by Bob Shively, Enerdynamics President and Lead Instructor
There’s a lot of industry talk and media coverage about the shale gas boom in the United States. But barely mentioned in the discussion is the fact that Natural Gas Liquids, or NGLs, are key to keeping the shale gas boom going.
NGLs — the hydrocarbon components extracted when natural gas is processed — are critical to creating enough revenue for producers to keep exploring and drilling even when natural gas prices are low. So to understand the future of shale-driven natural gas markets (say for instance, you want to know whether the U.S. could feasibly send LNG to Europe to reduce its dependence on Russian gas), you also need to have some understanding of liquids markets. Key pieces to this understanding include:
- what NGLs are
- why NGLs are critical to the economics of shale
- why it’s so difficult to predict the future of liquids markets
So…what are NGLs?
Natural gas liquids (NGLs) include ethane, propane, butane, isobutane, and pentanes. As indicated in the following chart from the Energy Information Administration (EIA), the various liquids have different uses and are sold into varying markets:
Source: EIA, available at http://www.eia.gov/todayinenergy/detail.cfm?id=5930
Gas wells with a significant amount of NGLs are often called “rich plays.” NGL content is commonly measured in gallons per thousand cubic feet of gas (GPM). Dry gas contains around 1 GPM. Rich gas plays are usually considered to have at least 2.5 GPM, and really rich wells may be as high as 9.0 GPM. Here are some examples of GPM for rich gas shale plays:
Source: Brookings Energy Security Initiative Natural Gas Task Force, Natural Gas Briefing Document #1: Natural Gas Liquids
Why are NGLs critical to the economics of shale?
Let’s look at the expected revenue from a well with a fairly robust liquids output of 5 GPM. Based on pricing for the various commodities that can be sold and assumptions about the percentage of each hydrocarbon in the gas stream, the revenue per MMBtu might look like this:
$/MMBtu
|
|
Natural gas
|
$5.00
|
Ethane
|
$1.00
|
Propane
|
$1.25
|
Butane
|
$0.75
|
Natural gasoline (pentanes and “heaviers”)
|
$0.60
|
Total Value
|
$8.60
|
As you can see in this example, 40% of the value is created by NGLs. And in recent times when natural gas prices were lower, NGLs might make up more than 50% of the value. Thus, for a producer deciding whether and where to drill, the potential liquids revenue stream is critically important.
Why the future of liquids markets is hard to predict
Unfortunately, NGL markets are much less transparent than other energy markets and are poorly understood by all but a few insiders. Factors that must be considered include:
- NGLs are used in various industries and each has its own demand fundamentals.
- Pricing for different NGLs is tied to different factors including weather, oil prices, agricultural demand, industrial demand, refinery needs, and in some cases foreign competition.
- Pricing is not very transparent and there are limited public sources of price data.
- Hedging markets for NGLs are thin.
- The facilities for processing, transporting, and storing NGLs are not well documented for access by outside observers.
- There are various technological flexibilities that result in variable NGL outputs under certain conditions. For instance, certain amounts of ethane can be left in the natural gas stream, or it can be taken out and sold as a product in its own right. Whether it makes sense to leave it in or take it out depends on factors such as the market price of natural gas, the market price of ethane, the amount of demand for ethane, availability of transport, and pipeline gas quality rules.
This discussion is but a mere introduction to the intricate relationship among NGLs, shale gas, and the natural gas industry as a whole. The important point, however, is that the shale boom cannot be fully understood without also recognizing and understanding NGLs and the game-changing economic ties they have to shale gas.