Natural Gas Business Processes

Lesson Overview

The Business Processes Lesson consists of the following topics

Business Process Summary
Existing Capacity: Types
Existing Capacity: Scheduling Priorities
Existing Capacity: Park & Loan Service
Existing Capacity: Scheduling Process
New Capacity: Project Development Objective
Operational Metrics: Measuring Success
Operational Metrics: System Integrity
Operational Metrics: Pipeline Integrity
Operational Metrics: Measurement & Billing
Master Limited Partnerships

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Business Process Summary

Pipeline transmission business processes are grouped into three types of activities:

Administration of existing pipeline capacity
Constant examination of the need to add new capacity for either producers or customers
Operational metrics to routinely measure pipeline operating performance

This section examines some of the key processes in each of these activities.

Existing Capacity

Types of Capacity

Pipelines offer three basic types of transportation services to their customers (shippers).

Firm Capacity. Firm capacity is based on a shipper agreeing to purchase a specific amount of capacity that is sourced from certain receipt points and delivered at certain delivery points. Firm shippers pay a reservation fee for the capacity for which they have contracted. This fee “reserves” their right to use this capacity with the highest scheduling priority of all transportation transactions.

Secondary Capacity. Secondary capacity is the term used for firm shippers nominating at points other than the primary points of capacity, or in some cases, nominating in excess of their contractual rights at a point specified in their firm capacity contract.

Interruptible Capacity. Interruptible capacity is provided to shippers who hold an interruptible transportation (IT) agreement. IT agreements generally have no specific entitlement or right to transport gas on the pipeline. IT shippers are only able to use system capacity when it is available after service has been provided to all firm requests. IT capacity is only paid for when it is actually used.

Scheduling Priorities

Scheduling priorities are used by pipelines to differentiate between customer (shipper) transactions – when more transportation has been requested (nominated) than can be accommodated by the available capacity.

The following scheduling priorities are listed from highest to lowest.

1. Primary Firm Customers
2. Secondary Firm Customers
3. IT – Interruptible customers

Pipelines offer numerous alternate types of firm and interruptible services that may change the priorities listed above. These services and their respective scheduling priorities are described in the pipeline’s published tariff.

Park and Loan Service

A large transmission pipeline maintains a very large volume of pipeline pack volumes, the term for any volume in transition from receipt to delivery point, generated by changes in the line compression pressure which increases the line capacity.

As flow metering technology has advanced, and contractual and operational practices have become more efficient and sophisticated, pipeline companies have been able to developed new, incremental transportation services for customers.

One practice today is the so called park and loan service—which means the pipeline will adjust deliveries to a customer by using line pack or temporary storage. A separate storage agreement may also need to be executed to cover large under- or over-delivered volumes – in periods of high demand.

Scheduling Process

Natural gas grid-wide scheduling is a continuous process that is conducted 365 days per year four times (or cycles) per day.

The process can be compared with hundreds of people standing on the side of a fast flowing river – full of kayaks. They are all trying to get into and down the river without smashing into another kayak or tipping one over. This gives some idea of the complexity of gas scheduling on a pipeline.

A four-step process is used:

Nominations: Made by the gas shipper, they are formal requests to transport gas, represented in full-day quantities. There are four daily deadlines for nominations. Among other things, nominations include the requested receipt and delivery points, the quantity to be transported, the upstream party providing the gas and the downstream party receiving the gas.

Scheduling: All nominations received by the pipeline operator must be compared to available capacity. If the nominated quantities exceed the available transportation capacity in the pipeline, reductions are made to the nominations until they match the available capacity. These reductions must follow the scheduling priorities stated in the pipeline’s published tariff.

Confirmations: At each point of interconnection where gas is coming into the pipeline, the operators (e.g., pipelines, LDCs, producers) compare nomination records to match supplies and markets. When mismatches occur, the “lesser-of rule” (i.e., the larger quantity is reduced to match the smaller quantity) is applied to balance the nominations across the interconnect point.

Reporting: Pipeline operators are responsible for making scheduled quantity reports available to both customers (shippers) and interconnected operators (e.g., pipelines, LDCs, producers). For each nomination, these reports indicate the quantities that have been scheduled to flow at the beginning of the next cycle, as well as reasons for any reductions to the originally nominated or previously scheduled quantities.

New Capacity

System Planning

Mathematical models are built to represent the pipeline system and include all lines and interconnects as well as the key operating factors, such as:

line sizes
compression and flow pressures
friction coefficients
gas quality

These models are sophisticated and include optimization routines that are used in three situations.

To determine the existing capabilities of the pipeline system under day-to-day operating and commercial conditions,
to evaluate long-term capacity determinations under varying operating conditions as they exist from time to time, and
understand the true value of added capacity as new system and facility investments are made.

Project Development Objective

From a project development perspective it is important to establish initiative and “first mover” status in a new area of supply.

Not only does this build overall market share, but also helps to advantage upstream extensions and build out as the field or production region matures.

From a commercial standpoint, pipeline projects seek to fully subscribe new projects before they are built. This is the term which means that a large portion of the pipeline capacity is committed to specific shippers before the pipeline is built.

This is often accomplished through a bidding process to solicit expression of customer interest in a new project.

If successful, it helps to ensure that the project application will gain acceptance and approval from regulatory authorities (e.g., FERC), and provides financial certainty of project success though the collection of demand charges from firm capacity subscription fees.

If a pipeline is only partially subscribed, it could be at risk for completion, and also allow competition to secure any additional customers.

Operational Metrics

Measuring Success

Success in natural gas transportation is measured in a number of ways.

Throughput or total volumes transported and relative load factors as a percentage of total compression capacity are often used to gauge the success of the pipeline project.
Firm capacity commitments (and corresponding demand charges) help maintain stable cash flow.
Total revenues, expenses, free cash flow and return on investment are all common management financial measures.
Lack of suspended or interruptions to service.

System Integrity

A pipeline system typically receives a report card survey twice a year – on the coldest winter peak day and the warmest peak summer day – when capacity and performance are pushed to the limit.

Success is measured in how the designed system performed. The peak day performance is a reflection of:

system integrity and reliability,
operations control accuracy,
maintenance efficiency, and
overall process execution.

Pipeline Integrity

As the offshore pipeline network expands, pipeline maintenance and safety becomes even more important and expensive.

Petrobras, the National Oil Company of Brazil, has become a global leader in development of several new technologies to make inspecting and maintaining offshore pipelines more efficient. Many of these inspection techniques do not require the pipeline to be taken out of service, including:

a gamma ray inspection device operated by robot and implemented using an ROV,
tool that inspects for internal corrosion, and
tools for removal of paraffin (wax) that can build up on the wall of the pipeline over time.

Additionally, cathodic protection equipment is available for onshore pipelines which are underground. These systems use an electric current which slows down pipeline corrosion to reduce pipeline downtime and extend the life of the facilities.

As they are installed, many pipelines are also coated with durable polymers to prevent corrosion.

Large diameter offshore lines are actually coated with 12” or more of cement to prevent the sea water from corroding the pipeline metal.

Common Safety Problems

In the US, the Pipelines and Hazardous Materials Safety Administration (PHMSA) manages safety and maintenance programs for gas and oil pipelines. With certain exceptions, all pipeline segments must be inspected at least every seven years. Safety and reliability programs are also called pipeline integrity programs.

As the chart indicates, most damage to pipelines is caused by excavation – what is called third-party pipeline infringement in Europe. This often occurs because contractors do not verify the accuracy of topographical information. Additionally communications are often not clear between the contractor, pipeline, and (often) a subcontractor.

The second factor causing safety concerns is external corrosion, caused by:

The existing aging infrastructure
Growing demand for new pipeline mileage,
Shortage of worldwide pipeline coating capacity, and
The heightened emphasis on pipeline integrity, which has put a strain on inspection firms.

Two new items are competing with safety and reliability in affecting future pipeline operations:

The move to reduce emissions of unwanted hydrocarbons in pipeline compressors and pumps.
The plan to move large volumes of alternative fuels, and pipelines will be needed to do it.

Measurement and Billing

As part of pipeline operations, the measuring and pressure regulation systems receive considerable attention.

The objective of the operations measurement group is to provide accurate, reliable, timely, volume and heating value data for customers and internal groups to manage the transportation and storage of natural gas on the pipeline system.

As shown in the pictures, natural gas is measured for billing purposes by means of an orifice meter or other electronic measuring device.

Measurement information is relayed by a field electronic reporting system on a real-time basis to the gas control group for efficient system operation, and to accounting for billing of services to the transportation customers.

Flow Control and Gas Quality

To preserve and protect the operating integrity of pipeline operating systems, tariffs typically provide the pipeline operator with the ability to issue “operational flow orders” to shippers mandating certain flow conditions.

Additionally, the pipeline protects integrity by control of the natural gas quality at every point where it enters the system. Allowable quality specifications for the gas are contained in the tariff and further mandate that the gas must be free of water and other liquids that could potentially harm the system.

Also, the pipeline may limit gas flows based on quality. Gas that contains entrained heavy hydrocarbons may be refused into the system because they can become liquids downstream on the pipeline as temperature and pressure conditions change – severely affecting operating conditions.

Master Limited Partnerships (MLPs)

For energy companies seeking new avenues toward growth, the master limited partnership (MLP) has become a powerful tool in today’s business landscape. The MLP structure has experienced a meteoric rise in popularity, with the last decade witnessing the birth of dozens of new entities comprising more than $130 billion market capitalization.

An MLP is a limited partnership structure whose limited partnership units are available to investors and traded on public exchanges, just like corporate stocks.
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Energy companies that form MLPs typically do so to take advantage of the special tax treatment of the partnership structure. MLPs do not pay federal corporate income taxes. Instead, each partner includes its distributive share of net income in computing its federal income tax. Subsequent distributions of cash from the MLP to the partners are not again subject to tax. These benefits create increased free cash flow and a lower cost of capital for the MLP.

A pipeline MLP resurgence took hold in the early 2000s. As the earliest pipeline MLPs proved, assets with slow growth and high cash flow best lend themselves to the MLP’s goal of maintaining and/or increasing cash distributions to unit holders.

MLP’s are becoming an increasingly popular vehicle because of the stable, predictable cash flows and returns inherent in these relatively capital intensive joint ventures

Following those guidelines, other subsets of the oil and gas industry can also work well in the MLP structure, such as natural gas processing plants, some coal production facilities, and fully developed and slowly declining crude oil or natural gas-producing assets.