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    Crude, NGLs and natural gas outlook

    Sandy Fielden, RBN Energy

    Natural gas production in the Lower 48 has surged 40% since 2005 – hitting record levels in recent months in spite of low prices and a drilling migration away from dry gas to liquids plays. Following a similar trajectory, natural gas liquids (NGLs) output from gas processing plants jumped 40% since 2009 as drilling for wet (high BTU) gas accelerated. Crude oil production from shale did not take off until the end of 2011 but since then has surged an astronomical 56 percent to 7.8 MMb/d. While this winter’s harsh weather has placed a temporary slowdown on these skyrocketing production numbers, RBN fully expects the growth trend to continue - putting the US within sight of energy independence in the not too distant future. Along the way plenty of new opportunities for the industry will be tempered by market challenges. Today we preview RBN’s latest Drill Down Report.

    If there is any uncertainty remaining about how much energy markets have changed over the past nine years, the three graphs in Figure 1 below should put it to bed once and for all.  Production statistics for US natural gas, natural gas liquids, and crude oil are all surging, in some cases into uncharted territory, in others back to levels last seen when President George H. W. Bush was President.  Make no mistake about it. The US is at the doorstep of that long sought-after goal of energy independence – where the country can produce all the energy that it uses. That goal may still be a few years away, but it is in sight.  And for the US consumer, that is a future so bright, you gotta wear shades.

     

    Figure 1

    Source: Energy Information Administration, RBN Energy [*LPG = propane, butane]

    The first graph on the left shows natural gas production in the Lower 48 since 2005.  Production has increased about 18 Bcf/d over that period, or about 40%.  That’s a big increase, and it is even more impressive if you consider that the total worldwide market for natural gas exports or liquefied natural gas (LNG) is about 35 Bcf/d.  So over the past few years, US natural gas has increased by the equivalent of half of the world LNG market.

    The middle graph shows liquid petroleum gas (LPG) production – propane and butanes, the fastest growing members of the NGL family. Compared to natural gas, LPGs took a little longer to kick into high gear, but when they did the increase was similar to natural gas, up 40% over the period since 2009 to 1.3 MMb/d.  That is equal to about half of the total imports of LPGs by the world’s biggest importers in the combined Asia/Pacific and Indian Subcontinent regions.  

    And then there is crude oil.  Between 2005 and 2010 while gas and NGL production was ramping up, crude seemed to be languishing – at least from the perspective of total U.S. statistics.  But since 2011 crude production has shot up like a skyrocket - returning to levels last seen in March 1991.  Crude production volumes are up 56% from about 5 Mb/d in 2009 to 7.8 Mb/d in late 2013.

    These dramatic production increases in the past nine years have been characterized by triumphs of technology and productivity. But there have also been growing pains as the midstream industry struggled to deliver the new hydrocarbon bounty to market. During 2013 and the first part of 2014 the shale revolution passed through important stages of maturity as new or repurposed infrastructure came online to extract NGLs from natural gas and to deliver those NGLs, together with new crude production, to fractionation, petrochemical and refining centers on the Gulf Coast. Along the way we have seen a plethora of investment in infrastructure involving wholesale re-plumbing of the gas and liquids distribution system and the advent of significant crude-by-rail shipments to by-pass pipeline congestion or deliver to markets with no pipeline service on the East and West Coast.

    And as new supplies have arrived at processing and refining centers the next phase of the revolution has begun as refiners and fractionators now seek new markets for surging production of NGLs and refined products from their plants. At the same time billion dollar plants to liquefy natural gas for export are being constructed – in many case on the same sites earmarked for LNG imports less than 10 years ago.

    Natural gas is the most mature sector of the shale industry and yet as Figure 2 below shows  production is expected to continue growing at 3.4 Bcf/d for each of the next six years - an even faster pace than the 2.2 Bcf/d seen since 2005. So although production is down temporarily due to weather related freeze-offs and other short-term problems this winter it will quickly recover to record levels in 2014 with higher prices encouraging more producers to drill for gas.

     

    Figure 2

    Industry growing pains in the face of record natural gas production have been demonstrated by rapid storage depletion this winter. That challenge has been particularly evident in the Northeast where surging Marcellus/Utica production is not yet fully connected to demand centers and pockets of shortage have continued in areas like New England (see Please Come to Boston). Surging Marcellus production continues to impact traditional pipeline flows into the Northeast and many of those will be reversed – as far south as Florida (see Miami 2017). In the meantime the prospect of long term stable natural gas prices has prompted new demand for growing supplies in the form of natural gas power plants, industrial capacity or exports to Mexico and global LNG markets (see Golden Years – the Golden Age of US Natural Gas).

    Production of ‘wet’ high BTU gas continues to drive significant increases in NGL output especially as new processing infrastructure comes online. Surplus supplies of NGLs are destined for export – most notably propane (see Sail Away). Surpluses of normal butane and natural gasoline will also move to export markets. Until new olefin crackers are built on the Gulf Coast and come online after 2017, significant volumes of surplus ethane will be rejected into natural gas although as we speculated in “The Gas is Hot Tonight” it could find its way into LNG exports. (If not exported, ethane rejection will continue even after 2017.)  However the NGL market has witnessed shortage as well as surplus this winter as we described recently in “A Perfect Storm”. The winter 2013- 2014 propane crisis will result in scrutiny of inventory, distribution and export practices by both industry and regulators.

    US crude production will continue to increase, although at a slightly lower growth rate than seen over the past two years. RBN Energy expects US production to reach 10 MMb/d in 2019 – up 2.2 MMb/d from the end of 2013. Canadian production will add a further 1.3 MMb/d to North American supplies. The most significant development in the crude market during 2013 has been the unwinding of the congestion and inventory surplus in the Midwest. Formerly landlocked supplies from North Dakota have also found outlets on the East and West Coasts via the rapid build out of crude-by-rail infrastructure that has been well documented by RBN (see I’ve Been Working on the Railroad). A number of tragic rail accidents involving crude oil in the past year have focused industry attention on new regulations that will likely have an important impact going forward but will not prevent rail transport from becoming a permanent fixture in the market because of the flexibility it offers shippers.

    As a result of new pipeline capacity and rail deliveries, a crude surplus is now building at the Gulf Coast – the biggest refining center in the US (see I’m Waiting for the Crude). That surplus is complicated by two factors in particular. The first is a mismatch between refinery configuration biased toward heavy crude processing and new supplies that are predominantly light crude. The second is a Federal ban on crude exports except to Canada. The refinery mismatch is putting downward pressure on prices for light sweet crude at the Gulf Coast that many refiners are not able to process without modifications to their configurations. The export regulations are not helping because they prevent excess supplies of light crude and condensate from finding a home in international markets. A related industry challenge that we have followed closely is that of processing very light crude condensate being produced in increasing volumes in shale basins such as the South Texas Eagle Ford. A number of new build condensate splitters are under construction and planned to process condensate supplies that are a poor fit for Gulf Coast refineries. (see Whole Lotta Splittin’ Going On).

    In the absence of crude exports, regional refiners are processing the glut of domestic crude headed to the Gulf Coast into refined products for export. That’s in large part because US domestic markets for refined products like gasoline and diesel are flat at best while demand for these products is growing in Latin America, Europe and Asia. Blessed with cheap natural gas fuel supplies and low price domestic crudes, Gulf Coast refiners have become the marginal refined product suppliers to the world and this trend will continue.

    Summing up, the US “drill-bit hydrocarbon” revolution has successfully navigated a number of challenges in 2013 and early 2014 ranging from weather to regulations as well as between surplus and shortage. Looking forward US production is poised to continue growing towards energy independence although that path can be guaranteed not to be a smooth one. Along the way the central tenet of this revolution continues to ring true – namely that the natural gas, NGL and oil markets have become truly interdependent such that changes in will one impact the others. Navigating those changes requires understanding the fundamentals of all three.

     

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