Based on my presentations and other discussions at the National Propane Gas Association board meeting in Key West, FL on January 30, 2012.
* Natural gas production remains strong, even with very weak prices and the anticipation of some producer shut-ins. Continued growth is expected. One reason is because it is still highly profitable to drill and produce liquids rich gas, and gas associated with crude oil production. The other is due to an expected demand response to low prices. All this cheap gas will eventually encourage power generators, petchems and others to use more gas.
* With gas prices cheap and crude prices remaining strong (crude/gas ratio from 35X to 45X) and producers having shifted drilling activities to wet gas and crude (also yielding associated gas) the average liquids content of gas is increasing. Processing gas with a higher liquids content yields larger volumes of NGLs.
* At the regional level, by far the largest percentage growth in natural gas production is expected from PADD I (Northeast) with the Marcellus building from a low historical base. Volumetrically it is PADD III that will see the most significant increases. But PADDs II and III both have respectable projected rates of growth.
* The outlook for NGL production follows a similar pattern to the growth in natural gas. By 2016, PADD I will be up 7 times today’s volume. PADDs II, III, and III will be up 30-40%. Big numbers. PADD V won’t see much change unless the Monterey Shale play takes off.
* After extraction at a natural gas plant, most NGLs are transported to major market hubs like Mt. Belvieu and Conway for fractionation. Prices are generally highest in Mt. Belvieu – center of NGL trading. Thus much of the production growth from PADDs II and IV ultimately is delivered in the form of raw make (mixed NGLs, a..k.a., y-grade) to PADD III.
* There will be enough fractionator capacity for these barrels, assuming the announced expansions and new-builds happen on schedule. By 2016, approximately 200,000 b/d of additional propane supply will need to find a home.
* Petrochemical and residential/ commercial demand for propane is down, a trend likely to continue. The residential/commercial sector – propane retail - is losing market share to much cheaper natural gas. Petchems are moving to ethane. These two markets make up the vast majority of propane demand. Could propane be thrown into a massive surplus situation like natural gas?
* No. Fortunately (for producers) there is a ready overseas market for the propane. Gulf Coast exports are moving to Latin America, especially Mexico. The U.S. is now a net exporter of propane. By 2016, 200,000 b/d of propane will move into the export markets, essentially all of the incremental growth in production.
* Dock expansions from Enterprise, Targa and others will be more than enough to handle these export volumes.
* U.S. propane barrels are displacing product from West Africa and the Middle East that previously supplied those Latin America markets.
* The displaced West Africa and Middle East propane is moving into Asia, where there is a growing market for all energy products.
* Thus net-net, surplus propane produced from U.S. shale gas is finding its way into the growing Far East economies – the long way around.
* The unfortunate consequence for propane retailers is that the propane market remains balanced, propane prices remain high, and propane continues to lose market share to natural gas.
