Good to Be a Gas Processor - The Rejuvenation of Natural Gas Processing Economics, Part 4

With ethane prices remaining below 30 c/gal, making it only slightly more valuable than natural gas at Henry Hub on a Btu equivalence, most natural gas processors/producers can earn a greater profit when ethane is sold with natural gas (rejected) than when it is extracted and sold with the NGLs. How much more money you may be wondering? The answer is — it depends. Are there downstream pipeline contracts and sunk costs impacting the decision making? Are the contracted volumes on an ethane-only pipeline or a raw mix pipeline? How far away is the producing basin from the Gulf Coast market? How do all these factors come together to determine whether ethane is produced or rejected and the value created? Today, we continue our discussion of the MQQV gas processing model — this time focusing on the Value principle. This is our final blog focusing on the MQQV model and, with it, we are making it available to all Backstage Pass holders should you want to run scenarios of your own.

In Part 1 of this series, we reviewed the calculation methodology, the history and the pros and cons of the Frac Spread — the difference between the price of natural gas and the weighted average price of NGLs on a Btu basis. We noted that while the Frac Spread is a good indicator of the relative health of natural gas processing over time, it is not representative of the processing margin for a particular stream of inlet gas. That is because the Frac Spread does not take into account the quality of the gas being processed either in terms of the liquids content or the Btu content, nor does it factor in the operating efficiency of the plant or help determine if ethane rejection makes sense. These factors and others ultimately determine the quantity of NGLs that a gas processing plant can produce from a given inlet gas stream.

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For this more detailed analysis, we need a model that goes deeper than a simple Frac Spread. In Part 2, we began our explanation of gas processing margin calculations using RBN’s MQQV (MeasurementQuantityQuality and Value) gas processing model. We got as far as looking at Measurement and briefly introducing Quantity in Part 2, and then in Part 3, we explored the rest of Quantity before moving into Quality, and concluded that the decision to reject or recover ethane is a balancing act between pipeline Btu specs and economics. In this final episode of this series, we’re going to run through a couple of examples of those economics, sunk costs implications, and the Value calculation and how Measurement, Quantity, Quality and Value are combined to analyze a gas processing plant.

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