.

INE & GAS JOURNALS

NATURAL

Implications Of
U.S. Natural Gas Growth:
Will Gas Bills Be Cheaper?
By Jodie M. Gunzberg, Vice President, S&P Dow Jones Indices

hat many have called "the natural gas revolution" is a

game changer not only for North American energy but
potentially for the rest of the world. The two main factors
in propelling commodities from local to global resources
are logistics and technology.
According to a recent U.S. Energy Information Administration (EIA)
report, the U.S. is expected to be the biggest producer of natural gas in
2013. So does that mean residential gas bills will be cheaper? Will there
be growth of U.S. natural gas into a global commodity?

perfectly with the pipelines in place for transportation and storage, there
is a need to expand the infrastructure to move the natural gas.
Natural Gas Pipeline Projects

Estimated U.S., l^ssia, and Saudi Arabia petroleum and natural gas production
ci^
quadrillion British thermal units
million barrets per day of oil equivalent
60

30
United States

SO
"

"^""'^
I SaudiAiat>ia

25

projects less than 100 miles

projects greater than 100 mi!

Source: U.S. Energy Information Administration

2008

2009

2010

2011

2012

2013

Source: US. Energy Information Administration

Although U.S. natural gas production is set to surpass Russia and

Saudi Arabia, natural gas is one of the most difficult and expensive
commodities to store and transport.
There are only 10 major locations that shows the production across
the U.S. with the highest growth coming from the northeast, but the
challenge is to store and transport the natural gas.
SIHH natural gas pdcas at mal tatling locations. January 1- June 30,2013

Legend:
Trading point
Jan - Jun 2013 average spot price
n-Jun 2012-2013
<J=^

eia*

^m. .70% .607. f/. .40'/. -30% -20% -10% 0% .tO% 2(r^ 3(. t <ai% f . *7{ >707.

^HHBBBissi' ^

c-W^K^

Pipelines are difficult and costly to build, not only the actual construction, but also the feasibility analysis, permitting and regulatory
processes that must be completed for safety and environmental reasons.
Even when these projects are approved and constructed, they are
complicated by requirements to compress and check the gas with meters
and valves along the way. Since the major trading locations don't match
40

Pipeline & Gas Journal I December 2013 / www.pgjonline.com

One way to see the high costs of storage and transportation through
indexing is to look at the negative roll return by subtracting the spot
return index (PR) from the excess return index (ER). However, before
examining the history of these costs, let's review the definitions of the
spot and excess return indices.
The S&P GSCI Natural Gas is a sub-index of the S&P GSCI that
includes only the natural gas eommodity from the broad-based
index. The spot version reflects only the prices of the included contracts
with the first nearby expirations, or the roll period expirations during
the roll (when the index exits the expiring contracts and includes contracts with the new roll period expirations).
The spot index level calculation does not incorporate the premium or
discount obtained by rolling positions forward as delivery approaches. It
also does not include interest earned on any fully coUateralized contract
positions on the commodities. The version of the index that does include
the pretnium or discount obtained by rolling positions forward as delivery
approaches but does not include interest earned on any fully collateralized
contract positions on the commodities is called the exeess return index.
Therefore, by taking the difference of returns of the spot from the
excess return index, the roll costs are isolated where a more negative
result indicates higher storage and transportation costs.
Two things of note (see "Roll Yield" chart, page 42) are there has not
been a significant positive roll yield since February 2003, and there is a
recurring high seasonal cost in the September-November period.
Also notice (table, page 42), the average the roll costs are higher on
average in September-October period than during the rest of the year.
The average cost of storage and transportation for the month of October
has been declining since 2009, and that October 2013 had the lowest
October roll cost since 2005.
Not only has the roll cost of nattiral gas declined, but the price as
reflected in the S&P GSCI Spot Index Level is also down to 61.7 from
a starting point of 100 on Dec 31, 2002. As a general measure of the
market, the index levels fall in-between the residential and wholesale
prices, so either or both of those prices fell.

PIPELINE & GAS JOURNAL'S

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$o you don't have to be.

NATURAL

R E P O R T

Roll Yield of Natural Gas

S&P GSCI Natural Gas ER-PR

aSiJssss

Data from December 2002 to October 21, 2013. Past performance

is not an indication of future results. This chart reflects hypothetical
historical performance.
Source: S&P Dow Jones Indices

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may now be fitted with
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from 1 - 207 bar.

Month

Average
Roll Cost

Year October Average

Roll Cost

1
2
3
4
5
6
7
8
9
10
11
12

-0.26%
-0.60%
-1.46%
-2.14%
-2.04%
-1.75%
-1.16%
-1.64%
-11.77%
-10.53%
-4.73%
-0.90%

2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

-5.74%
-18.15%
-3.27%
-25.94%
-12.09%
-4.36%
-15.15%
-9.83%
-8.23%
-8.77%
-4.30%

-3.25%

Total

-10.53%

Total

Data from December 2002 to October 2013.

Past performance is not an indication of
future results. The chart reflects hypothetical
historical performance.
Source: S&P Dow Jones Indices.

S&P GSCI Natural Gas

Index Level = 100 Dec 31,2004
Index Level = 61.7 Oct 21,2013

Zero battery usage

until activation!

GDI
42

Pipeline & Gas Journal I December 2013 / www.pgjonline.com

DatafromDecember 2002 to Oct. 21, 2013. Past performance is not

an indication of future results. This chart reflects hypothetical historical
performance.
Source: S&P Dow Jones Indices.

Both residential price and wholesale price of natural gas have

fallen. However, residential declined much less than wholesale. The
reason can be partially explained by the reduced storage and transportation costs. Nonetheless, the technology and future transportation logistics are expensive, and it is the retail consumer that bears
the brunt of the cost.
A significant portion of residential gas bills come from the cost of

PPELIN & GAS JOURNAL'S

NATUR
Natural Gas Prices
Index: 2005 = 100

Annual average Henry Hub Spotnatural gas prices, 1990-2040

(2011 dollars per million Btu)

120

History

Projections

Residential Price

'05

10

11

12

building and maintaining pipelines. Since those costs don't drop when
natural gas prices fall, the prices consumers pay for gas haven't fallen
nearly as much as the wholesale price. While U.S. natural gas prices
have remained relatively low post-2008 as a result of new production
technology and a lack of pipeline infrastructure that led to excess
supply, the cost of new incremental production may become more
expensive as more easily accessible reserves are depleted. From this,
the U.S. EIA estimates Henry Hub spot prices for natural gas will
increase by an average of 2.4% annually, to $7.83 per million Btu
(2011 dollars) in 2040.
As for the question of whether U.S. natural gas can grow into a global
commodity, that may depend on where the heaviest investment is spent.
Many companies that produce goods out of natural gas are eagerly
building facilities to take advantage of low prices, but that will cut into
inventory, eventually driving prices up again if production can't keep
up with demand. Also, there are a few countries with larger natural gas
reserves than in the U.S.
If these countries invest more heavily in exploration and produc-

tion or technology, than in logistics (China announced it will spend

$13 billion for E&P), then the chance U.S. natural gas becomes global
is less likely. Earlier in the year, there was news of a United Kingdom
company signing a deal to bring U.S. natural gas to U.K. homes, which
may help the U.S. natural gas globahzation, but then the real question
may become "How long it will last?" P&GJ
Author: Jodie M. Gunzberg is vice president at S&P Dow Jones
Indices. Gunzberg is responsible for the product management of S&P
DJI Commodity Indices, which include the S&P GSCI and DJ-UBS
CI. Gunzberg is a former director of the Board of Directors for CFA
Chicago. She received her master's degree from the University of
Chicago, Booth School of Business, and earned a bachelor's degree in
mathematics from Emory University.

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43

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