Natural Gas Liquids: A Revolution Within the US Shale Boom

Natural Gas Liquids: A Revolution Within the US Shale Boom

While it is no longer unexpected news that the U.S. is in the middle of an unconventional oil and gas boom, thanks to fracking technology and horizontal drilling that has opened up previously unrecoverable shale oil and natural gas deposits, what is largely still unknown is that a revolution is underway within the shale boom itself. It’s the development of natural gas liquids (NGLs).

Though ignored by most media and even oil and gas executives, there is abundance of NGLs to exploit and for healthy profits, especially in light of current low domestic natural gas prices. In case you need a fresher course, NGLs are very light hydrocarbons with the molecules between natural gas, which is mostly methane, and crude oil, They include ethane, propane, butane, isobutene and pentane.

In fact, even the U.S. Department of Energy (DOE) whose job is to track changes in the country’s energy sectors often ignores NGLs too for some reason.

However, the Brookings Institute thinks otherwise. In March it released a briefing on natural gas and said that changes in the hydrocarbon production landscape are now widely acknowledged, but what is less understood and discussed is the role that rapid increases in the production of NGLs will play in the U.S. hydrocarbon revolution and the important impacts of NGLs for the industry.

Al Troner, president of the Houston-based Asia Pacific Energy Consulting (APEC), told Energy Tribune that NGLs are often ignored because of their very nature and “fall into the Twilight Zone, on the shadow line of conventional oil and natural gas.”

“I am always surprised about how many gas people know a lot about NGLs  (they can’t avoid them as any gas will have some volume) but not a clue as how they can be used as base material, or applied directly as product, on the oil side,” Troner said. “Oil people on the other hand tend to disregard NGLs simply because they see them as a function of gas, and because from butane (C4) down, they all need specialized containments.”

Troner said that over a two-year period, 2009-2011, as natural gas prices softened, NGLs went from being a by-product of gas production to a co-producer; with some exploration companies subjecting that gas has actually become a by-product of NGL production. He said this first happened in the Bakken play then places like Eagle Ford and the Marcellus shales.

Banking on NGLs

While many in the oil and gas industry ignore NGLs, some companies are already factoring them into their future plans and capital expenditures, including William Partners L.P. who is banking on NGL development in their Ohio Valley Midstream Area, which includes West Virginia.

The state rests on top of both the Marcellus Shale and also the Utica Shale. According to the U.S. Geological Survey (USGS) Marcellus holds 84 trillion cubic feet (Tcf) of natural gas. The USGS’ first assessment of the largely undeveloped Utica Shale, which sits a few thousand feet under Marcellus, is still largely undeveloped and holds 38 Tcf of undiscovered, technically recoverable natural gas as well as a mean of 940 million barrels of unconventional oil resources and (even better news for Williams) a mean of 208 million barrels of unconventional NGLs.

In fact, NGLs are so promising in West Virginia and neighboring states that Williams is spending $4.5 billion to exploit and process these resources, the Associated Press reported on June 25.

Another company tapping into NGLs is independent exploration and production company Devon Energy.  In addition to producing natural gas, Devon also produces around 240,000 barrels per day (bbl/d) of oil and NGLs. By 2016 Devon expects oil and NGLs to account for more than half of its total production. In fact, NGLs are so promising for Devon that all 2012 capital was allocated toward oil and liquid rich plays.

Giving the U.S. an edge

While natural gas is used mostly for electrical power generation, residential and industrial usage, NGLs are primarily used in the petrochemical industry. This is starting to give U.S.-based petrochemical producers a source of cheap NGLs that in turn gives them a significant advantage over European and Asia producers, which mostly use more expensive oil based products such as naphtha and fuel oil as feedstock.

Ethane and propane (both NGLs) can be inexpensively transported via pipeline to petrochemical plants in the U.S., but in Asia the feedstock to steam cracking units is transported in tankers.

Yet, unlike crude oil that by law can’t be exported from the U.S. except to Canada and Mexico, and LNG, which has recently seen just two projects receive approval to export to non free trade agreement countries (FTA), NGLs have few export limitations. Though NGL exports have few regulatory hurdles, the product’s export is just starting to develop.

Earlier this year, Range Resources announced that it would be the first company to export NGLs via ship from the U.S. The company had an agreement in place to begin ethane shipments to a petrochemical company in Norway beginning in 2015.

The future of NGLs

The Brookings report argues that if the U.S. is to realize the full potential in its resurgence as a major hydrocarbon producer, NGLs will have to play a major role. Troner said that if the world shifts to increased natural gas use in many different sectors, particularly transport, this will inevitably produce greater volumes of NGLs. “There will be times – many, many times – that NGLs will be able to do what gas does, clean with a higher concentration of calorific value within volume unit,” he said.

Problems and hurdles have to be overcome however, including building NGL infrastructure, both midstream and downstream, pipelines need to be constructed (with some cost estimates reaching nearly $8 billion by 2016). Right-of-way issues and land development rights as well as regulatory problems may also impede the progress that the NGL sector could make.

An EIA study released June 14 places NGL production at 2.2 million bbl/d in 2011, and projects production at 3 million bbl/d by 2020 at a low level estimate, to around 4 million bbl/d at a high estimate, and up to more than 5 million bbl/d by 2040. With those kind of projections and the increased profitably for exploration and production companies, NGL production, sales and exports will continue to gain momentum as a driving force in the U.S. shale boom.

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Comments (1)

  • Will Flannigan July 26, 2013 at 8:28 am

    Nicely said, Tim. I think you’re correct in saying that not enough people are taking NGLs seriously. I think they’re going to play a major role in America’s position as an international energy producer in the 21st century.

    I linked to your story on my shale gas blog, Shale Gas Reporter: http://www.shalegasreporter.com

    Thanks so much for the good feature.

    Will

    Reply

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