Price and market trends: US shale oil output boosts NGL production

26 July 2013 08:45  [Source: ICB]

As companies increase shale oil production in the US, they will also produce natural gas liquids (NGLs), offsetting declines that could result from a slowdown in natural gas ­activity, consultants said.

Gas production is important because NGLs are produced in conjunction with it, and NGLs are the feedstock for the majority of the crackers in the US.

However, another source of NGLs is from associated gas, a by-product of oil production.

PROFITABLE CRUDE OIL

Because associated gas is a by-product of oil, companies will continue producing it regardless of prices for NGLs - as long as crude production remains profitable.

North Dakota Rex Features

 Rex Features  

North Dakota: the Bakken shale formation is rich with oil, producing 243m bbl in 2010

"Everything that comes out of the ground has to be sold," said Dan Lippe, president of Petral Consulting. "Even if it is sold at something close to zero, it has to be sold."

As it stands, crude prices have justified increased production, as illustrated by North Dakota, the home of much of the oil-rich Bakken shale formation.

The state produced 243m bbl of oil in 2012, more than four times its total in 2007, according to the North Dakota Department of Mineral Resources, Oil and Gas Division.

"There is so much crude in North Dakota, what happens to gas just doesn't really matter," Lippe said. "The Bakken is enormous."

Of course, other states such as Texas also have substantial reserves of shale oil. Altogether, overall oil production in the US rose to 6.50m bbl/day in 2012, up 28% from 5.08m bbl/day in 2007, according to the Energy Information Administration (EIA).

The increased oil production has likewise led to an increase in associated gas.

"Now that we have growing production of associated gas, it almost doesn't matter what happens to non-associated gas," Lippe said. At the least, NGLs derived from oil production should compensate for any slowdown in gas production.

Producers have several reasons to pull back on gas drilling.

Power companies are a major consumer of natural gas, and total retail sales of electricity in the US have yet to return from their high in 2007, according to the EIA. As a result, power companies have little incentive to expand capacity and consume more natural gas.

In fact, electricity sales actually fell both in 2011 and 2012, the EIA said.

Moreover, US regulators have adopted policies to encourage energy conservation, another cap on electricity consumption and thus natural gas demand, Lippe said. Other regulations favour renewable energy production such as wind farms and solar plants.

Liquefied natural gas (LNG) exports are not a panacea for the industry, even though they are considered another potential source of future demand, Lippe said. The world has a limited number of large LNG consumers, so exporters will be competing for a limited number of customers, he said. In Europe, LNG will compete with coal, which is coming increasingly from the US, as power plants in the US abandon it in favour of natural gas, Lippe said.

The prospect of LNG exports assumes that US regulators will approve export terminals. Those terminals face opposition from chemical producers and manufacturers, who are fearful of unrestricted LNG exports.

For now, natural gas production is starting to flatten out, said Peter Fasullo, principal at En*Vantage.

Petrochemical companies, though, are focusing on future supplies of NGLs, he said. Given the outlook for rising shale oil production, companies are confident that they will have the feedstock to pursue ambitious expansion plans in North America.

"Nobody can dispute the resource base that we have right now," Fasullo said. In fact, Fasullo sees the US becoming a major exporter of heavier NGLs such as propane and butane.

PANAMA CANAL

By 2015, the expansion of the Panama Canal should be completed, and that will allow the passage of very large gas carriers, Fasullo said. Once the expansion is completed, the transit time to Asia will be cut by almost half.

Likely markets include Japan and China, the latter which is building several propane dehydrogenation (PDH) plants, Fasullo said. China will need to import propane to provide feedstock for those plants.

The US could even begin to export ethane, Fasullo said. Switzerland-based INEOS announced such an arrangement in September 2012, reaching a supply agreement with US-based Range Resource-Appalachia.

Fasullo said there are a couple of companies that are considering ethane export terminals on the US Gulf Coast.

However, before such a project can proceed, those companies will have to find customers willing to commit to buying ethane and shipping it to their operations overseas.


By: Al Greenwood
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