EBF 301
Global Finance for the Earth, Energy, and Materials Industries

Lesson 6 Introduction



See text alternative below
Figure 1: Value Chain for Energy Commodities
Click here for a text alternative of Figure 1

Flow chart in the shape of an arrow.
Production & Gathering (Wellhead Cost, Gathering Fees, Fuel)

Leads to

Processing/Refining (processing fees, refining fees, inputs/outputs)

Leads to

Transmission (levels of service, tariffs, rates & fuel)

Leads to

Storage (levels of service, tariffs, rates of fuel)

Leads to

Distribution (utilities, end-users, residential, retail)

This graphic illustrates the various steps in the process of getting crude oil and natural gas from the wells all the way to market. As you can see, there is wellhead aggregation (production & gathering), the cleaning (processing and refining) of the raw stream, and production of valuable natural gas liquids (processing or refining), the transportation and storage, and finally, the distribution and retail delivery to the various end-users. As you will see, each step along this "path" will have some costs associated with it and most will represent an opportunity for generating revenue. These will add to the total profit that can be derived from the initial wellhead product.

Watch the following video about natural gas (3:38 minutes).

Natural Gas 101
Click here for the video transcript.

PRESENTER: Natural gas-- natural gas is primarily methane or CH4 with smaller quantities of other hydrocarbons. It was formed millions of years ago when dead organisms sunk to the bottom of the ocean and were buried under deposits of sedimentary rock. Subject to intense heat and pressure, these organisms underwent a transformation in which they were converted to gas over millions of years.

Natural gas is found in underground rocks called reservoirs. The rocks have tiny spaces called pores that allow them to hold water, natural gas, and sometimes oil. The natural gas is trapped underground by impermeable rock called a cap rock and stays there until it is extracted.

Natural gas can be categorized as dry or wet. Dry gas is essentially gas that contains mostly methane. Wet gas, on the other hand, contains compounds such as ethane and butane in addition to methane. These natural gas liquids or NGLs for short can be separated and sold individually for various uses such as in refrigerants and to produce products like plastics.

Conventional natural gas can be extracted through drilling wells. Unconventional forms of natural gas like shale gas, tight gas, sour gas, and coalbed methane have specific extraction techniques. Natural gas can also be found in reservoirs with oil and is sometimes extracted alongside oil. This type of natural gas is called associated gas. In the past, associated gas was commonly flared or burned as a waste product, but in most places today it is captured and used.

Once extracted, natural gas is sent through small pipelines called gathering lines to processing plants, which separate the various hydrocarbons and fluids from the pure natural gas to produce what is known as pipeline quality dry natural gas before it can be transported. Processing involves four main steps to remove the various impurities-- oil and condensate removal, water removal, separation of natural gas liquids, sulfur and carbon dioxide removal. Gas is then transported through pipelines called feeders to distribution centers or is stored in underground reservoirs for later use.

In some cases, gas is liquefied for shipping in large tankers across oceans. This type of gas is called liquefied natural gas or LNG. Natural gas is mostly used for domestic or industrial heating and to generate electricity. It could also be compressed and used to fuel vehicles and is a feedstock for fertilizers, hydrogen fuel cells, and other chemical processes.

Natural gas development, especially in the United States, has increased as a result of technological advances in horizontal drilling and hydraulic fracturing.

When natural gas is burned, there are fewer greenhouse gas emissions and air pollutants when compared to other fossil fuels. In fact, when used to produce electricity, natural gas emits approximately half the carbon emissions of coal. Despite fewer emissions, natural gas is still a source of CO2.

In addition, methane is a potent greenhouse gas itself, having nearly 24 times the impact of CO2. During the extraction and transportation process, natural gas can escape into the atmosphere and contribute to climate change. Natural gas leaks are also dangerous to nearby communities because it is a colorless, odorless, highly toxic, and highly explosive gas. That's natural gas.

Learning Outcomes

At the successful completion of this lesson, students should be able to:

  • define the steps in the movement of natural gas from the wellhead to the end-user (“wellhead-to-burner tip” path);
  • recognize the “value chain” along the path;
  • explain the general methods of transporting natural gas from well to end-user:
    • gathering,
    • processing & Natural Gas Liquids (NGLs),
    • pipeline,
    • storage,
    • distribution/end-use;
  • describe both the domestic and global markets for LNG.

What is due for this lesson?

This lesson will take us one week to complete. The following items will be due Sunday, 11:59 p.m. Eastern Time.

  • Lesson 6 Quiz
  • Lesson 6 Pipeline Rate Activity
  • Fundamental Factors


If you have any questions, please post them to our General Course Questions discussion forum (not email), located under Modules in Canvas. The TA and I will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you, too, are able to help out a classmate.