Point of View

Don't get burned in the natural gas market

November 6, 2012 

Are you ready to go into the financial markets and invest in natural gas? Not just local distribution companies but gas producers.

This should be a good time. In the past few years, fracking has spurred the discovery of vast new reserves of natural gas, and gas is a “hot” topic financially.

Before you invest, however, consider this:

Natural gas is a good fuel because it causes less pollution than oil or coal when they are burned. One problem, however, is setting a price for the gas, and that makes it difficult to estimate how natural gas fits into our future energy plans.

Natural gas is usually sold in British thermal units (BTUs) produced by burning the gas or in lots of 1,000 cubic feet at standard temperature and pressure (STP). A BTU is the amount of heat that raises the temperature of one pound of water by one degree Fahrenheit.

Standardization of volumes to STP is necessary because the volume of a gas decreases as pressure increases and increases as temperature increases. One cubic foot of gas commonly produces approximately 1,000 BTUs, with the exact amount variable because the composition of the gas is different from different sources.

Unfortunately, even with this standardization there is no single “price of gas.” It varies enormously from time to time, from place to place, from one type of use to another, and from one producer to another.

Gas producers commonly sell gas “at the wellhead” to local businesses and towns, and typical wellhead prices varied from $2 to $9 per 1,000 cubic feet in the past 12 years.

Naturally, prices are lower for organizations that buy larger quantities of gas, and the small quantities of gas used in residences are very costly.

At present, residential prices in the U.S. outside of Alaska (very low) and Hawaii (extremely high) range from less than $10 to slightly more than $20 per thousand cubic feet.

States that have no local production of gas must import gas from nationwide pipelines. Many of the pipelines radiate from the “Henry Hub,” a gas storage facility just south of the town of Erath (pop. 2,000) in southern Louisiana about 50 miles west of New Orleans.

The price of gas at the Henry Hub depends on nationwide production and consumption of gas. It has fallen from about $12 per 1,000 cubic feet to its present value of $3-4 per 1,000 cubic feet. This decrease in price results from the increased production of gas caused by the development of fracking.

The price of gas at the Henry Hub and in most pipelines is set in New York. The New York Mercantile Exchange includes trading of natural gas as a commodity, and its resolved price is used at the Henry Hub. This price closely follows the price of natural gas on the Chicago Board of Options Exchange at about $3-$4 per million BTUs (approximately 1,000 cubic feet).

Are you still ready to speculate (gamble) on the price of gas? Do you know how much future exploration will affect the price at the Henry Hub? Do you know which producers will sell their gas to local businesses and utilities? Whether we will start promoting the sale of natural gas abroad?

OK, you’re ready! Lots-a luck!

John J.W. Rogers is retired as the William R. Kenan Jr. professor of geology at UNC-Chapel Hill. He can be reached at jjwr@mac.com.

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