Natural Gas

Natural gas is often referred to as simply gas, especially when compared to other energy sources such as oil or coal. Natural gas consists primarily of methane and is found in coal beds. Before it can be used as a fuel, it must undergo processing to remove almost all materials other than methane. It is created by two mechanisms: biogenic (organisms in marshes, bogs, landfills, and shallow sediments) and thermogenic (created from buried organic material deeper in the earth from greater temperature and pressure).

 

Applications for Natural Gas

  • Fuel for industrial heating and desiccation process
  • Fuel for the operation of public and industrial power stations
  • Household fuel for cooking, heating and providing hot water
  • Raw material for chemical synthesis
  • Raw material for large-scale fuel production using gas-to-liquid (GTL) process
  • Fuel for environmentally friendly liquid natural gas vehicles

 

Processing

Natural gas processing is a complex industrial process designed to clean raw natural gas by separating impurities to produce what is known as 'pipeline quality' dry natural gas. Gas is turned into liquefied natural gas (LNG) at a liquefaction plant, and is returned to gas form at regasification plant at the terminal.

 

Storage

Natural gas is often stored underground inside depleted gas reservoirs from previous gas wells, salt domes, or in tanks as LNG. The gas is injected in a time of low demand and extracted when demand picks up. Storage nearby end users helps to meet volatile demands, but such storage may not always be practicable.

 

Transportation

The low density of natural gas prevents easy to storage or transport by vehicle. Therefore, pipelines are preferred for transport. Pipelines can transport natural gas up to 4,000 km over land and approximately half that distance offshore. Natural gas pipelines are impractical across oceans therefore LNG carriers transport LNG across oceans, while tank trucks can carry liquefied or compressed natural gas (CNG) over shorter distances.

 

Environmental Effects

Natural gas produces less carbon dioxide (CO2 emissions) per joule than either coal or oil and produces far fewer pollutants. In absolute terms, natural gas does contribute to global carbon emissions like all hydrocarbon fuels. Natural gas is a greenhouse gas more potent than carbon dioxide when released into the atmosphere; however, methane is oxidized in the atmosphere for approximately 12 years compared to CO2 which has an effect for 100 to 500 years.

 

Natural Gas Pricing

Natural gas prices, as with any other commodity, are mainly driven by supply and demand fundamentals. Natural gas prices are also linked to the price of crude oil and other petroleum products. The price of natural gas varies greatly depending on location and type of consumer. Natural gas in the United States is split between the financial (futures) market, based on the New York Mercantile Exchange (NYMEX) futures contract, and the physical market, the price paid for actual deliveries of natural gas and individual delivery points around the United States.

 

Demand Factors for Natural Gas

  • Weather
  • Demographics
  • Economic growth
  • Fuel competition
  • Storage Exports

 

Futures Market

The standardized NYMEX natural gas futures contract is for delivery of 10,000 mmbtu's of energy (approximately 10,000,000 cubic feet (280,000 m3) of gas) per day at Henry Hub in Louisiana over a given delivery month consisting of a varying amount of days. Monthly contracts expire 3–5 days in advance of the first day of the delivery month, at which points traders may either settle their positions financially with other traders in the market or choose to "go physical" and accept delivery of physical natural gas. Most financial transactions for natural gas take place off exchange in the over-the-counter ("OTC") markets using "look alike" contracts that match the general terms and characteristics of the NYMEX futures contract and settle against the final NYMEX contract value.

 

Physical Market

Physical prices at the beginning of any calendar month at any particular delivery location are based on the final settled forward financial price for a given delivery period, plus the settled "basis" value for that location. Once a forward contract period has expired, gas is then traded daily in a "day ahead market" wherein prices for any particular day are determined on the preceding day by traders using localized supply and demand conditions, in particular weather forecasts, at a particular delivery location. The average of all of the individual daily markets in a given month is then referred to as the "index" price for that month at that particular location. It is not uncommon for the index price for a particular month to vary greatly from the settled futures price (plus basis) from a month earlier.

 

Henry Hub

Henry Hub is the pricing point for natural gas futures contracts traded on the NYMEX. It is a point on the natural gas pipeline system in Erath, Louisiana that interconnects with nine interstate and four intrastate pipelines. Spot and future prices set at Henry Hub are generally seen to be the primary price set for the North American natural gas market.