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NGLs price plunge forces a rethink

The last leg of support for North America’s battered natural gas sector appears to be wobbling as prices for natural gas liquids (NGLs) plunge amid a wave of new unconventional supply

This is bad news for North American natural gas producers, who have relied on higher-value NGLs to compensate for lost revenue streams from dry natural gas as prices hit decade lows in the first half of 2012.

Spot propane at Mont Belvieu, Texas, is down about 48% from 2011, averaging 91 cents a gallon in June. Likewise, butane prices have fallen about 33%, to $1.30 a gallon. Ethane, the main feedstock for petrochemicals, is down 60% to 30 cents a gallon.

Compounding the problem, North American crude oil prices have fallen 15% since the start of the year, dragging the relative value of condensates linked to oil down 24%.

The price collapse has prompted a shift in thinking, with producers moving to wet-gas plays, such as the Eagle Ford, as activity and investment dry up in the traditional shales of the Barnett and Haynesville-Bossier.

Where NGL by-products once fetched premiums to West Texas Intermediate (WTI), wide discounts have opened up in regional markets, such as the Marcellus, even though gas production continues to rise, according to Energy Information Administration (EIA) numbers.

As much as a third of the gain in US oil production is in fact NGLs; liquids output hit a record 2.1 million barrels a day (b/d) in 2011 and  climbed to 2.3 million b/d in 2012, up 50% from 2009. Bentek Energy expects US NGLs production to reach 3.1 million b/d by 2016, adding to the growing glut.

Those numbers could be conservative. Emerging liquids gas plays like Ohio’s Utica, Oklahoma’s Granite Wash and Michigan’s Collingwood are only in early stages of ramp-up.

Faced with lower profit margins and a bearish outlook, many producers are simply choosing to stack rigs. According to the Texas Alliance of Energy Producers, the state experienced the first drop in drilling activity since the recession in December 2009.

It is still not clear if this is the start of a longer-term trend, but it adds further complexity to an upstream sector that has been the victim of its own success. Ever-increasing production, coupled with a worsening economy “is not a recipe for upside support for crude oil and natural gas prices”, Karr Ingham, the Alliance’s head economist, said.

Despite the diminishing returns, producers continue to pour money into developing liquids-rich plays. Marathon Oil said a 50% jump in Eagle Ford production contributed to a 20% increase in its overall North American volumes. However, its second-quarter profit fell 5% to $393 million from $417 million in the same period last year.

Similarly, Calgary-based Talisman Energy saw a 71% drop in second-quarter profits despite a 19% gain in its overall North American production to 201,000 barrels of oil equivalent per day (boe/d). Oil and liquids volumes rose 22%, including a seven-fold increase in Eagle Ford liquids production to 7,000 barrels a day (b/d). Eagle Ford output is expected to average 14,000-17,000 b/d for the year. The company plans to produce 60,000 b/d from its North American shale holdings by 2015.

Speaking in Calgary, Talisman chief executive John Manzoni acknowledged the changing North American NGLs supply dynamic and the impact this has had on pricing, which have aligned more closely with forward Henry Hub futures curves. Though Talisman expects a lower overall price environment, including lower NGLs over the longer term, he said it will not affect on Talisman’s Eagle Ford plans into 2013.

“Clearly NGLs are under some pressure, but probably not forever,” Manzoni said. “There’s a limit to how low they can go.”

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