The Golden Age of Natural Gas Processors – NGLs in a 50X Crude-to-Gas Ratio World – Part IV

This is Part IV of a multi-part series on the Golden Age of Natural Gas Processors.  The first three parts covered the following topics:

Today we look at how much money natural gas plants make, who gets the money and what that means for both producers and processors. 

[Update: The crude-to-gas ratio was back above 50X on a cash basis on Friday.  Henry Hub ICE cash dropped to $2.074, April Futures closed at $2.275 and prompt crude futures continued to cycle up and down, this time closing at $106.87.  That brings the crude-to-gas ratio on a cash basis to 51.5X and on a futures basis to 47X]. 

Table 1 below is similar to the numbers we’ve reviewed previously in this series, except that it (a) updates the prices to Friday 3/23, and (b) adds a column for Transportation and Fractionation (10 cnts/gal).  That is a representative cost for moving raw mix (y-grade) liquids from our plant to a fractionator and then paying the cost of fractionating the mixed stream into purity products.  Total product value per month generated by our 10,000 b/d of NGL production is $14.2 MM.

Table 2 is similar to the shrinkage table reviewed last Thursday in Part III.  It shows that the daily BTU value of the gas extracted to make the liquids (based on Friday’s ICE cash price at HH) is $76k, for a total value add of $397k/day or $11.9MM per month.

So who gets all this money? The answer depends on the type of contracts that are in place between the producer who owns the gas and the processor who owns the plant.  There are three basic types of contract structures used by the processing industry: fixed-fee contracts, keep-whole contracts, and percent-of-proceeds (POP) contracts.

Fixed fee – Just what it says.  The gas processing plant charges the producer a fixed fee for processing the gas. Usually the deal is on a Mcf or MMbtu basis.  In this case all of the uplift on liquids prices (or lack thereof in historical times) goes to the producer.  The processor has no commodity risk whatsoever, and has no exposure to NGL prices.  This was a good thing a few years ago when the frac spread was upside down (gas high relative to NGL prices).  Now commodity risk looks like free money.

In keep-whole deals, the processor returns dry (processed) gas to the producer equal to the total volume delivered at the plant inlet.  In this case the processor bears all of the processing margin risk, and gets all of the uplift from the frac spread.    When frac spreads were low, processors were hurt by these deals and many were converted to fixed fee contracts.  Of course, with today’s astronomical frac spreads, there is a lot of remorse over those conversions.   Processors with significant volumes on keep-whole deals are printing money.

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