Carbon Rich Value High - Trading and Pricing Natural Gas Liquids Part I

Natural gas liquids trading is quite unlike natural gas or crude oil.  Natural gas is natural gas.  It is a truly fungible commodity.  Crude oil varies widely in quality, but it is still crude oil.  Not so, NGLs.  Each of the five NGLs has different physical characteristics, different end-use markets and most importantly, different factors that make prices rise and fall.  It is not at all unusual for ethane prices to increase while normal butane prices fall.    Or vice versa. What makes this happen?  What’s carbon got to do with it?  Today we’ll look at purity product trading and market pricing relationships, starting with butanes and natural gasoline.

Let’s start at the beginning – before the NGL products become NGL products.  The majority of US natural gas liquids (NGLs) reach fractionation centers such as Mont Belvieu in the form of semi-processed y-grade. Traders do not trade y-grade and there is no posted price for it.  All you can do with y-grade is fractionate it into purity products. The value of y-grade is all in the purity products. So when you talk NGL trading, you are talking trading of the individual NGL products.

If you are unfamiliar with the general subject of natural gas liquids markets, before reading on it might help to take a look at “The Long and Winding Road Part I and Part II” as these followed the physical path of y-grade from wet gas production through fractionation into purity products. Once you get your head around that long and winding road the next step is easier - understanding just what drives purity product values when they reach the market. 

Recall that once fractionated, y-grade becomes five unique purity products; ethane, propane, normal butane, isobutane and natural gasoline. Unlike y-grade, each of these products has a specific market value and they are traded each day.  A lot.  The majority of those trades occur at market hubs where there is a critical mass of infrastructure – with the two biggest being Mont Belvieu, TX and Conway, KS. (see Can Mont Belvieu Handle the NGL Supply Surge  Part I and Part II).  Purity products are traded both physically (transfer from seller to buyer at a point within the physical trade location) and financially (via derivative transactions where the parties settle up against an index price, usually OPIS). 

Trading occurs between all sorts of counterparties – producers, end-users, professional trading companies, banks – all the usual cast of characters that trade energy commodities.  Sometimes trades are executed electronically on WebICE – the Intercontinental Exchange online trading system, sometimes the old fashioned way – by humans talking on the phone, and these days more often than not via instant messaging.  We will get into the details of trading activity in a later blog.  For now suffice to say that a lot of the time when physical barrels are traded they don’t physically move from location-to-location.  Instead they are traded ‘in place’ within storage facilities or pipelines via Product Transfer Order (PTO).  PTO’s are a key part of the NGL distribution story - also a great subject for a later blog.  However, all these topics only make sense if we first talk about the products themselves.  We’ll start by explaining the pricing intricacies of each purity NGL in turn. As you’ll see, they can be complicated and confusing.

Every purity NGL product literally trades in its own universe but is usually directly influenced by other (non-NGL related) energy market developments. In fact, as an anonymous but well-known deep thinking NGL industry icon once said, ‘NGLs are affected by everything but affect nothing’ - meaning that other markets impact NGL prices, but NGL prices impact few other markets.  That might be a little bit of an overreach, but not that much.

NGL Terminology and Trading Conventions

There are a couple of other terminology and trading convention issues we need to cover before getting into the nitty gritty.  NGLs are sometimes referred to by the number of carbon atoms in their molecules.   Yes, even traders with no engineering background do this.  It makes you part of the secret NGL society.  Ethane’s chemical formula is C2H6, meaning that it has two carbon atoms and 6 hydrogen atoms, and in the market it is called C2.  Propane’s formula is C3H8, and it is called C3.  Butanes are a little more complicated and it is best that we not get into the molecular chemistry here to explain it (for me and for you).  Suffice to say that normal butane is called NC4 and isobutane IC4.  Finally natural gasoline is called C5 (even though natural gasoline contains C5 plus a lot of C6 and greater).   The more carbon atoms in a hydrocarbon molecule, the heavier it is.  So in the market, butanes and natural gasoline are called  ‘heavies’ or ‘heavy ends’.  Ethane and propane are  ‘lights’ or ‘light ends’.   Using these semi-technical terms keep others from understanding what NGL people are talking about, which of course is the objective.

There’s one more aspect of NGL markets that must have been designed to confuse outsiders, because it certainly does.  NGL quantities are quoted in barrels.  NGL prices are quoted in gallons.  Really.  So I’ll sell you 10,000 barrels of non-TET normal butane for $1.36 per gallon.  It never occurs to NGL people to convert either the quantity to gallons or the price to a per barrel number.  They think of everything multiplied by or divided by 42.  Go figure.  And BTW, propane retail people do think in gallons - but that’s another story.

Let’s get back to the individual NGL products.  Today we’ll start with the heavies: natural gasoline and butanes.

Natural Gasoline  - C5s

Natural Gasoline represents about 15% of the y-grade stream. It is the heaviest of the NGL’s and goes by many different names, including pentane, naphtha and even “drip gas”.  It is similar in composition to a very low octane motor gasoline - hence the name natural gasoline.   Back in olden days, farmers ran their tractors on this stuff.  Natural Gasoline goes to a number of end-use markets.  It is used in motor gasoline blending, as a petrochemical feedstock, as a denaturant in ethanol (denaturing makes ethanol – which is otherwise pure alcohol – undrinkable - see ”A Market of Contradictions”), and more recently as a diluent (dilute to decrease “viscosity” or aid its ability to flow) for high viscosity bitumen from Canadian oil sands (see It’s a Bitumen Oil – Does it go too Far?).   

More than 50% of natural gasoline goes to motor gasoline blending.  As a result natural gasoline values tend to correlate tightly with gasoline and by extension, crude oil.  Natural gasoline traders look at the relative price of natural gasoline to motor gasoline and crude in percentage terms.  That number generally stays in a band between 85% and 115% of crude.  As shown in Graph #1 below, today natural gasoline is at the low end of that range along with the other NGLs.  A combination of factors have driven the ratio lower including increasing total NGL supplies and greatly reduced petrochemical demand for natural gasoline.  The one bright spot for natural gasoline is its use as a diluent.  In fact over 24% of all Natural Gasoline is expected to head that way by 2016.  If not for the diluent market, natural gasoline prices would be even weaker relative to crude oil.

Further complicating the situation is that not all natural gasoline is the same. For example, the infamous Non-TET vs TET price differential (see Can Mont Belvieu Handle the NGL Supply Surge  Part I) can be attributed to the fact that non-TET natural gasoline has a higher sulfur (H2S) content and thus is less valuable because the sulfur has to be removed before it can be used in gasoline.  Graph #2 shows the discount of non-TET natural gasoline to TET natural gasoline.  As you can see, the discount between these two flavors of natural gasoline appeared at the end of 2010 and has generally been getting wider since then.

Normal Butane – NC4

Normal butane is next up the heavy-to-light scale after natural gasoline and represents about 10% of the volume.  Normal butane also has several different end-use markets.  It is used as a petrochemical feedstock (small volume and declining), as a feedstock to a butamer or isomerization unit to make isobutane (see the section below on isobutane), or as a motor gasoline-blending component.  Enterprise, (one of the Big Four NGL players we met in “Can Mont Belvieu Handle the NGL Surge Part I”) owns  significant butamer capacity at Mont Belvieu. The largest market for normal butane is in motor gasoline blending. 

Although normal butane is a key component of motor gasoline, it is not that way year round.  Its use is highly seasonal.    Winter is the peak demand season for normal butane because when it’s cold more butane is added to gasoline to improve engine’s cold start.  In the summer refiners reduce the butane in gasoline to prevent vapor lock.  (Think of normal butane as those wavy vapor lines coming out of your gasoline tank on a hot summer day at the gas station).  Technically normal butane is used to adjust something called the Reid Vapor Pressure (RVP) of motor gasoline, but that’s enough said about that. 

Like natural gasoline, the primary drivers of normal butane prices are motor gasoline and crude.  And in the same way traders look at the ratio of natural gasoline to crude oil and motor gasoline, they do likewise with normal butane.   Although that ratio swings based on the season (since normal is more valuable in the winter than the summer), there are so many other factors that play into the ratio that it’s hard to eyeball the seasonality (See Graph #3).  What you can see is that normal butane has been in decline for the past year relative to crude oil.  The primary reasons are higher gas plant production volumes and low petrochemical demand.

Just like natural gasoline, not all normal butane is the same.  Most normal butane comes from y-grade fractionation, but it also is produced as a by-product of crude oil refining. In the summer when refineries do not need butane in the gasoline pool those refinery butanes end up being ‘surplused’ and mostly go into storage.   Refinery butanes typically contain several different refining impurities such as olefins.   Olefins are good when produced in an olefins cracker for making petrochemicals.  Bad for some uses of butane, particularly in a butamer (isomerization) unit for making isobutane and ironically not so good even as a feedstock for olefin crackers. 

 The two different grades of normal butane help to explain TET vs Non-TET normal butane price differentials (see Graph #4).  TET butane is refinery grade and it can only be used for gasoline blending. Non-TET purity normal butane is more valuable since it can be used for isomerization, as a petrochemical feedstock and in gasoline blending. This distinction drives the price differential between the two. 

Isobutane  - IC4

Just slightly lighter than normal butane is isobutane.  It makes up about 7% of y-grade.  Isobutane has a variety of exotic uses, such as aerosol propellant for everything from hair spray to cooking sprays and as a refrigerant (used instead of freon, which is a greenhouse gas).  The most significant use of isobutane is to make refinery alkylate. Alkylate is a high-octane motor gasoline blending component that evens out engine combustion (reducing the “knocking” effect).  Alkylate is good stuff.  Making alkylate requires refinery grade propylene as well as isobutane.  The propylene comes from olefin crackers, from refineries and recently from a stand-alone, on purpose plant for producing propylene called a dehydrogenation plant.

Graph #5 shows isobutane pricing falling relative to motor gasoline in the past year in the same way as we saw  natural gasoline and normal butane falling against crude. 

The price of isobutane is dependent not only on its relationship to gasoline and crude oil, but also on the differential between normal butane and isobutane.   The price of isobutane is closely related to the isomerization economics.  When the isomerization units are running hard, supplies of isobutane increase and the price of iso tends to fall in comparison to normal butane.   When the isom units are off line, the spread tends to widen.  The differential between normal butane and isobutane (see Graph #6) is therefore an important indicator of the state of both butane product markets.  In the summer that differential tends to widen, since the value of normal butane is at a seasonal low and the demand for alkylate into motor gasoline is high, due to the driving season.  In the winter that situation typically reverses and the spread narrows.  Probably the biggest factor to watch over the next few years is the impact of growing isobutane supplies as NGL production from wet shale gas increases.  Could shale gas bring on so much isobutane that we don’t need as much isomerization?  Gee, that sounds like still another blog topic.   I’d better stop here before I create too much work for myself.

Next in the Series

Next in this series we continue our purity product odyssey by examining the markets for light NGLs, ethane, propane and that mysterious combination of the two products, E/P Mix. 

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