• Updating the NGL Picture: Prices, Production, Exports, and More

    11/19/19 | Michael Laitkep

    Summary

    • Despite elevated inventories, delayed cracker additions, and steady export levels, Mont Belvieu NGL prices have increased off their late-summer lows, with seasonal demand likely helping.
    • High inventories reflect the continued growth in NGL production alongside crude in areas like the Permian, while additional pipelines, fractionation capacity, and export infrastructure have facilitated the movement of NGLs to the Gulf Coast.
    • Several midstream companies are developing projects to expand NGL export capacity along the Gulf Coast, with some also extending their NGL business into petrochemicals through propane dehydrogenation (PDH) plants.

    Despite being potentially less familiar to a generalist audience than more “approachable” hydrocarbons like oil and natural gas, natural gas liquids (NGLs) have grown in importance within midstream as US production and exports have risen quickly over the last few years. After falling to multi-year lows in August, NGL prices along the Gulf Coast have shown signs of a recovery over the last month. This week’s Insights post provides a high-level update on what’s driving NGL prices and inventories, production, and exports, as well as the infrastructure being developed to facilitate it all.

    Associated gas drives rise in US NGL production.
    While US NGL production growth has slowed this year after rising by 16.4% in 2018, NGL production remains near its record high of more than 4.8 million barrels per day (MMBpd). Perhaps the biggest driver of production is associated gas, which describes natural gas produced by oil wells. Associated gas often contains NGLs, which are separated at natural gas processing plants into a mixed NGL stream and then transported to a fractionation facility for separation into NGL purity products, such as ethane, propane, and butane. Per the Energy Information Administration (EIA), out of the 15 billion cubic feet per day (Bcf/d) of associated gas produced last year, the Permian contributed the most at 5.8 Bcf/d in 2018, while the Bakken and Eagle Ford each produced a little over 2 Bcf/d. Aside from associated gas, rising volumes of wet gas from Appalachia have also driven growth in NGLs. According to the EIA, production of three NGLs – propane, butane, and natural gasoline – are expected to rise just over 7% in 2020, while ethane production is projected to increase by over 17%.

    NGL prices have rallied recently but remain near long-term lows.
    Despite rallying off its low in 3Q19, the NGL basket price at Mont Belvieu has remained weak as a result of high NGL production levels and elevated US inventories. As of November 8, the price of the NGL basket at the hub was $21.11 per barrel, representing a 35.5% increase from mid-August’s low but a 21.3% year-over-year decline. As a net exporter of NGLs, US NGL prices are influenced by international supply and demand in addition to being generally correlated to natural gas and crude prices. The rate of export growth has stabilized in recent months following a large jump earlier this year (see chart below) as new pipeline and fractionation capacity increased the volume of NGLs available for export. Infrastructure additions have also unlocked a substantial amount of production from the Permian, and the increased supply has put pressure on prices at the Gulf Coast. Targa Resources (TRGP) commenced full operations on the Grand Prix Pipeline in August, which can transport up to 300 thousand barrels per day (MBpd) of NGLs from the Permian to Mont Belvieu. Similarly, Enterprise Products Partners (EPD) announced its Shin Oak NGL pipeline entered initial service in February, with full service of up to 550 MBpd of NGL pipeline capacity from the Permian to Mont Belvieu available beginning this quarter. In addition to Permian pipelines, ONEOK’s (OKE) 375-MBpd Arbuckle II Pipeline, which stretches from Oklahoma to Mont Belvieu, is expected to enter full service in 1Q20.

    Mont Belvieu NGL prices have also been negatively impacted lately by high inventory levels at the hub for purity products and in the US in general, where inventories are above the three- and five-year averages. The price of propane at Mont Belvieu increased nearly 8% month-over-month as of November 8 but is down 31.9% over the same time last year. The short-term price increase is likely due to propane’s seasonal demand for uses as a space heating fuel and in crop drying. Elevated propane inventories on the Gulf Coast are likely to temper any further price jumps in the short term and have kept prices down compared to last year’s heating season. Propane inventories hovered near three-year  highs for both the US and Gulf Coast (PADD 3) for the week ending November 8 (see chart below). High inventories reflect the continued growth in NGL production alongside crude in areas like the Permian, while additional pipelines, fractionation capacity, and export infrastructure have facilitated the movement of NGLs to the Gulf Coast. The chart below depicts current US NGL inventories as of November 14 and inventories for the same time period on a three-year average basis to account for seasonality.

    Mont Belvieu ethane price comes off three-year low as crackers start up.
    Ethane has been in focus lately as the Mont Belvieu price hit a multi-year low in late July but has recovered somewhat with new cracker capacity beginning to come online along the Gulf Coast. Unlike other NGLs, ethane can be left in the natural gas stream in a situation known as ethane rejection. Ethane prices generally track near natural gas prices with some variation possible as a result of international market dynamics from increasing export levels. In our last piece on NGLs, we noted the price of ethane spiked in 3Q18 to its highest level since 2012 as a result of fractionation constraints at Mont Belvieu. Today, ethane is trading slightly above its three-year low at 20 cents per gallon (cpg) and briefly hit 10 cpg at the end of July, which represents the lowest ethane price at Mont Belvieu in at least ten years. Incremental demand for ethane primarily stems from demand growth at petrochemical plants, which have been somewhat in flux recently. Sasol’s (SSL) Lake Charles Ethane Cracker, which has a 1.54 million ton per year nameplate capacity, reached beneficial operation at the end of August but was running at only 50% of capacity. Sasol has indicated it is closer to full completion of the project, which has been delayed due to technical challenges. A fire at ExxonMobil’s (XOM) Baytown Olefins Plant in July resulted in an unscheduled outage and the plant running at reduced rates. Lotte Chemical and Westlake Chemical (WLK) held a grand opening ceremony for their Lake Charles ethylene facility in May, but detailed updates on operations have been limited since then. Finally, Formosa Plastics expected to achieve commercial operations at its polyethylene plants by the end of this year. Ethane inventories peaked in June before declining by 8.2% through August, which is potentially the result of a slow ramping in ethane consumption by these plants.

    What’s driving demand for domestically produced NGLs?
    The US is currently the fastest growing exporter of crude and NGLs globally and has been a net exporter of NGLs since 2014. Aside from ethane cracker additions discussed above, domestic demand growth for NGLs is expected to remain relatively flat, meaning the incremental barrel of US NGL production will likely need to be exported. Since the beginning of 2014, NGL exports have tripled to exceed 1.8 MMBpd. At its recent investor day, Phillips 66 (PSX) said it expected LPG exports to increase by 50% between now and 2024. Global NGL consumption will be driven by economies with emerging middle classes in Asia, Latin America, and Africa, among others. These regions will require more NGLs for use in petrochemical plants, industry, heating, and other commercial processes.

    Several midstream companies are developing projects to expand export capacity along the Gulf Coast. In July, EPD announced an expansion project to increase LPG loading capacity in the Houston area by an additional 260 MBpd. When combined with a recently completed 175-MBpd expansion, Enterprise will have expanded its LPG export capacity in Houston to more than 1 MMBpd. EPD is also leveraging its NGL value chain by constructing a second propane dehydrogenation (PDH) plant that will consume up to 35 MBpd of propane when it is completed in 1H23. TRGP is expanding its export capacity in the Houston area at its Galena Park Marine Terminal by up to 67% to 11-15 million barrels per month by 3Q20. Up north, Pembina Pipeline (PPL CN) is investing $250 MM to construct the 25-MBpd Prince Rupert LPG export terminal in British Columbia, which is expected to be completed in mid-2020. Pembina is also developing a new $2.5 billion PDH plant, which is an opportunity to diversify its revenue stream and integrate its petrochemicals and NGLs businesses in Western Canada. As with crude and natural gas, NGL exports continue to represent a significant growth opportunity to connect production with growing demand abroad.

    Bottom Line
    Despite elevated inventories, delayed cracker additions, and steady export levels, Mont Belvieu NGL prices have increased off their late-summer lows, with seasonal demand likely helping. While a number of NGL-focused pipelines have recently come online or are nearing completion, NGLs will remain a growth area for midstream companies that extends beyond pipelines. New and expanded infrastructure will facilitate NGL production growth and increasingly move these hydrocarbons abroad.