Natural Gas - PDF by neodoc

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Large domestic and North American reserves relative to current demand (U.S. currently imports ~15% and that comes largely from Canada in contrast to US oil imports of approximately 50%) • Like all fossil fuels, natural gas is depletable and does contribute to global warming, however, it is the cleanest fossil fuel (lowest particulates, SOx, NOx, and C02). The Clean Air Act of 1990 and other environmental policies favor natural gas. Natural gas is the leading automotive fuel alternative to gasoline The winter of 2000-2001 included the highest natural gas prices in over 15 years.

• •

Increased Efficiency of Conversion of


• Introduction – What is Natural Gas • Worldwide Natural Gas
– Production, Reserves – Consumption

Lecture Outline

• US Natural Gas
– – – – Reserves Production Consumption Prices

• The Natural Gas Industry
– Refining – Transportation
• Pipelines • LNG

– Storage – Technology

• Environmental Impacts • Future

World Energy Consumption by Fuel, 1970 – 2020 (quadrillion Btu)

Source: EIA, Annual Energy Outlook 2001 – December, 2000

World Commercial Energy Consumption by Resource, 1999
(Total 344.7 Quads)

Nuclear Energy 8%

Hydroelectric 3%

Coal 25%

Oil 40%

Natural Gas 24%

Source: BP Statistical Review, 2000 Note: difficult-to-measure, non-commercial energy sources like biomass are not included in this figure

US Commercial Energy Consumption by Resource, 1999
89 Quads
Nuclear HydroEnergy electric 1% 9%

Coal 25%

Oil 40%

Source: BP Statistical Review, 2000

Natural Gas 25%

Note: difficult-to-measure, non-commercial energy sources like biomass are not included in this figure

World Electricity Production, 1997
144 Quads
Oil 9%

Coal 36%

Hydro 21%

Natural Gas 16%
Source: The International Energy Outlook, EIA, 2000,

Nuclear 16% Renewables 2%

Total US Net Electricity Generation 1999, by Source and Industry Sector
Note that: In 1998, Gas accounted for 9.1%, Coal accounted for 57.2%, Nuclear 20%, and Hydro 11%

Nearly 48% of all gas-fired generation is non-utility

Electricity Generation by Fuel in Two Cases, 1990-2020 (billion kilowatthours)
Reference Case
Renewable Hydropower Nuclear Petroleum Natural Gas Coal

1990+9% Case 5000





1990 1995 2000 2005 2010 2015 2020


1990 1995 2000 2005 2010 2015 2020

Source: EIA, July 2000

Gas Introduction
• • Natural gas has attracted global attention as the transition fuel to a more sustainable/renewable energy mix world wide. Recent and dramatic deregulation and restructuring of the pricing and transmission of natural gas (both have been regulated for over fifty years) is allowing the development of new markets in all sectors for natural gas. In 1990, natural gas began trading on NYMEX which has become the primary reference point for U.S. gas prices. Weather and gas storage patterns are the principal influences on wellhead gas prices. With deregulation, the largest boom in natural gas pipeline construction since WW II began in late 80s and lasted into early 90s. Significant construction continues today to better link reserves and markets. New technologies and policies have caused natural gas to be a fuel of choice rather than the "boobie prize" of oil exploration and led to the development of natural gas reserves in "unconventional" reservoirs such as buried coal beds and "tight" sands.




Significance • The first gas well in the US was drilled in 1825, long before the first oil well. It was connected by pipeline to users in Fredonia, New York. By 1886, an eight-inch gas line had been run 87 miles from Kane, PA to Buffalo, NY. • Globally, natural gas has posted dramatic growth over the past four decades. The US and the countries of the former Soviet Union are by far the largest producers of natural gas. The Middle East, although a major holder of natural gas reserves, is not one of the largest producers.

How the Natural Gas Industry Changed Since the mid-1980’s
• Deregulation: Arkoma Basin example: prices, pipelines, third party transactions • Oil and Gas have different origins…and unconventional resources emerged to become very important…Tight sands, Coalbed Methane • The Clean Air Act…and PURPA…the spead of Non-utility generation which both favored natural gas

Current Production = 87 tcf

Source: Power Surge

Definitions Natural Gas is largely composed of methane (CH4), the simplest hydrocarbon molecule.

Like oil, natural gas is described as sweet (low) or sour (high) depending on its sulfur content. It is also described as wet or dry depending on the presence of natural gas liquids and other energy gases. If natural gas is greater than 90% methane then it is referred to as dry. Finally, natural gas is described as associated or non-associated depending upon whether or not it is associated with significant oil production. Contrary to popular belief, most natural gas is not associated with oil. In the US, only ~20% of natural gas reserves are believed to be oil associated.

Natural Gas Definitions

A producing gas well – Christmas Tree An approximate breakdown of raw natural gas by component. Other hydrocarbon gases are removed from the methane mixture and sold separately from natural gas



• • •


Mineral Rights in the U.S.
• Largest, most extensive interest that can be owned in land


Mineral Deed

Divisible into:

Real Estate Deed

• rights to any natural constituent of the earth’s crust Oil and Gas Lease Lessee Lessor Lessor


• Includes water rights

• Gives holder right to explore for and produce oil and gas • Leases normally continue as long as wells drilled on the land produce oil and/or gas in commercial quantities


• Interest in gross revenues of oil and gas production (usually 1/8th of 8/8ths) • Limited liability: ownership is free and clear of all costs (“Landowner’s Royalty”) • Mineral owners receive a cash bonus as an inducement to execute a lease

Drilling for Gas Onshore
Same procedures and basic equipment as for oil exploration

Offshore Gas Fields (North Sea)


World Proved Reserves are currently approximately 5171 trillion cubic feet (about 5100 quads) with 73% of these reserves concentrated in the Middle East and former Soviet Union.

1999 World Natural Gas Proved Reserves
Asia & Australia 7% North America 5% Former Soviet Union 38%

Africa 8% Latin America 4%

Middle East 34%

Europe 4%

Source: BP Statistical Review, 2000

1999 World Natural Gas Production 86 Quads – 1 bcf = 1.03 trillion Btu
1 tcf = 1.03 quadrillion Btu

Latin America 4%

Rest of World 16%

North America 32%

Middle East 8%

Europe 12%

Former Soviet Union 28%

Source: BP Statistical Review, 2000

Natural Gas Use for Electricity Generation by Region, 1985 - 2020

Source: EIA,

World Natural Gas Consumption, 1970 - 2020

While the entire world continues to increase natural gas consumption…

World Natural Gas Reserves, 1970 - 2000

Reserve Growth is Increasingly in Developing Countries

Source: EIA, International Energy Outlook 2000

Natural Gas Consumption in Asia – Gas growth in China and India

Natural Gas Consumption Poised to Increase

Gas Use in India, 1990 - 2020

Source: EIA, International Energy Outlook 2000

1999 United States Natural Gas Proved Reserves
167 tcf
Rest of US 19% Alaska 6% Kansas 4% Louisiana 6% New Mexico 9%

Federal Offshore 16%

Oklahoma 8% Wyoming 8% Texas 24%

Source: EIA U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves 1999 Annual Report

1999 Dry Natural Gas Proved Reserves

Source: Energy Information Administration U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves 1999 Annual Report

Producing Regions and Primary Markets

How much Natural Gas is There?
• At current production levels, world and US reserves to production ratios are approximately 64 and 9, respectively. The size of the natural gas resource base has been growing in recent years as scientists’ understanding of its origin and occurrence has improved, and as companies are beginning to actively look for gas resources due to rising demand. The DOE states that there are at least 1300 TCF of natural gas in the US that can be recovered. Proved reserves sit at about 167 TCF or about a 9-year supply at current rates of consumption. It is only in the last decade that we have begun to seek gas production. We haven’t looked hard yet like we have for oil. Big potential: – Deep gas, tight gas reservoirs, coal bed methane. US Government has given substantial tax credits to boost development of resources. Thomas Gold (Cornell) - Natural gas is abundant beyond imagination - not necessarily limited to organic origin, but to the earth’s formation and thermal and chemical activity in the earth’s mantle


• •


Technically Recoverable Gas Resources in North America Comprise Almost 2,500 Trillion Cubic Feet
210 114 57 9 Alaska 0 0 133 71 1 319 WCSB* 286 58 Midcontinent 180 Gulf Coast Western Region 70 0 Mexico 149 101 55 95 0 East Coast 218 107

Northern Frontier

93 36 Resources (trillion cubic feet) Proved Reserves Conventional Resources Nonconventional Resources *WCSB = Western Canadian Sedimentary Basin

Eastern Region 58 36

Source: EIA

1999 US Natural Gas Production
23.7 Trillion Cubic Feet – 24.4 Quads
Kansas 3% Rest of the US Alaska 15% 2% Texas 32% Wyoming 4%

New Mexico 8% Louisiana 28%

Oklahoma 8%

Source: EIA Natural Gas Monthly - February, 2001 -

Lower 48 Dry Natural Gas Reserves and Production, 1945-2020
Reserves Peak


Trillion Cubic Feet


AEO 2000 Reference Case
Trillion Cubic Feet Lower 48 Dry Gas Production
Projected Production in 2020


25.9 TCF
World War II Ends Rapid

Production Peak



22 TCF


Lower 48 Dry Gas Reserves

Proved Reserves Decline Flattens High Gas Prices and Drilling



Lower Gas Demand



Lower 48 Reserves Lower 48 Prod (Dry) AEO 2000 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015


0 1945

0 2020

LowerU.S. Lower-48 Annual Estimates of Proved Natural Gas Reserves
Source: PaineWebber (1950 to 1976, American Gas Association; 1977 to the present, Energy Information Agency)

Net Reserves-toAdditions Proved Reserves Adjustments Production Year Beginning of YearExtensions Discoveries * & Revisions Production Ending Ratio 1950 1955 1960 1965 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 179.4 210.6 261.1 279.4 269.9 205.3 168.7 163 159.5 158.9 154 158.9 158.2 160 157.5 155.4 152.5 154.1 155.6 157.2 156.7 154.1 9 7.1 6.1 4.5 6.8 6.2 7.9 5.1 4.6 6.1 6.9 6.8 7.8 10.6 8.2 7 5.1 4 2.9 2.6 3.5 3.7 4.4 2.4 2.4 2.8 5.4 4.1 4.5 5.1 3.2 3.8 1.2 1.2 5.8 3.7 10.9 5.9 6.4 6.8 7.9 5.7 7.2 8.2 7.7 2.6 4.2 11.5 18.5 15.7 15.3 15.8 16.3 16.6 16.9 16.8 17 17.4 17.9 17.6 18.4 18.7 18.2 18.9 184.58 222.48 262.2 284.5 259.6 196.1 165.6 159.5 158.9 154 158.9 158.2 160 157.5 155.4 152.5 154.1 155.6 157.2 156.7 154.1 167.4 9 10.2 10.4 9.8 9.8 9.5 9.5 9.3 9.1 8.8 8.6 8.9 8.5 8.4 8.5 8.9

Trends in US Natural Gas Consumption and Supply
25 20 15 10 5 0
Consumption Production



Source: EIA

U.S. Natural Gas Net Imports, 1970-2020 (trillion cubic feet)

5 4 3 2 1



-1 1970 1980 1990 2000 2010 2020

Source: EIA

Current Natural Gas Spot Prices: Well Above the Recent Price Range

Henry Hub Daily Spot Prices Compared to Typical Range for 1998-1999

Dollars per MMBtu


Henry Hub Midpoint $/MMBtu Average, 1998-1999 +/- two standard deviations, 1998-1999=$0.64





















Source: Financial Times Energy, Gas Daily

Why the price surge in 2000?
Source: EIA

• • • • •

Supply Tightness Storage Stocks - lower than average Consumption increases Oil Price Increases Market Perceptions



Baker Hughes Oil/Gas Split
1200 1000


Rig Count













US Total Rigs US Oil Rigs US Gas Rigs

Data Source: Baker Hughes February 10, 2001

Data Through 2/9/01

Natural Gas Prices by Sector

Note: Year-end 2000 numbers not yet available – but for the months June-October 2000… Average Wellhead price Average Citygate price Average Residential price Average Commercial price Average Industrial price Average Electric Utility price EIA Natural Gas Monthly January 2001

$ 4.42 per Mcf $ 5.18 per Mcf $ 9.64 per Mcf $ 6.32 per Mcf $ 4.61 per Mcf $ 4.50 per Mcf

104% above ’99 avg. 64% above ’99 avg. 44% above ’99 avg. 19% above ’99 avg. 49% above ’99 avg. 72% above ’99 avg.

1998 US Natural Gas Consumption by End-Use 21.3 Trillion Cubic Feet
Transportation 8% Electricity 15% Residential 21%

Commercial 14%

Industrial 42%

Source: CERA, North American Gas Trends, 2000

The Industry At A Glance
Participants Producers Pipelines Natural Gas Marketers Local Gas Utilities End Users
8,000 Independents 24 Majors 140

Miles of Pipe
0 285,000

Regulatory Regime
Phased price deregulation Begun in 1979, completed in 1989 Federal Energy Regulatory Commission (FERC) Unregulated State Utility Commissions Unregulated

260 1,400

0 833,000 0

Residential 53 million Commercial 4.5 million Industrial 40 thousand Electric Utilities 500


Interstate - FERC Intrastate - State Commissions

Source: EIA

The Natural Gas Industry

Natural Gas Supply and Disposition in the U.S., 1996

(Trillion Cubic Feet)

17.5 3.0 3.0 18.8
2.9 0.014 0.035 0.005 0.052 0.034 0.068






Source: EIA

How is Natural Gas Refined?
• Natural gas is the end product in contrast to oil which needs to be refined. • Natural gas is gathered from individual wells, processed locally, and then moved via large pipelines to markets. • Minimal “refining” is done near the production to remove water, hydrocarbon liquids, helium, carbon dioxide, hydrogen sulfide, etc. Referred to as gas processing plants; much simpler than an oil refinery and they are located closer to the production. The owners of the production usually receive revenues for the byproducts of processing that have value.

How is Natural Gas Transported?
• By Pipeline! • The majority of the gas reserves in the US and the world aren’t located near the markets for the gas. • Oil goes by rail, truck, tanker and pipeline. Coal goes by rail, barge, truck and pipeline. Natural gas goes almost exclusively by pipeline. Why? Lack of energy density. Remember 7.5 gallons of oil as the same energy content as a 10x10x10 room filled with natural gas at standard conditions. Compressing natural gas is feasible but expensive. Compress to 1000 lbs/ sq inch to move economically.

Natural Gas Transportation - Pipelines
• Big upfront expense (low operating costs). Must be confident that the production and the markets that the pipeline will link will both last long enough to amortize the cost of the pipeline. • Monopoly power: • Intrastate: only made sense for cities and other customers to have one set of pipes rather than two competing sets - essentially have utility monopoly control and resulting regulations. • Interstate: commerce laws like trucking, electric power transmission, again monopoly control for most of the century - only one pipeline between production and markets: no competition. This is changing radically now. • First boom in long-distance high pressure pipeline construction right after WWII. Second boom began five years ago with deregulation. • LNG: Indonesia Japan; N. Africa Italy; Russia W. Europe (-250 degrees C) • If no pipeline: flare, reinject, shut-in, build a fertilizer plant or a power plant right next to production

Natural Gas Transportation - Pipelines
• • • • Pipelines move raw gas from wellheads to regional distribution centers. A pipeline company is a totally separate company from a producer or a distributor, although sometimes pipelines sell gas directly to large customers. Most sections of large pipeline are made of steel piping, measuring anywhere from 20 to 42 inches in diameter. When natural gas is moved through a pipeline, it is transmitted at higher pressures (from 200 to 1500 psi) to reduce the volume of the gas, and provide a pushing force to propel the gas through the pipe. Periodic compressor stations maintain pressure in pipeline to keep large volumes of gas moving Compressor stations are installed about every 100 miles along the pipeline, and require significant amounts of electricity.



Liquified Natural Gas
• • • • • • • When natural gas is cooled to a temperature of approximately -260°F at atmospheric pressure it condenses to a liquid called liquefied natural gas (LNG). One volume of this liquid takes up about 1/600th the volume of natural gas at a stove burner tip. LNG weighs less than one-half that of water, actually about 45% as much. LNG is odorless, colorless, non-corrosive, and non-toxic. When vaporized it burns only in concentrations of 5% to 15% when mixed with air. Neither LNG, nor its vapor, can explode in an unconfined environment. Shipping LNG by tanker is an ideal solution in cases where pipeline export is ruled out for technical, economic or indeed geopolitical reasons. But the process is expensive and the LNG chain requires heavy capital investment in liquefaction and regasification plants, refrigerated storage tanks, port facilities for loading and unloading and of course the specially-designed LNG tankers.

A LNG Tanker

Source: Source:

The Liquified Natural Gas Cycle
Natural gas is composed primarily of methane (typically, at least 90%), but may also contain ethane, propane and heavier hydrocarbons. Small quantities of nitrogen, oxygen, carbon dioxide, sulfur compounds, and water may also be found in "pipeline" natural gas. The liquefaction process removes the oxygen, carbon dioxide, sulfur compounds, and water. The process can also be designed to purify the LNG to almost 100% methane.




A typical liquefaction plant producing 5 million tonnes of LNG per year needs 110 MW of electric power for the compression cycle and another 60 MW (not to mention 60,000 cu.m/hr of water) for the cooling process. The investment involved is quite considerable: construction of the plant alone would cost about $1.5 billion, and then there is the cost of developing the gas field to supply the plant, and the cost of the tankers to ship the LNG to market. Controlling costs will undoubtedly be a major factor in keeping LNG competitive.

World LNG Exporters 1998
1600 1400 1200 1000

800 600 400 200 0
Indonesia Algeria Malaysia Australia Brunei UAE Qatar USA Libya

Source: BP Amoco

LNG Trade Is Important in U.S. Regional Markets
(1998, Billion Cubic Feet)


Gas Storage
To Japan

96 From UAE, Algeria, and Australia Inactive, planned for late 2000 reopening

67 LNG Terminal Facilities

Source: Energy Information Administration, Natural Gas Monthly (June 1999).

Natural gas: Major trade movements
Trade flows worldwide (billion cubic metres)

Natural gas
77.1 43.2 41.8 9.9 19.9 87.3 2 20.9 3 13.2


3.9 9.7 7.3 2.3 24.2 9.5





S. & Cent. America


Former Soviet Union

Middle East


Asia Pacific

SOURCE: El Paso Energy – Building Our Merchant LNG Business, February 6, 2001

Natural Gas Storage

A) Salt caverns, B) Mines, C) Aquifers, D) Reservoirs, E) Hard Rock Caverns

The three principal types of underground storage sites used in the United States today are: 1. Depleted reservoirs in oil and/or gas fields 2. Aquifers 3. Salt cavern formations

There are more than 400 underground storage sites in 27 states across the United States and Canada. Together, these sites can hold upwards of 3 quads of natural gas,

Storage acts as a sort of buffer between the pipeline and the distribution system, allowing distribution companies to serve their customers more reliably by withdrawing more gas from storage to meet customer demands during peak use periods. It also allows the sale of fixed quantities of natural gas on the spot market during off-peak periods. Having local storage of gas also reduces the time necessary for a delivery system to respond to increased gas demand. Storage also allows continuous service, even when production or pipeline transportation services are interrupted.

How Has Natural Gas Been Regulated?
History of US Government Regulation of Price and Distribution
Local distributors of natural gas have long been regulated by states as public utilities. They were included with the “natural monopoly” concept because it is inefficient to let more than one company lay gas mains under the street. Once large transmission lines began to cross the country, Congress decided that serious matters of interstate commerce were involved.


1973 1978



Congress created the Federal Power Commission to regulate the price, transportation and production of natural gas. FPC set unrealistically low prices for interstate commerce. These artificially low wellhead prices for natural gas, which existed through the 70’s, increased demand but simultaneously gave producers no incentive to develop new reserves, thereby reducing overall supply. Arab Oil Embargo. Oil price increase caused natural gas on intrastate markets (uncontrolled by FPC) to rise dramatically. Natural Gas Policy Act; A new system of gas pricing that distinguished between old gas and new gas. Old gas still heavily controlled at low price levels. New gas decontrolled by January 1, 1985. FERC (Federal Energy Regulatory Commission, successor to FPC) ruled in a series of orders that the role of pipeline companies would change from being gas purchasers and marketers to more strict transporters of gas and allowing the producers to sell their gas directly to customers. Congress passed legislation to lead to complete decontrol of prices by January 1, 1993.

Environmental Benefits of Natural Gas

• CCGT Technology is the cleanest and most efficient fossil generation option

Source: Power Surge

US Capacity Additions (1993-2000)
Steam 13%

40 GW Total US additions over this period Steam = 5 GW GT/CC = 35 GW

GT/CC 87%
Source: EPRI

Forecasts for the US and Western Europe show that over 90% of new installed capacity over the next five years will be combined-cycle natural gas-fired turbines

US Planned New Generating Capacity – 1999 - 2003
Utility – 27,505 MW
Oil Hydro Other 2% 3% 3%
Gas/Oil 27%

Non-Utility – Total 61,220 MW
Hydro Wind Other 5% 0% 0%

Oil 0%

Gas 68%

Gas 92%

Natural Gas Will Hold a Larger Share of the US Energy Market in 2020
Total Energy Consumption 94.7 Q
21.0 3.3

Natural Gas Consumption (Quadrillion Btu) 22.5 Q


36.9 14.3

5.1 2.1 2.9

22.5 9.1

118.6 Q
25.6 10.0 47.6 33. 1 10.1 12.3 3.8

33.0 Q

6.0 3.2


Natural Gas Coal

Petroleum Products Other

Industrial Electric Utility Other

Residential Commercial

Source: EIA

Source: Oil and Gas Journal

The Link Between Natural Gas and Fuel Cells
See the attached article from The Oil and Gas Investor

• •

When a hydrocarbon fuel is introduced into the system, the catalyst surface of the membrane splits hydrogen gas molecules into protons and electrons The protons pass through the membrane to react with oxygen in the air (forming water). The electrons, which cannot pass through the membrane, must travel around it, thus creating the source of DC electricity
The Role of Natural Gas – it is sent through a reformer that pulls hydrogen atoms off methane (NG) molecule, thereby providing source of hydrogen for the fuel cell Note that any hydrocarbon could be sent through a reformer, but NG is best because of its high H/C ratio compared to longer hydrocarbon chains (such as those in petroleum), thereby limiting the energy needed and waste produced to form Hydrogen ‘Green’ sources of Hydrogen (windpower) would eliminate CO2 produced in NG reforming

• •


Helpful Resources
• Australian Gas Association • American Gas Association • Energy Information Association • • Gaz de France – • • LNG information - • Consolidated Natural Gas – • Natural Gas Council - • Natural Gas Supply Association - • Gas Research Institute – • Insterstate Natural Gas Association of America - • DOE Fossil Energy Site - • Enron – • DOE -

Helpful Resources
• CERA Cambridge Energy Research Associates in Cambridge, MA is the leading energy information consultancy in the world. They publish a book every year called North American Natural Gas Trends. • Worldwatch Institute in Washington D.C.
– Excellent recent paper July 2000 on the micropower revolution by Seth Dunn

• Ron Barone and the Investment Research info provided by Paine Webber. Will release an annual paper on U.S. Natural Gas this week. • BP Statistical Review of Energy (see BPAmoco’s website) • February 10,2001 Economist Survey of Energy

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