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Natural Gas: Economic Exploitation of Natural Gas


a mixture of hydrocarbons that are vapors at normal temperatures and below-normal pressures.

Methane (CH4) is the primary component of natural gas; other components are ethane (C2H6), propane (C3H8), butane (C4H10) and pentane (C5H12); nonhydrocarbons, such as nitrogen, hydrogen, and water vapor; and traces of rare gases, such as helium. The heavier-than-methane hydro-carbons are collectively termed natural gas liquids.

Associated gas is gas dissolved in petroleum; it sometimes also appears as a gas cap over an oil-bearing formation. Associated gas is the primary source of the pressure forcing oil to the surface during production and also is a byproduct of this process. An estimated one-quarter of the world's natural gas reserves occurs as associated gas.

Natural gas is highly flammable, and the complexity and cost of the technology needed to recover and exploit it prompted oil companies at first to flare (burn) most of the natural gas they produced. During the 1920s, research into the production of petrochemicals led to the development of a number of commercial processes utilizing natural gas as a feedstock, but most of the natural gas produced as a byproduct of mining oil continued to be flared. At that time, the American Petroleum Institute commissioned a major study of the role of natural gas in oil production. Published in 1929when industry leaders and government officials were worried about imminent fossil fuel depletionthe study produced the first empirical evidence of the relationship between gas pressure and recovery of oil reserves. In response to the study, the large, vertically integrated oil firms took the lead in changing traditional methods of oil production and processing so as to conserve natural gas.

Other modern uses of natural gas date back to the nineteenth century, when it was substituted for coal and wood in boilers located near oil fields. During the mid-nineteenth century, gas synthesized from coal was the chief source of illumination in urban areas, until it was displaced by the incandescent light bulb. During the first half of the twentieth century, gas gained a share of the home heating market and was used as a fuel in manufacturing. But the high cost of gas infrastructure, coupled with the larger profits from petroleum, made natural gas the stepchild of the oil industry.

The economic exploitation of natural gas depends on its commercial value, which in turn is a function of the size, quality, and location of the gas deposit; the projected rate of production; the price of natural gas; and the price of alternative fuels. The dependence of gas collection, transmission, and distribution on expensive infrastructure has historically been the biggest factor limiting the use of natural gas as a fuel. Oil-exporting countries in the Middle East have long protested the waste of their natural gas by flaring, but it was not until they could assume at least some of the cost of providing infrastructure that other than limited local uses for their natural gas became common.

Internationally, gas exporters have encountered resistance from importers with respect to the sharing of costs, particularly for pipeline construction and the expensive cryogenic facilities needed to liquefy and transport liquid natural gas. As long as the preponderance of natural gas is used for heating, demand is highly cyclical. As natural gas displaces other fuels, however, the load factor or average rate of capacity usage rises, making it more attractive.

The Organization of Petroleum Exporting Countries (OPEC)which includes gas exporters such as Algeria, Qatar, Iran, and Libyahas had sharp pricing disputes with gas customers. Some led to interrupted deliveries, canceled contracts, and even the scrapping of entire projects. OPEC aspires to achieve a unified organizational position on natural gas pricing by developing formulas that link gas prices to crude oil prices. However, its efforts have been stymied by consumer resistance, by competition from non-OPEC gas sources (such as Russia) and nongas fuels (such as petroleum, which guarantees a built-in conflict of interest within OPEC itself), and by a long period of weakness in oil prices, which reduced producer incentives to link natural gas prices to crude oil prices.

Countering these drawbacks, improvements in transmission and storage technology and the growing global market for natural gas are positive economic signs. Although demand for natural gas in key industrial markets weakened in the 1980s as a result of recession, warmer winters, and conservation, the gas market has improved steadily for some years thanks to expansions in reserves (in 2000, proven reserves exceeded sixty times the rate of production); technical improvements in transmission, which is the most costly segment of the industry; marked improvements in load factors; and shifting priorities that make burning natural gas more attractive than oil and especially coal because gas produces lower levels of greenhouse gases and virtually no toxic pollutants.

Some OPEC countries see expanding internal consumption and manufacture of petrochemicals as superior alternatives to natural gas exports. However, neither the market for petrochemicals nor the domestic economies of most gas-rich members of OPEC can absorb the quantities of natural gas available. At the same time, antipollution regulations in fuel-importing countries make natural gas more attractive to developed-country consumers and lower its relative cost. Demand for natural gas is expected to top demand for coal by 2005, and it may approach demand for oil by 2025. Ongoing financial and regulatory changes in national and international markets support the continuation of these trends by improving security guarantees for producers as well as consumers.

see also organization of petroleum exporting countries (opec); petroleum, oil, and natural gas.


Davis, Jerome D. Blue Gold: The Political Economy of Natural Gas. London: Allen and Unwin, 1984.

International Energy Agency. Natural Gas: Prospects and Policies. Paris: OECD/IEA, 1991.

Mitchell, John, et al. The New Economy of Oil: Impacts on Business, Geopolitics, and Society. London: Earthscan, 2001.

Mossavar-Rahmani, Bijan, and Mossavar-Rahmani, Sharmin. The OPEC Natural Gas Dilemma. Boulder, CO: Westview Press, 1986.

Stern, Jonathan P. European Gas Markets: Challenge and Opportunity in the 1990s. Brookfield, VT: Dartmouth, 1990.

mary ann tÉtreault

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