Post originally appears in World Gas Intelligence, 06.25.14

At the start of the decade, natural gas liquids (NGLs) were the least glamorous side of the petroleum business. Many in the oil industry had little idea where ethane, propane, butane, isobutane or natural gasoline came from or what they might be used for. Since then, there has been a massive shift: The shale gale has turned the US into the world’s single largest NGLs producer and, rather than being a byproduct of the search for gas or oil, NGLs are now sought after in their own right because of their price premium over natural gas. Indeed, the International Energy Agency (IEA) says NGLs drilling is what is driving the increase in US gas production to recent highs of 72.7 billion cubic feet per day (758 billion cubic meters per year), even though natural gas prices remain just a fraction of those of oil and the gas-directed rig count has dropped for almost three years.

The search has resulted in the discovery not only of soaring volumes of liquids, but also growing amounts of associated natural gas, and the trend is expected to continue into the foreseeable future, the IEA’s recent Midterm Gas Market Report 2014 said. Consultancy ESAI Energy sees North American NGLs volumes growing dramatically in the next decade, from about 2.5 million barrels per day in 2010 to 4.5 million b/d in 2023. Only the Middle East shows a comparable increase in output.

US producers started to focus on NGLs when dry natural gas prices slumped in 2012. The cost of producing associated gas in liquids-rich plays is much lower than conventional dry gas, sometimes even negative, and the profits are higher than drilling wells solely for dry gas, the IEA said. Consequently, US producers can afford to sell the gas for the going rate, whatever the price. “The current forward curve shows gas prices remaining around $4 to $4.50 per million Btu for the rest of the decade, a level that companies often mention as the low end for healthy returns. Hence, most companies are unlikely to switch back to dry gas any time soon,” the IEA said.

A typical NGL barrel is composed of around 40%-45% ethane, 25%-30% propane, 5%-10% normal butane, 10% isobutane and 10%-15% natural gasoline (pentanes plus). Each liquid has its own market dynamics and own value. Ethane is mainly consumed by the petrochemical industry and primarily used as a feedstock for ethylene, which can also be produced from naphtha. As natural gas trades at a huge discount to crude oil prices in North America, ethane has been gaining ground as a petrochemical feedstock, reducing naphtha use. A unit of cracked ethane produces a higher percentage of ethylene than the naphtha cracking process, but naphtha has more potential uses since a naphtha cracker also generates propylene, butadiene and a significant volume of aromatics.

Growth in NGLs output is a critical component in the revival of the US petrochemical sector . “Low feedstock prices, together with lower factory power costs than those in the European Union and Japan, are giving the United States an unprecedented advantage,” the IEA said. “The low prices are causing a structural feedstock shift, which leads to increases in production of ethylene from ethane and LPG, mostly at the expense of naphtha. This is a fundamental shift in the US manufacturing sector, affecting the competitiveness of the oil and naphtha-based industries in other parts of the world.”

Right now, about 70% of US NGL supply comes from processing natural gas and stripping the liquids out of the gas stream. The rest comes from crude oil refining: Propane and butane are also refinery offgases and are known as liquefied petroleum gases (LPGs). ESAI sees US-produced LPGs making enormous gains in Asia in particular. The firm estimates that the US has only 3% of the market now, or 35,000 b/d. By 2023, that will be a 15% share, or 210,000 b/d

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