(Originally published in Energy Metro Desk, Dec. 2011)
No, this war won’t be fought with giant mechanical tripods, energy blasts or trusty disease-causing microbes. It is a war for markets, being waged by the gas industry on one side, and the crude oil business on the other. On second thought, the weapons are huge processing towers, explosive energy compounds, and catalysts made of tiny metal nanoparticles. I wonder if Spielberg would be interested.
The first skirmishes are being fought in North America, over what was until recently an obscure corner of the energy market – natural gas liquids, or NGLs. For the uninitiated, NGLs are that group of light saturated hydrocarbons including ethane, propane, butanes and natural gasoline. It’s a relatively small market, where NGL production from gas processors and refiners is used to manufacture petrochemicals, in residential/commercial heating, and in gasoline blending. But the conflict is spreading beyond this sector, across hydrocarbon commodities and around the globe. More about that later.
On one side of this War we have the Gas Giants, characterized by companies driving huge increases in natural gas production. Armed with shale technologies - horizontal drilling and hydraulic fracking – these companies have propagated a revolution in natural gas supply. In the U.S. from 2005 to 2011, production has grown an incredible 25%, from an annual average of 54 Bcf/d in 2005 to 67 Bcf/d in 2011. The result has been oversupply, which continues to swell - seemingly regardless of cheap natural gas prices.
Those cheap prices are driving the Gas Giants to move into new markets – NGLs in particular. By shifting their drilling activities to “wet” or high BTU gas, they can maximize production of NGLs which are selling between four to five times the price of natural gas on a BTU basis. A veritable arms race is underway to build more gas processing plants, NGL pipelines, and fractionation facilities to handle all of these liquids.
Why, you ask - do NGLs produced from cheap natural gas sell at such a premium price? It’s because NGLs compete not in natural gas markets, but in liquid hydrocarbon markets. Markets that are characterized by high prices and that are dominated by the other side of our conflict – the Crude Industrial Complex.
The Complex is that age-old network of U.S. domestic crude oil producers, importers and refiners, which was sold off by the majors years ago and written off as dead or dying by much of the global energy industry. But no more. Three developments are driving major changes in crude oil markets.
#1 – The shale revolution has come to the oil business. Light sweet crudes and condensates are pouring out of the Bakkan, Eagle Ford, Permian, Niobrara and other plays being developed with horizontal drilling and fracking technologies. The U.S. is experiencing its third consecutive year of oil production growth, and supplies will increase by another 2.0 to 2.5 MMB/d over the next five years.
#2 - At the same time this resurgence of domestic oil is taking place, production from Canada’s oil sands areas in Alberta continues to grow. Eventually TransCanada’s Keystone XL or some other combination of pipeline projects will flow an additional 1.0 MMb/d of this heavy crude into the U.S.
#3 – Several U.S. refiners are investing in massive capacity increases to run these heavy crude volumes. This new capacity – cokers, catalytic cracking units, hydrocrackers, etc.- is just now becoming operational. Unfortunately neither the refiners (nor anyone else, for that matter) expected the growth in U.S. light sweets and condensates from the shales. So the configuration of refinery capacity will be increasingly out of sync with the quality mix of domestic crude oil.
That gets us back to NGLs. The changes in crude production, refinery configurations and other potential developments in EPA motor gasoline blending regulations will generate more NGLs (called LPGs in the refinery sector). As a result, refiners that historically use more NGLs than they make will be making more than they use. And these NGLs will compete directly with surplus NGLs from natural gas processing. Thus we have the initial skirmishes between the Gas Giants and the Crude Complex.
Domestic markets simply will not be able to deal with these surpluses. It will get sloppy. Propane demand from both residential heating and the petrochemical sector is shrinking. Normal butane is being backed out of the gasoline pool and petchems. Only substantial increases in exports to international markets will save these two NGL products from significant supply imbalances. Gas plant liquids will compete fiercely with refinery liquids in these markets. Still more exports are necessary to handle surpluses of natural gasoline. The difference is that most excess natural gasoline will find its way into use as a diluent to facilitate the transportation of Canadian heavy crude. So at least the export market is nearby.
Ok, so the refiners and gas producers will duke it out for NGL markets. That doesn’t sound like the end of the world as we know it. Certainly not.
But it is a harbinger of things to come. Not only are domestic NGL surpluses pushing back into international markets, the same thing is happening in natural gas and refined products. Forecasts of U.S. LNG imports are a distant memory, and LNG exports are becoming increasingly likely. The Gas Giants will be pushing into global markets with U.S. supplies. The same thing is happening on the crude complex side. This year the U.S. will be a net exporter of petroleum products for the first time in 62 years, again pushing U.S. supplies into global markets.
For some period of time, and as long as the economy holds together, U.S. hydrocarbon exports will find a home in the rapidly growing energy markets of China, India and elsewhere. But this is only a reprieve. Shale deposits are not limited to North America. They are scattered across the globe. Special ops teams from the Gas Giants and the Crude Complex are poring over maps, gathering market intelligence and probably engaged in a little industrial espionage – getting ready for the big battles ahead.
In the not too distant future, global production of crude oil, natural gas and NGLs will start to feel the impact of the shale revolution. Gas Giants will fight with the Crude Complex for market share, lowering sales prices for both. In turn the markets will reward cheap, reliable hydrocarbon energy supplies that can be transported and used in the cleanest, most energy efficient applications – from transportation, to heating, to power generation. Gee, that doesn’t sound too bad. A war where the consumer wins.
