For those of you who heat your home, water and food with natural gas, Northwest (NW) Natural’s recent announcement that it will likely increase rates by up to 40 percent, likely came as a pretty massive shock. Just when natural gas customers thought they could avoid yet another impact from the volatile global energy market, this announcement hits at a most inopportune time. As I heat my home with Oregon-sourced and refined B99 biodiesel, this increase won’t hit me directly, but really, I’m already bent over the barrel (so to speak) –have you seen the price of Oregon-sourced B99? Yeah, no parade at my home, kids. The fact is, energy prices are squeezing us all. This being said, the recent announcement from NW Natural shines a glaring light on an industry that has long kept itself clean of the dirt kicked up during the recent oil and energy crisis. Natural gas deserves a closer look, especially as the coast is under deep investigation by the federal government for potential LNG (liquefied natural gas) ports. Or as I like to say, more needles to feed the habit.

First, before anybody completely skewers NW Natural for inflating rates, it’s important to note that gas utilities’ profits don’t depend on the volume of gas they sell. The price of gas for end-customers is based on what NW Natural refer to as the weighted average cost of gas. This figure is a complex sum of the price of gas withdrawn from NW Natural’s own storage wells, their long-term contracts, and the price the company pays on the wholesale market when it needs to bulk up supplies during the winter. According to the Oregonian:

“…in late August, NW Natural estimates its gas cost for the following year and submits the forecast to regulators at the Oregon Public Utility Commission, who analyze the request and set rates accordingly. If actual gas costs come in lower than the estimate, a refund is built into rates the next year. Utilities don’t lock in their entire supply for the year in advance. And regulators make sure utilities are motivated to buy gas judiciously by allowing them to share in any savings –or losses– they achieve from their original estimate.”

Natural is as Natural Does

NW Natural is an interesting business that has remained severely quiet during bio-fuel’s rise and recent decline… and for good reason. While they have a name that almost guarantees a perfect fit for Oregonians (’Northwest’ and ‘Natural’ in the same title!), there’s not a boatload to be proud of. Yes, the gas is from natural sources, and yes, it is delivered to Northwest customers, but that’s where the honeymoon ends. The fact is, natural gas comes from the same place that we get oil (for the most part). Though it is a gas and not a liquid, natural gas is, in fact, a non-renewable fossil fuel, just like oil. It’s found primarily in both oil fields and natural gas fields, as well as in coal beds (as coalbed methane).

Natural gas consists primarily of methane but including significant quantities of ethane, propane, butane, and pentane—heavier hydrocarbons removed prior to use as a consumer fuel —as well as carbon dioxide, nitrogen, helium and hydrogen sulfide. It’s really a rather robust energy cocktail. Natural gas was formed millions of years ago when organic matter was buried in the earth and ocean floor. Over time, thick layers of mud, sand, silt and rock settled over the matter, pushing it deeper and deeper into the earth’s crust. As the layers of matter built up, pressure and heat from the shifting surface of the earth filled the resulting cracks and crevices with oil and natural gas.

When methane-rich gases are produced by the decay of non-fossil organic material, these are referred to as biogas. Sources of biogas include swamps, marshes, and landfills, as well as sewage sludge and manure by way of anaerobic digesters, in addition to fermentation in cattle. Yes, it is true that biogas is an excellent future energy source. In fact, the City of Portland now has a waste treatment facility that is supplementing its’ power needs with gas produced by the human sludge bubbling within the bowels of the facility. This being said, it’s still a nascent industry, albeit an important focus for future sustainability.

Whatever it’s source, before natural gas can be used to steam your turnips, it has to undergo extensive processing to remove nearly everything but the methane. After processing, the resulting gas has to be transported to gas-consuming regions where it can be distributed via a vast network of underground pipelines. Carriers can be used to transport LNG across oceans, while trucks can carry liquefied or compressed natural gas (CNG) over shorter distances. Trucks might transport natural gas directly to end-users, or to distribution points such as pipelines for further transport. These may require additional facilities for liquefaction or compression at the production point, and then gasification or decompression at end-use facilities or into a pipeline. Pipelines can keep the gas flowing to homes for about 50 miles before requiring a ‘boost’ to keep the pressure in the lines up to optimal levels.

By the Numbers

Geology/logistics lessons aside, more than 60 million customers use natural gas in homes and businesses in the United States. In fact, natural gas provides about 24 percent of all the energy that is used across the nation, including 22 percent of America’s electricity. Natural gas consumption in the U.S. divides in the various sectors of the economy as such:

Industrial use: 33%
Electricity production: 31%
Residential demand: 22%
Commercial sector: 14%

With increasing demands and subsequent costs, it’s fair to ask just where the heck does all this natural gas come from? Fortunately, most of it (~80 percent) comes from domestic sources, but this is not a stable foundation. Thanks to peak oil fanatics, we know that oil production in the United States is in dramatic decline, passing the discovery peak for oil in 1930. The production peak followed 40 years later, in 1970. The U.S. now imports about 70 percent of its oil. During the time that we’ve remained focused on the source and production levels of our oil, the general public has remained in a gaseous fog as to the source and production levels of natural gas.

What you may not be as aware of is that natural gas production in the U.S. has also peaked. In fact, American natural gas production reached its peak in 1973, then went over a second, lower peak, in 2001. This was also the date for peak production of natural gas in all of North American, which is now in terminal decline. The depletion rates for natural gas in the U.S. are larger than for oil. Natural gas fields put into production in 1990 were down 17 percent after the first year. Fields put into production today deplete more than 30 percent during their first year of operation.

Because of this decline, the U.S. now imports more than 17 percent of its natural gas, three percent of which arrives on our shores as LNG, mainly from Trinidad. The remaining 14 percent comes from Canada (which represents one half of Canada’s production). This being said, Canadian imports don’t represent anything more than a tourniquet. The province of Alberta has about 3/4 of Canada’s natural gas reserves, yet production from Alberta’s gas wells dropped 71 percent from 1996 to 2004. In the past 25 years, Canada, the United States and Mexico have gone from having 12 percent of world reserves to four percent and we have less than 10 years of reserves at current production rates.

Home is Where the Gas Isn’t

Though North American production has peaked, we’re still demanding more and more from our shrinking reserves. We now import (via North American pipelines) more than four times the amount of natural gas than we did in 1982, mostly because we can’t keep up domestically. The vast majority of the natural gas reserves in the United States exist in just six states, plus a relatively large reserve in Alaska. The state of Oregon doesn’t have any reserves worth more than a mention and the closest state to us with any significant reserve is Wyoming. The Gulf of Mexico used to produce a good deal of our domestic natural gas, but even this is suspect for a solid future. According to Ziff Energy, a Calgary-based consultancy, the Gulf’s gas will fall from 25 percent of the total U.S. supply in 2000 to eight percent in 2014, as total offshore output will drop dramatically. True, there remains a large amount of natural gas reserves worldwide (though data is unreliable), however it is difficult and expensive to transport.

The world’s major natural gas reserves lie mainly in Russian Siberia, Iran and Qatar. Natural gas is shipped mostly via regional pipeline. Subsequently, in order for the U.S. to gain access to the large reserves in Asia and the Middle East, liquefaction facilities need to be built. Unfortunately, as soon as the appropriate facilities are built, stiff competition for liquefied natural gas drives up demand and prices. The fact remains, natural gas is, like oil, rife with potential for generating geopolitical conflict. Just 15 nations account for 84 percent of the world-wide production of natural gas. This story sounds far too familiar.

Oil. Gas. Non-renewable. Un-sustainable. It’s a broken record. Unfortunately, we can’t just stand up and walk to the turntable, lifting the stylus gently to relieve the pressure. Not this time. The words just keep pounding into our head. As I’ve said before, if only there was some huge glowing ball of energy out there from which we could endlessly power our homes, our lives… if only.