DEFINITION of Natural Gas Equivalent
Natural gas equivalent refers to the amount of natural gas needed to equal the energy produced from one barrel of crude oil as measured in British thermal units (Btu). The natural gas equivalent for a barrel of oil is calculated to allow for a comparison between natural gas and crude oil prices.
BREAKING DOWN Natural Gas Equivalent
Natural gas equivalent is still used as a term in the oil and gas industry. In the world of finance, however, it is more common to speak in terms of barrel of oil equivalent (BOE). For natural gas, barrel of oil equivalent and natural gas equivalent are the same thing – the amount of natural gas it takes to produce the same British thermal units as a barrel of oil. Of course, barrel of oil equivalent can be calculated and applied to other energy sources.
Calculating Natural Gas Equivalent
The calculation for the natural gas equivalent of a barrel of oil is fairly straightforward. As both oil and gas can be measured in Btu, the first step is to convert a barrel of oil. There are standard conversions for both a barrel of oil and 100 cubic feet of natural gas. A standard barrel of oil is 42 gallons of crude and equals 5.8 million Btu. 100 cubic feet of natural gas comes in at 103,700 Btu. To eliminate the discrepancy in energy, natural gas is measured in 1000 cubit feet units (Mcf) with 1.037 million Btu. So there is almost 6 times the energy in a barrel of oil than there is in 1000 cubic feet of natural gas. By tradition and for the sake of clean, round numbers, the natural gas equivalent of a barrel of oil simply rounds out to 6,000 cubic feet or 6 Mcf.
The Why of Natural Gas Equivalent
Natural gas equivalent is actually meant to help investors rather than confuse them. By standardizing energy into equivalents of a barrel of oil, energy companies make comparisons of production, proven reserves, probable reserves and so on much easier for investors and industry analysts. Of course, when it comes to energy, there is still some converting required to get a global picture, as some regional reporting across the world only provides metric units. Mcf is the standard way for reporting natural gas within the United States, but billions of cubic feet (Bcf) may also be used. In Europe, natural gas is reported by the metric ton.
And, of course, natural gas equivalent can be used in a more personal way to measure the difference between housing heating systems (heating oil vs natural gas for example) based on the market prices for their fuel.