August natural gas closed on Friday at $3.08/MMbtu, up 8.2 cnts and above $3.00 for the first time since January 9th 2012. Crude oil was down $1.22 to $91.44/bbl. That puts the gas to crude oil ratio at 30X, about half the 54X milestone hit in April and celebrated here in the series The Golden Age Of Gas Processors. Since then gas prices are up 60% while NGLs are down 20%. April ethane production was down 4% (due to ethane rejection), and may fall another 8% by the time we see the July EIA numbers. So is the Golden Age over already? Are gas processors panhandling on the streets of South Texas – “Will Process Gas for Food”? Or are processing margins still strong enough to make the Lexus payment just not cover the Mercedes as well? To figure this out we’ll resurrect the RBN Golden Age spreadsheet and drill down into the numbers.
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First, the facts. Graph #1 below shows the price of NYMEX prompt month natural gas. It was above $3.00/MMbtu at the first of the year, dropped below $2.00 in April and has now rebounded above $3.00. As natural gas has increased and with crude oil prices ten bucks lower than April, the ratio of crude oil to natural gas has dropped like a rock, as shown in Graph #2. Since natural gas liquid (NGL) prices are highly influenced by crude pricing, and since the price spread between NGLs and gas is the primary driver of the value uplift from processing gas, we should be worried about processing margins, right?
And that’s not all we have to worry about. U.S. NGL production in March and April was down according to EIA. Production down in the midst of the great gas processing boom? No secret there. The only NGL that is down is ethane, and the culprit behind the decline is the price for Conway ethane. Graph #3 shows EIA ethane production since 2009. Ethane has been on a good run for the past 3.5 years with particularly strong growth since September 2011. But in March the price of Conway ethane dropped below 20 cnts/gal. By April the price had hit a dime. Ethane production fell in March and April, and is expected to keep falling through the summer. That is because the price of ethane kept on falling. On July 6th, Conway ethane hit 2.25 cnts/gal. A year ago it was almost 60 cnts/gal. Graph #4 shows the prices for both Mont Belvieu and Conway ethane since the first of the year.
Just a brief diversion about 2.25 cnts/gal ethane before we go on. On a BTU basis so we can compare it to the price of natural gas, that is $0.34/MMbtu. On a barrel basis so we can compare to crude oil it is $0.945/bbl. Yes, that is less than one dollar per barrel. Just for fun (you can tell that it doesn’t take much for me to have fun) I calculated the cost per barrel of the Dasani bottled water sitting on my desk. The bottle probably was made from plastic that was once ethane. It cost $0.99 for the 20oz bottle. The answer is $266/barrel (269 bottles per barrel). Hmm. $266/bbl for water and $0.945/bbl for a ‘valuable’ liquid hydrocarbon. 282X. What does that tell us about the price of hydrocarbons in our economy? Sorry, I digress.