natural gas in the US: the “other” energy story

The US is now producing about 70 billion cubic feet of natural gas daily.  On a heat-equivalent basis, that’s equal to around 10 million barrels of oil.

When I was a starting-out energy analyst in the late 1970s, natural gas and crude oil sold for roughly the same amount per Btu.  In fact, in some instances, natural gas sold at a premium.  That hasn’t been true for a long time.  Up until July of this year, natural gas was selling for about $4.50 per thousand cubic feet (Mcf).  That’s the equivalent of $30 a barrel oil.

Why the huge price difference?

In the simplest terms:

–natural gas is a good substitute for oil as a heating fuel or for generating electricity, but it has made only small inroads in transportation, and

–because it’s in gaseous form, it’s harder to get from place to place.  Gas typically requires a pipeline, which is expensive and suffers from the NIMBY syndrome.

Even though the prices of crude and natural gas have going their separate ways for many years–with gas being consistently much cheaper than oil, natural gas, too, has had its own price collapse over the past six months.  Even at what should be a seasonal peak, natural gas is now going for $3.50 an Mcf (the equivalent of $23.50 a barrel), down by almost a quarter since summer.

The two price slides have one factor in common–an increase in production from hydraulic fracturing.  The other is mostly a gas thing–unusually warm weather in November and December  For what it’s worth, predictions are for continuation of the mild weather until spring.

The main effect of the natural gas price slide has been the obvious one–more money in the pockets of gas consumers.  But there have been several others.  Imports of natural gas from Canada are down.  Imports of high-cost liquefied natural gas (LNG) have dropped sharply.  The advantage that the EU’s petrochemical industry, which uses oil as its main feedstock, had achieved over its US counterpart, which uses gas, has abated.

my take

This is a situation where effects are asymmetrical.  The price decline is very bad for domestic natural gas producers. While it persists, demand for imported natural gas should be close to zero, although minimum “take” provisions of long-term contracts may force importers to buy at least some amount.  Bad for them, too, unless their customers ar contractually obligated to take the pricey stuff.

Because gas is hard to transport, this is a US phenomenon.

We use about 20 million barrels of oil in the US each day.  We use the equivalent of another 10 million in the form of natural gas.  On a dollar basis, though, gas amounts to only about 20% of overall hydrocarbon spending.  So the positive effect of the natural gas price decline will be much smaller than for oil and will be concentrated mostly in the Northwest and Midwest, where the weather is colder and where the pipelines terminate.




shale oil and shale gas (i): oil as an investment vs. natural gas

I want to write about the changes that horizontal drilling and hydraulic fracturing have made in the economics of oil and gas by allowing drillers to tap deposits in shale.  This is the first of three posts, and contains background.

what they have in common

Oil and natural gas are both hydrocarbon energy sources.

The same exploration and development companies look for both oil and gas.  They use the same geologists, the same sub-surface mapping tools, the same drilling equipment and the same oilfield service firms to make the actual holes in the ground.

Oil and natural gas often occur in proximity.  Sometimes a single well produces a mixture of the two.

In many areas, including the US, the government provides tax subsidies to encourage exploration.

A barrel of oil is roughly equivalent in heating value to 5,800 cubic feet of natural gas.  During much of my Wall Street career (I stared out as an oil analyst), the price of natural gas and the price of oil have been tied relatively closely to one another based on this heating value relationship.  In other words, if oil were selling at a price of $36 a barrel meant that natural gas would sell at more or less $6 an Mcf (thousand cubic feet).

That’s no longer true.  The current oil price of around $100 per barrel translates, on a heating value basis, into $16.67 per Mcf for natural gas.  Gas spent most of 2013 selling at about $3.50 an Mcf.  The recent severe cold spell in many of the densely populated parts of the country has caused the spot quote for gas to spike to a bit over $5 an Mcf..  That’s an anomaly that the arrival of warmer weather will correct,  but even today’s spot price is still less than a third of the heat equivalent price of crude,

how they’re different

Crude oil reaches the surface as a liquid.  In contrast, and as the name implies, natural gas reaches the surface as a gas.  This innocuous-sounding difference has enormous economic implications.

oil is easy to transport, natural gas isn’t

The most efficient way to move large amounts of either oil or gas from the wellhead is through a pipeline.  Often, when production begins in a new area, there’s no pipeline nearby, though.  Building one  is expensive and takes time.  That’s not a huge problem for crude oil.  It can be stored in a tank by the wellhead.  Trucks will come by periodically to take the oil away, either directly to a refinery, or to the railroad or a pipeline for further transport.

Natural gas is a different matter.  There’s no practical way to store it above ground, and there are no trucks made to transport it   In the past, for wells that produce both oil and gas, drillers would “flare” or burn away the natural gas just to get rid of it if no pipeline was available.  Today, the driller is most often required to pump the gas back down below the surface rather than simply destroying it.  For natural gas-only wells, no pipeline means seal up the well and wait.

One exception:  if the amounts of natural gas in a remote location are enormous, the natural gas can be cooled until it becomes a liquid and then transported to market in special refrigerator ships.  The cost of the required cryogenic plants + special ships + unfreezing operations at the buyer’s end can run into tens of billions of dollars, however.  So this requires lots of time, operational and financial planning, as well as the creation of long-term supply contracts.

lots of buyers for oil, not so many for gas

Early in my career, I studied an offshore oil and gas financing project in New Zealand.  The oil from the field was pumped directly into oil tankers that sailed away when full.  The natural gas got pumped back underground.

Why not ues the natural gas in New Zealand?   …lots of infrastructure needed.

One thing was the cost of the required miles-long pipeline to shore.   But that wasn’t the main issue.  To get the gas to residential/commercial users, local distribution companies would need to be formed.  These firms would then have to tear up all the streets in town to lay pipelines to everyone’s doors.  Potential users would have to either replace or modify their existing oil burners  so that they could use gas.  The expense would be enormous.  So, too, the disruption to daily life.  And you couldn’t force citizens to use gas, could you?  So it would be hard to guess in advance if there would be any payoff to all this.

Another example:  in the early 1980s the US tried to promote natural gas as automotive fuel.  The effort foundered on the lack of places to refuel.  No one wanted to buy natural gas-powered cars if there were no service stations.  No company wanted to build a national chain of natural gas service stations if there were no cars.  The plans did result in the creation of fleets of natural gas-powered local delivery trucks, but little else.

the big difference

Oil can move to markets all around the world.  Natural gas generally can’t.

More tomorrow.