We can take a lot of things for granted. Like the warmth of our furnace on a cold winter's day, or that juicy burger we made on the grill. We enjoy these things without giving much thought to what's fueling our everyday appliances. Yet, without natural gas, many a furnace and burger would be cold as ice. That's why it's essential to know more about the versatile fuel, and the industry that provides it, as it has such an important impact on our daily lives.
Natural gas in its simplest form. Source: Wikipedia via Public Domain.
What is natural gas?
Natural gas is a hydrocarbon, meaning it is made up of a chemical compound that contains both hydrogen and carbon atoms. In its simplest form, natural gas is known as methane and is made up of one carbon atom and four hydrogen atoms. It is odorless, colorless, flammable, non-toxic, and lighter than air. And yet, even in that simplistic form, it is among the most versatile natural resources on the planet.
Natural gas deposits are believed to have been formed millions of years ago through the decomposition of plants and animals. This organic matter, which was buried under layers upon layers of sand, mud and rock, is exposed to intense heat and pressure, transforming it into natural gas, oil, and other fossil fuels and chemical compounds.
It's these buried sources of hydrocarbons that contain most of the world's natural gas supplies. The gas can be contained in tight formations like sandstone or shale, or it can be found pooled either in association with oil or by itself. Further, natural gas can also be found alone with coal in what is known as coalbed methane. The following diagram from the U.S. Energy Information Agency portrays the different sources for natural gas underground.
Source: EIA.
How big is the natural gas industry?
Extracting the gas is a challenge, and in the U.S. alone, there are more than 6,000 companies involved in the exploration and production of natural gas. These companies own and operate nearly half a million producing gas wells in the country and range from mammoth multi-national corporations to a single investor that owns a partial interest in one well. The industry is constantly evolving as smaller producers are consolidated by larger rivals, while new entrants join the industry all the time.
From there, the natural gas industry's tentacles run throughout the nation by way of its pipelines, processing plants, and storage facilities. In the U.S., there are well over 2.5 million miles of pipelines that take the natural gas from wells through the more than 500 gas processing plants and then on to consumers.
Overall, the oil and natural gas industry in America makes a significant impact on the economy. The industry supports nearly 9.2 million jobs and provides $1.1 trillion in economic activity. That's roughly 7.7% of America's GDP. Not all of those jobs or economic activity are directly related to natural gas extraction, as the industry also supports manufacturing, transportation, technology, and a whole range of services.
How does the natural gas industry work?
Natural gas travels from deep within the earth through the wellhead and then into the pipeline system. From there, it is sent to a processing plant, where natural gas liquids, other gases, and impurities are stripped out, and then the methane is sent by pipeline to consumers. The following diagram gives a basic overview of the natural gas delivery system.
Source: U.S. Department of Transportation Pipeline & Hazardous Materials Safety Administration.
As a rule, the natural gas industry is made up of upstream producers that own and operate the wells; midstream companies that own and operate the processing facilities, pipelines, and storage facilities; and finally downstream companies that market the gas or distribute it on a local level. Some companies are more fully integrated across the delivery system, though that is becoming less common these days.
What drives the natural gas industry?
There was a time when the natural gas industry was driven almost solely by supplying gas to heat homes during the winter months. A brutally cold winter meant more gas was consumed and prices would rise, while a heat wave would cool off prices and production. This is what incentivized drillers to invest capital or hold it back.
However, with the discovery of an economical method to extract the abundant amount of gas found in shale, it's opening up the door for additional uses of natural gas in the country. As the following chart demonstrates, the use of natural gas for industrial and electric power will drive much of the industry in the future.
Source: Energy Information Agency.
Because of this, the natural gas industry in America will be driven more by the simple economics of supply and demand than by winter temperatures. In times of economic prosperity, demand for natural gas will increase as more of it will be used by industrial users as well as by electric utilities. Further, another trend that will drive the natural gas industry in the years ahead is the export marketplace. A number of facilities are being built to liquefy the gas and ship it overseas, where it can be sold at a premium. These facilities will sop up excess supply, which could impact prices.
These new dynamics driving the natural gas industry are creating a fundamental shift, offering an unparalleled opportunity for investors as the industry is no longer at the whims of Mother Nature, but is instead being driven by economic forces that are a bit easier to monitor.
