Thursday, February 5, 2009

The Natural Gas Report

Yesterday I wrote about the weekly reports on petroleum that are available from the EIA, and today I will switch over and comment on the natural gas reports, that are issued every Thursday. The reports are formatted somewhat differently, and the interpretation also differs, since the background to this fuel is somewhat different to that of oil. There are several reasons for this, one being that natural gas is a lot less fungible than crude oil. What that means is that if Saudi Arabia decides not to like us and send us any oil next month, then there are sufficient other sources of oil out there, that the supply can be maintained. However it is not quite that easy with natural gas.

Firstly this is because North America is still largely self-sufficient in natural gas, which is produced from wells and shipped, still as a gas, through pipelines to the end user. While this is a simpler process than that needed for oil, it doesn’t need refining for example, it also imposes some problems, since, while oil can relatively easily be put into a tanker and shipped over here, in its original form that is not quite as easy to do economically with natural gas. The large volume that the gas requires, and its low density make it impractical from a cost basis to move the gas here from abroad in that condition. Instead, where the gas cannot be brought here by pipeline, it only becomes practical to import the gas after it has been liquefied. This reduces the volume to the point that using tankers to bring the liquefied natural gas (LNG) to America becomes a viable option. And, the weekly report on Natural gas tracks how much is actually being imported.

LNG imports, by terminal

You may notice that incoming supplies largely went to only two terminals. The first is at Everett, MA, and is the oldest terminal in the country. It supplies roughly 20% of the natural gas needs of New England. Because of the way that it stores and distributes the LNG it can supply an extra 15% to meet a peak demand. It can hold 42 million gallons of LNG and while it can (theoretically) re-vaporize a billion cu ft per day, the sustainable output is 715 million cu ft/day. Some of the gas goes directly to an adjacent 1,1550 MW power plant that supplies Boston. The new fleet of LNG tankers are typically sized at around 138,000 cu m (roughly 5 million cu ft), which converts to 5.3 billion cubic ft of natural gas. Thus it takes several days to re-vaporize and transmit gas from a single tanker.

The second most popular tanker destination is at Elba Island in GA. It received, for example, roughly one tanker a week in 2005, and is expanding. The remaining terminals, as yet, do not get supplied on as regular a basis. Bear in mind that it takes, for example 43 days round trip from Qatar to Lake Charles and that it costs $2.09 per million Btu. Supplies are cheaper from Egypt, since the round trip only takes 30 days and costs $1.29 per million Btu (MMcf)).

Which is a good point to make a note on units – there are a number of different ways in which natural gas volumes can be measured, two common ones are the cu.m and cubic feet that have been used above. The alternate is to consider the amount of heat generated. This is given in Btu or more commonly millions of Btu (MMBtu). The conversion is that a cubic foot of natural gas holds 1,029 Btu, or a thousand cu. ft (Mcf) contains roughly a million Btu. The British use the price of a Therm, which is 100,000 Btu or roughly 100 cu ft, or 0.1 Mcf as their main unit for natural gas volumes. I will try and stabilize on thousand cubic feet (mcf) where possible.

The majority of the gas used in the United States (roughly 97%) is produced from wells, stripped of undesirables, (at least to the gas user anyway) and is then ready to put into a pipeline. To reduce the volume, and speed delivery the gas is first compressed (which can reduce the volume by up to 600 times) to a pressure of up to 1,500 psi., after which the pipeline network will carry it to distribution points for the different regions of the country.

About every fifty to a hundred miles the gas will pass through a compressor station, that uses a small portion of the gas to compress the gas and feed it on its way.

The price of natural gas varies around the country, depending on how far it must be shipped, and other local considerations, but the primary price, and futures prices are based on that at the Henry Hub.

Monthly gas prices at the Henry Hub over the past five years
The Henry Hub is owned and operated by Sabine Pipe Line, LLC, which is a wholly owned subsidiary of ChevronTexaco. The Sabine Pipe Line starts in eastern Texas near Port Arthur, runs through south Louisiana, not far from the Gulf of Mexico, and ends in Vermillion Parish, Louisiana, at the Henry Hub near the town of Erath. The Henry Hub is physically situated at Sabine’s Henry Gas Processing Plant.

The Henry Hub interconnects nine interstate and four intrastate pipelines, including: Acadian, Columbia Gulf, Dow, Equitable (Jefferson Island), Koch Gateway, LRC, Natural Gas Pipe Line, Sea Robin, Southern Natural, Texas Gas, Transco, Trunkline, and Sabine’s mainline. Collectively, these pipelines provide access to markets in the Midwest, Northeast, Southeast, and Gulf Coast regions of the United States. Sabine currently has the ability to transport 1.8 billion cubic feet per day across the Henry Hub. Relative to the total U.S. lower 48 average daily gas consumption of 60.6 billion cubic feet per day in 2000, the Henry Hub can handle up to 3.0 percent of average daily gas consumption.

Approximately 49 percent of U.S. wellhead production either occurs near the Henry Hub or passes close to the Henry Hub as it moves to downstream consumption markets. This is based on 2000 production levels reported for the Gulf of Mexico and the onshore Louisiana and Texas regions encircling the Gulf of Mexico.
Using the above, the EIA can compare the prices of natural gas around the country, and also how it compares with the price of an equivalent amount of energy obtained from oil.

The weekly report also gives a projection as to how conditions will evolve, and since the United States also gets significant natural gas from Canada, it also refers to the report prepared by the Canadian National Energy Board as to how it sees conditions. The relevant portions of the most recent version of that report reads:
Through mid January, storage levels are exceeding the five-year average and withdrawals have been lower than expected despite the cold weather. The lower than expected storage withdrawals during a period of high weather related space heating demand reflects the declining demand from the industrial sector as a result of the global economic downturn.

While lower natural gas prices will provide welcome relief to consumers, it is worth noting that they also make it uneconomic to drill wells in some areas of North America. This is apparent as the number of rigs drilling for natural gas in North America is now 18 percent lower than its late summer peak. Given the strong current production levels in North America and declines in industrial demand, this reduction in operating rigs is not an immediate cause for concern but it may eventually manifest in reducing available supply and then lead to some upward pressure on price as demand recovers.

Another area to watch will be the level of North American imports of liquefied natural gas or LNG. In 2008, relatively small volumes of LNG were imported into North America because global demand outside of North America provided more attractive prices to LNG suppliers. For 2009, it is expected that global LNG supply will increase while demand falls as a result of the global economic downturn. As a result, a moderate increase in LNG imports into North America in 2009 can be expected.
The Canadian projection of the next two months weather is:

Well that is a bit more of a digression than I had intended, but it will provide a base from which to interpret the comments made as we revisit the EIA Natural Gas site in the months ahead.

For more information, Dave Cohen reviewed that state of the LNG industry back in 2006 for The Oil Drum.


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