Natural Gas In A Nutshell

Natural gas is a fast growing form of energy with a rapidly developing competitive market. Natural gas is by no means a “green energy”, but also counts as petroleum (together with oil and bitumen). Gas exploration is a hot topic as it involves highly toxic substances and often renders whole regions uninhabitable. It is very important to understand natural gas, with its regulatory dynamics, benefits, and challenges. This article gives an overview about how it is produced, distributed, and sold. All of this is very important knowledge for every Energy Risk Professional.

Natural gas consists of hydrocarbon molecules from one to four carbon atoms in length, but mainly of the hydrocarbon methane (CH4),  which is the smallest occurring hydrocarbon molecule.

The typical composition varies from field to field. The English unit of volume measurement for natural gas is the cubic foot (cf). In the metric  system, cubic metres (m3) are used for volume of gas.

As with crude oil, there is sweet and sour natural gas. Sweet natural gas does not contain any hydrogen sulfide (H2S). Sour natural gas does contain hydrogen sulfide (H2S). Hydrogen sulfide (H2S) does not count as an inert (impurity in natural gas). It is lethal and very corrosive, and it must be removed from the natural gas before it can be delivered to a pipeline.

In the ground, natural gas is often dissolved in crude oil because of high pressure in reservoir. As the pressure of the reservoir increases with depth, the amount of natural gas dissolved in crude oil increases with depth also. When crude oil is lifted to the ground, the pressure is relieved and the natural gas (solution gas) bubbles out. Nonassociated natural gas is not in contact with oil in the subsurface. A  nonassociated gas well produces almost pure methane. Associated natural gas is in contact with oil, occurring in the free gas cap above  the oil and in solution with the crude oil. Associated gas contains butane, propane, and ethane next to methane.

The heat content of natural gas is measured in British thermal units, Btu. One Btu is about the heat given off by burning one wooden match. Btu values of pipeline natural gas range from 900 to 1,200 Btus per cubic foot (cf), while the most common heat content for pipeline natural gas is 1,000 Btu/cf. The heat content varies with the composition.

There are about 179 Tm3 proven reserves of natural gas available which equals about 65 years of production at the present rate. Ultimate  reserves are estimated at about 360 Tm3. Most proven reserves are located in the Middle East and in the former USSR, but the main  markets are in Europe and the United States.

Natural gas extraction by countries in cubic meters per year.

Natural gas reserves remote from markets are called “stranded reserves”. They were viewed as a nuisance in the past, but as options for monetizing some of these stranded reserves (sometimes discovered decades ago) increase, they are being increasingly developed.

The preferred way of transporting natural gas is the pipeline.

Because it is a gas, it is about five times as costly to transport as oil. Natural gas can also be transported in liquid form as liquefied natural gas (LNG) or compressed natural gas (CNG), but both are more costly as they involve further processing. Market centers (hubs) exist near the intersection of several pipelines and provide customers (shippers and marketers) with receipt/delivery access to two or more pipeline systems. The best known, but not the largest, market center in the United Stated and Canada is the Henry Hub located in Erath, Southern Louisiana.

If it is not immediately needed, natural gas is stored in caverns (usually washed salt domes), depleted oil or gas reservoirs, aquifiers (water-bearing rock formations), or steel tanks. Demand for gas fluctuates seasonally and intraday. Operating storage is used by pipeline companies to balance short-term demand swings. It takes four days for natural gas stored on the U.S. Gulf Coast to reach the Northeast of the United States. Seasonal storage is used to accommodate for seasonal swings. Pipeline companies or local distribution companies own seasonal storage. A characteristic of the natural gas market is the alternating injection season (around March) and withdrawal season (around November), which heavily impacts price volatility.

The natural gas market is becoming more and more deregulated, and therefore more competitive. The main regulating agency is FERC (the Federal Energy Regulatory Commission). FERC is an independent agency in the United States that regulates the interstate transmission of natural gas, oil, and electricity. FERC also regulates natural gas and hydropower projects. Since 1993, FERC orders have provided for open-access storage service, the separation of  purchase and transportation services by interstate pipelines (“unbundling”), and deregulation of interstate pipeline sales sources, with only the market constraining rates. All of these actions have made natural gas more competitive compared to oil.

The main acts governing the gas market are:

  1. National Energy Conservation Policy Act. Required utilities to encourage customers to conserve energy.
  2. Power Plant and Industrial Fuel Use Act. Required power plant users to convert to coal, whenever possible.
  3. Public Utility Regulatory Policies Act (PURPA). Federal standards for termination of service, spurred development of cogeneration project  (simultaneous production of electricity and heat, more efficient).
  4. Natural Gas Policy Act. Gradually phased out curtailment measures.
  5. Energy Tax Act. Established tax credits for low-emission dwelling and transportation.

The main advantages of natural gas is its abundance and therefore its low price. Many natural gas reserves are found in the United  States, and are therefore viewed as one of the answers to the dependence on foreign oil.

The main problems with natural gas are:

  • Low energy density. High pressure is required to increase gas density and raise its energy content per unit volume so that the gas can be transported economically.
  • Storage. Large quantities of natural gas cannot be stored easily above ground as oil and coal can.

Natural gas exploration is very controversial as it is very harmful for the local flora and fauna, especially the method of hydraulic fracturing (hydrofracking) involving toxic “frakcing fluids”. Burning gas also still produces CO2, and is by no means an answer to the dependence on fossil fuel and global warming. Natural gas as a form of energy is therefore still only a half-hearted substitute for oil, and it remains to be seen how the unsolved problems of discovering and producing natural gas will impact its future as a form of energy.

Required Readings for the Energy Risk Professional (ERP) Exam

The required readings for the ERP exam are directly available from GARP in printed or electronic form. The price tag is rather high though, so you may want to consider assembling the readings yourself, preferably from your university library, as they will be exactly the same. The books may also be available on Amazon, but the price including shipping to your country may again be quite high.

In either case, finding all the books is very cumbersome, so I went ahead and compiled a list of required readings that can be used to substitute or complement the GARP study package.

A word of warning: The required reading list for the ERP exam looks extremely daunting. In reality, you will only have to read 2-3 chapters from each book on average, so it pans out to about 2,000 pages in total. I think candidates will benefit immensely from organizing the reading material properly, which is the main reason I made the ViveraRISK ERP Concept Checkers available on this site.

Below you will find a list of all the books from the ERP Study Guide 2011 published by GARP that can be found on their website. Please verify that all the titles are complete, as I can not guarantee that I have not missed or misspelled one.

As always, please contact me with any questions. I wish you all the best for your ERP exam preparations!

Printed books that you may find in your library or on Amazon:

  • Charles F. Conaway. The Petroleum Industry: A Nontechnical Guide (Tulsa, OK: PennWell Books, 1999)
  • Institut Français du Petrolé Publications. Oil, Gas Exploration, and Production: Reserves, Costs, Contracts (Paris: Editions Technip, 2007)
  • Charlotte Wright & Rebecca Gallun. Fundamentals of Oil & Gas Accounting, 5th Edition (Tulsa, OK: PennWell, 2008)
  • Norman J. Hyne. Nontechnical Guide to Petroleum Geology, Exploration, Drilling, and Production, 2nd Edition (Tulsa, OK: PennWell Books, 2001)
  • Thomas O. Miesner and William L. Leffler. Oil and Gas Pipelines in Nontechnical Language (Tulsa, OK: PennWell Books, 2006)
  • Samuel Van Vactor. Introduction to the Global Oil and Gas Business (Tulsa, OK: PennWell Books, 2010)
  • James H. Gary, Glenn E. Handwerk and Mark. J Kaiser. Petroleum Refining: Technology and Economics, 5th Edition (New York: CRC Press, 2007)
  • Davis W. Edwards. Energy Trading and Investing (New York: McGraw-Hill, 2010)
  • Rebecca L. Busby. Natural Gas in Nontechnical Language (Tulsa, OK: PennWell Books, 1999)
  • Arthur J. Kidnay and William R. Parrish. Fundamentals of Natural Gas Processing (Boca Raton, FL: Taylor and Francis, 2006)
  • Frank Fabozzi (ed.): The Handbook of Commodity Investing (Hoboken, NJ: John Wiley & Sons, 2008)
  • Michael D. Tusiani and Gordon Shearer. LNG: A Nontechnical Guide (Tulsa, OK: PennWell Books, 1999)
  • Davis W. Edwards. Energy Trading and Investing (New York: McGraw-Hill, 2010)
  • Chris Harris. Electricity Markets: Pricing, Structures and Economics (West Sussex, England: John Wiley & Sons, 2006)
  • Sally Hunt. Making Competition Work in Electricity (New York: John Wiley & Sons, Inc., 2002)
  • Richard Baxter. Energy Storage: A Nontechnical Guide (Tulsa, OK: PennWell Books, 2006)
  • Roy L. Nersesian. Energy for the 21st Century: A Comprehensive Guide to Conventional and Alternative Sources (Armonk, NY: M.E. Sharpe, Inc., 2007)
  • Ann Chambers. Renewable Energy in Nontechnical Language (Tulsa, OK: PennWell Books, 2006)
  • Fisher Investments. Fisher Investments on Energy (Hoboken, NJ: John Wiley & Sons, 2009)
  • Tom James and Peter Fusaro. Energy and Emissions Markets: Collision or Convergence? (Singapore. John Wiley & Sons (Asia) Pte Ltd., 2006)
  • Frank Fabozzi (ed.): The Handbook of Commodity Investing (Hoboken, NJ: John Wiley & Sons, 2008)
  • Steven Errera and Stewart L. Brown. Fundamentals of Trading Energy Futures & Options, 2nd Edition (Tulsa, OK: PennWell Books, 2002)
  • Robert McDonald. Derivatives Markets (Boston: Addison-Wesley, 2003)
  • Markus Burger, Bernhard Graeber, and Gero Schindlmayr. Managing Energy Risk: An Integrated View on Power and Other Energy Markets (West Sussex, England: John Wiley & Sons, 2007)
  • Vincent Kaminski (ed). Managing Energy Price Risk (London: Risk Books, 2004)
  • Alexander Eydeland and Krzysztof Wolyniec. Energy and Power Risk Management: New Developments in Modeling, Pricing, and Hedging (Hoboken, NJ: John Wiley & Sons, 2003)
  • Vincent Kaminski (ed). Energy Modeling: Advances in the Management of Uncertainty, 2nd Edition (Incisive Media Investments Limited, 2005)
  • Davis W. Edwards. Energy Trading and Investing (New York: McGraw-Hill, 2010)
  • Fletcher J. Sturm. Trading Natural Gas: A Nontechnical Guide (Tulsa, OK: PennWell Books, 1997)
  • Dragana Pilipovic. Energy Risk: Valuing and Managing Energy Derivatives, 2nd Edition (New York: McGraw-Hill, 2007)
  • Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management (London: Lacima Publications, 2000)
  • Helyette Geman (ed). Risk Management in Commodity Markets: From Shipping to Agriculturals and Energy (West Sussex, England: John Wiley & Sons, 2008)
  • Peter C. Beutel. Surviving Energy Prices (Tulsa, OK: PennWell Books, 2005)
  • John Wengler. Managing Energy Risk: A Nontechnical Guide to Markets and Trading (Tulsa, OK: PennWell Books, 2001)
  • Tom James and Peter Fusaro. Energy and Emissions Markets: Collision or Convergence? (Singapore. John Wiley & Sons (Asia) Pte Ltd., 2006)
  • Steve Leppard. Energy Risk Management: A Non-technical Introduction to Energy Derivatives (London: Risk Books, 2005)
  • Tom James. Energy Markets: Price Risk Management and Trading (Singapore: John Wiley & Sons, 2008)
  • Eduardo Canabarro and Darrell Duffie. ALM of Financial Institutions, ed. Leo Tilman (London: Euromoney, 2003)

Readings available online as downloads:

What Is The ERP Exam? What To Expect, And How To Prepare For It

The Energy Risk Professional (ERP) is a new professional designation from GARP aimed at risk professionals working in the physical and financial fields of energy. I was actually studying for the CAIA (Chartered Alternative Investment Analyst) and the CFA (Chartered Financial Analyst) when I became interested in energy risk management. It was intuitive to me to use energy financial instruments for risk management and hedging, but the physical aspects of the energy risk professional designation were not entirely clear to me. Still, I took the plunge and registered for the November exam in summer of 2010.

Little did I know what I had signed up for: The ERP curriculum stretched over nearly two thousand pages, consisted of over 100 readings different and academic papers, some of them very lengthy. Next to a 60 hour work week, the study material was a mountain of work. Organizing the material, summarizing it, reviewing and practicing for the exam were made even more difficult by the lack of study material and preparation resources, as only one (!) practice exam was available at the time.

The curriculum stretches from physical aspects of petroleum (hydrocarbon genesis, refining, transport with tankers, pipelines) over coal and natural gas, to alternative energy such as solar, hydro, wind, and biomass. There is also a segment of nuclear energy, financial trading instruments, valuation of energy transactions, financial disclosure, and laws and regulations. A large part of the material is electricity. The finance part was easy for me, as it covered mainly options, futures, forwards, swaps and little structured derivatives. Energy futures was a different bag altogether, but not too remote from what I already knew.

The physical aspects were much more interesting, as they contained ideas and concepts that were new to me. Even simple truths like the fact that electricity is not storable and what this means for trading electricity derivatives seem trite at first, but when you get into it further, it opens up a whole new universe.

My main challenge was reviewing and learning the study material. I had made a ton of summaries of the original readings, but how should I pack that into my head for the exam? I used a spaced repetition with my summaries in question and answer format, and that was quite effective (but not very efficient, as it ate a lot of time). In retrospect, I spent about 200 hours preparing for the exam, and passed. If this sounds like a lot, it was. There were simply no tools available at the time that I could have used for a shortcut.

If you work in the energy industry, and are involved with risk management, I encourage you to look into the Energy Risk Professional (ERP) from GARP. This designation is new, but I believe it will grow tremendously in importance over the next few years, and has the potential to help you in your career. I wish you all the best for your exam preparation!

How Will the ERP Designation Help Me to Advance My Professional Career?

A common question I get in emails is this one: “I already work in the energy industry. What will the ERP (Energy Risk Professional) designation do for me to advance my career?”

This is an obvious question often heard from energy marketers, energy commodity traders, engineers, and energy risk managers. The ERP designation is not widely known yet, but this may change soon. While the ERP (short for “Energy Risk Professional”) is relatively new, it stands on solid footing endorsed by GARP (the Global Association of Risk Professionals) and API (the American Petroleum Institute). There are approximately 500 ERP charterholders so far (as of 2010), and their number is expected to grow very quickly. The pass rate on the ERP exam has been about 35% in 2010, so this is definitely not a designation that you simply buy by enrolling for the exam. The ERP designation can be gained by passing one exam, held in May and November each year, but this may be amended in the future, just as has been the case lately with the FRM designation (short for Financial Risk Manager, also by GARP), which now spans over two exams. The time to gain the ERP designation is still relatively short with manageable effort, for the time being.

Having passed the ERP exam in the first go, I can say that the material is not too difficult. You should, however, take your exam preparation seriously: Start at least six months before the exam with the required reading material, and finish reading and summarizing the material at least two months prior to the exam, so you have ample time to review all the study materials and take practice exams.

I definitely think the ERP designation will add value to your resume if you work in the energy industry. Even if you work in related financial fields, I would advise you to consider taking the exam. The effort is not as huge as for other designations such as the CFA, CAIA, or FRM, but you will still get an endorsement from GARP and API. If you can show to prospective employers that you are willing to improve your skills, this always sends a positive signal that will differentiate you from the herd. Employers rewards achievers, so be prepared for an improvement of your professional situation upon getting any professional designation.

If you have made the decision to enroll for the ERP exam, I applaud you. This is your first step to excellence in the growing field of energy risk management. I wish you all the best for your exam preparation on the way to becoming an Energy Risk Professional!