EME 801
Energy Markets, Policy, and Regulation

Characteristics of Natural Gas


Characteristics of Natural Gas

There's 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. Natural gas is extremely important in the North American energy market for two distinct but interrelated reasons. First, natural gas has become the fuel of choice for dispatchable electricity generation. This means that all alternative forms of generation are compared on a cost basis with the constriction and operation of a gas-fired power plant. Second, natural gas is the major source of heating for the built environment throughout North America. It represents a very important source of energy storage that can be dispatched upon very little notice. Particularly with the rapid emergence of unconventional natural gas resources (these are often grouped into a catch-all category of “shale gas” but include 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.

Like crude oil, natural gas is an energy source based on hydrocarbon chains, but the composition of natural gas is generally different than the composition of crude oil. Natural gas is primarily composed of methane, though some natural gas deposits also contain substantial fractions of other hydrocarbon gases or liquids such as ethane and propane (these are longer hydrocarbon chains that have substantial value as chemical feedstocks). Most gas deposits also contain impurities such as sulfur or other carbon compounds that must be separated prior to the gas being injected into transmission or distribution pipelines. Gas deposits that consist primarily of methane are known as “dry” gas deposits, while those with larger fractions of other hydrocarbons are known as “wet” or “rich” gas deposits.

Photograph of a natural gas pipeline
Figure 10.13. Natural gas pipeline.
Credit: www.eia.gov

Unlike oil, natural gas is essentially wedded to its transportation system – without pipelines (and liquefied natural gas tankers, which we’ll discuss later), there is no economical way to get large quantities of gas to market. Moreover, natural gas pipelines generally need to be dedicated assets. Using oil or petroleum product pipelines to move natural gas is not really possible, and moving other products in natural gas pipelines is not possible without completely repurposing the pipeline (and the injection/withdrawal infrastructure on either end). This asset specificity and complementarity between natural gas and the pipeline transportation infrastructure has been a significant factor in the development of the natural gas market. Each has little use without the other.