Question

Describe Natural Gas' supply chain from raw materials to consumer, and how it's financially traded.

Answer 1

Supply chain management is the broad range of activities required to plan, control and execute a product's flow, from acquiring raw materials and production through distribution to the final customer. Natural Gas supply chain is called as Upstream and downstream supply chain. The process closer to the end user is called as downstream. Raw material extraction or productions are elements of the supply chain considered to be upstream. The upstream companies identify oil and natural gas deposits and engage in the extraction of these resources from underground. These firms are often called exploration and production companies. Refiners represent the downstream element of the oil and gas supply chain. Four important participants of supply chain are producers, distributors, retailers, customers. The process of supply chain in natural gas industry went through the phases of exploration → Production → Refining → marketing → Consumer. Each stage can be a separate company or a unit of an integrated firm. Exploration operations create value through seismic analysis and identifying prospects. Production operations become the customers that use the output of exploration. Refining is the customer of production while marketing is the customer of refining and the consumer of refined products such as gasoline is the ultimate customer. For oil and gas companies, the profit margin can be greatly enhanced if the companies manage their purchasing dollars throughout the entire supply-chain. Both customer relations and supplier relations are main thing of effective coordination of supply-chains.

Natural gas is traded financially under commodity head. There are two distinct markets for natural gas: the spot market, and the futures market. There are two possible objectives to trading in financial natural gas markets: hedging and speculation. Spot market is the daily market, where natural gas is bought and sold 'right now' and get the price of natural gas on a specific day. The futures market consists of buying and selling natural gas under contract at least one month, and up to 36 months, in advance. The price of natural gas is set by market forces; the buying and selling of the commodity by market players, based on supply and demand, determines the average price of natural gas.