as open access production or the production of their affiliated natural
transporters.77 Although interstate pipelines may buy gas production company.
and sell natural gas, they now do so for operational • Smaller geographically focused marketers target
reasons and no longer act as merchants. As noted particular regional areas and specific natural gas
earlier, interstate pipelines transport natural gas at rates markets. Many marketing entities affiliated with LDCs
approved by FERC. are of this type, focusing on marketing natural gas for
the geographic area in which their affiliated distributor
NATURAL GAS MARKETERS operates.
Most natural gas trading in the U.S. is performed by • Aggregators generally gather small volumes from
natural gas marketers. Any party engaging in the sale various sources, combine them and sell the larger
of natural gas can be termed a marketer; however, volumes for more favorable prices and terms than
marketers are usually specialized business entities would be possible selling the smaller volumes
dedicated solely to transacting in the physical and separately.
financial energy markets. It is commonplace for natural • Brokers are a unique class of marketers because they
gas marketers to be active in a number of energy never take ownership of natural gas themselves. They
markets, taking advantage of their knowledge of these simply act as facilitators, bringing buyers and sellers of
markets to diversify their business. natural gas together.

77 Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation; and Regulation of Natural Gas Pipelines After
Partial Wellhead Decontrol, Order No. 636, FERC Stats. & Regs. ¶ 30,939 (1992).

2024 ENERGY PRIMER n 29 n FEDERAL ENERGY REGULATORY COMMISSION

Most marketing companies have significant operations PHYSICAL TRADING OF NATURAL GAS
capabilities in addition to the core trading group. Physical natural gas contracts are negotiated between
These support staff are responsible for coordinating buyers and sellers. There are many types of physical
everything related to the sale and purchase of natural gas contracts, but most share some standard
physical and financial natural gas, including arranging specifications, including the buyer and seller, the price,
transportation and storage, posting completed the amount of natural gas to be sold (usually expressed
transactions, billing, accounting, and any other activity in a volume per day), the receipt and delivery points,
that is required to complete the purchases and sales the tenure of the contract (usually expressed in number
arranged by the traders. These companies also have of days, beginning on a specified day), and other terms
risk-management operations that are responsible for and conditions. Other special terms and conditions can
ensuring that the traders do not expose the marketing outline such things as the payment dates, quality of
company to excessive risk. These companies also have the natural gas to be sold, and any other specifications
risk-management operations that are responsible for agreed to by both parties. Physical natural gas contracts
ensuring that the traders do not expose the marketing are negotiated between buyers and sellers over the
company to excessive risk. phone or executed on electronic bulletin boards and
e-commerce trading sites.
HUB PRICES AND BASIS
Natural gas is traded at different locations throughout There are three main types of physical natural gas
the country and the prices at specific hubs and citygates contracts: swing contracts, baseload contracts, and
are determined by the relative supply and demand for firm contracts:
natural gas at the particular locations. Additionally, the • Swing (or interruptible) contracts are usually
difference between the Henry Hub price and another hub short-term contracts between one day and one
(or citygate) is called the location differential, or basis. month in length. These contracts are the most
flexible, and are usually put in place when either
Basis usually reflects the variable cost to transport the supply of gas from the seller, or the demand
natural gas between the Henry Hub and another hub. for natural gas from the buyer, are not guaranteed.
Basis can change, sometimes dramatically, depending • Baseload contracts are similar to swing contracts.
on local market conditions, and can widen considerably Neither the buyer nor seller is obligated to deliver
when pipelines between two points are congested. Basis or receive the exact volume specified. However,
in excess of transportation costs results from pipeline it is agreed that both parties will attempt to
constraints and lack of pipeline competition. The natural deliver or receive the specified volume, on a
gas price at a hub in Florida, for example, would be the best-efforts basis.
price at the Henry Hub and the basis to the Florida hub. • Firm contracts are different from swing and
baseload contracts in that both parties are legally
In addition to being the country’s benchmark hub, the obligated to either receive or deliver the amount
Henry Hub is also the delivery point for the NYMEX of natural gas specified in the contract. These
natural gas futures contract. Historically, changes in price contracts are used primarily when both the
at the Henry Hub provided a good indicator of how prices supply and demand for the specified amount
were generally changing across the country, however, of natural gas are unlikely to change.
over the past few years, the price at the Henry Hub as
become less reflective of regional price trends outside of
the Gulf Coast.

2024 ENERGY PRIMER n 30 n FEDERAL ENERGY REGULATORY COMMISSION

Price Discovery voluntarily report their monthly bidweek transactions
to publications as well. Publications convert these
SPOT (CASH) MARKET transactions into monthly locational price indexes that
The U.S. natural gas marketplace has a highly are available on the first business day following the
competitive spot, or cash, market where brokers and last day of bidweek. These daily and monthly indexes,
others buy and sell natural gas daily in short-term deals in turn, are referenced in contracts for those firms that
for next-day delivery. The daily spot market for natural do not choose to enter into fixed-price contracts (or are
gas is active, and trading can occur 24 hours a day, seven prohibited from using them by state or local regulators).
days a week. These points include market centers, where The majority of the natural gas that is physically traded
brokers actively trade and prices are established. In is priced off of index prices.
addition to these market centers, natural gas is actively
traded at many other locations, including segments THE FINANCIAL MARKET
of individual pipelines and locations where pipelines In addition to trading physical natural gas, there is
interconnect with LDCs. a significant market for natural gas derivatives and
financial instruments in the U.S. In the financial market,
Spot market transactions are normally conducted on market participants are interested in profiting from
electronic exchanges or by telephone, with the buyer the movement of the price of natural gas rather than
agreeing to pay a negotiated price for the natural gas delivering or receiving natural gas. Financial trades also
to be delivered by the seller at a specified point on the market participants to hedge a price exposure without
next day. Natural gas spot prices reflect daily supply and having to make or take physical delivery of the natural
demand balances and can be volatile. gas commodity. The pricing and settlement of these
financial products are tied to physical natural gas. It is
BIDWEEK estimated that the value of trading that occurs on the
Bidweek is the name given to the last five business days financial market is at least a dozen times greater than the
of a month, when producers sell their core production value of physical natural gas trading.
and consumers buy natural gas for their core needs
for the upcoming month. In 2021, some publications Derivatives are financial instruments that derive their
condensed the bidweek trading period to the first three value from an underlying fundamental – in this case, the
days from within the full, five-day bidweek timeframe.78 price of natural gas. Derivatives can range from being
quite simple to being exceedingly complex. Traditionally,
INDEX PRICES most derivatives were traded on the over-the-counter
Several publications, such as Platts Gas Daily, Natural (OTC) market, although most are now traded via
Gas Intelligence, and Natural Gas Week, survey the exchange-cleared, standardized contracts. Derivatives
market for daily physical transactions that are used to can be used to speculate, or seek to profit from market
form daily indices that are made available the night fluctuations, or to hedge price exposure in other financial
before or the morning of the next business day. Market or physical positions.
participants voluntarily provide this information to
publications, some of which also incorprate ICE trades in More information on financial markets appears in
their indices. Many market participants Chapter 5.

78 See NGI, NGI Adopting Three-Day Natural Gas Bidweek Trading Period, Making Other Changes to Price Index Listings (May 7, 2021), https://www.
naturalgasintel.com/ngi-adopting-three-day-natural-gas-bidweek-trading-period-making-other-changes-to-price-index-listings/.

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