The Future Of Natural Gas

  

A recent edition of The Economist ran a fantastic article on natural gas and its emergence as a global commodity.  Three factors are coming together to achieve this convergence: Demand is exploding as a response to environmental concerns; Supply is expanding due to technologies being applied to improve recovery rates; and Capital is going into projects to provide inter-regional transportation.

Increasing demand is being driven by a switch from dirtier fuels, especially coal.  (See the companion piece.)  Natural gas produces less carbon dioxide, sulfur dioxide, nitrous oxides, and particulates per megawatt hour of electricity produced than coal.  The technology to convert a coal fired plant to natural gas is decades old and proven in terms of efficiency and effectiveness.  And supplies have been plentiful, for the most part.

The supply side of the natural gas revolution is being driven by two technologies: horizontal drilling and hydraulic fracturing.  These two technologies are allowing  energy exploration and development companies to drill wells that will produce five to ten time the hydrocarbons that a conventional well in the same basin would produce.

Finally, transportation methods are being developed that will encourage gas trading across regional borders.  The increased supply and demand justifies the capital expenditures for liquid natural gas facilities in shipping ports and the production of LNG tankers. Increasing transportation capacity will drive pricing convergence, and will erode the market dominance of any particular producer or pipeline in a region.

These development are going to support the stabilization of gas prices.  Multiple producers serving multiple markets, all with growing quantities are indications of a strong, healthy industry.