NATURAL GAS 101 THE BASICS OF NATURAL GAS

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1 NATURAL GAS 101 THE BASICS OF NATURAL GAS April 25, 2014

2 Natural Gas Basics What is natural gas? Natural gas is a fossil fuel composed primarily of methane, and other hydrocarbons such as ethane, butane and propane, that occurs naturally in certain underground geologic formations. It can sometimes be found in conjunction with other fossil fuels such as oil and coal. It may contain contaminants such as hydrogen sulfide a/k/a sour gas. Where is it? Traditional natural gas supplies have come from Texas, Louisiana, the Gulf of Mexico and Appalachia New supplies from the various shale formations including Marcellus/Utica regions of Pennsylvania and Ohio coming into the market and changing the dynamics of the industry. 2

3 Where are Shale Gas Formations? 3

4 What is Exploration and Production? What is an E&P Company? Exploration and production companies look for, drill for and bring natural gas to market. Geologists study the earth to find the likely locations of natural gas. The best prospects are then drilled in the hope of developing a producing well. If natural gas is found in commercial volumes the well will then be completed by casing the well bore and adding well controls. The well then must be connected to a pipeline to allow the gas to flow to a market. Drilling a well can cost anywhere from a few million dollars to tens of millions of dollars depending on the depth and location of the well. 4

5 What is Pipeline Quality Natural Gas? Why is Natural Gas Stripped? Natural gas is often found in conjunction with oil, water or other compounds such as hydrogen sulfide. So natural gas is often stripped or treated to remove these other substances before being sent to a pipeline. One reason that natural gas is preferred by consumers is that a cubic foot of treated gas in Texas is very close in quality and composition to a cubic foot of gas produced in Pennsylvania. Once the gas has been stripped it is frequently referred to as pipeline quality gas. 5

6 How is Natural Gas Transported? What is a Pipeline? The bulk of natural gas in the world is transported through large underground gas pipelines. These lines can be as large as 42 in diameter and operate at pressures approaching 1,000 psig. Major interstate pipelines may have two, three or four of these lines running side by side for hundreds of miles. Since most of the natural gas was originally found in Louisiana and Texas a large number of long-haul pipelines run from there to the industrial north. With the recent development of shale gas, many pipelines are changing the direction of flow to move the gas to the south. 6

7 Gas Pipelines of the United States

8 What is a Local Distribution Company Gas? Who is my Gas Supplier? In states that do not allow choice, your natural gas supplier is your local distribution company (LDC). They are usually regulated by a state public service commission. Without choice and without competition they are usually the most expensive way to purchase natural gas. In states that allow choice, the LDC exists primarily as a distributor of natural gas. Consumers in those states can purchase their gas in the competitive marketplace. Wisconsin has not adopted statewide choice, so generally, only commercial and industrial customers can attempt to purchase their gas competitively.

9 How is Natural Gas Measured? Volume vs. Energy In the early days of the industry, natural gas was measured on a volumetric basis such as a standard cubic foot (scf). As instrumentation improved, gas began to be measured based on its thermal content. The British thermal unit (Btu) became the standard thermal unit in the U.S. The NYMEX commodity exchange and many traders use MMBtu which is one million Btu s. LDC s use a combination of Mcf (a thousand cubic feet) or therms (one hundred thousand Btu s). Federal regulators use Dekatherms (Dth) which is equivalent to MMBtu or ten (10) therms. Thus when looking at your gas statements it is important to know which unit of measure is being utilized on each bill. For example, $0.42 /therm is equivalent to $4.20 /Dth.

10 Why does Natural Gas Smell? Why is Odorant added to Gas? Natural gas after it is stripped of contaminants and liquids is odorless. Large pipelines transport the gas this way because there are many industrial process that need clean natural gas. Once the natural gas reaches local distribution companies the LDC s inject an odorant, usually mercaptan, into the gas intended for residential use for public safety reasons. Large commercials and industrials may or may not be odorized by the LDC, so check with your local LDC to be sure of the type of gas you are receiving.

11 What is Fracking? Fracking Short Version Fracturing of underground rock formations to extract natural gas is something that has been done for decades. What is new is the ability to drill horizontally and the ability to thus apply fracking technology to shale rock formations. It is highly unlikely to contaminate ground water from the fracking process itself. There are three basic issues. Improper completion of the well or the well casing. The disposal of the waste water generated by the fracking process. And the reluctance of some drilling companies to publicly disclose the chemicals that they add to the injection water. Not all fracking uses water. In some areas nitrogen gas is used to fracture the rock.

12 QUESTIONS?

13 Glossary Billion Cubic Feet (BCF) A measurement of gas that is commonly used to define large volumes of natural gas Combine Cycle (CC) An electric generation plant that uses the same heat source to turn both gas and steam turbines in tandem for base load or intermediate power generation. Combustion Turbine (CT) An electric generation plant that uses gas turbines to meet peak power demands. Commodity Charge Cost paid on a unit basis for pipeline or distribution service, i.e., $/MMBtu or $/therm. Curtailment Reduction to the flow of natural gas on the pipeline to protect the operational integrity of the pipeline system. Demand Charge Cost paid to guarantee the right to use a service. This cost incurs whether the service is used or is not used. Fuel Cost/Shrinkage The volume loss in the pipeline due to compression and line loss. Force Majeure Acts of God or Man, such as hurricanes, earthquakes, wars or other major events, that prevent the pipeline from delivering contracted obligations. Million British Thermal Unit (MMBtu) - A measurement of energy that is commonly used to define natural gas. 1,000 standard cubic feet (scf) of gas at a heat rate of 1,000 Btu s per cubic foot = 1 million MMBtus NAESB - The North American Energy Standards Board (NAESB) serves as an industry forum for the development and promotion of standards in support of a seamless marketplace for wholesale and retail natural gas and electricity. Nomination - A request, normally created electronically, to move, store, or purchase a volume of natural gas. 13

14 Glossary Operational Balancing Agreements (OBA) An agreement with the pipeline which defines how to manage any volumes that were over pulled or not consumed by the power plant. Park and Loan (PAL) A contracted services which allows a pipeline customer to hold natural gas volumes on the pipeline (Park) or borrow natural gas (Loan) for a daily rate. Summer Season The calendar days of April 1 to October 31 Winter Season The calendar days of November 1 to March 31 14