NEW MARKETS FOR GAS
Faced with natural gas consumption that fell 27% between 1972 and 1986 and has only recently begun to recover, the natural gas industry must expand to new or under-utilized markets that can fuel future growth. Three markets appear most attractive, offering the possibility of growth in demand for gas of between 1.6 trillion cubic feet and 4.2 Tcf. These three markets are:
- Electric power generation, where gas demand will grow between 1.5 trillion cubic feet and 3.6 Tcf by 2000 to fuel utility plants and plants built by non-utility generators. This market is by far the most attractive, accounting for 85% to 95% of the estimated growth in demand by 2000.
- Natural gas-fueled vehicles. Gas consumption by NGVs could increase by 60 billion cubic feet and perhaps as much as 200 Bcf during this decade.
- Gas cooling. The market for gas cooling, which virtually collapsed between 1970 and 1980, might see only negligible growth of 20 Bcf but could increase by as much as 400 Bcf by 2000.
New technologies will lead to increases in gas use in particular industrial applications, but the industrial sector does not appear to be a growth opportunity. The gas industry will likely focus on protecting industrial loads in the next decade, not in pursuing overall growth in this market.
IMPEDIMENTS TO NEW GAS MARKETS
But before gas can capture new markets in power generation, NGVs or gas cooling, the gas industry must overcome impediments in each market.
To make greater inroads into power generation, the gas industry must overcome customers’ fears that it will be unable to deliver gas at stable prices over the long term. Electric utilities and non-utility generators, sophisticated customers, say they need greater cooperation with the gas industry, including detailed long-term assessments of the ability of the gas industry to deliver more gas reliably.
Gas industry restructuring, including regulatory changes under consideration at the Federal Energy Regulatory Commission, creates further uncertainty in the minds of many. Pipeline companies and power generators are not sure how the restructuring will impact on their dealings, providing further reason for better cooperation and dialogue.
In the gas vehicles market, technical issues are the key impediments as well as a perception by customers that gas may not be available at low prices in the future. Gas producers, pipelines and local distribution companies (LDCs) want improvements in fuel tanks, emission control and vehicle performance. Customers fear being at the mercy of a regulated monopoly — the LDC — for fuel.
For gas cooling, impediments include equipment reliability, the complexity of gas cooling technologies, and the need for greater attention to customer needs by LDCs, including integrated heating and cooling services. Many LDCs continue to regard themselves as selling a commodity rather than a service.
IMPLICATIONS FOR THE GAS INDUSTRY
To overcome these serious impediments to capturing new markets, the natural gas industry should consider two types of initiatives: first, generic — or horizontal — actions that the industry needs to take to assure removal of impediments to all three new markets; and second, a vertical initiative, aimed at the power generation sector, specifically.
Taking Generic Actions
- Developing collaborative market strategies.
Current gas industry activities to capture a new market reflect how each industry segment views the potential of that market in light of its own interests and abilities. Gas companies from each industry segment support initiatives to develop gas use in markets where they see clear benefits. But producers, pipelines, and LDCs need to work together to address industry-wide market issues.
The gas industry needs to coordinate the marketing efforts of the Natural Gas Vehicle Coalition, the American Gas Cooling Center, and the INGAA Power Generation Task Force with the technology advancements of equipment manufacturers, the Gas Research Institute and the Department of Energy. The industry should tap the resources of these groups and establish a program within an organization such as the newly established Natural Gas Council to develop strategies to overcome generic impediments to new market development in power generation, NGV and gas cooling markets.
This program should have a limited life and a capped budget, with specific goals to target the impediments described in this report. Among them:
- Demonstration and commercialization efforts to bring R&D products to market and disseminate information about new technologies.
- Public relations initiatives to overcome customer perception problems and deal with legislative and regulatory impediments.
- Workshops, conferences and forums to help the gas industry understand the impediments and to promote communications between the gas industry and its ultimate customers.
Adiusting RD&D and Commercialization Priorities
The power generation market holds the largest opportunity for the gas industry and needs funding for commercialization. Also, NGV and gas cooling markets need substantial RD&D and commercialization funding, beyond current levels, to ensure that government and industry investments in these markets pay off. Long-term, high risk R&D, funded by the Department of Energy, is also necessary to give natural gas an opportunity to continue to offer consumers innovative solutions to their energy needs.
Linking regulatory issues to customer needs
If the gas industry is truly entering a more competitive era, it will have to shift its attention from the concerns of regulators to the concerns of its customers. The gas industry should sponsor forums where federal and state regulators can discuss fundamental regulatory objectives with gas company representatives and their customers. This would provide regulators with the concerns of customer groups — power generators, NGV owners and owners of gas cooling equipment — outside the formal regulatory proceedings.
Capturing the Power Generation Market
To capture more power generation market opportunities, the industry should take four near-term actions:
- Address natural gas reliability. The different segments of the industry must work together to provide objective information on the gas industry’s ability to meet rejected loads, especially power generation swings, and recommend ways to reduce or eliminate curtailment risks.
- Study and understand emerging electric utility regulatory developments such as demand-side management, integrated resource planning and competitive bidding, to assure that the gas industry can take full advantage of the market opportunities these developments present.
- Offer technical assistance and institutional support for those marketing gas to electric utilities. In particular, the gas industry must understand how state regulators deal with gas price issues when comparing generating alternatives.
- Put greater resources into state-level programs to influence decisions by state regulatory agencies. Gas companies must coordinate their legislative and regulatory efforts more effectively, particularly before environmental agencies, so that the industry is well represented in state and local proceedings.
We found many companies in the gas industry that are pursuing the new and expanding gas markets of power generation, NGVs and gas cooling, as part of their own strategic plans. The analysis contained in this report is based on direct inputs from producers, interstate pipelines, local distribution companies, electric utilities and research organizations. Those interviewed shared their experience and concerns. The interviews formed the basis of our analysis and determined the extent to which a particular issue or problem was identified in this study as an impediment to new gas markets.
In Chapter 1 we describe the four new gas markets examined in this study, their current demand levels, and their projected level of demand growth through the year 2000. In Chapter 2 we present a conceptual framework for classifying and discussing the various impediments to uses of natural gas in these new markets, and provide a detailed comparison of the viewpoints of producers, pipelines, and local distribution companies concerning these impediments. In Chapter 3 we describe the actions that companies in the gas industry are taking to capture new markets and outline the activities of various gas industry organizations that are active in power generation, NGV and gas cooling markets. Finally, in Chapter 4, we analyze the implications of our assessment and present our recommendations to the INGAA Foundation.
Appendix A is the list of questions that we used as a guide during our interviews. Appendix B lists the organizations which we contacted for this study. Appendix C is a compilation of several statistical tables that detail the data used for the projections discussed in Chapter 1. Finally, Appendix D contains a discussion of the sensitivity of new gas markets to wellhead prices and price expectations in support of the findings summarized in Chapter 2.
This study relied on two types of information sources:
- Publications including topical periodicals and reports, market and R&D program descriptions, and legislative and regulatory documentation.
- Interviews with senior managers of producers, pipelines, local distribution companies, electric utilities, as well as experts at gas industry trade associations and RD&D centers, the Edison Electric Institute, and other trade associations. Most of these interviews were conducted in person.