The natural gas industry: lessons for the future of the carbon dioxide capture and storage industry.

• Author: Schwartz, David
• Position: Symposium: Creating a Legal Framework for Sustainable Energy

INTRODUCTION

The United States is one of the world's leading producers of two chemically simple but crucially important gases, carbon dioxide (C[O.sub.2]) and natural gas (C[H.sub.4]). (1) In terms of growth, the two industries are at opposite ends of the spectrum: the "industry" for capturing, sequestering, and storing C[O.sub.2] is incipient at best, whereas the natural gas industry is fully developed, having gone through almost a century of development, regulation, and restructuring. Natural gas is an integral part of the U.S. economy, accounting for almost a fifth of U.S. power generation, as well as being the major source of energy for residential heating purposes. (2) More impressively, the natural gas industry has an incredible infrastructure: over 420,000 natural gas wells in the United States alone (3) produce 18.5 trillion cubic feet of natural gas (4) that is transported through 285,000 miles of pipeline to its various users. (5) The United States also imports some 16% of its natural gas, nearly all of it from Canada via pipeline. (6) Somewhat ironically, it is the combustion of natural gas, along with all other fossil fuels, that has given rise to the infant industry of C[O.sub.2] capture and storage (CCS). CCS represents a major tool in the effort to reduce anthropogenic C[O.sub.2] emissions into the atmosphere, especially for the United States, which relies on fossil fuels for over 85% of its energy needs. (7) And while CCS is only one of a portfolio of measures being considered by policymakers, (8) because it can be used for any large point source of C[O.sub.2], ranging from coal-fired power plants (9) to cement production or the iron and steel industry, (10) CCS is '"the critical enabling technology" that can significantly reduce C[O.sub.2] emissions while still allowing the United States to rely on coal and other fossil fuels in the near future. (11) This is particularly salient for coal, given that the United States possesses the largest recoverable coal reserves on the planet. (12) Thus CCS presents what may be the most feasible and broadly applicable method for reducing C[O.sub.2] outputs that the United States currently possesses in the short- to medium-term.

Many authors and institutions have focused on analyzing CCS because nearly all of the industry's pieces currently exist or are technologically feasible; all that is left is for someone to put them together. (13) It is at this point, however, that difficult questions arise: what will the CCS "industry" look like? Who will own the C[O.sub.2]? How will it be economically feasible? And how will the industry be regulated? While the natural gas industry is not the only analog to CCS, (14) a close examination of the industry and its lessons for CCS has yet to occur. This paper seeks to do exactly that: Part I contains a detailed case study of the natural gas industry and its past and present regulation; Part II gives a brief description of the CCS industry's various moving parts; Part III draws lessons from the case study to the CCS industry; and Part V offers some conclusions.

1. THE NATURAL GAS INDUSTRY

   1. Present Industry Structure

      The natural gas industry is made up of a fairly straightforward structure, starting with natural gas production and processing. Though the discovery and processing of natural gas are deeply involved processes, they are outside the scope of the present analysis. (15) Thus the relevant analysis of the natural gas industry begins once the gas has been discovered, processed, pressurized, and ready for transport.

      1. Pipelines

         Pipelines transfer natural gas from the major production and processing regions of the United States to the major consumption areas. (16) Figure 1 demonstrates this principle as well as the extent of the natural gas pipeline infrastructure.

         Pipeline costs vary widely: factors such as the area's congestion, terrain (e.g., mountains or rivers), population, and environmental concerns can easily double the cost of pipe per unit length. (17) For example, in 2005, new pipeline construction costs ranged from just over $400,000 to over $2.5 million. (18) As all gas transported by the pipelines is heavily pressurized, pipelines usually contain compressor stations every 40 to 100 miles along a pipeline to recompress the natural gas. (19) Moreover, pipeline construction is heavily regulated; in order to build new pipelines the companies must show that the new pipelines serve the public interest, are economically feasible, and do not have significant environmental impacts. (20) Yet even with these costs and regulatory barriers, there are still over 285,000 miles of pipeline in the United States owned by some 160 companies. (21)

         [FIGURE 1 OMITTED]

         Beyond pipeline construction, the interstate pipelines' market operations are also thoroughly regulated by the Federal Energy Regulatory Commission (FERC) (see Parts I.B-C infra). To begin with, the FERC regulates the pipelines' rates for transportation, insuring that they are "just and reasonable." (23) Prices are usually based on the cost of transportation, which is equal to expenses plus a rate of return on the pipeline itself. (24) While prices based on market rates are technically allowable, as of 2004 no pipeline was allowed to charge such prices, due to the FERC's fears of pipelines' ability to charge above-market prices (see Part I.B infra). (25)

         The FERC has also required the pipelines to provide "open access" to all firms, making the pipelines common carriers. (26) Irrespective of whether the customer requiring the pipeline's services (a "shipper") actually purchased gas from the pipeline company, the pipeline must transport the shipper's natural gas. (27) Additionally, the FERC requires pipelines to make available considerable amounts of information about their tariff schedule and available capacity, usually via an electronic format. (28) The combination of these two requirements has resulted in the deep integration of the national natural gas market: The additional capacity, combined with the ability for anyone to use it, has given the natural gas market a flexibility that allows shippers to move natural gas across the country to meet demand on a moment's notice. (29) Pipelines are thus a heavily regulated portion of the natural gas industry, and while this regulation undoubtedly burdens expanding pipeline capacity, it has also given the natural gas industry as a whole unprecedented flexibility and integration.

      2. Market Centers

         The advent of pipelines as common carriers, created by the industry restructuring in the 1990s, has resulted in a series of market centers located at "hubs" of pipelines. These market centers provide a wide array of crucial services for the natural gas industry, from storing the natural gas (see below), to physically moving the gas between pipelines, to transferring title between producers and consumers. (30) Presently, transferring and transporting gas between shippers and consumers remain the market centers' most important function. (31) The price the centers can charge for those various services depends on whether those services are regulated by the FERC. (32) For example, a center can only charge the cost of service for transporting gas along an interstate pipeline, as the FERC mandates the pipelines' rates, but can charge market-based rates for services such as title transfer or parking (i.e. short-term storage). (33)

         The firms that own such market centers, called gas marketers, are often specialized firms involved in a variety of markets, the most notorious of which was, until recently, Enron. (34) The development of market centers has greatly enhanced the integration of the natural gas industry. Besides creating ideal locations for spot and future markets (the New York Mercantile Exchange delivery point for natural gas futures is the Henry Hub in Louisiana), the market centers have also spurred increased connections between the pipelines themselves. (35) These two trends have also greatly contributed to the natural gas industry's present flexibility: not only can buyers and sellers easily discover the best price for their needs, but the market centers' ability to store and move gas allows market participants to move gas around the country at a moment's notice, or hold onto the gas until a better price shows up. (36) Market hubs are thus a recent development in the natural gas industry, but are nonetheless a crucial one.

      3. Storage

         The market centers would not exist without the ability to store gas over a long period of time; indeed, more than two-thirds of the U.S. market centers have some form of access to storage. (37) However, market centers are not the only entities in the natural gas industry that own storage: pipeline companies, shippers, producers, and local distribution companies all own storage facilities for various purposes. (38) Today, the United States has nearly 400 natural gas storage sites, holding an estimated 3600 billion cubic feet of available storage, (39) or nearly 61,750 thousand metric tons of natural gas.

         Natural gas storage facilities come in one of three forms: depleted natural gas reservoirs, aquifers, and salt caverns. (40) Each of the facilities has relative advantages and disadvantages. Salt caverns can hold less natural gas overall, (41) but have greater deliverability rates, as measured by the amount of gas able to be withdrawn per day. (42) In contrast, the depleted natural gas reservoirs have greater capacity and are cheaper and more convenient than salt caverns, but have less deliverability. (43) Aquifers are in general the least desirable form of natural gas storage, as they are the most expensive option, and such storage is only used when there are no alternatives. (44) As Figure 1 supra shows, most high-deliverability salt cavern storage exists near the major productions areas like the Southwest and the Gulf Coast, while the larger depleted reservoirs are located closer...