Over the past few weeks, NGL prices have dropped to levels relative to other hydrocarbon prices that we have not seen since the bad old days of 2009. Since early April 2013, the frac spread (see Another Fracing Problem and RBN Spotcheck graphs) has averaged less than a bargain basement level of $5.00/MMbtu. For months ethane at Mont Belvieu has been valued at no better than the price of natural gas at the Henry Hub. Propane at Mont Belvieu languishes below 40% of the value of crude oil, and normal butane at 50% of crude oil, levels not seen in years. Even natural gasoline (being exported in record volumes to Canada for diluent) is down to only 85% of crude. Must NGLs do some kind of dirty deeds to recapture their historical valuation? Or is this the new normal? Today we kick off a three part blog series to explore the sad case of rock bottom NGL prices.
The Good Ole Days
It is somewhat ironic that just over a year ago we were wrapping up a blog series on NGLs titled The Golden Age of Natural Gas Processors– Party on Dudes! Early in 2012 the frac spread had been as high as $12/MMbu, ethane was four times the price of gas and natural gasoline was trading equal to crude oil. Ah, the good ole days. Natural gas prices were headed below $2.00/MMbtu, while WTI crude oil at Cushing remained comfortably above $100/bbl. The crude to gas ratio, a key driver of the health of NGL prices was headed above 50X. Gas processing margins were off the scale. It certainly was a golden age. But that is ancient history. Let’s take just a few minutes to recap the carnage from then until now.
Ethane crashed and burned in the spring of last year (Figure #1). Natural gas plant production of ethane breached the 1.0 MMb/d threshold. Ethylene crackers, the only market for U.S. ethane production were experiencing downtime – some scheduled and some related to operating problems. Inventories were building and prices headed south. By late 2012, ethane in Mont Belvieu was below 25 cents/gal, which equates to $3.76/MMbtu. Natural gas was $3.35/MMbtu, a ratio of 1.12 to ethane. By January that ratio was below 1.0 and has bounced around on either side of 1.0 ever since. At that price, the netback of ethane at many gas plants (Mont Belvieu price less transportation and fractionation deducts) is well below the price of natural gas at the tailgate of those plants. The implication is rejection – ethane left in the natural gas and sold for the price of natural gas, which is above the price of ethane at the plant tailgate. (For more on ethane rejection, see The Ethane Asylum: Big Time Ethane Rejection in the Shale Gas World.) We estimate that between 200 and 250 Mb/d of ethane is being rejected as we write these words, mostly in markets distant from Mont Belvieu. That is because distant markets must bear greater transportation costs to get to market. In effect, the price of ethane is bouncing along its floor price – ethane’s natural gas btu equivalent.
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There was a time (years before 2012) when propane at Mont Belvieu typically traded at a ratio of 60% of WTI crude oil at Cushing. That was the natural order of the universe. Certainly propane was stronger relative to crude in the winter and lower in the summer due to propane’s use as a heating fuel. But the average could be expected to gravitate back to 60% over time. In 2012, that ratio hit the skids. Part of the problem was the winter of 2011-12, or as we call it ‘the year of no winter’. Demand hit a historical low and winter propane supplies never came out of storage. But at the same time, propane production was increasing. And propane exports were limited by the availability of dock capacity. All of these factors pushed propane prices down to 35% of crude oil. The only thing that kept prices from getting even lower was the ethylene crackers that played propane and ethane off on each other, buying the cheapest until the other product experienced enough weakness to make a new low. Then the flexible crackers (those designed to switch between the most economical feeds) would switch feedstocks to take advantage of the lower price. Since the spring of 2012, the price of propane has seen some periods of strength relative to crude. But for the most part, as shown in Figure #2, the price has bounced off 35% of crude for more than a year. Ethane and propane are dukeing it out in a fight to the bottom of the ethylene feedstock slate.