Southern African Natural Gas Advisory Service Service

Regulation in the gas supply industry

The regulation of the ownership, governance, management and operation of exploration, production, transmission, distribution and marketing of natural gas is an important aspect of the industry. Each step in the gas supply process is owned and regulated in different ways and there are various types and degrees of regulation in each.  Some elements of these supply activities remain lightly regulated whereas others such as safety are stringently regulated.

The commercial aspects are also regulated in different ways depending on how the supply assets and operations are owned and managed. Throughout the world there are different business models that apply and differing levels and severity of influence by independent regulators.

Some natural gas supply activities are in the hands of monopolies while others are economically liberalized and in the hands of many competing commercial entities.

The ownership, operation and regulation of the different stages in natural gas supply has become a highly complex and sophisticated business throughout the world, both within countries, across borders, across the sea and whole continents. Each step of this supply process is subject to regulation by local and international regulatory bodies.

Countries are at varying stages in terms of becoming fully competitive markets for natural gas.  South Africa for example is  in the non- competitive phase with Sasol being a monopoly  and currently holding dominant market power through an exclusive hold over natural gas supply.  However Sasol’s exclusive carriage rights with the bulk supply  pipeline from Mozambique is due to end in 2014; and, other entrants for the supply of natural gas are likely to emerge in due course. Currently the National Energy Regulator of South Africa (NERSA) regulate pipeline gas supply arrangements in the country.

Regulation of safety

In terms of safety in the natural gas extractive, processing and transmission sectors there is rigorous regulation to ensure safe practices are implemented and adhered to.  There are both international and local  country codes of practice, legal regulations and numerous technical requirements that must be obeyed.

Frequently natural gas activities must be licensed and remain open to external independent inspection, accreditation and certification by specialist agencies, in order to remain in operation. Similar safety and operating rules and regulations apply to the transportation of natural gas through transmission pipeline networks or as LNG when transported at sea.      

Ownership and Operation: Reserves and Production

Another aspect of regulation involves the ownership and administration of the natural gas reservoirs and gas fields. These are generally owned by the country in which they are located and exploration companies are awarded licenses to explore designated areas or blocks by the Government or their appointed agencies.

When gas is discovered and then produced further production licenses are awarded to either state owned bodies or private companies to produce the natural gas. The production agreements and licenses usually involve a royalty payment and other rents that the production company pay to the Government for the natural gas that is extracted and then marketed either within the country or exported abroad.

State owned and controlled national oil and gas bodies now control vast reserves of natural gas in countries such as Iran, Qatar, Saudi Arabia and Russia. The major oil companies such as BP, Total, Exxon and Shell are commercial international companies who compete with each other to also obtain exploration and production licenses for the production of oil and natural gas. They spend billions every year on exploration and the development of oil and gas production fields and facilities. So the exploration, extraction and production of natural gas is normally undertaken by consortia of both public and private sector bodies.

Transmission

Transmission pipeline networks are also often constructed with a similar mixture of public and private capital and are usually operated by dedicated pipeline management bodies. These bodies may be public or private sector undertakings, owning and operating whole sections of gas transmission pipeline networks.

In some cases pipelines are used exclusively by the operator who is part of an integrated natural gas supply body or company. In other words these pipelines are used to transport the company's own gas. A more common practice today however is where transmission pipelines carry natural gas that belongs to a number of different sellers and buyers of the gas. Such open access  transmission networks act as a type of transport system moving defined quantities of gas for clients from a dispatch  to a receipt point (station) on the network for a negotiated carriage or transmission fee.  

The regulation of the construction and operation of natural gas transmission pipelines is provided by a range of regulatory bodies.

Within countries there are a number of regulatory agencies that range from local town planning approvals for the route of the pipeline to technical requirements for the actual construction and operation of the pipeline that fall under various other regulatory bodies.

In the U.S. there are Federal Regulatory Agencies that coordinate the regulation of pipelines that run across several different states.

In the European Union there are similar regulatory agencies who handle the necessary governance of pipeline construction and operation across and between different member countries.

Regulation of natural gas distribution

Historically local natural gas supply bodies have been awarded exclusive rights to distribute natural gas in designated geographical areas and to provide services such as safety inspection, new gas supply connections to premises, metering, billing and customer marketing services. In these circumstances local gas suppliers have been treated as natural monopolies since it is uneconomic and impractical to construct multiple networks for a particular area. This usually resulted in a single gas utility providing distribution services. In view of this situation and gas utilities being monopolies, independent regulation has been a feature of local gas supply for many decades to ensure that their monopoly power is not abused.

In many instances around the world local gas distribution utilities have to have a license to operate that is granted by the Government or their designated agency. Such distribution undertakings are required to meet a wide range of conditions and must operate efficiently in the public interest in order to retain their operating license.  

In the USA there are state run utility commissioners responsible for regulatory oversight of both publicly and privately owned local natural gas utilities. In South Africa there is the National Energy Regulator (NERSA) and in Britain the Office of Gas Regulation (OFGEM) similarly responsible for the provision of independent regulation of natural gas distribution, tariffs and supply to users. Most of the regulatory framework that applies in different countries is also backed by law with various legal statutes that define the governance of local gas supply.

In countries where local gas supply has been economically liberalized and unbundled with different parts of the supply process being provided by commercial companies the regulatory bodies continue to provide important independent oversight.

The setting of natural gas tariffs, safety provisions, customer service performance standards and various other matters must continue to be governed in an equitable and proper manner in the mutual interests of both the seller and buyer. Regulators conduct independent surveys of customer satisfaction and monitor the performance of local gas supply companies to ensure that the highest levels of operational efficiency are maintained.

In some countries natural gas ombudsman facilities exist whereby dissatisfied customers can refer complaints to an independent authority (usually part of the local gas regulator) for investigation and adjudication.