Natural Gas and its Supply Chain Natural gas is a commonly used energy source around the world. Thousands of people are employed in its supply chain, helping with drilling and extracting natural gas, treating it, and...

Natural gas is a commonly used energy source around the world. Thousands of people are employed in its supply chain, helping with drilling and extracting natural gas, treating it, and transporting it to commercial and industrial consumers.

In this article, we'll discuss what natural gas is, explore its supply chain in greater detail, and cover some current events and recent discussions related to it. We'll also offer tips for people interested in investing in this sector.

Key takeaways:

• Natural gas is produced over millions of years by the slow breakdown of organic matter as its pressed and heated under sand and sediment.
• Natural gas is primarily composed of methane, though it often needs to be processed when it's first drilled from underground due to the presence of non-hydrocarbon compounds like sulfur and helium.
• The future performance of natural gas companies will be affected by socio-political events like war, government sanctions, and green energy initiatives.

What is Natural Gas, and How Do We Get It?

Formation

Natural gas is a non-renewable resource that consumers can burn to generate heat, electricity, or cook food. Formed by the anaerobic decomposition of organic matter, methane is the primary component of natural gas, but it also contains small amounts of carbon dioxide, nitrogen, and various other gases.

Imagine marine plants and animals dying millions of years ago and being buried on the ocean floor. Over time, the build-up of sand and silt pushes their remains deeper into the Earth, exposing them to higher temperatures and increased pressure. This combination eventually breaks down carbon bonds in organic matter, producing thermogenic methane (natural gas).

Extraction

Natural gas is found underground in formations like sandstone beds and coal seams. Like petroleum, natural gas can flow freely to wells because of natural underground pressures pushing the gas through rock. Petroleum reservoirs often contain natural gas too, and drillers often find the gas (because it's lighter) on top of the oil.

The extraction process for natural gas involves pumping into a well bore to bring oil and gas to the surface. Drillers intentionally try to fracture rock to facilitate gas flow through the reservoir.

Studies from the last ten years have shown 75% of the world's natural gas deposits are in the Middle East, Europe, and the former U.S.S.R. That leaves a relatively small amount of natural gas in the United States, but it is still a significant industry and employs thousands of Americans yearly.

Processing

Natural gas companies typically transport their product through pipelines. These pipelines carry natural gas to processing plants where water vapor and nonhydrocarbon elements are separated from methane. It doesn't always need to be processed if the natural gas harvested is not especially "wet" (mixed with elements besides methane).

Processed natural gas (which usually contains trace amounts of other elements) is called "dry natural gas" and can be delivered through pipelines to underground storage fields or distribution companies before being sent to consumers. Natural gas is naturally odorless, so chemicals called odorants are added to natural gas so consumers and workers can detect leaks.

Transportation

Liquefied natural gas (LNG) is natural gas that has been cooled to -260 degrees Fahrenheit to reach a liquid state. Because liquids are more compact than gases, LNG takes up only 1/600 of the space it does as a gas. This allows for easy transportation around the globe to places without access to natural gas pipelines.

Once LNG has arrived at its destination, regasification facilities will heat the gas until it returns to a gaseous state. The company can then deliver the gas to consumers' homes through local pipelines.

Unlike other fossil fuels, natural gas burns cleanly and produces less toxic air pollutants and carbon dioxide. Carbon dioxide emissions from natural gas (per unit of energy produced) are roughly 40% lower than coal and 20% lower than oil. This gives natural gas a reputation as a relatively safe and efficient energy source.

However, there's disagreement over the benefits of using natural gas and whether they're outweighed by methane released into the atmosphere during processing and transportation.

Flaring

Flaring is the process of burning natural gas and is a common by-product of oil extraction. Many oil and gas value chain workers defend flaring as necessary for safety and economic reasons. Drilling creates pressure and gas build-ups which flaring helps offset. It's also not profitable for companies to bring as much natural gas as possible to market.

However, many others criticize the process of flaring as polluting and wasteful. Viable markets are necessary for companies to invest in capturing and processing excess natural gas. Until then, flaring remains a controversial step in many oil and gas operations.

Whereas flaring involves burning natural gas at a production well, venting is another process drillers use to eliminate excess natural gas. Venting involves the direct release of natural gas into the atmosphere, and though it's typically in small amounts, it's still considered damaging to the environment.

American Natural Gas Market

Natural gas now accounts for roughly a quarter of global electricity generation. In the U.S. in 2023, analysts measured the natural gas industry's market size (by revenue) to be over $200 billion. Natural gas represents a potential investment for many people. Because it is slightly more environmentally friendly than other thermal energy sources like coal, climate change legislation passed in the coming years may affect natural gas less.

Because natural gas is an energy source used by so many people, regardless of the state of the economy, it's a relatively stable sector during a recession. Whereas increased interest rates and decreased spending power can chip away significantly at something like an entertainment company's revenue, an energy company will usually not see profits fall by too much in an inflationary environment.

If you're interested in exposing your portfolio to natural gas companies, you can invest in an exchange-traded fund (ETF), buy a futures contract, or invest in individual natural gas companies on an exchange. Major oil and gas stocks typically offer investors high dividends, making these stocks even more attractive to potential investors.

Socio-political Events Affecting Natural Gas

Like all other energy sectors, current socio-political events can significantly impact companies' performances. It's not just climate change legislation affecting the outlook of energy companies.

The Nord Stream Incident

In September 2022, a series of bombings and subsequent gas leaks occurred on the Nord Stream 1 and 2 pipelines. The pipelines were designed to transport natural gas from Russia to Germany across the Baltic Sea.

Before the bombings, the Nord Stream pipelines had been filled with natural gas — but were not operational due to disagreements between Russia and the European Union. In 2021, Europe relied on Russia for over 40% of its gas, and the sudden choke in the supply chain caused energy prices to skyrocket.

In the background of this event were Russia's invasion of Ukraine and the U.S. threatening sanctions on any country that helped Russia finish the construction of the Nord Stream pipelines. Though it remains unknown who was responsible for the attacks on the pipelines, the event shows the effect current events can have on natural gas prices.

The U.S. tied Qatar in 2022 as the world's largest LNG exporter. The incident benefited companies specializing in solar, hydroelectric, wind, and biomass energy sources.

U.S. Investment in Natural Gas

Another effect of the Ukraine War and the increase in LNG prices was further investment in home energy sources. The U.S. plans to build some liquefied natural gas terminals along the Gulf Coast; this would mangify the number of exports the U.S. could make.

While this news is not necessarily good for those worried about the U.S. meeting certain fossil fuel emissions thresholds, it suggests the landscape of the American natural gas industry may change significantly in future years.

The Future of the Industry

It's challenging to know what direction the natural gas sector will go. People may consider switching energy sources if there's an extended energy crisis. As climate change legislation targets thermal energy sources with more sizable carbon footprints, natural gas demand may continue to grow in the coming years since people still want reliable energy sources to heat their homes and cook with.

The Inflation Reduction Act, signed into law by President Biden this August of 2022, allocated $369 billion towards fighting climate change by creating and developing green energy. We'll have to wait to see how companies specializing in green energy respond to increased funding and good press. If demand continues to grow, there's a chance their market share will cut into that of natural gas companies. Only time will tell.

Final words

When you say natural gas, most people immediately think of the small blue flames on their gas burners in the kitchen. Natural gas is a non-renewable energy source made over millions of years through the breakdown of organic material. The process of harvesting and processing it is complex and involves a certain amount of environmental harm through the release of methane.

As the energy world changes around us — with factors ranging from energy crises abroad to green energy initiatives here in the U.S. — demand for natural gas will likely continue to grow in the coming decades. As an investor, you may be interested in companies that either process LNG or ship it globally.

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