NGL Show And Tell
Overview
The global energy markets are undergoing a seismic shift, and investors should take heed. In a recent issue of The Energy Strategist, I examined the market and outlook for liquefied natural gas (LNG). Today I discuss the likely impacts of natural gas liquids (NGL) and liquefied petroleum gas (LPG) on the global energy markets.
But first, a quick overview of the differences within this alphabet soup of hydrocarbons.
Natural gas is predominantly methane, the simplest hydrocarbon. Under normal conditions, methane is a gas.
Compressed natural gas (CNG) is methane that has been pressurized and put in a tank — but it still exists as a gas. Most of the world’s natural gas vehicles are CNG vehicles.
LNG is natural gas that has been cooled to below -261°F, at which point it becomes a liquid. The advantage of LNG over CNG is that the liquid form takes up less space, thus more can be transported per unit volume. The disadvantage is that it must be kept cold, and that requires energy. Nevertheless, because LNG has a greater range, it is often preferred in heavy trucking applications over CNG.
CNG allows a given volume of natural gas to be compressed to ~ 0.4 percent of its original volume, while LNG can reduce that initial volume down to less than 0.2 percent. A container of specific volume could transport 1 unit of natural gas, 250 units of CNG, or 600 units of LNG.
Natural gas liquids (NGL), on the other hand, are longer-chain hydrocarbons like ethane, propane and butane that are typically condensed out of natural gas during processing and sold separately. So LNG and CNG are forms of natural gas (methane), but NGLs are not.
A typical composition of NGLs would be:
Ethane (2 carbon atoms; 35-55 percent of the total composition)
Propane (3 carbon atoms; 20-30 percent)
Normal Butane (4 carbon atoms; 10-15 percent)
Isobutane (4 carbon atoms; 4-8 percent)
Pentanes and higher hydrocarbons, also called natural gasoline (5 or more carbon atoms; 10-15 percent)
US NGL production is now above 2 million barrels per day, the highest level in history:
Ethane
Ethane makes up the lion’s share of NGL production. Ethane can be removed from the gas stream and used as a chemical feedstock, but in recent years supplies have outgrown demand such that ethane has also been increasingly “rejected,” meaning left to be sold with the methane in natural gas. There is a limit to this, however, as the heating value can be too high if too much ethane is left alongside methane, causing problems for the end user.
Ethane could be used as transportation fuel, but this would require significant infrastructure development for what would be a niche fuel. It could also be used to a greater extent as a raw material for gasoline production in oil refineries, but this would likewise require costly investments in new refining equipment. Most of the world’s ethane is used to produce ethylene, which is itself used to produce (among other things) polyethylene. Ethane has far greater value as a petrochemical feedstock over the long term, so it is unlikely to gain much traction as a transportation fuel option, and thus will be unlikely to affect the transportation fuel supply/demand picture.
Propane and Butane (LPG)
The two fractions after ethane in NGL are propane and butane. LPG is generally a mixture of the two. Although pure liquid propane or pure liquid butane is sometimes marketed as LPG, the acronym almost always denotes a mixture of the two. Hydrocarbon chains that are longer than butane are used as chemical feedstock as well, but can also be blended into the gasoline supplies in an oil refinery.
While oil refineries produce LPG as a byproduct of the refining process, the bulk of the LPG supply growth in recent years has been the result of growing NGL production resulting from the tight gas boom. This has created a surplus of NGL supplies coming from the Eagle Ford and Permian Basin in Texas, as well as the Marcellus and Utica shales.
LPG is widely used for heating, cooking and transportation. When used in an internal combustion engine, LPG is referred to as “autogas” and is the third most popular transportation fuel in the world, behind distillates (e.g., diesel, jet fuel) and gasoline. More than half of the world’s autogas use is concentrated in five countries – Korea, Turkey, Russia, Poland and Italy.
\Largest autogas markets 2010. Source: World LP Gas Association
Autogas consumption increased by 60 percent over the past decade, and there are now more than 17 million cars worldwide fueled by autogas (of a total global fleet of ~1 billion cars, light-, medium- and heavy-duty trucks).
Global autogas demand growth. Source: World LP Gas Association
Autogas consumption in various countries is strongly affected by government policies. The fuel performs better environmentally than gasoline or diesel in most emissions categories, and as a result some governments have encouraged its use.
In South Korea and Japan taxis and other light-duty fleet vehicles account for a large share of autogas consumption. The overwhelming majority of taxis in both countries run on autogas thanks to a combination of incentives and government mandates.
The US has not adopted meaningful incentives for autogas consumption, and as a result autogas prices are not especially competitive with gasoline. This has resulted in very low penetration of autogas vehicles in the US, where the primary use of LPG is expected to continue to be for heating and as a petrochemical feedstock.
Autogas vehicle share among total passenger vehicles. Source: World LP Gas Association
LPG Trade Flows
Historically, the US has been a net importer of LPG, while the bulk of the world’s exports were supplied by the Middle East.
Global LPG imports and exports. Source: Danish Ship Finance
Regionally, the US and Canada produce slightly more LPG than does the Middle East, but US demand has historically ensured that the country remained a net importer of LPG. But that changed in 2012, when shale gas development and the associated growing NGL production made the US a net LPG exporter for the first time. In its Annual Energy Outlook 2013, the US Energy Information Administration projected that US LPG exports will reach 500,000 bpd by 2015, and that the US will remain a net exporter of LPG through 2040.
This rapid increase in US LPG exports has major global ramifications as the US begins to compete with the Middle East for the world’s LPG trade. (Current Middle East exports of LPG are ~ 1 million bpd). Initially the US will begin to compete with Middle Eastern LPG in our neighborhood, but ultimately that competition will take place in Europe and Asia.
Who stands to benefit from this shift in trade flows? Consumers, obviously, as Middle Eastern producers will likely be forced to cut LPG prices in response to the increased supplies. But US LPG producers and companies and partnerships dealing with LPG logistics also stand to gain.
NGL Producers
DCP Midstream has been the largest NGL producer in the US for six straight years. DCP produced 401,914 bpd of NGLs in 2012, or about 17 percent of production in the continental US. DCP Midstream is a 50/50 joint venture between Spectra Energy (NYSE: SE) and Phillips 66 (NYSE: PSX), and the general partner of DCP Midstream Partners (NYSE: DPM), a master limited partnership that owns 19 gas plants, nine fractionators, and ~11,000 miles of pipeline.
Leading NGL producers. Source: DCP investor presentation
Enterprise Products Partners (NYSE: EPD) is the largest MLP by market capitalization. Initially formed in 1968 as a wholesale marketer of NGL, today Enterprise has 24 natural gas processing plants, 21 NGL and propylene fractionators, 50,000 miles of pipelines, and a major NGL import/export facility on the Houston Ship Channel. Enterprise recently announced an expansion of its liquefied petroleum gas (LPG) export terminal at the Oiltanking Partners (NYSE: OILT) complex on the Houston Ship Channel. The expanded LPG export terminal is expected to be in service by the end of 2015 and is supported by long-term export agreements. Following this expansion, Enterprise will have aggregate capacity to load in excess of 16 million barrels per month of low-ethane propane and/or butane.
Phillips 66 is also looking to capture a piece of the propane/butane export market. The company has announced a $1 billion LPG export terminal at Freeport, Texas. The capacity was announced at 4.4 million barrels per month. Along with the EPD facility, these two projects would more than cover the 15 million or so barrels per month of LPG exports expected by the EIA.
In addition to DCP and Enterprise, major NGL producers include Williams Partners (NYSE: WPZ), Targa Resources Partners (NYSE: NGLS), Devon Energy (NYSE: DVN) and ONEOK Partners (NYSE: OKS). While these companies have benefited from their growing NGL production, the higher volumes have come at the expense of lower profit margins given the excess of NGL supplies that are still somewhat logistically constrained. Since late 2013, however, prices have perked up quite a bit, especially for the propane and the butane getting a boost from rising exports:
Source: Energy Information Administration
Logistics
Of course many of the major NGL producers are also involved in moving NGL from the field to the customer. There are more than 20 dedicated NGL pipelines in operation or being planned in the US. Many new projects are underway to move NGL from West/South Texas, North Dakota, and Pennsylvania to the Gulf Coast for export. These include the proposed 200,000 bpd Bluegrass NGL Pipeline, a joint venture between Williams (NYSE: WMB) and Boardwalk Pipeline Partners (NYSE: BWP) to transport NGL from the Marcellus and Utica shale plays to the Gulf Coast.
Oneok Partners has a 600-mile Bakken natural gas liquids (NGL) pipeline that moves NGL from the Williston Basin to an interconnection with the Overland Pass Pipeline in northern Colorado. The Bakken NGL pipeline came online in April with an originally planned capacity of 60,000 bpd and is currently being expanded to 135,000 bpd. Oneok has announced that it will spend another $100 million to expand the Bakken NGL pipeline to 160,000 bpd.
Conclusions
NGL production will certainly expand over the next few years, and a number of producers are poised to benefit. Oversupply has hurt prices in recent years, but the present discount looks unlikely to persist in the face of new ethylene crackers and growing exports, which will be supported by a number of pipeline, storage, and export terminal projects. Portfolio holdings poised to benefit from the growth in NGL production include Enterprise Products Partners, Williams, MarkWest Energy Partners (NYSE: MWE) and, last but not least, Targa Resource Partners sponsor Targa Resources (NYSE: TRGP). As always, we will be keeping close tabs on developments.
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