Filling Up on Natural Gas

Steady as she goes--the energy complex continues to climb with no end in sight. Foolish mandates for ethanol will continue to send the energy sector higher-- much, much higher.

Within the energy sector, natural gas seems to be the most undervalued commodity. Over the past two years, crude, heating oil and gasoline futures have climbed between 60-85 percent higher. In comparison, natural gas has gained only about half as much at about 40 percent.

Most recently, natural gas has begun to narrow the spread by rallying significantly. I expect this trend to continue as the laggard in the energy sector becomes the leader.

click to enlarge images

Where's the demand?

Beyond the obvious demand for energy commodities, there are a couple more factors for why I believe the demand for natural gas will increase. The first reason has to do with the fact that natural gas is the cleanest of all the fossil fuels, producing about half as much carbon dioxide per unit of energy as coal and is primarily composed of methane. The main bi-products of natural gas are carbon dioxide, and water vapor, the same compounds that we exhale when we breathe.

Electricity Generation

Because natural gas is more eco-friendly it has emerged as the fuel of choice for producers of electricity through the use of gas turbines and steam turbines. More than 90% of electrical generating plants built in North America since 1990 have been natural gas fired plants.

Source: EIA

The Ethanol Effect

The global fascination with ethanol has played a major role in the record levels for the CRB index. Ethanol mandates from countries like the United States, Australia, Canada, and Brazil, have resulted in huge demand of not only corn, and soy, but for natural gas, and fertilizer as well.

The United States has about 116 ethanol distilleries, with 78 plants under construction and seven undergoing expansion. The 25 percent increase in last year's ethanol production will look like a drop in the barrel unless the government wakes up--good luck with that.

Over 90 percent of U.S. ethanol plants are using natural gas boilers because they are seven times cheaper than ones that burn coal. It takes about 30,000 BTU of natural gas to produce a gallon of ethanol. Therefore, a 50 million gallon per year ethanol plant consumes about 5 billion cubic feet of natural gas.

The increase in natural gas demand from ethanol is not limited to the broilers but includes a huge increase in global demand for nitrogen based fertilizers. With global grain prices soaring farmers are increasing the amount of fertilizer they use in order to maximize their yield per acre. Manufacturing 1 ton of anhydrous ammonia fertilizer requires 33,500 cubic feet of natural gas.

Source: EIA

Natural gas consumption in the U.S. increased by about 6 percent in 2007, according to the Energy Information Administration, and is expected to increase between 2 to 6 percent going forward. With the increase in demand from ethanol and in electricity generation expect the demand to far surpass government estimates.

Who's got gas?

What about supply? Production of natural gas in the U.S. has remained relatively flat over the past 40 years. In 1960 we produced 20,698,240 mmcf, and in 2006 production was at 19,381,895 per mmcf. The number of rigs exploring for natural gas in the United States is nearing a 25-year high but production has remained flat.

The average production from a North American natural gas well is continuing to decline. A gas well that went into operation 10 years ago is producing about 70 percent less gas then at their peak.

The combination of increasing demand with stagnant supply--well you know the rest.

Comments

[redbaron:]

And when we get around to using hydrogen as a fuel, it will likely be made from natural gas. Natural gas has a very bright future.
JK

2008 Apr 03 08:03 AM

[Ron2008:]

If NG production is flat and demand is up then why were inventories at the highest levels in history last year?

2008 Apr 03 10:07 AM

[Parchment:]

Should there be a new way to produce ammonia, without the use of fossil fuels at a reasonable cost, you'd solve a number of things here. The University of Michigan fueled a pickup with ammonia and gasoline (mostly ammonia). Ammonia as a fuel is interesting. Making ammonia without natural gas would be a very exiting stepping stone. Coal to ammonia? Maybe. A "green" produced ammonia: home run.

2008 Apr 03 10:23 AM

[TIRED:]

WE NEED TO DO AWAY WITH ETHANOL. CUTS DOWN ON MILEAGE, AND INCREASES PRICES ON EVERYTHING ELSE. FOOD PRICES ARE SKY HIGH BECAUSE OF ETHANOL. NEED TO HAVE CONGRESS GET OFF THEIR BUTTS AND GET ON TO LOWERING PRICES. OPEN UP DRILLING IN THE USA, AND THEN WE WILL NOT HAVE TO SUPPORT FOREIGN COUNTRIES FOR OUR FUEL. THE MONEY WOULD STAY HERE, AND PRICES WOULD COME DOWN, EMPLOYMENT WOULD GO UP.

2008 Apr 04 02:06 AM

[xander:]

drive 55 and thrive

2008 Apr 04 05:47 AM

[Stever530:]

Not only does burning natural gas only emit CO2 and water vapor, it emits less CO2 than most other energy sources, including ethanol. Good for the environment, and Kyoto countries. Unfortunately for your price analysis, it's not as scarce as other fuel sources because it can be obtained in various ways. Natural gas is mostly methane. Where else does methane come from other than the ground? I'll give you a hint, look up anaerobic digestion.

2008 Apr 04 04:49 PM

[William Eic...:]

From article above, 'The combination of increasing demand with stagnant supply - well you know the rest."

Might "the rest" be: LNG imports thru KMP

2008 Apr 04 06:50 PM

[wachry:]

If you are driving 55 please stay in the slow lane

2008 Apr 04 07:22 PM

[THofler:]

Parchment: Ammonia vapors are highly toxic. I can just imagine all the fatalities from ammonia inhalation at car accidents! Einstein invented the safe ammonia/water absorption refrigerator back when ammonia was the only way to refrigerate. Too many workers were dying in refrigerator factories.

Howardem: I agree with you, but ... Most of the CEOs in the ag/food cos say that ethanol is only partly to blame for their prices. The bulk of the blame lies with raging BRIC economies.

2008 Apr 04 11:29 PM

[AEB:]

50 million gallons of ethanol requires 1.5 Bcfg, not 5 Bcfg as stated in the article. That means that it takes 11 MM gallons of oil equivalent to produce the heat to make 50 MM gallons of ethanol.

2008 Apr 05 10:30 AM

[AEB:]

Natural gas production was not flat in 2007 in the United States, but increased about 4%. Unfortunately, demand increased 6%.

2008 Apr 05 10:32 AM

[GKM:]

I think we could easily see $14/mcf gas this summer. I'm just hoping that it pulls back to about $8.6 so I can load the boat. I also think a good strategy is to look for out of favor gassy juniors that don't do much hedging.

Further, with the Canadian royalty trust unwind in the mix, I wouldn't be surprised if you actually see reverse takeovers i.e. Company X a big energy trust wants to switch to a regular corporation so it invests in Company Y (a smallish producer) and then Company Y uses the proceeds to takeover Company X and voila you have a new regular corporate entity.

2008 Apr 05 12:45 PM

[Pasoman:]

Ethonal is a political football. It is a valuable energy/chemical source in the US ONLY if and when non food sources can be utilized (saw grass etc.). At best it is a gasolene additive today. There is nothing Green about it. It is a nasty polluter (except when used in small concentrations), far worse than other energy sources as far as smog gasses go. It is an inconvienent truth that the environmentalists refuse to acknowledege because it does not support the agenda.

2008 Apr 05 02:32 PM

[pockyclips ...:]

Debt, weapons, and agriculture are the only 3 exports we have.
We will be forced to back off on ethanol, so we have more corn to
manipulate the third world with. Most people in the world don't drive,
but all the living ones eat!

Frankly, I think it's either electric cars or mass transit. If they can get 60 miles commuting distance, and be recharged overnight, I'd
buy one. Even if I had to replace the batteries every other year.

Hybrids are also a joke. Hauling 1600 lbs of dead weight engine and transmission with a little electric motor is just plain dumb.

2008 Apr 05 04:53 PM

[Canuck Inve...:]

It's a good article in terms of explaining how demand is affecting price. But the big issue in the medium to long-term is the impact that large supply volumes of LNG imports will have on North American gas prices. Natural gas production may be in decline in North America but there's plenty of it in places like Qatar and Trinidad. Unlike Oil, the world isn't running out of Natural Gas.

2008 Apr 05 09:16 PM

[SpoiledAmer...:]

Thank You - I so want this to get out to the public. We want to use politicians rather than scientists to find real solutions in this country. Natural gas has always been a very inexpensive way to heat your home. Then came ethanol and wind generation. (wind generation needs backup generation and the electric generation of choice is natural gas powered) So many people struggle with the concept of supply and demand. Simply put, when we use more without new sources and the infrastructure to get it to the market, the price goes up.

We are a spoiled country and believe our freedom includes, never having to carpool, never having to use public transportation, run to the grocery store every time we are out of milk or bread, drive SUVs, take 3000 mile vacations, live 2 hours drive from our jobs, our kids drive to school …… we could all list many more.

WE ARE RESPONSIBLE FOR OUR SITUATION!
NOT THE GOVERNMENT OR THE OIL COMPANIES!

We are a spoiled country and believe our freedom includes, never watching the same TV show as anyone else in the family ( a TV on in every room), hot tubs, bright lights on every sign (not just the strip in Vegas), computers, video games, stereos, lights on in every room ……. again, we could all list many more.

We need to, and can fix these problems ourselves.

PS How much fuel do you suppose our political candidates have used this year.

2008 Apr 11 11:01 PM

[Yael Pipano:]

nearly 80% of world oil reserves are controlled by state-owned firms

2008 Apr 28 12:58 PM