Malcolm Abbott - The Economics of the Gas Supply Industry

One of the most striking features of global energy market development since the 1980s has been the steady increase in the use of natural gas and its growing importance in international trade (both piped and liquefied natural gas). Consumers are growing more interested in using natural gas, not only because of its convenience, but also because of its cleanness in terms of carbon emissions. In addition, many governments are promoting its use not only because of its environmental attributes, but also because of a desire to diversify energy sources away from coal and oil for national strategic reasons.

From an economists point of view, the study of the natural gas industry is a particularly interesting one because it fuses together two industry-relevant economics in a way that no other industry study has. On the one hand, the exploration and development of natural gas sources has many of the characteristics of other natural resources industries (e.g. oil or coal), and the economic study of this aspect is similar to those industries. Governments have often been involved in the development of natural gas, similar to their input into the oil industry. On the other hand, the industry also has the characteristics of a utility such as electricity or water, in that natural gas is supplied to consumers across a pipeline network, one that possesses natural monopoly characteristics. It is this combination of natural resource economics and network economics that makes a study of the industry so interesting.

Energy forecasters expect natural gas consumption to escalate in the near future, and the many recently discovered gas reserves (both conventional and unconventional) are likely to satisfy this growth in demand. However, there are also some long-used reserves, such as those in Europes North Sea, which are almost exhausted, meaning some countries will need to adapt their natural gas supply arrangements. The construction of new long-distance pipeline networks and the growing capacity of countries such as Qatar and Australia to export liquefied natural gas are also meaning that the worlds natural gas markets are starting to integrate.

Combined together, these factors make the study of the growing use of natural gas a fascinating subject. The purpose of this book is therefore to introduce students and others to the economic aspects of the natural gas industry, which as previously mentioned is a combination of natural resource and network economics. Understanding the development of the industry from now and the past will hopefully prepare readers for the challenges that may face the industry in the future.

allocative efficiency allocative efficiency measures factor proportions given relative factor prices

associated gas a form of natural gas that is found within deposits of petroleum

Averch-Johnson effect this is the tendency of regulated companies to engage in excessive amounts of capital accumulation (to increase their rate base) to expand the volume of their profits if a companys profits-to-capital ratio is regulated at a certain percentage, then there is an incentive for it to over-invest in order to increase profits overall

barrel a unit of volume equal to 42 US gallons, 159 liters or 35 imperial gallons

barrels of oil equivalent (BOE) a unit of energy based on the approximate energy released by burning one barrel (42 US gallons or 159 liters) of crude oil

base-load the lowest load level during a utilitys day or annul cycle

billion cubic feet (Bcf) a cubic foot is an imperial and US customary unit of volume, defined as the volume of a cube with sides of one foot in length, and a billion cubic feet is a billion of these

billion cubic meters (Bcm) a cubic meter is a metric unit of volume, defined as the volume of a cube with sides of one meter in length, and a billion cubic feet is a billion of these

biofuel liquid fuels and blending components produced from biomass feed stocks, used primarily for transportation

biomass any accumulated body of organic material in the gas industry, it is a reference to organic waste products of agricultural processing, feedlots, timber operations or urban refuse from which methane can be derived

British thermal unit (Btu) a measurement of heat one Btu raises the temperature of one pound of water by one degree Fahrenheit at a temperature at which water has its greatest density (approximately 39 degrees Fahrenheit); it is equal to about 1055 joules

building block approach where the allowed revenue of a company is equal to the sum of underlying components, or building blocks, consisting of the return on capital, the return of capital (also known as depreciation), the operating expenditure and various other components such as taxes and incentive mechanisms

butane a hydrocarbon component (C4 H10) of produced natural gas and crude oil, one of the natural gas liquids, and a component of liquefied petroleum gas

capital asset pricing model (CAPM) a model that describes the relationship between risk and expected return and that is used in the pricing of risky securities

Capture Theory the theory that regulators are made to act in the interests of those that they regulate

carbureted water gas an advanced technique developed in the 1870s by Thaddeus Lowe for the production of coal gas

city gate a location at which custody of gas passes from a gas pipeline company to a local distributor

coal gas gas manufactured from coal

coke solid residue produced from the destructive distillation of coal or oil it is used as a fuel and as a reducing agent in smelting iron ore in a blast furnace

combined cycle turbines a two-stage electrical generation plant that combines a combustion turbine and a steam turbine driven by the residual heat in the combustion gases

combustion turbine a single-cycle turbine fueled by natural gas and driven by the expansion of the combustion gases used for the propulsion of jet aircraft and for the generation of electricity these turbines are frequently used as peaking or standby plant