Commodity Derivatives, 2nd Edition

CHAPTER 7Natural Gas

7.1 FORMATION OF NATURAL GAS

Natural gas is a fossil fuel, the main constituent of which is methane (CH₄). Oil and natural gas, which are frequently found together in the same deposits, are formed from the decay of vegetation and animals. Over time, geological processes turned these remains into reservoirs of hydrocarbons trapped by overlying impermeable rock strata.

Natural gas that is discovered with crude oil is often referred to as ‘associated gas’ but is classified as ‘non‐associated gas’ when found separately. Although the actual composition of natural gas varies between reservoirs, a distinction can be made between ‘wet’ and ‘dry’ gas. Wet gas has a high proportion of other gaseous substances such as pentane, ethane, propane, and butane referred to collectively as natural gas liquids or NGLs. Dry gas is natural gas without these associated substances. After natural gas has been extracted from the ground the NGLs are removed and can be sold separately. For example, ethane is a key input in the production of plastics. The processing of natural gas also removes any water and hydrogen sulfide and adds a smell for safety purposes, as methane in its naturally occurring form is odourless.

A major development in the industry is the significant technological advancements made with respect to the recovery of natural gas trapped in shale rock formations. These formations will sometimes have fractures that contain natural gas, but since the surrounding rocks ...