A. Natural Gas: An Abundant Resource:
Natural gas is a major source of energy throughout the world. Produced from underground formations, it consists primarily of methane, nature's simplest and most abundant hydrocarbon molecule.
North America has vast amounts of natural gas. Land formations under and offshore the Lower 48 states contain an estimated 1,466 trillion cubic feet (tcf) of natural gas. Alaska has an additional estimated 313 tcf in gas resources.
Total recoverable North American resources are estimated at more than 2,400 tcf - more than we'd use in a century at current rates of consumption. That figure has the potential to grow as new natural gas fields are discovered.
Most U.S. natural gas comes from the Southwest.
The top-producing states of Texas, Louisiana, Oklahoma, and New Mexico together supply about 75 percent of marketed natural gas production. More than half of all states, however, produce some natural gas. Canada is also an important source of gas for U.S. customers.
Many currently producing fields were discovered in the mid-20th Century. To find new sources of natural gas, producers are constantly looking for formations that hold this resource.
Today, many are moving into little-explored "frontier" areas like offshore eastern Canada, Western Canada, the Mackenzie Delta and Beaufort Sea, and the Alaskan North Slope.
“North America has a tremendous natural gas resource base that will provide reliable, environmentally friendly fuel to many future generations, if the industry obtains necessary access."
George Kirkland President Chevron North America Exploration & Production
Offshore natural gas is increasingly important. By the beginning of the 21st century, the offshore Outer Continental Shelf supplied approximately 29 percent of total U.S. natural gas production.
Producers are also tapping nontraditional or "unconventional" formations that hold natural gas, including tight sands, Devonian shales, and coalbed methane.
Unconventional gas contributed 18 percent of total U.S. production in 1990; by the end of the century, the share was 24 percent. Coal-bed methane contributed more than 6 percent of U.S. production and constitutes more than 7 percent of reserves.
Natural gas producers have generally maintained seven to nine years of supply as "proved reserves" - gas in verified locations owned or leased by producers and available for near-term production.
Reserves are large enough to allow producers make development plans for the next several years but not so large as to prove an uneconomic inventory drain on company resources. Advanced technologies that could decrease drilling and production times may reduce the size of the reserve pool needed in the future.
B. Exploring for Natural Gas:
Exploration relies on highly advanced computer technology. Seismic surveys use sound waves to map underground formations; the technology helps identify promising areas and images the effectiveness of production technologies.
Producers also take core samples and drill test wells in promising areas.
Offshore, exploration and production can occur in waters more than 7,500 feet deep and as far as 200 miles from shore.
Exploration and production are costly, and most of the cost occurs before any gas is produced or sold. The average well cost in 1998, for instance, was more than $800,000.
Onshore wells average just $400,000 per well to drill and complete; offshore wells average $4.3 million. To spread the risk, producers frequently undertake joint exploration initiatives.
C. Producing Natural Gas:
More than 8,000 producers operate in the United States in addition to a wide variety of field-service companies. They range in size from large, international companies to small, family-owned operations.
Production is highly competitive. No one or two companies dominate the marketplace. The top five producers supplied approximately 23 percent of the U.S. market in 1999. Independent producers supply about 65 percent of total U.S. natural gas production.
Today, the United States produces about 85 percent of the natural gas we use. About 29 percent of that total comes from offshore.
U.S. production is rising. The amount of marketed natural gas produced in the United States is expected to rise from 19 trillion cubic feet (tcf) at the beginning of the 21st century to 26 tcf or more by 2015.
D.Natural Gas at the Wellhead:
Natural gas reaches the earth's surface at the wellhead.
There are more than 300,000 wells producing natural gas in the U.S. Most of these are gas-only wells. At the beginning of the 21st Century, about 14 percent of U.S. gas was classified as "associated" - produced from reservoirs that also contain crude oil. Associated gas is expected to drop to about 8 percent of total U.S. production by 2020.
Wells produce a combination of gases, water, and other liquids. Methane - consisting of one carbon and four hydrogen atoms - constitutes the bulk of the natural gas stream.
Depending on the well, the stream can also contain ethane, propane, butane, natural gasoline, heptane, hexane, pentane, and other gases and minerals. Some wells also produce small amounts of helium.
An approximate breakdown of raw natural gas by component. Many other hydrocarbon gases are removed from the methane mixture and sold separately from natural gas.
Graph adapted from table in Modern Petroleum, PennWell, 1992 Water is generally removed at the wellhead and collected in a tank. It is trucked off-site for disposal.
The wellhead is the first place natural gas is measured and valued.
Producers share the value of the natural gas with the owner of the land (or the mineral rights to the land) via a royalty agreement.
When producers lease privately owned land, they frequently negotiate contracts one-on-one with landowners. Leasing government-owned land is a more complex and formal process that frequently involves competition through sealed bids.
The federal government annually receives more than $2 billion in royalties from natural gas produced on federal land. More than half of all federal royalties come from natural gas.
This income bolsters the federal budget and supports programs like the National Park Service, the Land and Water Conservation Fund, and the Reclamation Fund. Because royalties fluctuate with the value of natural gas, the federal government receives significantly more money when prices rise.
All states share in the nation-wide programs funded from federal royalties, States in areas where natural gas is produced on federal land receive additional sums via royalty-sharing arrangements with the federal government.
States also receive royalties from natural gas produced on state-owned land.
E. Moving Natural Gas from the Wellhead:
Natural gas moves from the wellhead via small-diameter, low-pressure pipes (or "gathering systems"). The total length of all U.S. gathering systems exceeds 300,000 miles.
Some gathering lines are owned by producers; others are owned by independent companies or by companies primarily in the pipeline (transportation) business.
Processing separates the natural gas wellhead stream into components.
Trace liquids and gases that do not affect quality may be left in the marketed gas; however, when larger quantities are present, they can be separated out and sold.
Processing can also remove carbon dioxide, which can be used to pressurize oil fields, enhancing recovery. Processing may also remove nitrogen to increase the heating value of the gas.
F.The Natural Gas Marketplace:
Marketplace Competitors:
Historically, producers, pipelines, distribution companies, and large customers have been separate entities. Most remain so today. Marketing - the process of finding buyers and negotiating prices - links these entities and provides a pathway for natural gas to reach the market.
Natural gas is marketed as a "commodity" once it enters an interstate pipeline; that means it is treated as identical product no matter where it is located. The slight variations in the gas going through different pipelines do not affect gas value or use.
Many different entities market natural gas. Some large producers market their own gas. Others use joint ventures or independent marketing companies as their primary marketing outlets.
Most smaller producers sell their gas to larger producers or marketers rather than marketing it themselves. They may also sell directly to large industrial customers, to local utilities, and to competitive companies that supply gas to residential and business customers.
Large customers can become sellers. Companies with long-term, low-price commodity contracts can resell their natural gas at a profit when prices rise. They may switch to another fuel to supply their energy needs or even close facilities temporarily until price trends reverse.
Within the industry, the term "marketers" generally refers to independent or affiliated companies that buy and sell natural gas. Some act as agents for large customers. Others buy and sell gas for their own account; they sell it to whoever is buying - large customers, local distribution companies, or other marketers.
There are more than 300 companies in the United States that market natural gas. In 1998, the top five marketers handled about 24 percent of the total volume of gas sold; the top 20 handled about 66 percent.
Marketers help increase "liquidity" - the ease of making "buy" and "sell" transactions without corporate financial disruptions - by communicating price signals among buyers and sellers, matching available supplies with demand, identifying transportation routes, and encouraging standardization of transactions.
Marketers make major investments in complex risk-management systems, credit controls, and sophisticated computer (or "back-office") operations. Increasingly, marketers trade both natural gas and electricity.
Natural gas may be sold and resold several times before it reaches the customer. Typically, gas may have two or three owners before it is actually used. In 2000, about 80 percent of all natural gas passed through the hands of marketers at some point.
"Domestic natural gas producers compete with each other, with imported gas, and with other fuels to fill America's energy needs." Tony Fountain President - BP Energy Company
Marketing Tools:
The process of trading natural gas is highly sophisticated. Trading, which for many years was done almost exclusively by telephone and fax, is increasingly moving to computerized bulletin boards and the Internet. Electronic commerce is growing.
While trading can occur at any time, most takes place during the last week of the month, known as "bid week." The day-to-day price of natural gas for near-term delivery under short-term contracts is known as the "spot price."
Conversations among traders and indices compiled daily - or more frequently - by trade publications play major roles in spot-market price discovery. As with most commodities, the spot price of natural gas is subject to variation.
Long-term contracts may be negotiated one-on-one between producer/marketer and customer. Prices may be specified, or they may be linked to spot market prices or to price variations in a "basket" of fuels.
Buyers and sellers reduce price risk by using hedging tools or derivatives. One commonly used hedge, the futures contract, is traded on the New York Mercantile Exchange (NYMEX) for deliveries at the Henry Hub in Louisiana; the Kansas City Board of Trade (KCBOT) trades futures that use a Waha Hub (West Texas) delivery point.
Contracts are bought and sold for natural gas that is physically located at more than 30 major U.S. hubs. Hubs frequently develop where several pipelines merge or cross.
Marketers play a vital role in identifying regions with excess supply and moving the gas to areas of excess demand, helping to balance the marketplace.
Arranging the Movement of Natural Gas:
Marketers frequently arrange for natural gas transportation through interstate pipelines. Large customers and local distribution companies may, alternatively, make their own transportation arrangements.
Contracts for transportation are separate from contracts for the natural gas commodity. Some large customers and local distribution companies hold long-term or "firm" contracts on pipeline space through which they move gas.
A few marketers also hold such contracts. "Firm" contract holders not using their space may resell it on the secondary market. Other gas may be moved on a "space available" or "interruptible" basis.
Natural gas that meets specific quality measurements enters pipelines at thousands of interconnect or receipt points. Propelled by compressing stations located about 70 miles apart, gas moves to markets through more than 270,000 miles of large-diameter pipeline.
"Our industry has created a pipeline grid that serves customers throughout North America and allows marketers to deliver natural gas to those who need it.” Steve Bergstrom President & Chief Operating Officer - Dynegy Inc.
Natural gas may be stored before reaching its destination. This is especially common in regions with cold winters, where demand for heating fuel is very high during a few months of the year.
There are about 400 underground storage sites in 30 states that together can hold almost 4 trillion cubic feet of natural gas.
Natural gas liquefies at -260 degrees Fahrenheit. Liquefied natural gas (LNG) is compact; it occupies only one-six-hundredth of the original gas volume.
It is expensive, however, to create and store, and is thus used primarily to bolster local supplies during particularly high-demand or "peak" periods, such as prolonged cold weather. LNG can also be used to fuel vehicles.
Large customers frequently take natural gas directly from pipelines. Residential and commercial consumers receive gas through more than 830,000 miles of small-diameter pipe owned by local distribution companies.
"Technology is reducing the cost of liquefying natural gas. That expands the ways we can supply customers with the energy they need."
Skip Horvath President Natural Gas Sup
source: NGSA.ORG
© 2000 Mena Report (www.menareport.com)
