Don Warlick, Warlick Energy, Houston
First, a quick bring-up on NGLs and condensates: NGLs, or natural gas liquids, include ethane, propane, butane, isobutane, and pentane extracted from the natural gas production stream in natural gas processing plants, ending up as follows:
- Feedstock to petrochemical plants (e.g., ethane, propane). About 55% of total NGL production ends up here.
- Utilized for residential and commercial heating and cooking (e.g., propane). About 30% of total NGL supply enters the heating market.
- Blended (e.g, butanes) into vehicle fuel. About 15% ends up here.
Condensates are liquid hydrocarbons, not quite like an NGL and not quite like crude oil. They can be divided into three categories:
- Lease condensate produced from oil or gas wells at the wellhead along with natural gas;
- Plant condensate, which is a product of NGL processing plants similar to natural gasoline; and
- Light naptha.
As a result of higher crude oil prices, oil and gas producers in the US are targeting liquids-rich areas, which in turn influence production of NGLs. Savvy investors are paying attention to increasing NGL field production, which is now at an all-time high.
Prices for NGLs and condensates are more aligned with crude oil than natural gas. With crude oil prices historically high compared to natural gas, high-BTU NGLs and condensates have a higher wellhead value for the producer. Relatively high prices for NGLs have kept many wet gas wells profitable despite low gas prices. Essentially, E&P companies are drilling for liquids and producing natural gas and/or crude oil as a byproduct.
So now to the important questions: Is there an oversupply of NGLs? Are we facing a glut and in turn, depressed prices? The answers are partly based on which condensates may be exported and which go into various domestic US markets.
First, the status of NGL production. Here's what some experts are saying: Normally, a healthy NGL price is ~55% of WTI crude oil prices with some expecting NGL prices to trade at about 42% of crude by the end of this year. A surge in US oil and gas production has essentially decoupled historical pricing relationships.
The crude-to-gas ratio hit record highs in April but gas rig counts have fallen to 13-year lows. Gas-processing capacity will increase more than 20% by 2015.
In an example of an uptrending shale, the Eagle Ford is on track to go from producing zero barrels of NGLs a few years ago to more than 300 MBD by 2020. According to the EIA, at year-end 2011 NGL consumption was slightly more than 2.2 million BD. So if total production held flat the Eagle Ford could easily account for more than 10% of the total US NGL market in 2020.
Among the leading indicators of NGL oversupply are the relative prices of olefins ethylene and propylene, which are produced from NGLs. When propylene prices exceed ethylene prices it's a leading indicator for ethane being sold for its heat value into the natural gas market as opposed to being sold into chemicals markets.
According to Groppe, Long & Littell, that indicator is currently "flashing red." The problem with selling ethane into natural gas markets is that with current low natural gas prices, ethane may get just 10 to 16 cents per gallon, a fraction of the current price.
According to Raymond James, analysts project a 200,000 BD annual increase in NGL production through 2015, up 40% from 2011 levels of ~3 million BD. Pipeline capacity should keep pace, increasing some 55% to 3.4 million BD by mid-2014 from the current takeaway of 2.2 million BD. The biggest source of future demand should come from the newbuilds expected between 2016 and 2018, which could up demand by some 250,000 BD.
Further, analysts at Tudor, Pickering, and Holt have dubbed the current NGL pricing situation the "NGL bloodbath." Ethane prices halved in 2012, while propane and butane have fallen nearly a third. The price of a barrel of ethane-propane mix was down nearly 58% from January, outpacing the ~19% drop in crude oil from a February peak.
So how is the industry responding?
E&Ps are cutting production and in some cases are reducing cash flow projections (e.g., Spectra Energy and Devon). EOG Resources is switching production to shale oil-rich plays and leaving the dry-gas/NGL combo fields.
Some pipelines like Targa Resources and Enbridge Energy Partners are reporting less revenue for their gas liquids processing plants.
Helpful to the cause is that LPG exports should relieve some of the supply overhang in propane/butane markets.
On the demand side we must remember that the US is home to 27 major petrochemical facilities, mostly located along the Texas/Louisiana Gulf Coast. Also at this writing, Shell is planning a world-class ethane cracker in Pennsylvania, sourcing its ethane feedstock from the Marcellus Shale. Then there is the Chevron-ConocoPhillips JV. It plans to build an ethane cracker and ethylene derivatives facility on the Texas Gulf Coast that is designed to consume up to 95,000 BD of ethane.
And on the supply side, gas processing capacity should increase ~ 20% through the end of 2015. Keep in mind also that US NGL production will jump about 35% by 2015, translating into an additional 815 MBD.
Almost all ethane is transported by pipeline, so it goes without saying that other ethane pipeline projects are in the works. Current projects involve companies like Vantage Pipeline, MarkWest, Enterprise, Sunoco Logistics, and others.
As it typically happens in the US upstream, the industry recognizes an attractive market opportunity with great economics, they dive in to take advantage, and others join them, ultimately with predictable overcapacity and the roving prices. That is now taking place with a wave of NGLs coming from US shales. That wave will have some negative consequences in the form of potential impediments to the development of big wet shales. But all this will ease as we approach 2015 with new US petrochemical-producing capacity continuing to grow — all with commensurate demand for NGLs. OGFJ
About the author
Don Warlick is president of WarlickEnergy (www.warlickenergy.com), a Houston-based energy intelligence firm. The company publishes a series of special reports on each of the leading US unconventional shales and also provides market research services addressing North American and International oil and gas markets.