Natural gas is trapped in the Earth under impermeable layers of rock. To harvest it, a producer drills a production well through the impermeable layer to allow the natural gas to escape into the collection system. It is then sent to a refinery for impurities to be removed prior to it being piped to customers or storage. The production well can be on dry land or on an elevated platform positioned in the ocean.
The producer may market its gas directly to the consumer or sell its gas to a marketer who then provides it to consumers. The LDC (Local Distribution Company) may purchase the natural gas from a producer or marketer. The purchase contract should specify the length of the contract, the amount of gas to be purchased, and the geographical point at which the gas is put into the interstate pipeline. In the United States, natural gas is purchased in units of either MMBtu or dekatherm. The purchased gas must be transported through a pipeline to the LDC for consumption. This is accomplished through the use of transportation contracts with the pipeline owner.
The LDC will have at least one transportation contract with an interstate pipeline. (There may also be a contract with an intrastate pipeline.) The interstate pipeline is regulated by the Federal Energy Regulatory Commission (FERC) (www.ferc.gov). FERC Order 636 was part of the federal process to deregulate the natural gas industry in the late 1980s. This order states that an interstate or intrastate pipeline can only transport, manipulate or store natural gas. With this order a pipeline can no longer sell natural gas. The consumer is required to purchase natural gas from an entity other than the pipeline. Prior to this order, LDCs purchased transportation, pipeline services and gas supply from the pipeline.