There is no such thing as a typical NGL barrel. For example, the composition of y-grade production out of the Marcellus is significantly different from y-grade out of most of the Permian. And it is not just gas processing engineers who care. The make-up of an NGL barrel is inextricably linked to the value of that barrel. The reason is pretty simple: there’s a big difference in the value of each of the five NGL products. These days, natural gasoline is worth nearly eight times as much per gallon as ethane. Normal butane is worth 1.6X as much as propane. Consequently, the more natural gasoline and normal butane in your barrel versus the amounts of ethane and propane, the more the barrel is worth. So it’s important to anyone trying to follow the value added by gas processing and related infrastructure to understand where these numbers come from and how much the composition of a barrel can vary from basin to basin, or for that matter, from well to well. In Part 2 of our series on gas processing, we turn our attention to the variability in the mix of NGL production and its implication for processing uplift.
Part 1 of this blog series laid out a framework for the basic understanding of natural gas processing value creation, using the frac spread as the metric. Frac spread — the differential between the price of natural gas and the weighted average price of a typical barrel of NGLs on a dollars-per-Btu basis — is a rough-cut indication of the value added at gas processing plants by extracting NGLs out of the raw natural gas stream from the wellhead. We went through a frac spread history lesson to explain what the measure can tell us about cycles in the natural gas and NGL markets, and then we worked through an example using RBN’s basic frac spread Excel model. After touting all the exceptional insights that can be gleaned from looking at the frac spread over time, we then looked at the limitations of the frac spread model, including differences between the mix of NGL purity product components in the NGL barrel from one production area to another, and from one set of market conditions to another. Today, we’ll delve into the details of those issues, and along the way, we’ll point out some data quirks imbedded in the assessment of NGL production volumes.
NGL Barrel Composition
In our RBN frac spread model provided in Part 1, we used a “typical” wellhead NGL barrel composition of 42% ethane, 28% propane, 11% normal butane, 6% isobutane and 13% natural gasoline. So where do these percentages come from, and what makes them “typical”? Well, we’ve been using these numbers for a few years. They are based on Energy Information Administration (EIA) U.S. NGL production volume statistics from 2010 and 2011, which was a time before the Shale Revolution had started to significantly impact NGL markets. Ethane prices were high and ethane rejection (sale of ethane in the gas stream versus recovery as liquid ethane) was minimal, so the volumes reported by EIA accurately reflected wellhead production. Later, as ethane production overwhelmed demand, ethane prices dropped and massive rejection kicked in, EIA production volumes (which only report ethane actually recovered) no longer were reflective of the wellhead NGL barrel composition. Thus, we felt it was more accurate to use the pre-shale, minimal-rejection numbers.
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