NGLs: Will Production Gains Hurt Prices and Planned Infrastructure Projects?

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Natural gas liquids (NGLs) prices may be poised for a fall, repeating the boom-and-bust cycles that have long characterized that industry. And the prices NGLs fetch in the market will have an impact on U.S. NGL pipeline and midstream projects now under development, which have a combined total investment value (TIV) of several billion dollars.

In the U.S., strong demand for NGLs pushed up prices in the years before the Great Recession of 2007-09. In the years before that slowdown, when demand was strong, developers announced plans to significantly expand U.S. NGL production and processing capacity. Current U.S. NGL production is about 2.35 million barrels per day (BBL/d), a 25% increase from 2005, largely as a result of the shale revolution. NGL production is scheduled to surge another 25% to about 3.25 million (BBL/d) by 2016, analysts at BENTEK Energy (Evergreen, Colorado) told a recent NGL workshop sponsored by Platts in Denver.

Click on the image at right to see average weighted U.S. NGL prices from 2005 to the present. (source: BENTEK Energy)

NGLs are found in deposits of natural gas. NGLs are a broad category of liquid hydrocarbons that are processed into ethane, butanes, propane and natural gasoline. After processing, about half of NGLs are consumed as feedstock in the Chemical Processing Industry. NGLs also are used for heating and motor gasoline. A small portion, perhaps 7%, are exported, but this is expected to rise sharply over the next few years, Holmquist said.

"U.S. NGL producers have scheduled an unprecedented amount of capacity additions over the last few years," Kristen Holmquist, a manager of energy analysis for BENTEK, told the workshop. "This growth is creating quickly changing market dynamics. I don't see the U.S. market as being able to absorb all this new product. We're already producing more than we use. Domestic prices for propane and ethane prices are low today and have been supported by exports. The greatest risk I see is on the demand side: Will there be a strong global market for this new production capacity, and at what price?"

Holmquist said high overseas demand for some NGLs, such as Europe's need for propane, should help support U.S. NGL prices. Buyers in northwestern Europe pay about twice what U.S. buyers pay for propane. "There is money to be made exporting propane, even after the freight and terminaling costs are considered," she said. Right now, Holmquist said U.S. terminaling capacity is constrained, but those bottlenecks should be alleviated as planned expansions and grassroot terminal projects are built.

Although NGLs are not sold by the barrel, BENTEK creates a hypothetical weighted average price-per-barrel for NGLs to facilitate price comparisons with other hydrocarbons, including crude oil. Prior to their price collapse in 2008, U.S. NGL prices peaked at about $80 per barrel. They then plummeted to a low of about $16 per barrel before recovering to the current price of about $45 per barrel.

In those natural gas formations with significant levels of NGLs, high prices for the liquids have helped offset low prices for dry gas. Drilling has been particularly active in shale formations that contain a high percentage of NGLs, such as the Bakken, Eagle Ford, Anadarko, and parts of the Marcellus. For more on this issue, see June 1, 2011, article - Project Spending Rising for North American Oil & Gas Production, Petroleum Terminals and January 5, 2011, article - High Oil and NGL Prices Drive U.S. Shale Drilling Decisions.

Currently, there are more than a dozen U.S. NGL pipeline projects under development; the scheduled in-service dates for these projects range from early 2012 to late 2014, according to BENTEK.

Some of the larger U.S. NGL pipeline projects under development include:

• Pecos Sandhills Grassroot NGL pipeline, a 700+ mile pipeline valued at $950 million. This pipeline is sized to transport up to 130,000 BBL/d of NGLs from West Texas and South Texas to Mont Belvieu, Texas. This project is scheduled to kick off this summer and be complete in October 2014. The project is being developed by DCP Midstream Partners LLC (Denver, Colorado), a unit of DCP Midstream Partners LP (NYSE:DPM)M (Denver).


• Skellytown Texas Express Grassroot NGL Pipeline, a 580-mile pipeline capable of transporting between 280,000 BBL/d and 400,000 BBL/d of NGLs from Skelleytown, Texas, to Mont Belvieu, Texas. Valued at $850 million, this project is scheduled to kick off in early 2013 and begin operating in mid-2014. This project is being developed by units of Enterprise Products Partners LP (NYSE:EPD) (Houston, Texas), Enbridge Incorporated (NYSE:ENB) (Calgary, Alberta, Canada), DCP Midstream Partners and Anadarko Petroleum Corporation (NYSE:APC) (The Woodlands, Texas).


• Sterling III Pipeline Project, an $810 million project stretching from Medford, Oklahoma, to Mont Belvieu. This 570-mile, multi-stage project will be able to transport up to 193,000 BBL/d of NGLs. Construction is scheduled to begin in early 2013 and be complete by yearend 2013. The project is being developed by ONEOK Incorporated (NYSE:OKE) (Tulsa, Oklahoma).


• Jackson Grassroot West Texas NGL Pipeline, a $595 million project that will move up to 130,000 BBL/d of NGLs from Winkler County, Texas, to Jackson County, Texas, a distance of 570 miles. This project, being developed by units of Energy Transfer Partners (NYSE:ETP) (Dallas, Texas) and Regency Energy Partners LP (NYSE:RPG) (Dallas), is scheduled to kick off in mid-2012 and be in service by early 2013.

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