Weak Domestic Market and Shaky Export Market Darken Outlook for U.S. Natural Gas Liquids Business

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The specter of China, India and Europe hung over a conference here this week on U.S. natural gas liquids (NGLs). One speaker, Peter Fasullo, principal of En*Vantage, Incorporated (Houston, Texas), said, "We really need China's economy to be growing at 9.5%." But he acknowledged the fading prospects for that: China's economy, the world's second-largest behind the U.S., is slowing, though the rate of deceleration remains under debate.

Another speaker, Anne B. Keller, managing director of Midstream Energy Group Incorporated (Stafford, Texas), told conference attendees that about 50% of global waterborne liquid petroleum gases (LPGs) shipments go to China, Japan and India--all economies that are either in the doldrums (Japan) or are slowing from their recent breakneck pace (China and India). In fact, she said, India recently shut down some of its petrochemical processing plants as demand flagged.

"I'd make sure your seatbelts are securely fastened, because the NGL market is going to hit a few speed bumps over the next few years," Fasullo told attendees at an NGL conference sponsored by EUCI Incorporated (Denver, Colorado). Fasullo's bleak near-term outlook for the NGL business was shared by Keller, who said, "Prices are not looking very good in the near-term. We could see a race to the bottom for ethane and propane if domestic demand doesn't rise."

Supply and demand fundamentals have pressured the U.S. NGL industry over the last 18 months. The still-weak U.S. economic recovery means lower demand for chemical and petrochemical products that use NGLs as a feedstock. Although demand has strengthened recently, the U.S. petrochemical industry is still using fewer NGLs as feedstock compared to what it was using before the recession started in late 2007. That industry used about 1.8 million barrels of NGLs per day, on average, between 2004 and 2007. But since 2009, the industry's demand has averaged 1.6 million barrels per day (BBL/d).

Keller noted that a hypothetical barrel of NGLs used to fetch 50% to 60% of the price of a barrel of West Texas Intermediate (WTI) crude oil as recently as early 2010. But now an NGL barrel of is priced at 20% to 35% of a barrel of WTI -- which has itself fallen by about $25 since May. So NGLs are garnering a smaller percentage of a commodity that has itself dropped about 25% in the last three months. For more on NGL supply, demand, and prices, see May 1, 2012, article - NGLs: Will Production Gains Hurt Prices and Planned Infrastructure Projects?

Speakers at the EUCI conference warned the NGL business could get worse before it gets better. U.S. production of NGLs has risen sharply in recent years, driven in part by large discoveries of shale gas that contains high percentages of NGLs as well as significantly increased crude oil production, driven by high prices. NGLs are found in crude oil deposits and to varying degrees in natural gas deposits. Some large shale plays, such as the Eagle Ford and parts of the Marcellus, contain significant deposits of NGLs. Other formations contain mainly "dry" gas.

U.S. NGL production capacity grew 355,000 (BBL/d) between 2001 and 2011, Fasullo said, citing data from the U.S. Energy Information Administration (Washington, D.C.), a branch of the U.S. Department of Energy (Washington, D.C.). Most of those gains were concentrated in the Rocky Mountain and onshore Texas markets. By 2015, he continued, production capacity is scheduled to grow another 868,000 BBL/d, mainly in the onshore Texas, Marcellus and Bakken markets.

Several large petrochemical projects have been announced for Texas, the Mid-Atlantic and Midwest regions to take advantage of low-cost gas and NGL feedstocks from those markets. But speakers and attendees at the EUCI conference doubted the new petchem projects could soak up the regions' incremental gas and NGL production.

NGL exports have helped balance supply and demand in recent years, and several new or expanded export facilities are under construction, with scheduled in-service dates of later this year and early next year. But slowing overseas economies diminish the potential for export markets to absorb all the extra supply that is slated to come online in the coming years.

"Right now, the U.S. is long on propane and butane," said Keller. "Domestic prices are low enough to attract overseas petrochemical companies that want to replace naphtha with LPGs. But the global economic slowdown could cut into export opportunities at precisely the same time as new production and processing capacity comes online."

Jesus Davis, Industrial Info's vice president of research for the Oil & Gas industry, wryly summed up the situation facing NGL business by invoking an old adage: "The best way to create a small fortune in this industry is to start with a large fortune, and watch it shrink."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.