Why Isn't Natural Gas at $19.50 per Mcf?

Source: redorbit.com (7/3/08)

It is easy to deliver oil to almost any market. This is not true of gas - the infrastructure for transporting gas is less developed and has a higher starting hurdle. This is also true of the infrastructure for the end user, who has to be tied to the gas pipe.

This article is a departure from the usual format, but I want to discuss the current price of natural gas and its sluggish behaviour against the booming oil price. Traditionally gas was evaluated at its energy content which, when compared to the energy content of a barrel of conventional oil, was about one-sixth. This traditional measurement was used for years as a tool for evaluating gas reserves in barrels of oil equivalent (BOE). Therefore, it was a tool for setting the value of reserves in a single format.

Over the last half dozen years this traditional measurement has lost its validity as the price of natural gas has failed to maintain its place in a rising oil price environment.

The reasons for this disconnect are manyfold:

OIL IS A WORLDWIDE COMMODITY, GAS IS NOT

Oil transportation and user infrastructure are fully developed so oil becomes a fungible, worldwide commodity. If a refinery in Texas doesn't need the oil then it can be rerouted to China or Japan or England or Spain or India or Sri Lanka . . . you get my drift.

Not all oil can go all places, but skipping the restriction on undesirable grades, it is easy to deliver to almost any market.

This is not true of gas - the infrastructure for transporting gas is less developed and has a higher starting hurdle. This is also true of the infrastructure for the end user, who has to be tied to the gas pipe...

The number of liquefaction plants (delivery to tankers) and gasification plants (removal from tankers) continues to grow. This growth is fast and furious as oil users, like China, look to replace oil importation (a shrinking supply commodity) with natural gas (a growing supply commodity).

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