There is an old joke from the oil industry that goes something like this:
An oil company executive walks into a bar and sees a wildcatter slouched over the bar, staring into his drink.
“What’s the matter,” says the oil company executive, “another dry hole?”
“Worse,” says the wildcatter, “we found gas.”
For many decades, natural gas was the poor cousin to crude oil. Often found alongside crude oil in reservoirs, natural gas was considered to be a low-value waste product that was often flared or vented into the atmosphere in very large quantities (enough to supply several European countries for an entire year), in order to more easily access the high-value crude. Nowadays, the world has changed. Particularly with the rapid emergence of unconventional natural gas resources (these are often grouped into a catch-all category of “shale gas” but includes natural gas found in sandstone formations, coal beds and other types of geologic formations other than shales), there are lots of perceived opportunities in natural gas. We will discuss shale gas in the next lesson, but first we will walk through an introduction to natural gas as a commodity and the functioning of North American markets for natural gas.
By the end of this lesson, you should be able to:
- identify the role that the “Henry Hub” plays in North American natural gas pricing;
- explain why prices for natural gas change seasonally;
- define “wellhead” and “citygate” prices for natural gas, and explain why these prices are usually different;
- use the NYMEX website to construct a forward curve for natural gas;
- calculate correlations between natural gas prices in different regions of the United States, using data from the Energy Information Administration.
Aside from the online materials, you will need to access the websites of the EIA and NYMEX (CME Group). The EIA has a nice introductory reading to the world of natural gas as part of their "Energy Explained" series. You will also need to download the following reading from the Lesson 03 module:
- S. van Vactor, Flipping the Switch: The Transformation of Energy Markets, Ph.D. Dissertation, Cambridge University, 2004.
- Note: Chapter 5 of the van Vactor reading has a nicely detailed discussion of the development and structure of markets in both the U.S. and Europe.
What is due for Lesson 3?
This lesson will take us one week to complete. Please refer to the Course Calendar for specific due dates. See the specific directions for the assignment below.
- Homework: Answer some questions regarding the role of the Henry Hub as a "benchmark" for North American natural gas prices, and
- Collect and analyze natural gas pricing data from the U.S. Energy Information Administration.
If you have any questions, please post them to our Questions about EME 801? discussion forum (not email), located in the Lesson 00 module in Canvas. 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.