Natural Gas 101

Energy is a contentious industry right now. What with the loan guarantees, oil spills, controversial pipelines, political strife, and natural disasters, it can be a daunting sector to follow. This article is meant to serve as the first building block in a series that introduces the wonderful world of natural gas to Fools looking to diversify their portfolios with some colorless, odorless gold.

What is "natural gas" exactly?
The primary component of natural gas is methane. It accounts for anywhere from 70% to 90% of natural gas coming out of wells. Secondary components include ethane, propane, butane (20%), and much smaller amounts of carbon dioxide, oxygen, nitrogen, and hydrogen sulfide. Trace amounts of cool gases like xenon and neon are found sometimes as well. By the time the gas gets to your house it is almost all methane; the other components get separated off and sold for use in other products like tanks for backyard grills and lights for bar windows.

 When a well produces gas that is almost completely methane, the product is called dry gas. Wet gas implies a mix of methane and the other gases, which may appear in liquid form. They are often referred to as natural gas liquids or NGL.

Production is a numbers game
It is important to understand how we measure natural gas in order to evaluate how productive a particular well, company, or country is. Natural gas is measured in cubic feet, and the four most common units you'll find in annual reports or natural gas articles are:

• Mcf (thousands of cubic feet)
• MMcf (millions of cubic feet)
• Bcf (billions of cubic feet)
• Tcf (trillions of cubic feet)

Sometimes you'll see an "e" at the end of the unit, which simply stands for "equivalent" and is typically used to quantify reserves.

Of course, one unit is never enough; we need another unit to express how much energy is generated from the stuff. For this we use the British Thermal Unit, or Btu.

One cubic foot of natural gas is roughly equivalent to 1,027 Btus. In general conversion, though, 1 MMBtu is equal to 1 Mcf. Btus become especially important when we think of gas as a commodity, because that is the unit natural gas trades in. The Btu will use the same prefixes as cubic feet, so for example, when NYMEX publishes its daily number for natural gas futures, it looks like this:

$3.53 per MMBtu

Well production
A well's ability to produce natural gas depends on its location. The Marcellus Shale region stretches from the edge of Ohio across West Virginia, Pennsylvania, and up to western New York. This is the natural gas sweet spot right now, and the top wells there are producing anywhere from 7,147 to 22,276 Mcf per day.

Natural gas companies will also report detailed information on new wells and strong-performing wells in their annual reports and quarterly updates. The companies treat their wells just as they treat their financials, keeping track of year-over-year production statistics for each well.

Who are the top producers?
The U.S. produced 21.6 Tcf of natural gas in 2009, and is the top producer worldwide; Russia, Europe, Canada, and Iran round out the top five. Some of the top producers limit their business to the U.S. while others are global giants. The top 10 natural gas producers in the U.S. are listed here:

Source: Natural Gas Supply Association.

Because drilling companies can use most of the same equipment to drill for oil as gas, there are companies on this list that actively drill both, often emphasizing whichever commodity is the most lucrative at any given time.

The Fool's Energy Editor Dan Dzombak published a list of the top 25 natural gas producers last month; check it out here if you're interested to see how the rest of the field stacks up.

Foolish bottom line
Building a foundation of knowledge in an industry doesn't happen overnight. Utilizing Internet-based tools like My Watchlist and Twitter are a great way to stay up to date on analyses and industry updates.

Tune in next week for "Natural Gas 201" for information about which shales and basins drillers are focused on, the difference between horizontal and vertical drilling, and the contentious wonder that is hydraulic fracturing!

Developing a taste for natural gas? Click here to check out the Motley Fool's special free report "One Stock to Own Before Nat Gas Act 2011 Becomes Law."