Plunge in NGLs prices add to US gas producers' woes
North American producers have, since the collapse in Henry Hub prices, relied on higher-value liquids to offset low natural gas prices, but the hedge is ending
Prices for ethane and propane fell 48% and 32%, respectively, in 2012, data released by the Energy Information Administration (EIA) shows, placing further stress on the already difficult economics of unconventional natural gas.
Spot ethane prices hit an all-time low of $0.22.5 per gallon in December 2012, compared with $0.78/g at this time last year. Propane has fallen to $0.80/g from $1.39/g in the same period. Prices for secondary products butane, isobutane and natural gasoline also fell by 5-12% in the past year.
This is bad news for struggling gas producers. Last year's Henry Hub average price of $2.77 per million British thermal units (Btu) was the lowest in a decade, according to the EIA.
To pad their bottom lines, producers have taken a deeper cut of the natural gas liquids (NGLs), which are linked to the oil price. Consequently, US field production of NGLs has jumped 20% since 2008, to 2.2m barrels per day (b/d) in 2011.
The increase is due almost exclusively to the rise of the US tight shales, and fields like the Marcellus and Bakken. The biggest gains have come from Texas's Permian basin, where NGLs production increased 25% to 806,000 b/d. The International Energy Agency (IEA) expects US NGLs to top 3m b/d by 2020, which would help it pass Saudi Arabia to become the world's largest oil producer.
But NGLs are not oil. Liquids are fractionated, not refined, and the sudden increase in supply has led to broad processing and transportation constraints. This in turn has led to a phenomenon of 'ethane rejection', the EIA said, where ethane is left in the natural gas stream when the cost of removing it is too high.
The growing disparity presents an opportunity for downstream marketers to invest in new processing, transportation and storage. Colorado-based market consultants Bentek Energy does not see any relief until 2016, when new crackers are built or reconfigured to handle the new supply.
Bentek estimates total US fractionation capacity must increase by more than 30% over the next five years to handle the new volumes. So far, 17 new crackers and 28 new processing plants have been planned, which will add 9.6 billion cubic feet per day of new processing capacity in the next five years. A dozen new pipelines and expansions of existing lines will add an additional 1.8m b/d of transportation, mainly to Mont Belvieu, Texas.
While that will bring some relief to the sector, Bentek expects the short to mid-term to outlook remain volatile. "As exploration and production companies continue to focus on high-Btu, liquids-rich plays, the volume of NGLs is increasing rapidly. All of this has the potential to wreak havoc in the markets for natural gas liquids," it said.