Natural Gas

Natural gas is a fossil-based energy source. Like all other fossil fuels, it is a gaseous mixture of hydrocarbons that originate from the decomposition of organic matter fossilized throughout millions of years. In its raw form, natural gas is made up primarily of methane, with varied proportions of ethane, propane, butane, and heavier hydrocarbons, as well as CO2, N2, H2S, water, hydrochloric acid, methanol, and other impurities. The higher levels of carbon are found in non-associated natural gas.

The main properties of natural gas are its density in relation to air, its calorific power, the Wobbe index, the dew point of the water and the hydrocarbons, and the levels of carbon, CO2, hydrogen, oxygen, and sulfur compounds.

Besides being a basic raw material in the gas and chemicals industry, the use of natural gas has increased in the industrial, transportation, and electric power generation sectors. The investment in gas production for the generation of thermoelectric power has been spurring the interest of analysts and entrepreneurs, due to the depletion of the country’s best hydraulic potentials and the need to expand the electric power-generating park.

Natural Gas Advantages

  • Safer energy source than oil
  • Dissipates easily in case of leakage
  • Significant improvement in manufactured products
  • Increase in the useful life of fabrication equipment
  • Low pollutant emission rate
  • Low odor and contaminants rate
  • Greater flexibility of transportation and utilization
Combustion characteristics Values
Calorific power Over 9,400Kcal/m3
Spontaneous ignition temperature 540ºC
Flame velocity 30-50cm/s
Flammability limit 5-15% in volume
Flame temperature 1,945ºC with air
2,810ºC with oxygen
Boiling point -16ºC
Flash point -189ºC
Absolute density 0.766kg/m3(@20ºC; 1 atm)

The natural gas production chain

The production process of natural gas involves three different stages, as listed: (i) exploration and production of natural gas; (ii) processing; (iii) transportation and storage; and (iv) distribution. 

The specifics of each of these stages allow them to be treated as different enterprises. In many countries, there is even a required legal separation between these parts of the chain, so that specific regulations can be established for each of the sectors.

Exploration and Production

The exploration and production stages of natural gas are practically identical to those of petroleum. Generally, big oil companies are responsible for the exploration and production of natural gas, since gas and petroleum tend to be associated.


Once the production of natural gas has begun, the product must go through natural gas processing units. These treatment stations are responsible for the separation of methane from other heavy hydrocarbons (natural gas drying), through the desulphurization process, water removal, and the removal of other contaminants. In technical terms, the fractions of heavy hydrocarbons are removed to a point where the minimal calorific power of natural gas is not compromised.


After treatment, natural gas is moved to consumer centers through pipelines or in the form of liquefied natural gas (LNG) or compressed natural gas (CNG). The choice of technology used depends on technical and economic issues.


The term “transportation” refers to the network of pipelines used to move the gas from the production plants to the “distribution” network, which, in turn, transports it to the final client: residential, industrial, thermal or commercial. These networks are different in pipeline diameter and in gas flow pressure. While in the transportation network, natural gas is compressed to an average pressure of 80 bar (high), while in the distribution network it is never above 20 bar.

The Transportation and Distribution of Gas in Brazil 

In 2013, Brazil had a 9,190 km gas pipeline network that followed the Brazilian coast, from Porto Alegre to Fortaleza. In addition, a gas pipeline connects the producing areas of Bolivia to São Paulo, and another connects Urucu-Coari-Manaus, in the center of the Amazon. In Ceará, Bahia, and Rio de Janeiro, gas is brought from offshore producing fields by ships and is fed through transportation and distribution networks. From the Santos basin, gas is transported in pipelines to São Paulo, Rio de Janeiro, and Espírito Santo. 

Gas distribution is carried out through 27 distributors, each serving one or two of the federation’s states. Six of them are independent, and two controlled by Petrobras. The other 19 are affiliated to Petrobras.

Use of Natural Gas

Natural gas is used in the residential, commercial, industrial, and automotive segments. It can be used as fuel to supply heat and motive power; as a raw material in the steel, chemical, petrochemical, and fertilizer industries, and as a substitute for diesel, gasoline, and alcohol in vehicles. Because of these attributes, it can be used almost without restriction, in accordance to environmental and safety measures. That is why its participation in the world’s energy mix is increasing.

Energy Use Chemical Use
  • Industrial Use
  • Residential, commercial, and hospital use
  • Thermoelectric plants
  • VNG – Vehicular
  • LNG – Liquefied
  • CNG – Compressed
  • Synthesis gas - C1 chemistry
  • Separation between ethane and propane: C2 and C3 trees
  • Separation of the heavier: C4 and condensed

Non-Conventional Gas – Some Definitions

Recently, there has been a great acceleration in the production of gases from non-conventional sources, especially in the USA. These gases come from low permeability and/or porosity rock formations. These are some examples:

Tight gas

Natural gas contained in reserves similar to conventional reserves, but with low permeability sandstone and limestone, which make it very difficult for the gas (or the liquids) to migrate. The liberation of gas often requires hydraulic fracturing.

Shale gas

Natural gas retained in layers of shale that contain low porosity and permeability, which is also liberated through hydraulic fracturing. Liberation of the gas depends on the geological characteristics of the layers of shale and the interfaces between them.

Coalbed methane (CBM)

Natural gas found in coal reservoirs, which can also only be liberated through hydraulic fracturing. It is also known as coal seam methane (CSM).

It is important to point out that the division between conventional and non-conventional gases is not strictly defined, and may vary in time according to the evolution of technology and the decrease in costs. In the USA, for example, tight gas, which already represents 40% of total gas production, is now defined as a conventional gas in official statistics.

Non-Conventional Gas in Brazil

The production of shale gas in Brazil differs considerably from in the United States, even though Brazil has one of the largest non-conventional gas reserves in the world, and the ANP is currently running seismic tests to define bidding areas. In addition to the acquisition and/or development of technology, the country lacks a gas pipeline network connecting the locations where these reserves are situated to the consumer centers. Regulatory and environmental issues must also be taken into account. The lack of such infrastructure reduces the potential returns on extracting non-conventional natural gas.

Natural Gas Pricing

The price dynamic differs greatly in each market, according to the following factors: (i) elevated transportation costs; (ii) large differences in the diffusion degree of gas in the energy mixes of each country or region; (iii) asymmetries in the endowment of gas resources; and (iv) the maturity and liberalization levels of the national gas market. 

The final price for the consumer depends not only on the price of the raw materials, but also on transportation and distribution costs that can represent more than 50% of the final price. Therefore, the price varies immensely between markets.   

The prices that are in effect for gas will depend on the elasticity of substitution and the need to remunerate the investments made for provisioning. Even under these conditions, which impact the pricing in specific markets, the price of the commodity has historically maintained a direct connection to the price of oil and its products. 

Gas pricing in long-term contracts

In order to offer some stability to the return in investments in production, transportation, and distribution, some markets/suppliers work with long-term contracts. After the negotiation of the initial price, these generally include a price escalation formula that indexes the gas price to the petroleum price or to that of competing energy products. They usually contain “take or pay” clauses, in which the buyer takes on the obligation of paying for part of the total contracted quantity during a specific period of time, even if there is no consumption. They may also contain requirements for minimal volumes for the utilization of pipelines, in clauses known as “ship or pay”.  

Gas pricing in liberalized markets

In certain regions or locations spot prices are practiced, but, for this to occur, certain preconditions are necessary: (i) interconnection between gas pipelines that allows for gas exchange between different systems; (ii) storage capacity; (iii) transportation convenience to and from the “hub” (interconnection junction between pipelines that transport gas from different basins and areas with large storage capacity); (iv) the possibility of auxiliary services provision, such as the balancing of the gas system and dispatch; (v) title transfers for gas supply contracts and transportation capacity; and (vi) short-term spot market. 

The United States market

The USA pioneered the liberalization of the natural gas industry, a process that resulted in a vigorous gas market through the adoption of new pricing forms. The country contains production facilities and transportation infrastructure that guaranteed the emergence of spot (physical) and derivative (financial) markets for natural gas.

With over 8,000 gas producers competing against one another, in 2009, North America contained 33 active hubs, nine of which are in Canada and 24 in the United States. The Henry Hub, in the state of Louisiana, is the largest gas commercialization center in the world, connecting 12 gas pipelines and containing three storage reservoirs. The prices of the gas commercialized in the hub are easily accessible (visibility and transparency) and serve as reference points for futures contracts and gas derivatives negotiated in the NYMEX and Inter Continental Exchange (ICE) electronic exchanges.

The European market

Europe is essentially a gas importer, since it has no producers competing in its territory – supply is concentrated. However, by observing the clear advantages offered by organized markets, in which there is price transparency, United Kingdom’s electronic International Petroleum Exchange (IPE) started using the prices practiced by the National Balancing Point (NBP), also from the UK, as indexers for future gas contracts. Unlike the Henry Hub, NBP is a virtual hub, reflecting the prices of the gas negotiated and transported by the Transco network. Since January 1997, when this occurred, contract values negotiated in the NBP became a reference for gas prices in Europe, and England’s natural gas became, along with the North American market, one of the most competitive and net markets in the world.

In this market, we can observe a trend of medium-term alignment between spot market gas prices and the prices in importation contracts indexed to oil prices. That is why, since 2009, when the oil price went up from a level of US$ 40 to US$ 100 per barrel, the NBP gas price followed it, distancing itself from those practiced by the Henry Hub. In the European market, gas prices are influenced by the petroleum supply, while in the USA, where they have their own production, the price dynamic depends on the country’s internal supply. 

Other parts of the world

Unlike the USA and Europe, the price of natural gas in other regions of the world is not defined by spot markets, be it the gas or oil market. According to the International Gas Union (IGU), half of the gas consumed worldwide is not priced based on rules of public markets, be it a spot market or contracts based on the price of petroleum.  

According to this publication, in 2010, 15% of the gas consumed in different internal markets around the world was priced below the production and replenishment costs. This occurs primarily in Russia, the Middle East, and some African countries. In other countries (14% of the gas consumed in 2010), the price of natural gas is regulated and follows sociopolitical criteria. Hence, the price is defined by governments on irregular bases, and according to social and political pressures. The evidence that in such regions of the world the price of gas is not determined by supply and demand conditions is the discrepancy that exists between the price of the exported gas, aligned with the international market, and the price practiced by the internal market. 

The Brazilian market

In Brazil, the supply and demand structure for gas is basically characterized by the existence of a single seller and a single buyer. Petrobras is effectively the only supplier. State distributors, both private and public, are the only consumers, and Petrobras itself either controls or is a shareholder in several of them. In addition, Petrobras owns the pipelines, and has a lot of control over the final price. Therefore, the price of gas is not established through the balance between supply and demand.

The prices are connected by a reference base value, but it contains an escalation clause associated to the fuel price, a competing raw material with a value connected to the price of petroleum. In addition, they are readjusted every trimester in relation to the inflation and the rate variation measured by the Ptax dollar (BACEN). There is a formula for national gas and another for imported gas (Bolivia). Over these prices, state distributors add their distribution margin. Both the distributors and the margins that they practice are regulated by state regulatory agencies.

In addition, there are differentiated prices for the electricity sector, PPT (priority thermoelectric program), for some thermal plants, and, currently, for the price of international GNL gas (indexed to Henry Hub or Brent).


Last updated on 2015-04-29T18:29:41


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