Natural Gas Fundamentals

Lesson Overview

The Natural Gas Fundamentals Lesson consists of the following topics

Learning Objectives
What is Natural Gas?
What is it used for?
Typical Natural Gas Compositions
Important Gas Terminology
How is Gas Measured?
How Does Natural Gas Occur?
Reserves – Global Gas, a Different Picture
World’s Top 10 NGL Producing Countries 2007
Global Stranded Reserves
Major Global Gas Trade Movements
Regional Example: North America
Regional Example: Europe
Delivered Gas – High Transport Component
Demand Characteristics – Natural Gas
Demand Characteristics – LPG
Monetizing Gas

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What is Natural Gas

Natural gas, like crude oil and coal, is a mixture of hydrocarbon compounds which are multiple combinations of carbon and hydrogen atoms. The principal components of natural gas are methane and ethane with varying amounts of heavier hydrocarbons including propane, butane and pentane. Methane is a light hydrocarbon. It has a relatively low boiling point, so at room temperature it is a gas.

Natural gas is the cleanest of all the fossil fuels. The main products of the combustion of natural gas are carbon dioxide and water vapor, the same compounds we exhale when we breathe.

Unlike coal or oil, combustion of natural gas releases very small amounts of sulfur dioxide and nitrogen oxides, virtually no ash or particulate matter.

After processing, natural gas is valued for its heating ability with end use heating values generally ranging between 950 and 1150 Btu (British Thermal Unit) per cubic foot.

What is Natural Gas Used For?

The chart shows the current and forecast volumes of gas demand by sector, the common term for a category of end-users, from the IEA world outlook in 2006.

Because of its clean burning characteristics and heating value, natural gas is used around the world as follows:

Residential sector users are housing units. Natural gas uses include heating, cooking, and fueling appliances such as water heaters and clothes dryers.

Commercial sector users (called services on the IEA chart) consist of business and government facilities. Common uses of natural gas associated with this sector also include space and water heating, air conditioning, lighting, refrigeration and cooking – on a scale larger than residential.

Industrial sector users consist of all facilities and equipment used for producing, processing or assembling goods. Industrial uses parallel those of commercial users. As examples, natural gas is used to fuel industrial processes, such as heat treating steel or manufacturing glass. It is also a feedstock for other chemical products such as fertilizer.

Power generators are utilities that produce, transfer and sell electricity. Power generators, the largest sector of industrial sector users, burn natural gas (and other fuels) to produce electric power. A gas-fired power plant has much lower emissions of carbon dioxide (CO2) and nitrous oxides (NOx) than coal or oil-fired plants.

The chart indicates that GTL (Gas-to-Liquids) conversion will use up a small portion of global supplies by 2030.

Typical Natural Gas Compositions

Most gas in the ground contains some liquefied hydrocarbons and thus is known as wet gas. Gas with little or no liquefied hydrocarbons or non-hydrocarbons is called dry gas.

Additionally raw natural gas production will include non-hydrocarbons such as carbon dioxide, nitrogen, hydrogen sulfide along with water vapor. These components are often termed “contaminants” and must be removed from the gas stream to prevent damage to equipment and pipelines.
Wet gas must be treated to become dry gas before being transported by pipeline. As the chart indicates the dry gas is almost pure methane.

Gas with a high sulfur content, known as sour gas, is extremely corrosive. It must be isolated and transported separately until it is stripped of the sulfur at a treatment plant. It is then called sweet gas.

Important Natural Gas Terminology

Treated natural gas is most commonly transported by pipeline from the production field to homes, businesses and industrial users to generate heat and electric power.

With processing technology advances, significant new segments of the natural gas industry have now evolved. The new products/segments that will become increasingly important in the future are as follows:

Liquefied Petroleum Gases (LPG) consist of the following hydrocarbons in the wet gas: ethane, propane, and butane. LPG is separated at production fields and also produced from crude oil processing in refineries.
Natural gas liquids (NGL’s) are heavier hydrocarbons such as ethane, propane and butane and natural gasoline suspended in the produced gas as it comes from a reservoir. These hydrocarbons are separated as liquids near the production field with a variety of types of processing equipment. NGL’s reserves are most commonly combined with oil reserves, not natural gas.
Liquefied Natural Gas (LNG) is natural gas that has been liquefied by reducing its temperature to -260 degrees Fahrenheit. This is a refrigeration process and the gas does not change chemical state. Once converted into liquid form in a liquefaction plant, it is ready for shipment on specialized insulated tankers to areas of high demand throughout the world. At the receiving terminal, regasification plants are used to convert the liquid back to a gas. This allows the gas to be injected into the existing natural gas pipeline infrastructure.
Compressed Natural Gas (CNG) is natural gas that is compressed to a pressure at or above 2,400 pounds per square inch and stored in special high-pressure containers. It is used as a very clean burning substitute for petrol-gasoline to fuel vehicles. Again, the gas does not change chemical state.
Gas-to-Liquids (GTL) conversion is a complex set of processes that changes chemistry by combining the carbon and hydrogen elements in natural gas molecules to make synthetic liquid petroleum products, such as diesel fuel for automotive use.

How Natural Gas is Measured

Like crude oil, natural gas has a variety of global and US measurements.

Heating Value – BTU

Natural gas, like other forms of energy, is measured in terms of heating value – e.g., British thermal units.

(Btu’s) or Million of BTU’s (MMBTU). Heat from all energy sources can be measured and converted back and forth between Btu’s and volume units.

One Btu is the heat required to raise the temperature of one pound of water one degree Fahrenheit. To put the Btu in perspective, ten burning matches release 10 Btu.

Volume – Cubic Foot

One cubic foot of natural gas releases approximately 1,031 Btu.

Natural gas reserves are measured in terms of volume – e.g., Millions of Cubic feet (MCF), billions of cubic feet (Bcf), trillions of cubic feet (TCF) or billions of cubic meters (BCM or Bm3).

In natural gas production, prolific wells produce and deliver hundreds of thousands or even millions of cubic feet of gas per day (MMcfd). Pipeline size is measured in terms of pipe diameter. Compression is measured in terms of pressure relative to atmospheric pressure at sea level, expressed as pound-force per square inch gauge (psig).

Transportation capacity, which is a function of pipeline size and compression capability, generally is measured as a consistent stream, expressed in Bcf per day or MMcfd.

Purchases and sales of natural gas are measured in millions of BTU’s (MMBTU’s).

How Does Natural Gas Occur?

Like oil, natural gas formed deep in the earth as ancient marine life was deposited and decomposed over millions of years in reservoir environments. As the picture indicates, depending on the reservoir, gas occurs in two principal forms: associated gas and non-associated gas.

Associated gas occurs in conjunction with crude oil reservoirs — either dissolved in the oil or occurring separately in the same reservoir. Since it separates from the oil at the casing head of the production well, it is also known as casing head gas or oil well gas. There are huge quantities of associated gas produced with Middle East crude oil.

Associated gas often is re-injected into the producing well to either raise the pressure to get more oil out of the well, or hold the gas in the reservoir until a distribution system can be developed to move the gas to market.

Non-associated gas occurs in gas-only reservoirs separate from crude oil. The majority of US natural gas production is non-associated gas.

Gas condensate is a two-phase fluid which is neither true gas nor true liquid. It is usually produced from high pressure, deeper reservoirs and is rich in complex and useful hydrocarbons (NGL’s).

Global Natural Gas Reserves

The chart shows supply locations for worldwide gas reserves. In oil, the Middle East dominates. In gas, Russia dominates, with 27% of the world’s 2007 total of 6,813 trillion cubic feet (TCF) of proven gas reserves. Like oil, these reserve figures are an estimate of the real producible gas in the ground.

Iran and Qatar are also major holders of gas reserves. Russia is the largest supplier of gas to Eastern and Western Europe.

Qatar has the world’s largest set of investments in facilities to liquefy gas (LNG) or convert it to diesel fuel (GTL) for shipment to other markets.

Stranded Natural Gas Reserves

Natural gas is more abundant than oil. But over one-third of global gas reserves is considered stranded.

Stranded reserves of natural gas are discovered and proven, but undeveloped because they are situated in parts of the world that are remote. Companies cannot economically justify the large production investments needed to bring these reserves to market.

Examples of stranded natural gas reserves would include West Africa, the Northwest shelf of Australia and many regions of the Middle East and Russia. Another example is the North slope of Alaska, which holds 35 TCF of gas reserves, in addition to the largest US oil reserves. Many stranded gas reserves are far offshore and in deep water, adding engineering and commercial complexity.

Billions of dollars of capital are needed to turn stranded reserves from a liability to an asset. Some examples of these new developments are:

Constructing a pipeline from the Alaska reserves to the North American gas markets.
Using a Floating LNG Facility (FLNG) – a technology developed by Shell, comprising of a barge with a small LNG compression facility.
Floating GTL units, still in the concept and design stage, to make diesel fuel aboard a floating facility.

Global Gas Trade Movements

The chart from BP, shows the movements of gas (in green) and LNG (in blue) for 2006. Because gas is difficult to transport, nearly three-quarters of current demand in most countries is met with production and pipelines inside a specific country. As demand grows and gas fields deplete this will change.

Oil-rich nations in the Middle East also have significant gas reserves, but historically these supplies were considered stranded. At the same time, industrial Japan and parts of Europe had limited indigenous gas resources.

Several West African nations, like their Middle Eastern neighbors, have significant gas supplies, but as yet insignificant markets. Currently the gas is being flared which is a waste of resources and adding large quantities of CO2 to the environment. The World Bank has initiated the Global Gas Flaring Reduction Partnership which has been successful in developing policies and programs to limit flaring and use the gas in other ways.

The LNG industry originally was developed to connect North African and Indonesian supplies with European and Japanese demand. Advances in technology and safety have enabled numerous LNG projects to connect stranded supplies with rapidly increasing demand in industrialized countries.

Regional Analysis: North America

The impetus for the development of a natural gas industry in any continent or region has been the need to connect long-term supplies with long-term demand.

In North America it began with long-haul pipelines from production areas in the Southwest and Gulf Coast to major cities in the Northeast and Midwest. Now more than 300,000 miles of gas pipelines exist in the US.

Miles of pipeline in Canada fully interconnect the supplies in Alberta to demand in Eastern cities in Canada and the US.

Fully 97% of the US gas supply comes from domestic sources and Canada.
There are abundant gas reserves in southern Mexico as well. Thus far, the economics of supplying markets in northern Mexico and the southern US have not been stable enough to support the significant investments needed.

Regional Analysis: Europe

The European Union (EU) nations have an objective to create a single, unified market – supplied by a diverse set of gas exporters.

Like other parts of the world, Europe’s gas production is declining as demand rises – making them rely more on imports. European gas prices are higher than the US and can be subject to price spikes and supply disruptions. In the long term they plan to diversify supply from a number of sources:

Algeria and other North African exports to the South (shown on the chart) and
Russian supplies to Northern Europe
Kazakhstan and Azerbaijan (east of the Caspian Sea) supply to Central and Southeast Europe

To accomplish this ambitious objective requires billions of Euros of investment in infrastructure, because the “politics of natural gas across Europe are determined by infrastructure.” Therefore:

North African exporters and Gazprom (Russia’s state-owned gas monopoly) realize this and are rapidly expanding facilities.
Exporters around the Caspian Sea are considering expensive pipelines under the Caspian and require a political willingness to sell gas west to Europe rather than east to Russia.

Supply diversity seems to be an altruistic objective as many large utilities across Europe have already signed long-term supply agreements with Gazprom. These direct deals weaken the EU supply diversity objective.

These major options will be making EU headlines in the coming years as large suppliers and end-users jockey for position to keep the growing market supplied with natural gas.

Natural Gas Transport

Natural gas, as discussed, is generally marketed and traded on a continental land mass where pipeline transportation exists.

Generally speaking, delivered natural gas contracts contain components for both the commodity and the cost of pipeline transportation to the point of delivery at the end-use market.

As the chart shows, transportation accounts for 42% to 50% of the delivered cost of gas, even when the price changes, because gas is used as the fuel for compression along the pipeline.

Demand Characteristics

Natural Gas

Most natural gas is consumed in the northern hemisphere, where gas demand peaks in the winter, reflecting its use for space heating.

A second, summer peak reflects fluctuations in the use of gas for power generation for air conditioning .

Shoulder months are those periods of lower demand between the winter and summer peaks.

To smooth out the demand curve, some industrial end-users with the ability to switch from gas to fuel oil reduce gas purchases during peak periods.

In addition, storage is being used to take advantage of seasonal price differentials. Gas is purchased from the field and injected into storage during the shoulder months, when gas is cheaper, and withdrawn and transported to market during peak periods.

Liquid Petroleum Gas (LPG)

LPG is the most widely traded NGL on the world market.

About half of world’s LPG demand comes from the residential-commercial market for heating and cooking, especially in emerging economies. In recent years, LPG has been an economical industrial fuel – except during peak seasonal LPG demand.

Processing of natural gas is the largest supply source of LPG, accounting for nearly 60% of total worldwide production during the last 10 years. Refineries produce almost all the remaining LPG.

Prices for NGL’s (primarily propane, butane, and pentane) track oil prices more closely than gas so there is a big incentive to recover as much as possible from the gas stream.

A fundamental change in the market will occur as LPG is also recovered from LNG upon liquefaction. The growth in LNG facilities around the world will increase LPG production accordingly.

Monetizing Gas

The industry challenge, whether US or global, is to be able to monetize gas reserves wherever they exist, for commercial delivery to end users.

The chart shows a high-level, but useful, representation of how these valuable, clean-burning hydrocarbons get to user-markets through a variety of processing and transportation channels.