Natural Gas from the Ground to the Ethanol Plant

By Leanna D. Whipple | July 08, 2008
While new technologies for alternative energy sources to natural gas are being studied, a majority of ethanol plants in the United States continue to use natural gas as their primary energy source. This article follows the journey of natural gas from the ground to the plant and the various players involved.

The first step is to find and extract the natural gas. This process alone requires significant resources to secure the permits and rights necessary from regulatory bodies and private landowners for the exploration and extraction of the natural gas. Once the natural gas has been extracted, it is transported through low-pressure gathering pipelines to a processing plant where any oil, carbon dioxide or water, among other items, is removed.

Once processed, the natural gas enters the interstate pipeline system. The Federal Energy Regulatory Commission (FERC) provides regulatory oversight of interstate pipeline companies (IPCs). IPCs are considered natural monopolies, as one IPC will likely service an entire regional area, without duplication of pipelines from other IPCs. Thus, the FERC ensures that this monopolistic structure is not abused and customers are protected from unreasonable rates.

Historically, IPCs purchased natural gas from the producer and then re-sold it to local distribution companies (LDCs) or end-users. However, in 1992, the FERC ordered IPCs to "unbundle" their services and separate their sales of transportation services from their sales of natural gas. As a result, marketers and even end-users now have open access to purchase natural gas directly from the producers, and the IPCs are required to provide transportation services equal in quality whether the natural gas is purchased from the IPC or from a producer or marketer.

Once the natural gas reaches the region of a plant via an interstate pipeline, a connecting pipeline must be constructed either to the interstate pipeline itself, or to a pipeline owned by a LDC or local utility. An ethanol plant can either connect directly to the interstate pipeline through a privately-owned interconnection line, or a local utility or LDC may construct, own and operate the connection line. The costs of both options must be weighed on an individual basis. Either way, it is beneficial for ethanol plants to locate their plants in close proximity to an interstate pipeline to minimize construction costs and reduce the number of landowners from whom easements must be secured. In addition, the construction of the interconnection pipeline generally requires regulatory approval from the state utilities regulatory commission.

In today's open access model, an ethanol plant can negotiate directly with the producers of the natural gas. However, due to the current volatility in natural gas prices, marketers can play a key role in procurement. Marketers enjoy minimal regulation by the FERC or state utilities commissions and can provide a wide range of services, such as negotiating with IPCs for their transportation services and connection to their pipelines, natural gas procurement, risk management through hedging programs and pipeline construction.

Once the connecting pipeline is constructed and tapped into an interstate or LDC pipeline, and a supply of natural gas has been procured and is flowing through pipelines, the ethanol plant can flip its switch and begin production.

Leanna D. Whipple practices primarily in the areas of securities and corporate transactions, as well as environmental and public utilities law at BrownWinick, a Des Moines, Iowa-based law firm serving the renewable fuels industry. Reach her at whipple@brownwinick.com or (515) 242-2433.