Natural Gas

Natural gas is a fossil fuel that is colorless, shapeless, and odorless in its pure form. It is a mixture of hydrocarbon gases formed primarily of methane, but it can also include ethane, propane, butane, and pentane. Natural gas is combustible, clean burning, and gives off a great deal of energy. In about 500 BC, the Chinese discovered that the energy in natural gas could be harnessed. They passed it through crude bamboo-shoot pipes and then burned it to boil sea water to create potable fresh water. Around 1785, Britain became the first country to commercially use natural gas produced from coal for streetlights and indoor lights. In 1821, William Hart dug the first well specifically intended to obtain natural gas, and is regarded by many as the “father of natural gas” in America. There is a vast amount of natural gas estimated to still be in the ground in the US, concentrated in Texas and the Gulf of Mexico.

In the US, the industrial sector accounts for 43% of natural gas used, with the residential sector coming in second. The major industries using natural gas include pulp and paper, metals, chemicals, petroleum refining, stone, clay and glass, plastic, and food processing. Natural gas as a source of energy has always been much cheaper than electricity for residential consumers. Natural gas costs less than 30% of the cost of electricity per Btu. Natural gas accounts for roughly one-quarter of all US energy consumption.

Natural gas futures and options are traded on the New York Mercantile Exchange (NYMEX). The NYMEX natural gas futures contract calls for the delivery of natural gas representing 10,000 million British thermal units (mmBtu) at the Henry Hub in Louisiana, which is the nexus of 16 intra-state and inter-state pipelines. The contract is priced in term of dollars per mmBtu. NYMEX also has basic swap futures contracts available for 30 different natural gas pricing locations against the benchmark Henry Hub location. Natural gas futures are also listed in London on the International Petroleum Exchange (IPE).

Prices – NYMEX natural gas futures on the nearest-futures chart in 2003 showed an upward spike to a record high of $11.90 per mmBtu related to the start of the Iraq war, but then quickly settled back down to the $5-7 area through Q2 and Q3 2003. Natural gas prices then moved higher in December to post a 10-month high of $7.55 and closed the year at $6.19, up 16% from the 2002 close of $5.34. The rally late in the year was generally attributed to higher demand with the stronger economy, the weak dollar, and early cold weather in the US. However, inventories were also rising during that period and federal authorities started an investigation into allegations of price manipulation.

Supply – The US recovered 24,130 billion cubic feet of natural gas in 2002, down 1.4% from 2001. The world’s largest natural gas producers are Russia (with about 34% of world production), the US (30%), and Canada (10%).