Natural gas and its supply chain

by Ana Lopez

Natural gas is a widely used energy source worldwide. Thousands of people are operating in its supply chainassist in drilling and extracting natural gas, treating it and transporting it to commercial and industrial consumers.

In this article, we’ll discuss what natural gas is, take a closer look at the supply chain, and touch on some current events and recent discussions related to it. We also provide tips people interested in investing in this sector.

Key learning points:

  • Natural gas has been produced over millions of years by the slow decomposition of organic matter as it is pressed and heated beneath sand and sediment.
  • Natural gas consists mainly of methane, although it often has to be processed when it is first drilled underground due to the presence of non-hydrocarbon compounds such as sulfur and helium.
  • The future performance of natural gas companies will be affected by socio-political events such as war, government sanctions and green energy initiatives.

What is natural gas and how do we get it?

Formation

Natural gas is a non-renewable resource that consumers can burn generate heat, generate electricity or cook food. Formed from the anaerobic decomposition of organic matter, methane is the main component of natural gas, but it also contains small amounts of carbon dioxide, nitrogen and several other gases.

Imagine if sea plants and animals died millions of years ago and were buried on the ocean floor. Over time, the buildup of sand and silt pushes their remains deeper into the Earth, exposing them to higher temperatures and increased pressure. This combination ultimately breaks down carbon bonds in organic matter, creating thermogenic methane (natural gas).

extraction

Natural gas is found underground in formations such as sandstone seams and coal seams. Like petroleum, natural gas is free to flow to wells because of natural underground pressure that pushes the gas through bedrock. Petroleum reservoirs often also contain natural gas, and drilling machines often find the gas (because it is lighter) on top of the oil.

The natural gas extraction process involves pumping into a wellbore to bring oil and gas to the surface. Drilling machines deliberately attempt to break up rock to facilitate gas flow through the reservoir.

Studies over the past decade have shown that 75% of the world’s natural gas resources are in the Middle East, Europe and the former USSR. That leaves a relatively small amount of natural gas in the United States, but it’s still a major industry, employing thousands of Americans each year.

Process

Natural gas companies usually transport their product through pipelines. These pipelines carry natural gas to processing plants where water vapor and non-hydrocarbon elements are separated from methane. It does not always require processing if the harvested natural gas is not particularly “wet” (mixed with elements other than methane).

Processed natural gas (which usually contains trace amounts of other elements) is called “dry natural gas” and can be delivered via pipeline to underground storage fields or distribution companies before being sent to consumers. Natural gas is odorless by nature, so chemicals called odorants are added to natural gas so that consumers and workers can detect leaks.

Transport

Liquefied natural gas (LNG) is natural gas that has been cooled to -260 degrees Fahrenheit to reach a liquid state. Because liquids are more compact than gases, LNG takes up only 1/600 of the space it takes up as a gas. This allows for easy transportation around the world to places without access to natural gas pipelines.

Once LNG has arrived at its destination, regasification plants will heat the gas until it returns to a gaseous state. The company can then deliver the gas to consumers’ homes through local pipelines.

Unlike other fossil fuels, natural gas burns cleanly and produces less toxic air pollutants and carbon dioxide. Natural gas’s carbon dioxide emissions (per unit of energy produced) are about 40% lower than coal and 20% lower than oil. This gives natural gas a reputation as a relatively safe and efficient source of energy.

However, there is disagreement about the benefits of using natural gas and whether they outweigh the methane released into the atmosphere during processing and transportation.

Flaring

Flaring is the process of burning natural gas and is a common by-product of oil extraction. Many workers in the oil and gas value chain defend flaring as necessary for safety and economic reasons. Drilling causes pressure and gas build-ups that are offset by flaring. It is also not profitable for companies to market as much natural gas as possible.

However, many others criticize the flaring process as polluting and wasteful. Viable markets are necessary for companies to invest in capturing and processing excess natural gas. Until then, flaring remains a controversial move in many oil and gas operations.

While flaring involves burning natural gas in a production well, venting is another process drillers use to remove excess natural gas. Venting releases natural gas directly into the atmosphere, and although it is usually in small amounts, it is still considered harmful to the environment.

US natural gas market

Natural gas now accounts for about a quarter of global electricity generation. In the US, analysts estimated the market size of the natural gas industry (by revenue) to exceed $200 billion by 2023. Natural gas is a potential investment for many people. Because it is slightly more environmentally friendly than other thermal energy sources such as coal, climate change legislation passed in the coming years may affect natural gas less.

Since natural gas is an energy source used by so many people, regardless of the state of the economy, it is a relatively stable sector during a recession. While higher interest rates and reduced purchasing power can significantly reduce the earnings of something like an entertainment company, an energy company usually won’t see profits fall too much in an inflationary environment.

If you’re interested in exposing your portfolio to natural gas companies, you can can invest in an exchange-traded fund (ETF), buy a futures contract or invest in individual natural gas companies on a stock exchange. Major oil and gas stocks typically offer investors high dividends, making these stocks even more attractive to potential investors.

Socio-political events affecting natural gas

Like all other energy sectors, current socio-political events can significantly affect company performance. It’s not just climate change legislation that’s affecting the prospects of energy companies.

The Nord Stream incident

In September 2022, a series of bombings and subsequent gas leaks occurred on the Nord Stream 1 and 2 pipelines. The pipelines are designed to transport natural gas from Russia to Germany across the Baltic Sea.

Before the bombings, the Nord Stream pipelines were filled with natural gas but were not operational due to disagreements between Russia and the European Union. In 2021, Europe depended on Russia for more than 40% of its gas, and the sudden supply chain narrowing caused energy prices to skyrocket.

In the background of this event were the Russian invasion of Ukraine and the threat of US sanctions against any country that helped Russia complete the construction of the Nord Stream pipelines. While it remains unknown who was responsible for the attacks on the pipelines, the event shows the effect current events could have on natural gas prices.

The US tied Qatar in 2022 as the world’s largest LNG exporter. The incident benefited companies specializing in solar, hydro, wind and biomass energy resources.

US investment in natural gas

Another effect of the war in Ukraine and the rise in LNG prices was further investment in energy sources for home use. The US plans to build some liquefied natural gas terminals along the Gulf Coast; this would increase the number of exports the US could make.

While this news isn’t necessarily good for those worried about the US meeting certain fossil fuel emission thresholds, it does suggest that the landscape of the US natural gas industry could change significantly in the coming years.

The future of industry

It is a challenge to know which way the natural gas sector will go. People may consider switching energy sources if there is a protracted energy crisis. With climate change legislation targeting thermal energy sources with a larger carbon footprint, the demand for natural gas could continue to grow in the coming years as people still want reliable sources of energy to heat their homes and cook with.

The Inflation Reduction Act, signed into law by President Biden in August 2022, has allocated $369 billion to combat climate change by creating and developing green energy. We’ll have to wait and see how companies specializing in green energy respond to more funding and good press. If demand continues to grow, there is a chance that their market share will become smaller than that of natural gas companies. Time will tell.

Last words

When most people think of natural gas, they immediately think of the small blue flames on their gas burners in the kitchen. Natural gas is a non-renewable energy source created over millions of years by the decomposition of organic matter. The process of harvesting and processing is complex and entails a certain amount of environmental damage due to the release of methane.

As the energy world changes around us – with factors ranging from energy crises abroad to green energy initiatives here in the US – demand for natural gas is likely to continue to grow for decades to come. As an investor, you may be interested in companies that process or ship LNG worldwide.

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