Driven by a huge jump in domestic natural gas production, the U.S. natural gas market has grown for the past two years with total gas transaction volume in 2011 up 8% on the year and up 15% from 2009, according to a new study published by Cornerstone Research.

The U.S. gas industry is "unconcentrated with a large number of diverse participants," the study found, with the top 20 transacting companies by volume accounting for slightly more than half of the transaction volume covered by FERC Form 552 submissions.

FERC Form 552, which was first started in 2009 and included submissions from 686 firms in 2011, contains timely transaction data for natural gas sold at wholesale and in interstate commerce to federal and state governments, buyers and sellers of wholesale natural gas and the public.

"There has been a recent revival in natural gas production in the United States, with annual marketed production increasing by 28 percent from 2005 to 2011. This increase is due to the development and expansion of shale natural gas production," the report said. "As the U.S. natural gas market evolves, it continues to be important to analyze market participants and the pricing of natural gas."

The Energy Information Administration predicts shale gas production will increase from 23% to 49% of U.S. natural gas production over the next 25 years.

The increase in domestic natural gas production has resulted in decreasing prices and efforts to find innovative ways to use natural gas, Cornerstone found. From 2005 to 2011, wellhead prices decreased by 46%, while the use of natural gas to fuel vehicles increased by 44% as natural gas users sought alternatives to higher priced gasoline and diesel.

Traders or wholesale marketers continued to report the largest transaction volumes, accounting for approximately 41% of transactions. Combine large integrated-upstream (21.2%) and integrated-downstream (8%) companies and the share jumps to 72%. In contrast, industrial or commercial consumers and chemical consumers account for only 2.3% of the Form 552 volume.

Cornerstone found participants in upstream industry segments are more likely to be net sellers while participants in downstream segments are more likely to be net buyers. From 2008 to 2010, the proportion of reported volume by net buyers and net sellers was roughly equal. In 2011, the difference between the proportion of net buyers and net sellers that report to the price index publishers exceeded 20% for the first time, with net buyers reporting 58% of transactions and net sellers reporting 37%.

A comparison of fixed-price physical transactions reported by the company-level Form 552 submissions and hub-level IntercontinentalExchange data shows that fixed-price physical transactions reported by ICE in 2008-2011 represent approximately 70% of the Form 552 volume. The top quartile of North American natural gas hubs reported by ICE has 29 times the average daily day-ahead volume and 46 times the average monthly month-ahead volume of the bottom quartile of hubs.

Number of companies reporting prices rises to 126

Of the 686 respondents in 2011, 126 reported transaction information to the price index publishers for at least one affiliate. Only 59% of the reporting-eligible volume is transacted by companies that report to the price index publishers.

"A large number of companies continue to be active in the natural gas market; the base of information-forming indices is sizeable and robust," Cornerstone Vice President Greg Leonard said in a July 31 emailed statement.

The share of transactions based on index prices increased from approximately 69% in 2008 to 72% in 2011. According to Leonard, this "underscores the importance of a robust process for determining the indices."

However, these estimated percentages likely overestimate the actual share of index-price transactions, Cornerstone warned, because the data include all index-price transactions but exclude some other types of physical transactions not based on indices.

"Going forward, the continued analysis of the characteristics and volume of price-reporting companies will be informative to the marketplace," he said.

Reporting to price index publishers is not consistent across industry segments, the study found. Integrated-upstream and integrated-downstream companies and traders or wholesale marketers report the majority of eligible volume to the price index publishers whereas industrial or commercial consumers and chemical consumers report less than 10% of their eligible volume.

The 2011 proportion of net buyers and net sellers reporting to the price index publishers did not remain stable in 2011; for the first time in the last four years, the proportion has departed from a relatively equal division. In 2011, net buyers reported 58% of transactions, while net sellers reported 37% of transactions.

Copyright 2012 SNL Financial LC. All Rights Reserved.

(Originally published August 6, 2012, in SNL Energy Gas Utility Week.)