Natural Gas Value Chain
Lesson Overview
The Natural Gas Value Chain Fundamentals Lesson consists of the following topics:
- Learning Objectives
- Overview of Natural Gas Value Chain
- Gathering
- Processing
- Elements of Midstream Activities
- Transmission – Variety of Pipeline Systems
- Gas Storage
- Storage Strategy and Services
- Local Distribution
- LNG – Value Chain Overview
- LNG – Specialized Ships
- LNG – Receipt & Regasification
- Storage Facilities – Surface
- Future Importance of LNG
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Value Chain Overview
Natural gas production is gathered from land-based (onshore) wells via low-pressure, small-diameter pipelines from numerous wells. Gas wells located in water, called offshore, present unique challenges not only in drilling the wells, but also in putting them into production. The gathering systems for offshore wells are often placed on the seabed and consist of highly engineered equipment that must be operated by remote control.
Once gathered, the gas is then moved to a central processing plant, a treatment plant, or both. Wet gas is processed to strip out NGLs, which can be sold separately as fuel and petrochemical feedstock, much like petroleum products. All gas – wet or dry – is treated to remove any solids, water vapor and/or contaminants. Dry gas then moves to a pipeline for transportation.
In accordance with the contract terms, the natural gas is transported from the production area to the customer on high-pressure, large-diameter pipelines. Along the way, the gas most likely will be co-mingled with other gas producing supplies and may also be injected and withdrawn from a storage field as needed.
This module will consider long-line pipelines as the key components of gas transmission. Note that, in the US, transmission is also a common term for electric power.
At the end of the pipeline, gas typically is sold to a local distribution company (LDC) or Local Distribution Zone (LDZ) in Europe. The LDC/LDZ develops and controls an extensive network of low-pressure, small-diameter pipes, buried under the city.
In the marketing of gas:
- Gas may be bought and sold multiple times along a pipeline.
- LDC/LDZ sales are done at what is termed the “city gate” for resale and distribution to residential, commercial and industrial end-users.
- Some commercial and industrial end-users purchase gas directly from a marketer “bypassing” the LDC/LDZ.
- Marketers buy or sell gas through individually negotiated contracts or on a commodity exchange.
Gathering
It would be impractical to connect each gas production well directly to the long-haul transportation grid. So gas production is gathered at a collection point in the production field, and processed into a marketable commodity before being delivered into a major pipeline. This is done by an operation or set of providers often called “field services.”
Gathering systems are a group of small pipelines which move gas (or oil) from wells and fields into a major processing facility or pipeline.
Gathering lines of the late 1800s and early 1900s were short, inefficient and leaky. As onshore production expanded, gathering lines became much longer and more sophisticated, built with high-strength steel pipe, compression, measuring and pressure regulation devices.
Specialized pipe-laying equipment originally was developed for gathering operations in the shallow offshore waters (15 – 60 meters) of the US Gulf of Mexico. All over the world today, high-pressure gathering lines are laid at great water depths (over 1,000 meters), called subsea completions, to connect deep water production to onshore pipeline systems.
Processing
Natural gas at the wellhead or casing head gas has widely varying composition depending on the production field and its associated reservoir characteristics. The safe, efficient operation of the natural gas market requires that all gas be processed (treated) to meet a consistent set of minimum quality standards, called pipeline quality.
Pipeline quality gas is free of liquid hydrocarbons, solids, water vapor and contaminants, and has a heat content within the pipeline-specified range, measured in Btu per cubic foot.
To meet the standards, the first step at the field processing facility is to remove any water and natural gas condensate. Typically, any wastewater is collected and treated before being sent back to the well or offsite for waste water disposal. All contaminants, hydrogen sulfide and carbon dioxide, mercury and nitrogen are also removed.
At the next process step, the gas plant receives the gas condensate and separates it into marketable and valuable Natural Gas Liquids (NGL’s).
Finally, any NGL’s – propane, butane and pentanes – are separated from the natural gas stream, recovered, stored and transported to LPG and petrochemical end-user markets.
Midstream Activities
The Midstream is the term for the function that provides the vital link between far-flung producing areas and the population centers where most consumers are located. Gathering, processing, fractionation & storage and and transportation pipeline companies are a major part of the midstream industry.
As the chart shows, the midstream handles natural gas, natural gas liquids (NGLs)and sulphur.
Fractionation plants which remove NGL’s from the produced oil and gas stream are also a key component of the midstream activities. Here the processed liquids are fractionated into products such as ethane, butane, propane and LPG to be marketed as chemical feed stocks, fuel or blend stock for gasoline.
The pure natural gas is then compressed for transportation via pipeline.
LNG operations are often considered to be part of the Midstream.
Transmission
There are various types of gas pipeline systems used throughout the world as described below and in the graphic for the UK:
Production Area (Gathering) Systems – When significant new reserves are discovered outside the established transportation system, gas producers often will negotiate with pipeline companies to build pipeline facilities connecting the new production area to an existing long-haul pipeline.
Long Haul Systems – Long-haul pipeline systems transport gas from major gas basins to major market areas. Pipeline diameters can range from 12-50 inches. Compressor stations are needed every 70-100 miles for transmission.
Web, Short Haul Systems – Major urban or industrial areas that have built up in regions with significant gas supplies may be served by a web of short-haul pipelines.
Reticulated Systems – In some cases, these web systems are reticulated – that is the flow can easily be reversed to provide maximum flexibility to shippers.
Market Area Systems – Similarly, pipeline companies regularly look for opportunities to build extensions off their existing long-haul systems to new or rapidly growing market areas.
US Pipelines – Integrated with Canada
The major US Pipeline operators in the US are shown on the chart.
Additionally, gas pipeline infrastructure is more developed between Canada and the US than between Mexico and the US. Canada is the world’s second largest natural gas exporter after Russia. Alberta is the dominant producer. Nova Scotia is increasing its production.
Canada’s gas flows to the US through several major pipelines feeding markets in the Midwest, Northeast, the Pacific Northwest and California. Some key examples are the:
- Alliance Pipeline,
- Northern Border Pipeline,
- Maritimes & Northeast Pipeline,
- TransCanada Pipeline System and
- Westcoast Energy pipelines.
Gas Storage
Natural gas can be stored underground in depleted reservoirs, aquifers and salt caverns to balance seasonal demands. Depleted reservoirs are the most economically efficient storage facilities because their geology is known and the extraction equipment is in place.
Aquifers naturally store water, but they also can be reconditioned to store natural gas. This is the most expensive storage option because:
- determining their gas storage suitability requires time-consuming and expensive geologic studies, and
- extensive extraction and gas retention infrastructure, including dehydration facilities are required.
Through a process known as leaching, the salt in an underground dome can be extracted, leaving a strong structure for storing natural gas. Leaching is expensive, and salt domes are smaller than the other two types of storage facilities. However, gas can be injected and withdrawn from them much more quickly, providing more flexibility to the pipeline operator. Salt domes also retain gas much better than aquifers.
Storage Strategy and Services
Because the gas transmission business often has high seasonal fluctuations, well-placed gas storage helps pipelines maximize their ability to provide steady service to customers.
As the chart shows for North America, the highest demand for natural gas is in the winter, as a result of home heating. In past summers, demand for natural gas was reduced, so pipeline deliveries were lower. In recent years, because of increased demand from gas-fired power plants for air conditioning, demand has become somewhat less seasonal.
To maximize the use of the pipeline capacity all year and create additional flexibility in a pipeline system, pipeline companies operate gas storage fields, here the pipeline:
- injects natural gas into the storage field when demand is low (summer), and
- withdraws it from the storage field during times of high demand (winter).
In the US, natural gas storage is often contractually controlled by the pipeline’s major customers.
Local Distribution
In metropolitan areas, LDC’s and LDZ companies are the last link in the natural gas value chain, they receive natural gas from long-haul pipelines and deliver it to thousands of homes, offices, stores and industrial facilities.
This distribution system is another web of small-diameter, low-pressure pipe. In contrast to the steady flow of gas in major pipelines, metropolitan gas is distributed on an as-needed basis. Power generators take delivery directly from a major pipeline because they can take large quantities of gas in a steady flow.
In addition, distributors add an odorizing agent, mercaptan, so that leaks are immediately recognizable.
Some history is relevant…
In 1937 in the small oil town of New London, Texas, the public school was heated with natural gas. At that time delivered natural gas was odorless and colorless. On March 18, a gas leak was triggered by a spark, and the whole school exploded. Over 300 children and their teachers were killed.
As a direct result of this catastrophe, the US government passed a law that the chemical “Mercaptan” be put into natural gas to give it an identifying odor.
Liquified Natural Gas (LNG) Overview
The newest aspect of the global natural gas business is LNG and the chart shows a typical LNG value chain.
- Once received from the production facilities, the LNG processing starts with a liquefaction plant at which the natural gas is cooled to a temperature of -260 degrees F before storage and shipment.
- In this liquid state, LNG occupies only 1/600th of the volume it occupies as a gas. The result is a stable, high-BTU product that can be stored and shipped via specialized tankers to high demand markets throughout the world.
- At the receiving location, a terminal called a regasification facility converts the LNG from its liquid state – ready to be transferred to a pipeline for transport to end-user customers.
Countries of origin for LNG liquefaction and exports include Algeria, Australia, Indonesia, Libya, Malaysia, Nigeria, Oman, Qatar, Trinidad and Tobago. Qatar’s LNG business has expanded most rapidly of any of the producers.
LNG Transport
Following liquefaction, LNG is generally loaded onto specialized ocean-going tankers for shipment to global markets. These tankers carry double-hulled pressure insulated storage tanks (the spheres in the picture) that keep the LNG in its liquid form for safe transport.
Depending on point of origin and final destination, these tankers can be in transit for several weeks before delivery is accomplished. So the carriers are insulated to limit the amount of LNG that “boils off” or evaporates during the voyage.
Current LNG carriers are typically up to 300 meters long and require a minimum water depth of 15 meters when fully loaded, with a load capacity of 125,000 cubic meters to 145,000 cubic meters.
More recently, there has been a very large increase in the sizes of vessels ordered, to as much as 250,000 cubic meters. Larger vessels have the advantage of reducing transportation and overall LNG delivery costs. This size increase, however, will affect the design of the LNG plants and terminals.
By 2008, more than 140 LNG tankers were in service delivering over 120 million metric tons per year.
LNG Receipt and Regasification
As the picture shows, regasification terminals can receive the LNG from the vessels into storage tanks, with enough storage tanks to both accommodate a vessel and provide uninterrupted flow into the natural gas pipeline.
Here, the imported LNG is then “regasified” through a series of pressure and temperature changes.
Regasification facilities tend to be very large and very expensive. Newer terminals in the US can deliver 1 BCF per day or more and can cost upwards of US $1 billion per terminal.
From a commercial perspective, capacity at regasification terminals is governed by a terminal use agreement.
Once regasified, the natural gas product is ready to be injected into a pipeline and moved to end-user markets.
Storage Facilities – Surface
Surface storage facilities are the easiest part of the midstream to observe.
LNG above-ground tanks use an inner membrane or a steel-nickel inner tank lined with concrete to contain and help insulate the (very cold) LNG prior to regasification.
The common LPG sphere is found at NGL recovery facilities (often called gas plants) and refineries. It is round because that is the most structurally sound facility design to keep LPG under slight pressure.
Future Importance of LNG
As crude oil reserves become increasingly difficult to produce and keep up with growing demand, natural gas will begin to replace fuel oil and diesel – especially in power generation.
Historically, natural gas needed to be tied by a pipeline to a regional market. The rapid pace of investment by gas producing countries in LNG capacity has altered significantly the value chain for natural gas. The chart shows the importance of LNG to the supply chain – especially in Europe – as indigenous production of gas in the UK and other countries is on the decline. Europe’s support of the Kyoto protocol and other carbon emission initiatives will also accelerate the use of gas.
This brings new opportunities for liquefied natural gas. LNG offers a global supply advantage and flexibility in the marketplace. Therefore, there are now investments around the world in liquefaction terminals, cryogenic ships, receiving terminals and re-gasification plants.
European Pipelines Reflect Supply Changes
Europe has few natural gas production resources and gas continues to grow as an important fuel source for electricity generation. In Europe:
- 17% of electricity generated used gas in 2004
- compared to only 6% in 1990, and it is
- expected to grow to 29% by 2030.
Often, gas is the marginal fuel driving prices for electricity. Gas, often referred to as ‘storable’ electricity, can sometimes be more economic to transport by pipeline than electricity by wire.
Existing LNG use and expected growth is also expected to alter the transportation landscape as is indicated by the chart. Currently nine existing LNG terminals serve Europe, and another twelve are in the planning stage.
Related Resources:
What is the difference between Upstream and Downstream?
Drilling Wells for Oil and Gas and Offshore Drilling