BROOKINGS ENERGY SECURITY INITIATIVE NATURAL GAS TASK FORCE

NATURAL GAS BRIEfING DOCUMENT #1:

Natural Gas Liquids

MARCH 2013

Charles K. Ebinger Govinda Avasarala

BRO O K I N GS N AT U RA L GAS TAS K FO RC E Issue Brief 1: Natural Gas Liquids

PREFACE

n May 2011, The Brookings Institution Energy Security Initiative (ESI) assembled a Task Force of independent

natural-gas experts, whose expertise and insights provided inform its research on various issues regarding the U.S. natural gas sector. In May 2012, Brookings released its rst report, analyzing the case and prospects

for exports of liqueed natural gas (LNG) from the United States. The Task Force now continues to meet pe-

riodically to discuss important issues facing the sector. With input from the Task Force, Brookings will release periodic issue briefs for policymakers. The conclusions and recommendations of this report are those of the authors and do not necessarily reect the views of the members of the task force.

Members of the Brookings Institution Natural Gas Task Force

J OHN B ANKS , Brookings Institution K ELLY B ENNETT , Bentek Energy, LLC J ASON B ORDOFF , Columbia University K EVIN B OOK , ClearView Energy Partners, LLC T OM C HOI , Deloitte C HARLES E bINGER , Brookings Institution, Task Force co-Chair D AVID G OLDWYN , Goldwyn Global Strategies, LLC, Task Force co-Chair S HAIA H OSSEINZADEH , WL Ross J AMES J ENSEN , Jensen Associates R ObERT J OHNSTON , Eurasia Group M ELANIE K ENDERDINE , Massachusetts Institute of Technology Energy Initiative V ELLO K UUSKRAA , Advanced Resources International M IcHAEL L EVI , Council on Foreign Relations R ObERT M c N ALLY , The Rapidan Group K ENNETH M EDLOcK , Rice Universitys James A. Baker III Institute for Public Policy L OU P UGLIARESI , Energy Policy Research Foundation, Inc. B ENjAMIN S cHLESINGER , Benjamin Schlesinger & Associates, LLC J AMIE W EbSTER , PFC Energy Non-participating Observers to Task Force meetings included ofcials from the Energy Information Administration and the Congressional Research Service.

BRO O K I N GS N AT U RA L GAS TAS K FO RC E Issue Brief 1: Natural Gas Liquids

KEY TAkEAWAYS
 NGLs are a signicant portion of what many international organizations refer to as U.S. oil production. It is important to recognize that roughly 2.5 mmbd of U.S. oil production is from NGLs, the majority of which are not substitutable for crude oil.  NGLs will be essential for the revenues of gas producers during prolonged periods of low natural gas prices.  Maintaining domestic oil and gas production is critical for U.S. NGL production and for the U.S. industrial sector.  Domestic infrastructure is currently ill-situated to harness new production: investments in new pipelines and petrochemical facilities are often delayed by the regulatory and permitting process.  U.S. NGL exports are important for reducing price volatility and incentivizing further production.

BRO O K I N GS N AT U RA L GAS TAS K FO RC E Issue Brief 1: Natural Gas Liquids

INTRODUCTiON

he fundamental changes in the U.S. hydrocarbon production landscape are now widely acknowledged. Advances in exploration and drill-

gas, they are a critical component of the industrial sectors ability to take advantage of the U.S. hydrocarbon resurgence, and will play a large role in the countrys ambitions for energy self-sufciency. NGL production has increased signicantly in recent years. According to the Energy Information Administration (EIA), total domestic NGL production increased from just over 1.7 million barrels per day (mmbd) in 2005 to nearly 2.5 mmbd in October 2012, and now accounts for around 20 percent of the global market. As Figure 1 demonstrates, NGLs are projected to account for roughly one-quarter (nearly 3 million barrels per day) of U.S. liquids supply by 2025. Figures 2 illustrates the absolute and year-on-year growth in NGL production.

ing technology have led to a surge in domestic oil and gas production in recent years with profound economic and geopolitical implications. However, one important aspect of the U.S. unconventional oil and gas revolution, has gone relatively unnoticed: the rapid increase in the production of natural gas liquids (NGLs). NGLs comprise a number of hydrocarbon products that are produced in conjunction with methane (also known as dry natural gas), or as a byproduct of crude oil rening, and which are liquid at room temperature. NGLs include ethane, propane, butane, isobutane, and natural gasoline. While such commodities do not attract the attention that is shown to crude oil, gasoline, or natural

Figure 1: U.S Liquids Supply by Source, 2011-2025

14 Domestic Liquids Supply (mmbd) 12 10 8 6 4 2 0 26% 25% 24% 23% 22% 21% 20% 19%

NGLs as a % of Liquid Supply

Other Non-petroleum Supply Refinery Processing Gain Natural Gas Plant LIquids Other Crude Supply Domestic Crude Production NGLs As a % of Liquid Supply

2014

2015

2011

2012

2013

2016

2017

2018

2019

2021

2022

2023

Source: EIA, Brookings

BRO O K I N GS N AT U RA L GAS TAS K FO RC E Issue Brief 1: Natural Gas Liquids

2020

2025

2024

Figure 2: U.S. NGL Production, 2009-2012

3000 2500 Production (mbd) 2000 1500 1000 500 0 Jan 2010 Jan 2009 Jul 2009 Oct 2009 Jul 2011 Jan 2012 Jul 2010 Oct 2010 Jan 2011 Jul 2012 Oct 2011 Apr 2009 Apr 2010 Apr 2012 Oct 2012 Apr 2011 Isobutane-Isobutylene Butane-Butylene Propane-Propylene Ethane-Ethylene Pentanes Plus

Source: EIA, Brookings

NGL Basics
What is a natural gas liquid? Not all natural gas is created equal. Dry natural gas is comprised mostly of methane. Wet natural gas, which has a higher energy content than dry gas, generally has a number of other gases that make up the gas stream including ethane, propane, butane, isobutane, and natural gasoline (sometimes known as pentanes plus). These gases, known as natural gas liquids, are separated from the dry gas at gas processing facilities. Such processing of natural gas accounts for roughly 74% of U.S. NGLs. NGLs are also produced

as a byproduct of the crude oil rening process, which currently accounts for around 20% of U.S. NGLs. (The remaining 6% of liquids is imported.)1 A standard unit of measurement for the NGL content of natural gas is gallons per thousand cubic feet of gas (GPM). Typically, dry gas contains about 1 GPM, while the NGL content of wet gas can vary widely. For example, gas produced from the Barnett shale formation in Texas produces about 2.5 to 3.5 GPM while that from the Bakken formation in North Dakota can produce up to 12 GPM. See Table 1 for the liquids-content of gas from selected shale plays.

Table 1: Gallons of NGL per Thousand Cubic Feet (Mcf) of natural gas, selected shale plays Rich Gas Shale Play Bakken (shale oil) Barnett Eagle Ford (oil and gas) Green River (shale oil) Niobrara (shale oil) Marcellus/Utica (oil and gas)
Source: Veresen, EPRINC 1 Presentation by Anne Keller, NGL 101 the Basics, Midstream Energy Group, June 6, 2012.

Gallons of NGL per Mcf (GPM) 6 to 12 2.5 to 3.5 4 to 9 4 to 6 4 to 9 4 to 9

BRO O K I N GS N AT U RA L GAS TAS K FO RC E Issue Brief 1: Natural Gas Liquids

Figure 3: Map of Various North American Shale Gas and Oil Plays

Source: EPRINC

Figure 4: New Sources of Supply: U.S. NGL supply by Formation, 2017

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Other Bakken Rockies Anadarko Permian Eagle Ford Utica Marcellus

Source: EPRINC, Bentek

BRO O K I N GS N AT U RA L GAS TAS K FO RC E Issue Brief 1: Natural Gas Liquids

Where are NGLs found? As demonstrated in Figure 4, the regional diversity of shale oil and gas production is changing the map of the source of NGLs. Historically, the majority of NGL production has occurred in the Gulf Coast region, mostly in Texas, with additional NGLs being produced offshore Texas and Louisiana, and in the Mountain West. However, increased signicant volumes of NGLs are expected to come from newer formations like the Bakken and the Marcellus and Utica formations in Pennsylvania, West Virginia, and Ohio, all of which are experiencing increased unconventional oil and gas production. How are NGLs made? NGLs produced by gas processing are separated from the overall gas stream at a processing plant, which separates the raw NGL mix from dry gas. The dry gas is then sent through pipeline to consumers, while the raw mix is sent to a fractionation facility, which processes and separates the mix into different NGLs (ethane, propane, butane, iso-butane, and natural gasoline), also known as purity products.

An important component of the NGL production and marketing process is storage. Since NGLs are not always consumed when and where they are produced, appropriate storage locations are important. In the United States, NGLs are usually stored in salt-dome formations, most of which are found in East Texas, near Mont Belvieu. Not surprisingly, much of the petrochemical production capacity and reners, two major NGL consumers, are also located in this region. Who uses NGLs? After being processed, or fractionated, NGL products are piped to various consumers. Different industries consume different NGLs. Almost all ethane and around one third of all propane is consumed by the petrochemical sector to make olens such as ethylene and propylene.2 These compounds are then turned into plastics and a variety of other products. Heating and other fuel uses account for 52% of propane consumption. NGLs such as butane, isobutane, and natural gasoline are often used as blending agents in the renery process.3 Figures 5 and 6 breakdown NGL consumption by sector and source.

Figure 5: NGL Consumption by Sector

Petrochemical Space Heating/Fuel Uses Motor Gasoline/Blendstocks Ethanol Denaturing Fuel Exports

Source: Envantage
2 3

Presentation by Peter Fasullo, Outlook for U.S. Propane Supplies, En*Vantage, January 30, 2012. Ibid.

BRO O K I N GS N AT U RA L GAS TAS K FO RC E Issue Brief 1: Natural Gas Liquids

Figure 6: Who Consumes What? NGL Consumption by Sector and Source

100 90 80 70 60 50 40 30 20 10 0 Ethane Propane Butane Iso-butane Natural Gasoline

Petrochemical Ethanol Denaturing Space Heating/Fuel Uses

Source: Envantage

Fuel Exports Motor Gasoline/Blendstocks

Why are NGLs important? The increase in NGL production is a boon for the U.S. economy. As Figure 5 demonstrates, the petrochemical industry is a major consumer of NGLs. Liquids such as ethane are central ingredients in many industrial processes, such as the production of ethylene, which is a critical component in the production of plastics and other goods. Owing to a surge in domestic NGL production, petrochemical producers are now benetting from the availability of cheap NGLs. The latter give U.S.-based petrochemical producers a signicant competitive advantage relative to many European and Asian producers, which mostly use more expensive oil-based products, such as naphtha and

fuel oil as a feedstock. The American Chemistry Council, an industry trade body, estimates that for U.S. petrochemical producers to be internationally competitive, the absolute ratio of the price of Brent crude, an international crude oil benchmark, to the price of natural gas traded on the New York Mercantile Exchange priced at Henry Hub, must be at least 7:1.4 As of March 2013, this ratio stands at more than 25:1. According to a May 2011 ACC study, a 25% increase in ethane production will yield a $32.8 billion increase in U.S. chemical production. Figure 7 illustrates the impact of abundant NGLs (specically, ethane) on the cost-competitiveness of U.S. petrochemical producers.5

Shale Gas and New Petrochemicals Investment: Benets for the Economy, Jobs, and U.S. Manufacturing, American Chemistry Coun cil, March 2011. 5 It is important to note that this competitive advantage has its limits. While fractionating ethane produces ethylene, it doesnt produce much else in the form of by-products. When petrochemical producers crack naphtha to create ethylene, however, there are often valuable by-products such as propylene and butadiene. This suggests that there will always be a demand for naphtha-based petrochemical production.
4

BRO O K I N GS N AT U RA L GAS TAS K FO RC E Issue Brief 1: Natural Gas Liquids

Figure 7: Typical Petrochemical Cost Curve by Country/Region

Cost of Ethylene Production

Global Naphtha Cracking N. America Ethane Crackers Middle East Ethane Crackers 5-15/lb 15-20/lb 40-60/lb

Source: LyondellBasell Investor Presentation, November 2012

BRO O K I N GS N AT U RA L GAS TAS K FO RC E Issue Brief 1: Natural Gas Liquids

THE U.S. NGL MARKET

The Market Players While some of the major integrated oil companies have NGL operations, the NGL market is dominated by a number of less-familiar companies, which own much of the processing, fractionation, pipeline, and storage capacity. These companies include Enterprise Product Partners, DCP Midstream, Targa Resources, Williams Company, and OneOK. Fundamentals of the NGL Market NGL pricing is cyclical. As the primary consumer of NGLs, the petrochemical industry is an integral factor in determining prices, particularly in the case of ethane, which represents roughly 40% of the NGL stream. Industrial consumers bid for NGLs depending on the difference between the price of NGLs and the price of gas, also known as the spread. During periods of strong industrial-sector demand, the spread increases and gas processors continue to pull ethane out of the natural gas stream. As NGL production increases, prices for NGLs come down and it is more economic for gas processors to leave ethane in the gas stream, a process known as ethane rejection. Leaving ethane in the gas stream increases the physical volume of natural gas, putting downward pressure on prices and reducing gasand NGLproduction. Declines in NGL production leads to an increase in prices, and the trend repeats itself (see Figure 8).
Gas prices decrease E&P shut-ins

Over the past two years, NGLs have played a particularly important role in driving the economics of natural gas production. With prices for dry gas hovering above $3/MMBtuand, at one point in 2012, even dropping below $2/MMBtuproducers have moved rigs to wetter plays, where they can produce higher-value NGLs as well as dry gas. Traditionally, NGL prices track oil prices because the primary consumers of NGLspetrochemical producers, home and commercial heating, and gasoline mixingare able to use rened petroleum products (such as naphtha and fuel oil) as substitutes. By maintaining demand for ethane and propane, consumers have helped maintain domestic gas production.

Figure 8: Economics of NGL production

Gas supply decreases Fewer NGLs are processed

NGL prices increase

Ethane economic to process more ethane produced

Ethane production decreases / gas supply increases Ethane rejection

Source: Tudor Pickering Holt, Brookings

Too much ethane prices decrease

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Figure 9: NGL Production and Ethane and Propane Prices, Feb 2010-November 2012 180 160 140 120 100 80 60 40 20
Nov 2011 Feb 2012 Nov 2010 May 2010 May 2012 Aug 2010 Aug 2012 Nov 2012 Feb 2010 Feb 2011 May 2011 Aug 2011

3000 2500 2000 1500 1000 500 0

Ethane Price (LHS) Propane Price (LHS) NGL Production (RHS)

Source: EIA, Bloomberg

As Figure 9, illustrates, NGL prices have come under downward pressure since the increase in NGL production. Declining NGL prices have encouraged drillers to divert rigs away from NGLs to crude oil plays instead. Owing to this shift, it is likely that NGL supply will be driven by oil production as opposed to just gas production. As ethane prices remain low, more gas processors are leaving ethane in the gas stream and remove only the heavier liquids, such as propane. Some industrial consumers are responding to this by consuming propane instead of ethane in their facilities. (This is only an option for petrochemical producers that have made upfront investments in exible facilities that can process either feedstock.) However, unlike ethane, which is consumed almost exclusively by the petrochemical sector, propane is a major

source of heating fuel, which accounts for over half of propane consumption. As a result, propane demand peaks in the winter and troughs in the summer, leaving the petrochemical sector dependent on a far more variable market. The NGL market is facing a glut of supply in the coming years. Although traditional NGL economics would suggest that a prolonged period of low NGL prices would result in a shortage of ethane, improvements in the efciency of shale gas production have maintained gas and liquids production despite a diversion of rigs to crude oil plays. With large NGL volumes expected to enter the market in the coming years, it is more likely that demand will not be able to keep pace with supply rather than the other way around.

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CHAllENgEs FACiNg THE SECTOR AND CONsiDERATiONs FOR POliCYmAKERs

f the United States is to realize the full potential in its resurgence as a major hydrocarbon producer, NGLs will play a major role. NGLs production will

midstream sector are responding to market signals of low prices and supply bottlenecks: they are investing in the construction of a host of pipelines that will transport NGLs to market. Tudor Pickering Holt, an investment bank, forecasts that by 2018 NGL pipeline capacity will nearly double from 2012 levels (see Figure 10). Developing new pipeline capacity, however, will not be without difculties. Right-of-way issues and landowner rights are pose potential obstacles that can slow down the construction process. Nowhere is this clearer than in the northeast. Pipeline investments are particularly important for the projected surge in NGL production from the Marcellus and Utica. With enough investment in pipelines and petrochemical production capacity, the Northeast states will no longer have to send their NGLs to the Gulf Coast for consumption or export. While some companies have expressed interest in developing new petrochemical facilities in the Marcellus, getting permits and approval has proven to be a daunting task. To construct pipelines in the state of Pennsylvania, a company has to work with any affected individual townships. By one estimate, there are over 2,500 townships in the state of Pennsylvania alone, many of which have their own regulations.

have a direct impact on the competitiveness of U.S. manufacturers and petrochemical producers and play a signicant role in any scenario of domestic self-sufciency in hydrocarbon liquids. As the ow diagram above demonstrates, the NGL sector is highly responsive to market signals. Much of the success of the NGL (and overall unconventional) production is owing to the market-driven nature of investments in production, transportation, and consumption. However, while the market is generally efcient at allocating resources in the NGL sector, politicians and government ofcials should understand what factors could slow down future investments in domestic industry and the resultant prospects for a U.S. petrochemical renaissance.

Infrastructure Bottlenecks and Permitting

NGL infrastructureboth midstream and downstreamhas struggled to keep up with the increase in supply. The Interstate Natural Gas Association of America, a midstream trade association, estimates that companies need to spend at least $7.8 billion in pipeline investments by 2016. Companies in the
6

A feast of NGL riches from shale, NGL Shale Gas Special Report, Argus Media, 2012.

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Figure 10: Forecasted NGL Pipeline Projects

5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500

New pipes nearly double takeaway capacity

Q1 2012

Q1 2013

Q1 2014

Q1 2015

Q1 2016

Q1 2017

Q1 2018

Line EZ Arbuckle Seminole Local Refineries (C4s, C5) W. Rockies - MAPL Permian Capacity
Source: Tudor, Pickering, and Holt

WTLPG Sterling I and II Chapparal Eagle Ford Capacity E. Rockies - OPPL/FR NE C2 Capacity

WTNGL (LDH) Skelly-Belvieu TX/LA NGL System Midcon Capacity Bakken Capacity NE C3+ Capacity

The downstream sectorcomprising consumers of NGLsis unlikely to build the capacity to keep pace with the increase in supply. Despite a surge in new planned petrochemical capacity, contributing as much as 550,000 barrels/day of new ethane demand, NGL supply will likely outweigh demand for much of the remainder of this decade, owing to the long lead times and high capital expenditure required to build petrochemical facilities.
7

with respect to new pipelines, some analysts suggest that regulatory bottlenecks surrounding issues such as ozone permits for new facilities are also contributing to a delay in new capacity development.

Export Policy
Just as the U.S. has become a net exporter of rened petroleum products and is a potential exporter of liqueed natural gas (LNG), it has also become a net exporter of NGLs and petrochemical products, such as propane and propylene (see Figure 11). NGL exports, which are occurring as a result of an excess

One consideration for policymakers would be the streamlining of the permitting process for new facilities. While permitting delays are often mentioned

Brad Olsen, The NGL Report Summary, Tudor Pickering Holt, April 27, 2012.

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in domestic supply and weak demand from the petrochemical sector, are growing increasingly important for sustaining domestic NGLand dry natural gasproduction. Further, the need for an outlet for NGL supplies is met with growing demand for propane and other liquids, which are critical for heating and cooking in a number of emerging economies, including India and Central and South America. Yet although exports have been increasing, according to RBN Energy, a consultancy, export capacity is still constrained by a lack of suitably equipped terminals. A number of companies are looking to
8

at Marcus Hook, in Philadelphia. The latter project, which is connected to Sunocos Mariner East pipeline evacuating NGLs from the Marcellus shale, is viewed by some analysts as critical for the development of the Northeasts NGL infrastructure. Exporting NGLs will provide producers an incentive to maintain production of both NGLs and, in turn, dry natural gas. Further, many investors see exports as a critical component to smoothing the price volatility that characterizes the NGL market. More important than the current surge in investments in U.S. manufacturing is the assurance of a predictable supply of NGLs, something provided by increase NGL export.

expand or build new export capacity including Enterprise and Targa, both in Mont Belvieu, Texas, and Sunoco Logistics, which is building an export terminal Figure 11: U.S. NGL Imports/Exports (-), 2008-2012
300 200 100 0 -100 -200 -300

Isobutane-Isobutylene Butane-Butylene Propane-Propylene Ethane-Ethylene Pentanes Plus

Sep 2008

Sep 2009

Sep 2010

Jan 2008

Jan 2009

Jan 2010

May 2008

May 2009

May 2010

Source: EIA, Brookings

Exports Prescribed for Propane Relief, RBN Energy Network, November 1, 2012.

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May 2012

Sep 2012

Sep 2011

Jan 2012

Jan 2011

May 2011

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