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Natural Gas 101

by Aimee Duffy, The Motley Fool Oct 14th 2011 11:53AM
Updated Oct 14th 2011 1:08PM

Energy is a contentious industry right now. What with the loan guarantees, oil spills, controversial pipelines, political strife, and natural disasters, it can be a daunting sector to follow. This article is meant to serve as the first building block in a series that introduces the wonderful world of natural gas to Fools looking to diversify their portfolios with some colorless, odorless gold.

What is "natural gas" exactly?
The primary component of natural gas is methane. It accounts for anywhere from 70% to 90% of natural gas coming out of wells. Secondary components include ethane, propane, butane (20%), and much smaller amounts of carbon dioxide, oxygen, nitrogen, and hydrogen sulfide. Trace amounts of cool gases like xenon and neon are found sometimes as well. By the time the gas gets to your house it is almost all methane; the other components get separated off and sold for use in other products like tanks for backyard grills and lights for bar windows.

 When a well produces gas that is almost completely methane, the product is called dry gas. Wet gas implies a mix of methane and the other gases, which may appear in liquid form. They are often referred to as natural gas liquids or NGL.

Production is a numbers game
It is important to understand how we measure natural gas in order to evaluate how productive a particular well, company, or country is. Natural gas is measured in cubic feet, and the four most common units you'll find in annual reports or natural gas articles are:

  • Mcf (thousands of cubic feet)
  • MMcf (millions of cubic feet)
  • Bcf (billions of cubic feet)
  • Tcf (trillions of cubic feet)

Sometimes you'll see an "e" at the end of the unit, which simply stands for "equivalent" and is typically used to quantify reserves.

Of course, one unit is never enough; we need another unit to express how much energy is generated from the stuff. For this we use the British Thermal Unit, or Btu.

One cubic foot of natural gas is roughly equivalent to 1,027 Btus. In general conversion, though, 1 MMBtu is equal to 1 Mcf. Btus become especially important when we think of gas as a commodity, because that is the unit natural gas trades in. The Btu will use the same prefixes as cubic feet, so for example, when NYMEX publishes its daily number for natural gas futures, it looks like this:

$3.53 per MMBtu

Well production
A well's ability to produce natural gas depends on its location. The Marcellus Shale region stretches from the edge of Ohio across West Virginia, Pennsylvania, and up to western New York. This is the natural gas sweet spot right now, and the top wells there are producing anywhere from 7,147 to 22,276 Mcf per day.

Natural gas companies will also report detailed information on new wells and strong-performing wells in their annual reports and quarterly updates. The companies treat their wells just as they treat their financials, keeping track of year-over-year production statistics for each well.

Who are the top producers?
The U.S. produced 21.6 Tcf of natural gas in 2009, and is the top producer worldwide; Russia, Europe, Canada, and Iran round out the top five. Some of the top producers limit their business to the U.S. while others are global giants. The top 10 natural gas producers in the U.S. are listed here:

Rank

Company

Q2 Production (MMcf/day)

Q1 Production (MMcf/day)

Year-Ago (MMcf/day)

1

ExxonMobil (NYSE: XOM )

3,842

3,904

3,909

2

Chesapeake Energy (NYSE: CHK )

2,575

2,703

2,497

3

Anadarko (NYSE: APC )

2,326

2,412

2,324

4

Devon Energy (NYSE: DVN )

2,029

1,964

1,982

5

Encana (NYSE: ECA )

1,864

1,801

2,240

6

BP (NYSE: BP )

1,833

1,905

1,875

7

ConocoPhillips (NYSE: COP )

1,651

1,589

1,822

8

Southwestern Energy (NYSE: SWN )

1,347

1,277

1,077

9

Chevron (NYSE: CVX )

1,299

1,270

1,317

10

Williams (NYSE: WMB )

1,203

1,155

1,099

Source: Natural Gas Supply Association.

Because drilling companies can use most of the same equipment to drill for oil as gas, there are companies on this list that actively drill both, often emphasizing whichever commodity is the most lucrative at any given time.

The Fool's Energy Editor Dan Dzombak published a list of the top 25 natural gas producers last month; check it out here if you're interested to see how the rest of the field stacks up.

Foolish bottom line
Building a foundation of knowledge in an industry doesn't happen overnight. Utilizing Internet-based tools like My Watchlist and Twitter are a great way to stay up to date on analyses and industry updates.

Tune in next week for "Natural Gas 201" for information about which shales and basins drillers are focused on, the difference between horizontal and vertical drilling, and the contentious wonder that is hydraulic fracturing!

Developing a taste for natural gas? Click here to check out the Motley Fool's special free report "One Stock to Own Before Nat Gas Act 2011 Becomes Law."

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Gumby

I plainly do not see how our economy can grow again if ever without massive energy conservation efforts put in place first!! it is much harder to increase energy supplies than to conserve energy which is a already known quantity yet unexploited for the most part. We have much more to conserve energy yet we refuse to do so... For obvious reasons like liberty and freedom of choice ,etc... which is good virtues , too. Today, we probably have to make a little sacrifice in liberty and freedom of choice in order to help our unemployed workers get hired and banks start lending money once again... As long as we continue to waste energy foolishly, the future is not bright for the ever growing army of unemployed workers for a much longer time to come than necessary. I dont know how Americans will choose products for energy efficiency in the future becaue they might continue to favor least efficient products for their own selfish pursuits of happiness as well as liberty and freedom of choice.. This is a very sad picture for America!

October 14 2011 at 2:55 PM Report abuse rate up rate down Reply
Gumby

Those energy companies listed above are really huge companies that we might be mistaken for thinking or believing that they are fully capable of helping our economy grow with their vast resources of oil and natural gas as well as coal.. The stark truth is that they no longer can ... Look , they already began importing oil from various nations at OPEC or outside for decades and decades which should tell you that they are no longer potent energy companies that we can depend on for economic growth in the future. If we want to hire millons of workers back , we must start conserving energy that will be needed by the workers at work and at home as well. We must learn to share energy with them. We cannot just forget about them and continue to waste oil, natural gas as well as coal ourselves without really caring about them.. This is a dangerous path for Americans who still have jobs to continue to be selfish about energy consumption.. The prices is so tight and taut that traders in the pits for oil, natural gas and coal is already nervous... and itching to bid up prices at every twitch of any economic growth or worker hirings.. Our energy supplies is so tight that oil, natural gas , coal , etc is no longer adequate to power economic growth on their own.. We must expand "more clean energy" supplies to help loosen up our already tight energy supplies comingfrom oil, natural gas, coal, etc.. Yes, nuclear energy and hydropower are still not enough ... America consumes way too much energy and we are still not changing our old habits at all. We are still driving around in SUVs and PickUps we bought recently... We are still stuck wtih them.. So more the reason, America needs to tighten our energy belts now or sooner or things will keep getting worse and worse .. Why our government has not been more aggressive on energy conservation is because it is not good politics.. You will vote them out of offices for forcing or encouraging more energy conservation... Voting is not the answer to our energy issues... Your own individual participation in energy conservation is the only good way to help and support our economy and unemployed workers get jobs back.. Big Oil, Gas and Coal ,etc will not suffer at all if we conserve energy now as they will resell to unemployed workers who find jobs, anyway.. All Americans have to understand this...

October 14 2011 at 2:47 PM Report abuse rate up rate down Reply
Gumby

Big Oil, Gas, Coal , Etc is still uninterested in participating in "more clean " energy projects like solar, wind, geothermal, biofuels, etc... because it will still not "enhance" their earnings. Shareholders are still holding the sway in our energy future and they are not so concerned about millons of Americans still unemployed for lack of adequate energy supplies . We can hire them right now but we will risk rapidly climbing energy prices as they return to the workforce and starting consuming more energy at work and at home.. This is the reason why we had been outsourcing jobs overseas for decades since.. Yet there is an irony as you know that we continued to buy gas guzzlers and big mansions ourselves while jobs are outsourced to help reducing our dependence on imported oil or to help reduce air pollution. This is a big irony, indeed! , in case you dont notice or realize that... We blame banks for wrong reasons.. Banks just know that they cannot lend money to small businesses for growth that will also increase demand on our energy supplies and push prices up more... This is why oil prices move up and down wildy as of recently for signs of economic recovery as oil traders already know that America is very tight in oil supplies as well as natural gas supplies.. Coal supplies may be of less concern but it is a major pollutant which probably cannot be increased as well. it is the Energy, stupid!! It is not really about clean energy because it is really more about MORE ENERGY ! We are installing wind turbines and solar panels which will take a really long , long time to help our economy grow on adequate energy sources.. Should we go faster or what?? Should Big Oil, Gas, Coal, Etc start participating in more clean energy projects now instead of continuing to study more and weighing against earnings , etc.. Can we afford to allow them to delay and delay on our energy needs simply based on earning questions... ??? This seems unwise to me... ??

October 14 2011 at 2:35 PM Report abuse rate up rate down Reply
Gumby

It is no longer the economy , stupid! it is now the Energy, stupid!! Clean or not, clean ones is more plentiful, F Y I !!

October 14 2011 at 2:08 PM Report abuse rate up rate down Reply
Gumby

Aimee, you forgot to mention "therms" . Let me help you .. Therms is what utility ratepayers read on their utility bills for natural gas. A therm is equivalent to 100 cf or 100 cubic feet or 1/10 mcf. Your utility pays the going rate of $3.53 per 1000 cubic feet and divide them into 10 therms and usually bill you around $1 per therm or 100 cubic feet. Also, that solar energy can be measrured in Btus like natural gas which mean that solar energy can also compete with natural gas for heating your home . Unlike electricity, solar heat cannot be stored in batteries but they can be stored in molten salt which may not be practical for home use. Solar energy can be used to heat your home directly and immediately by opening your draperies to let sunlight in. There is a lot of Btus in sunlight . You can attach sunrooms to your homes to capture valuable solar heat . You can also use mirrors to capture as much valuable sunlight as you need . Actually, you can modify your exisitng skylights into solar collectors very cheaply and easily. Solar energy is most efficient through Btu generation much higher than solar panels that is used to generate electricity. Btu efficiency can be as high as 90-95% as compared to around 20% for solar panels (photovoltaics). Yet, both is useful and practical in many ways that they can be complementing with eachother. Natural gas is a great fuel to have but not something to rely too heavily on as supplies are limited. The Sun is 800,000 mile across and very mighty which should be our primary energy source of the future. It is not financially appropriate to count on rising prices for oil and natural gas as optimal and conservative investment opportunities as consumers are harmed by rising prices.

October 14 2011 at 12:29 PM Report abuse rate up rate down Reply