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Transporting Natural Gas: A Primer
Have you ever wondered how to transport natural gas? Chances are, all of the political discussion about pipelines, drilling, fracking, and more has increased your awareness of the issue. Just in the last few months, controversial studies have come out both in support of and against the Atlantic Coast Pipeline to help transport natural gas to meet the needs of the mid-Atlantic. Despite the demand for natural gas in so many areas, many individuals still have little knowledge about the process in which it arrives to their region. Learning about the safest ways to transport natural gas, though, will help you develop an educated, knowledgeable opinion about the issues.
Why We Need Natural Gas
Understanding the need for natural gas can help determine why the hydrocarbon is so important. As a fossil fuel, the creation of natural gas began millions of years ago when microscopic plants and animals living in the oceans absorbed energy and stored it as carbon molecules. As these creatures died and became buried under sediments, the heat and pressure rose, creating natural gas or natural oil. Now, natural gas heats around 56 million households, is the primary fuel for water heating in the U.S., and is a leading fuel for cooking. It’s also used by transportation companies to reduce emissions from their fleets; right now, there are about 150,000 natural gas vehicles in the U.S. and about 15.2 million in the world.
In the U.S., Louisiana, New Mexico, Oklahoma, Texas, and Wyoming are the leaders, producing more than half of the country’s natural gas. To provide this important fuel to so many households, it’s important to safely and efficiently transport natural gas from these states.
More than Moving: The Importance of the Pipelines
If you want to learn how to transport natural gas, you need to also take into account the importance of storing the resource; if the natural gas will not be immediately used, it needs to be properly stored in a secure facility.
The natural gas transportation system is complex network of underground pipelines. A variety of different materials and sizes of pipelines start from the source of the natural gas and take it to its final destination.
- Gathering pipelines are very small, usually less than 18 inches in diameter, that have low pressure — about 715 psi. They are normally placed about four feet deep, because they need more frequent care. These pipelines are responsible for carrying the raw, unodorized gas, and in that state, it can be highly corrosive and impact the integrity of the pipeline in a matter of a few years.
- Interstate pipelines carry the natural gas long distances within states or across state borders. They are large, steel pipes, typically at least 10 inches in diameter, and can have a varied pressure, carrying the unodorized gas at anywhere from 200 to 1,500 psi.
- Transmission pipelines are usually between six and 48 inches, with the mainline transmission pipelines and interstate pipelines much larger than the lateral transmission pipelines that carry natural gas between mainline transmission pipes.
- Distribution pipelines carry the odorized gas at low pressures, between .3 and 200 psi, and are small- to medium-sized. They take the gas from the high-pressure transmission pipelines to the low-pressure service pipelines.
- Service pipelines are very narrow and low-pressure; typically, they are less than two inches in diameter and 6 psi. These copper, plastic, or steel pipes carry the natural gas to individual customers.
Are Pipelines Safe?
Pipeline operators are always looking to improve their system to transport natural gas. They are regularly monitoring and specializing their equipment to ensure that the systems are efficient and secure. This can include the care of the actual pipelines and the seams to connect large holes to the seamless small-diameter pipes that are regularly tested to guarantee that it can withstand the pressure and strengths needed for safe transport. Compressor stations are located every 40 to 100 miles along pipelines and use turbines, motors or engines to compress the molecules of the natural gas into a more compact, easy-to-transport state.
There are significant rules and regulations operators need to follow to make sure the transportation and pipeline system meets standards or, for more in-depth information, can check out the Handbook of Natural Gas Transmission and Processing Principles and Practices.
The steps to transport natural gas can be complicated, but over the past 20 years, the number of significant incidents has decreased while the consumption has increased, showing an improvement in the processes. Let us know what you think about the pipeline process to transport natural gas, or ask your questions in the comments.
Sources:
NaturalGas.org: “The Transportation of Natural Gas”
The Balance: “Know the Natural Gas Lines Before Digging”
Oil and Gas Royalties
Small or starting investors should take a look at oil and gas royalties. If you are willing to put in the homework and have the financial backing needed, these can net 12-30% returns.
When considering oil and gas royalties there are some things you will be expected to have gotten in place prior to getting started.
- As with any investment you must exercise your due diligence, consult with a royalty specific attorney for legal advice. A well-known firm in San Antonio would be Philip Mani or in Dallas there is Geary, Porter & Donovan. Even if you are not in their area they would be able to refer you to someone equally as competent in your area.
- You will have to establish a legal entity specifically for purchasing. Whether you utilize a company, partnership or just your name, your attorney will be able to advise the best option for you.
- You have your own rainy day fund, nest egg, or have lined up your own financial backing to be able to proceed.
Once you have got your basic structure in place you will want to follow this 6 step process to get going.
Anyone who owns oil and gas royalties means they probably own the mineral rights. Although rare, in some instances this may not be true, however oil royalties and mineral rights are usually synonymous phrases.
Phase 1. Find potential royalty owner sellers.
Phase 2. Make an offer to purchase the seller’s royalty.
Phase 3. Take any and all calls from potential sellers to answer questions.
Phase 4. Quickly perform due diligence once you determine a seller is serious about the sell.
Phase 5. Send out mineral deeds and paperwork to owners who think they’d like to sell their royalties. Be sure to follow up with these people immediately.
Phase 6. Once you receive the deed back and have paid the seller, file the deed with the correct county courthouse.
Finding Sellers
Locating potential sellers sounds simple, however you will find it is pretty challenging. There are a couple of ways to go about this:
- One internet site that is somewhat of a Craig’s List (if you will) for oil royalties, whether you would like to buy or sell, royaltyexchange.com.
- If you already own royalties you should be receiving a division order. This is the document that shows you who gets what of any monies. While it’s not common practice, it may also provide you the names and address of those who share in the funds…..hence your new leads. Remember it never hurts to ask, the worst will be a simple no and even then you have lost nothing.
- A data vendor who actually sells lists of royalty owners. One that comes to mind and has a complete list for Kansas and Texas would be Blackbeard Data Services. They boast a healthy 4 million plus list. Newbies are encouraged to start with one specific county first and see how that works for them.
Making Offers
If you have a division order you will not only have the names, address, lease name, percentage of royalty, and values of the royalty. It’s not uncommon for a “wanna be buyer,” to mail out thousands of offers, banking on the laws of statistic to pay off.
When mailing offers you might send a letter offer including a bank draft to show how serious you are and ready to deal, a letter simply stating your offer or a letter that lets the owner know you are interested to purchase if they are interested to sell.
Hook Em
Realistically you should expect about three responses for every 1,000 letters you mail. These are calls mind you not done deals. Of those calls you will have a good shot at closing half. Be sure to take all of your calls. An answering machine quickly squashes the urgency and authenticity of your offer. People like to have their questions answered. Let them know whether it is yours or someone else you plan to purchase within 7 days. Your money is in hand.
If an owner is entertaining more than one buyer, the owner may be looking towards 60-70 months production. If you are the offer you should get 30-40 months of production.
Check Them Out
Do your homework. I can’t push that point enough. Be sure the party you are dealing with really owns the royalty they are going to sell. Have them provide four months of paystubs for the royalty. Take a trip to the courthouse and check the records, they are public. Regardless of your method get it done and get it done quickly before your seller changes their mind, or decides the grass may be greener elsewhere.
Get ‘er Done
Once you know the seller really owns the royalty you want, and they have accepted your offer, FedEx the paperwork ASAP. Be sure your attorney has provided you both a mineral deed as well as a contract. 24 hours after they have signed and received your package follow up.
File at the Courthouse
I’m sure your attorney will let you know where and what to sign, once you get your package back and by all means get the seller paid. A contract isn’t binding until your seller has been paid. After you receive your documents get your documents filed at the proper courthouse and contact the existing oil company who has been paying the royalty. It normally takes about three months before you will start receiving your royalty checks.
Start a Business?
A buddy of mine gets royalty checks and used them to start a business. That’s a great way to extend the earning power of those dollars IF you know what you’re doing. He started a construction business, which is a sector that is pretty resilient and he’s doing well. If you need bathroom remodeling in Columbus, Ohio, look him up. 🙂
How Can I Invest in Petroleum…Let Me Count the Ways
Petroleum could be the world’s most important commodity. Petroleum is refined into fuel for all types of transportation and its byproducts even used to manufacture plastics and chemicals too. As diverse as its many end products, so are crude oils investment opportunities.
Investing in the Price
One way you can invest in crude oil would be by investing in Exchange Traded Funds (ETF). These tend to be mid to long range investments that track the yield and return of its native index. Currently they do account for 1.34 trillion of the 14.72 trillion in total assets being held through investment companies with a majority of this share being in mutual funds.
The goal of the ETF is to provide investors with a benchmark return for a minimal cost and usually commission free. These funds move up and down in value and also track the spot price of the petroleum. Crude oil ETF’s currently trading on US Stock Exchanges use the value of West Texas Intermediate Light Sweet Crude Oil as their benchmark.
On the flip side one should also understand that there is also an inverse ETF. The inverse ETF works the same way as the previously mentioned ETF only these are used to bet against the markets and its declines allowing one to profit from falling oil prices. To find these look for “short,” “bear,” or “inverse” in the name.
Trading the Swings of Crude Oil
Trading short term swings in the price of oil is done through the investments in futures. These typically require a marginal deposit between 5 and 10 percent the value of the actual future contract. Often these investments provide bigger profits on smaller moves in the price of oil. These trades do require a Registered Commodity Futures Broker.
Exploration & Production
If energy exploration and production sound appealing to you, there are stocks trading that are directly affected by the price of the oil. “E&P,” as they are referred to drill for the oil and when successful earn huge windfall profits. These same companies often increase profits and shares prices when oil is moving slower to keep their investment opportunities appealing. These companies range from smaller region specific options to large companies with worldwide sites looking for new oil.
Crude to Fuel
There another option after you’ve gotten it out of the ground and even after it’s sold, that’s transporting and refining.The industry has termed “upstream” when speaking of production, “midstream” when you are talking transporting and “downstream” when it comes to the refining and marketing of the product.
There are companies who focus on each of the 3 parts of stream and others who cover all 3. The ones who encompass all 3 are energy giants like Exxon-Mobil, Chevron, BP, and Royal Dutch Shell. These investments tend to cling to old investing concepts and often have the most dramatic swings and shifts.
Where to Get the Funds to Invest
Energy in general and oil and gas specifically is a robust sector for investment of retirement dollars. If you’re saving for the long haul, you can juice your returns by diversifying into these sectors. One common way to do that is with self-direct retirement funds such as a solo 401k. That’s one way to both diversify your retirement portfolio and easily participate in a sector that isn’t just standard Wall Street investment instruments.
3 Big Trends in the Distribution and Marketing of Fuels – What’s Driving These Changes?
#1 Biggest Trend in the US fuel industry is the long term decline of our gasoline demand. This anticipated decline is to the tune of some 30 billion gallons of fuel expected to impact all areas of the industry across the board. Sounds like quite a bit, right? The average fuel marketer accounts for just about 30 million gallons a year. The shortfall as expected could potentially be the demise of 1,000 distributors if not more. The fuel industry as a whole, whether speaking of refineries, distribution or even the retail level have all grown a steady 1% annually, for several decades. A reversal in the gasoline market where we are forced to contemplate shrinking demands could really cause a renovation if you will of the entire market as we know it.
Two trends that seem to support this theory are that many refiners continue to seek export opportunities as a failsafe to their future success. In the ability to continue on a profitable path the distributors will be forced to consolidate and continue to lower their costs. Fuel retailing will remain an important category but most likely won’t be a product that is the sole reason a store exists.
Big Box Retailers, drugstores, and even grocery stores continue to add gasoline as a product line. Convenience stores, also far from conventional, often have larger food footprints than they do fuel. At least from a gross profit perspective anyway. As fuel economies continue to double, these product line views and retail gasoline will continue to be the norm rather than the exception.
#2 trend is the increasing specialization of petroleum marketing companies. Twenty years ago there were no less than 12,000 distributors, today there are about 4,000. Consolidation while not discussed began several years ago and continues to be a central theme for the industry while we have all watched. To really wrap your mind around these numbers you could equate that to one distributor a day over the past 15 years either being acquired or absorbed by another.
The continuing trend that has allowed for growth in petroleum distribution are largely or even entirely focused on one product line. A prime example would be to look at Petro Choice. They have brought large amounts of private equity into the industry.With that money they consolidated their lubricant business and invested in their own lubricant distribution company so they became a much more advanced service provider to the industrial, automotive and even fleet customer.
Mansfield has consolidated their commercial fuel company while continuing to work with firms focused on both lubricants and their retail fuel markets. Along the same mind set Guttman diversified their long term lubricants business to focus more on their core fuels market and even TAC Energy sold off their terminals to become more focused on their fuel marketing.
The point here being that this trend of specializing is in direct result of the demand trend. With the demand for the largest product category, gasoline, declining every other product category will definitely be impacted.
The #3 trend and possibly the biggest game changer yet would be that of the exploding US Crude Oil and Natural Gas production. One might ask how a fundamental change in primary supplier of our key commodity could affect our downstream. Simple, new larger producers like Continental Resourcescan’t export crude oil and continue to offer big discounts and record crack spreads to downstream refiners which really keeps them disconnected from the end user. As our production here in the US continues to grow and our own domestic refining expands, change is surely coming.