RBN Energy

Last Friday the price for ethane in E-P mix in Conway dropped to 4.5 cnts/gal for a period of time.  According to OPIS, the price averaged 7.25 cnts/gal for the day.  Those numbers are all-time low prices for the product, and rock bottom by anyone’s definition.  As we discussed here in Monday’s post titled Monitor-Monitor on the Wall, Who’s the Cheapest Hydrocarbon of All, these are prices at the Conway Hub.  Most NGLs coming into Conway incur a transportation fee to get there and a fractionation fee to convert mixed NGLs into salable products.  That deduct can be between 6 and 12 cents per gallon.  Let’s say the deduct is 10 cnts/gal. Subtract that from 7.5 and by my math that’s negative 2.5 cnts/gal.  It’s hard to make money selling at negative prices.  Fortunately producers and natural gas processors are still making good money churning out propane, butanes and natural gasoline.

At the recent Platts Oil and Gas Conference in Denver, the reoccurring theme was outbound capacity constraint.  The area needs a lot more crude oil pipelines and rail terminals to mitigate regional oil price crashes (see Bakken’ and a Rollin’ at Clearbook and Guernsey).   The natural gas situation is worse, with more than one-third of natural gas on the North Dakota side of the Bakken being flared.  The region needs more gas gathering systems and more takeaway capacity.

Yesterday the price of ethane in E/P mix in Conway dropped again, now down to 14.5 cnts/gal, or $6.09/Bbl.  A lot of the ethane barrels that move down the ONEOK Overland Pass NGL pipeline from Opal, WY to Conway, KS get priced out based on Conway ethane numbers.  We talked about this situation last Wednesday in Not Gonna Lie.

This is Part V of a series on the Golden Age of Natural Gas Processors.  The first four parts reviewed the crude-to-gas ratio at 50X, the impact of increasing NGL production on prices, the uplift value provided by gas processing, and who gets all the money.  Today we examine the incredible magnitude of gas processor’s margins – if the processor has access to the right gas streams.

In the previous posts of this series (Part I and Part II) we’ve looked at the relationship between NGLs and crude (weaker), the differences between the price performance of light and heavy NGLs (weaker vs. stronger) the frac spread for a typical plant (huge).  Assuming we buy the logic that the crude-to-gas ratio will be this healthy for quite some time, what does that mean for the profitability of natural gas processing – how much value is created when wet natural gas is processed?

A long anticipated market milestone either has happened, is happening, or soon will happen. No I’m not talking about one-handle natural gas prices.  That’s old news.  The much more amazing number is a 50X crude-to-gas ratio. Whether it has happened yet or not depends on which prices you use to calculate the ratio.  More on that below.  But regardless of your math, one thing is certain.  The value of extracting a hydrocarbon molecule in gaseous form and selling that molecule as a liquid has never been higher.  It is a golden age of natural gas processing.  It is a business that over the past two years (since March 2010) has experienced a decline in feedstock costs of more than 50% and an increase in its traditional measure of profitability – the frac spread –by +33%, from $9/MMbtu to almost $12/MMbtu.

This post continues yesterday’s review of the Conway ethane market.  If you did not see that one, please go to The Decline and Fall of Conway Ethane – Implications of a 75% collapse in price.  Otherwise the paragraphs below won’t make much sense.