Module 5 - Natural Gas Liquids Markets

Topics in Module 5 include:

Module 5.1 — NGL Supply/Demand

Presenter: Rusty Braziel

NGL markets have been extremely chaotic this year, with strong exports being a big factor in higher prices. Propane inventories were low going into the winter season, created a lot of concern for the retail propane sector. In addition, the ethane market is tightening, with a huge new steam cracker due to come online in a few weeks. And there’s a lot more going on, including higher ethane exports. We begin with a look at Mont Belvieu ethane prices, which have nearly doubled since the Texas Deep Freeze in February, and which knocked out supply and demand for a while. This module will set the stage for a thorough review of NGL market developments and their consequences.

Module 5.1b - Frac Spread

Presenter: Rusty Braziel

The job of removing NGLs from the natural gas stream is called natural gas processing. A natural gas processing plant is, therefore, the physical linkage between gas and NGL markets. To simplify those relationships, we use RBN’s frac spread model, which calculates the difference between the price of natural gas and the price of NGLs on a BTU basis ($/MMBtu). Simply put, the greater the spread, the more favorable the market is for natural gas processors. The spread is a yardstick measure of the general financial health of the gas processing sector.

Module 5.2a — Gas Processing

Presenter: Rusty Braziel

To compute the economics of gas processing at the level of an individual plant or at the regional level, we need to factor in some specific types of data, like the liquids content of gas, the BTU of inlet gas, the extraction efficiency of a plant, the cost of getting a plant’s production to market, and the value of that market relative to the industry benchmarks at Mont Belvieu. To understand these factors and to really grasp the current state of the natural gas processing marketplace, we need to move beyond the frac spread to something much more detailed and representative of the processing value chain. RBN’s MQQV model gets its name from the four key factors it assesses and calculates: measurement, quantity, quality, and value. When combined, these factors provide a logical means for determining how many barrels of each NGL are produced from a given raw gas stream and the economic uplift for the extraction and sale of those barrels.

Module 5.2b — Gas Processing Model

Presenter: Rusty Braziel

A continuation of Module 5.2a, we’re going to walk you through each section of our model, using it to look at a 200 MMcf/d gas processing plant in the Eagle Ford. We can use the model to find out if processing the gas and extracting the NGLs will yield a positive gross margin, not counting things like cost of capital and plant expenses. This model is focused on the gas that comes in and then the gas and NGLs that go out.

Module 5.3a — Ethane Rejection

Presenter: Rusty Braziel

Ethane rejection is an important balancing mechanism in the ethane market. It’s an escape valve that allows for the disposition of barrels that the petrochemical market can’t absorb. How and when that escape valve releases can have a big impact on price, and whether that valve is released is dependent on a host of factors, some physical, some contractual, some economic. It is the economic considerations that are of most interest to our fundamentals analysis and our modeling exercise, since it's the economic rejection into the natural gas stream that sets a floor for the price of ethane.

Module 5.3b — Ethane Rejection Model

Presenter: Rusty Braziel

A continuation of Module 5.3a, we walk through RBN’s ethane rejection model, which we use to demonstrate how the economics of ethane rejection work in different regions of the country. The most significant variables between regions are the local price of gas and the transportation cost from the processing plant to wherever the steam cracker where it will gets used. In our model, that’s the Gulf Coast. We’ll use the model to look at four basins: Permian, Appalachia, Willison/Bakken, and the Rockies.

Module 5.4a — Petrochemical (Steam Cracker) Feedstock Margins

Presenter: Rusty Braziel

About half of U.S. steam crackers have some level of feedstock flexibility which allows them to pick the mix of feedstocks that will make them the most money. A cracker’s planning staff determines the optimal slate based on the relative margins of each one, although their switching capacity is limited by logistical and operating constraints. The margins are based on the interrelationships between the feedstock prices, the cracker product yields, and the prices of the petrochemicals that are produced by the cracker — ethylene, propylene, benzene, butadiene, and all sorts of other products. Many of these units buy their feedstocks at about the same price and sell their products into many of the same markets or use them in the same kind of downstream processes. If you can anticipate when some of the flexible crackers are going to start buying or selling, you can stay on top of or ahead of the market.

Module 5.4b — Petrochemical (Steam Cracker) Feedstock Margins

Presenter: Rusty Braziel

A continuation of Module 5.4a, we’ll walk you step-by-step through each table in the RBN Petrochemical (Steam Cracker) model, spending most of our time on petrochemical feedstocks. The model takes the prices that are fed into it to calculate representative cracker margins based on the yields of various petrochemical products and co-products.

Module 5.5 — International LPG

Presenter: Simon Hill

There has been a lot of volatility in the international LPG markets recently and this module covers the gamut. We start with the relationship between supply and demand — are we more likely to see a supply pull or a demand push? Then we look at possible impacts from the COP26 climate summit, what impact a severe (or mild) winter might have on the market, the COVID recovery, and issues such as the supply chain and inflation. In this module, we discuss all those those trends and how they are reshaping the global LPG trade.