Module 5 - Natural Gas Liquids

Presenters: Rusty Braziel, Kelly Van Hull & David Braziel

When crude oil prices fell in 2015, production of crude oil declined, resulting in lower associated gas production. Crude prices also pressured NGL prices lower, which resulted in slower growth and declines in ‘wet’ gas production. But at the same time, ethane export capacity and new cracker capacity was coming online.  By 2018, with several new ethane-only world scale crackers in service and ethane exports flowing contracted volumes, there will not be enough ethane available to meet demand of new units and existing flexible crackers currently running ethane. As a result, flexible crackers will increase runs of alternative feedstock supplies – both propane and natural gasoline/naphtha/condensate – and LPG exports will be pressured. Module #5 explores these developments, examines RBN’s NGL price forecasts and provides four important models – natural gas processing economics, the frac spread, ethane rejection and petrochemical feedstock economics.

5.1 NGL Basics. Section one covers the NGL value chain, the relationship between BTU content and GPM (gallons of NGL per MCF of gas), and examines the functions of gas processors and fractionators, while considering the production sources and downstream markets for NGLs.

5.2 Model 5.1 – Frac Spread. Section two covers RBN’s Frac Spread Model which is used to calculate the difference between the price of natural gas and the weighted average price of NGLs on a BTU basis. This module defines the frac spread, its factors and step by step calculations.

5.3 Model 5.2 – NGL Processing Balance. Gas processing economics are all about converting hydrocarbon volumes from one state to another and understanding how much energy each liquid or gas stream 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.  Section three covers Model 5.2, RBN’s gas processing model which calculates the volume of liquids produced, the residue gas stream and the value uplift based on the quantity and quality of an inlet gas stream.

5.4 NGL Supply & Demand by Product. Section four is a thorough review of RBN’s forecast for the NGL supply/demand balance, including potential vs. recovered ethane by PADD, exports, and petrochemical feedstock selection economics. This section also includes natural gas processing plant production, refinery production, petrochemical demand, residential/commercial demand, refinery/diluent demand with special emphasis on imports and exports.

5.5 NGL Price Forecast. Based on the supply/demand forecasts in previous sections and scenarios for future crude oil and natural gas prices, we are able to anticipate price movements for natural gas liquids.  In section five, Kelly VanHull explains the complexity of NGL price movements and why they’re sometimes counter-intuitive in this five-year forward outlook for NGL prices.

5.6 Permian NGL Takeaway Capacity and Model 5.3 - Ethane Rejection. Substantial production growth out of the Permian has demanded new infrastructure to be built to handle all the liquids.  We’ll examine those developments and new projects being built.  In order to make those infrastructure investment decisions, midstreamers need to know how much NGL will be produced and what will be left in the gas stream. One of the most important factors in ethane pricing, and the pricing for other NGLs as well, is ethane rejection – the sale of ethane into fuel markets as natural gas rather than the extraction of liquid ethane.  Section six steps through the math of ethane rejection in Model 5.3, including volumetric conversions, transportation rates, netbacks, and regional gas prices.

5.7 Model 5.4 Petchem Feedstock Selection. Model 5.4 pulls together NGL prices, feedstock prices, petrochemical product yields and other factors necessary to estimate the margins for a representative flexible olefins cracker.  By knowing these estimated margins, it is possible to project industry profitability, product price sensitivity, and pricing behavior for individual NGL feedstock inputs.