THE NATURAL GAS INDUSTRY
This chapter provides a brief description of the natural gas industry. My intention is to note features of the industry that are especially relevant to the methodology and analysis of this study. The industry is comprised of three levels: production, transmission, and distribution. Although the analysis concentrates on the transmission of gas to local distribution centers, some understanding of the production and distribution levels is helpful.
Since one objective of this study is to provide evidence on the economic justification for federal price and entry regulations of pipelines, a brief review of the relevant regulations is also provided. A historical review of gas regulation reveals an inconsistency between regulations (or changes in regulations) at the wellhead and at the city gate. One consequence of such ad hoc regulation is to limit the ability of city-gate prices to efficiently adjust to changes in wellhead prices. In short, federal intervention has created gas shortages in some periods and surpluses in others.
Natural gas is a simple hydrocarbon that is gaseous when brought to the surface. Methane is the most common form of natural gas. 1 It is found by drilling into porous underground formations called reservoirs. Natural gas is generally produced from gas wells, but it is sometimes jointly produced with crude oil. 2 Small-diameter pipes (or gathering lines) are utilized to collect the gas from the producing wells in the field. In large gas fields, gathering lines deliver the gas and oil to field stations (or lease separators)