Natural gas processing plants are being built or expanded at a feverish pace. At least 90 projects are in the works around the U.S., expected to add more than 15 Bcf/d of capacity according to the latest Bentek NGL Facilities Databank numbers. How do the economics of these investments work? We know that it is a lot more complicated than a simple frac spread. But does that mean the calculations must be exclusively the purview of engineers armed with gas plant optimization models? Heck no. Anybody, even an MBA with a spreadsheet, a few standard factors and a gas analysis can figure out how a gas processing plant makes money. So to prove that point today we’ll dive one more time into natural gas processing economics to understand how the composition of an inlet gas stream is converted to outlet streams of natural gas liquids and residue gas.
This posting continues the series that we started some weeks back focused on the details of natural gas processing economics. In Another Fracing Problem? NGL Prices and the Natural Gas Processing Frac Spread we looked at recent NGL and natural gas price trends and the implications for the Frac Spread, a measure of the difference between gas prices and NGL prices on a BTU equivalent basis. That analysis showed us that even though the natural gas processing business is not as lucrative today as it was back in November 2011, it is still in pretty good economic shape when compared to long run trends. But we also noted that the Frac Spread is just that, a price spread. It should not be interpreted as a gas processing margin. That is because the Frac spread does not incorporate variables like gas quality and quantity into its calculations.
That got us to Part II of the series, How Rich is Rich? – How BTU Content and GPM Determine NGL Quantities. This is where we reviewed gas processing basics, then went deep into the math of a four factor model for understanding gas processing economics – MQQV, short for measurement, quantity, quality and value. These four factors provide a framework for understanding how processing economics work. We explained the first two of these factors in Part II. Today we’ll review what we learned in Part II and then jump into the modeling abyss from there. As we’ve noted before, this is a deep dive, not a casual read. Also, it will be difficult if not impossible to follow today’s discussion without having read Parts I and II of this series. You have been warned!!
MQQV – Measurement and Quantity Revisited
Here’s the big picture -- Gas processing economics are all about converting hydrocarbons from one state to another (gas to liquids, liquids to gas) and understanding how much energy each liquid or gas contains. NGLs enter the gas processing plant as gas – part of the inlet gas stream. The NGLs are extracted from the gas and converted to liquids. They exit the plant as liquids and then are sold in liquids units – gallons or barrels. At every stage in the process, the gases or liquids have a measurable energy content.