People Out There Turnin' Natgas Into Gold - NGLs, Gas Processing and the Frac Spread

OK, we admit it. Our title may be a bit of an overstatement in early 2020, but it was absolutely true back in 2012, when the frac spread was $13/MMBtu. These days, the frac spread — the differential between the price of natural gas and the weighted average price of a typical barrel of NGLs on a dollars-per-Btu basis — is only $2.48/MMBtu as of yesterday. But with Henry Hub natural gas prices in the doghouse — they closed on February 11 at $1.79/MMBtu — getting $4.27/MMBtu for the NGLs extracted from that gas, or an uplift of 2.4x, is still a pretty darned good deal. And that’s Henry Hub. Natural gas prices are lower in all of the producing basins, and are likely headed back below zero in the Permian this summer. So even with NGL prices averaging 30% lower than last year, the value of NGLs relative to gas can be a big contributor to a producer’s bottom line — assuming, of course, that the producer has the contractual right to keep that uplift. Today, we begin a blog series to examine the value created by extracting NGLs from wellhead gas, including processing costs, transportation, fractionation, ethane rejection, margins, netbacks and the myriad of factors that make NGL markets tick. We will start with the frac spread — what it tells us in its simplest form, how we can improve the calculations so it can tell us more, and, just as important, the economic factors that the frac spread excludes.

In a way, the frac spread is best described by what it’s not. First of all, as we use the term, it is unrelated to hydraulic fracturing, the well-completion technique. You do hear the term “frac spread” used to describe a fleet of fractionation equipment, which includes all of the water trucks, sand haulers, pumps, etc. that an oilfield services company uses to complete a hydraulic fracturing job. But that has nothing to do with what we are talking about here. The term is actually a shortening of “fractionation spread,” but that’s a misnomer too, because frac spread does not refer to NGL fractionation either — fractionation being the process of splitting a mixed NGL stream (or “y-grade”) into purity products like ethane, propane, normal butane, isobutane and natural gasoline. Instead, the frac spread is simply a measure of the value of natural gas versus the value of a basket of NGLs. In other words, it is a rough-cut indication of the value added at natural gas processing plants by extracting NGLs from the raw natural gas stream from the wellhead. 

By convention at RBN, we use the front-month Henry Hub natural gas futures price versus a weighted average of Mont Belvieu NGL prices that’s converted from cents per gallon to dollars per Btu. We make that calculation each day and include it with our Spotcheck Indicators data, which is available to RBN Backstage Pass subscribers. This methodology is about as simple as you can get, and there are a lot of enhancements and refinements to the calculation that we’ll be addressing in this blog series. But for now, let’s start with the basics to see how the numbers fit together and what this statistic tells us about NGLs and gas processing.