What is fractionation?
If you read my article from last week, I talked about gas processing in relationship to my husband’s cereal separation habit. I promised to take it one step further today by covering fractionation. While fractionation is a fee-based business, midstream investors should understand that there is no such thing as a fractionation-only MLP. If you fractionate, you typically also have a gathering and processing business. (However, the reverse is not always true.)
Now, without getting too science-y, let me attempt to explain what happens when NGLs are fractionated. After the raw natural gas stream is processed, the remaining NGL stream is sent to a fractionation plant. The energy industry calls this mixture of hydrocarbons the y-grade NGL stream. The y-grade NGL stream itself has no commercial value because it cannot be used in any industrial application. Only the individual purity products are useable, which is why they are separated with fractionation. Fractionation uses cryogenic freezing just like processing except that the temperature gradient is more tightly controlled (click here and select the orange box labeled “Fractionation” for more details on the exact temperatures). One at a time, the lightest products are boiled off and then condensed.
At this point, it’s fair to say that you may have had your fill of my cereal example, but to further the analogy from last week, let’s pretend my husband, Jon, who decided to separate out the yellow rectangles from the berries in Captain Crunch and sell the components on Craigslist, has now determined that he’ll further break out the berries by color. If we think of the berries as the NGL stream, the groups of berries that are formed by this additional process can be compared to the ethane, propane, butane, isobutane, and heavier gases that are boiled off and condensed during fractionation.
Where are the fractionation plants in the US and who is doing it?
Enterprise Products Partners (EPD) owns interests in 15 NGL fractionation facilities in Texas and Louisiana. Of the 15, eight of them are in Mont Belvieu, Texas. This list provides greater detail on the company’s fractionation facilities and ownership interests in each. Mont Belvieu is certainly a hot spot for fractionation as both Energy Transfer Partners (ETP) and Targa Resources (TRGP) have facilities in the area, along with Louisiana locations too. NGLs are transported via pipeline to these plants from the Permian and Delaware basins and the Barnett and Eagle Ford shales. While fractionation is concentrated in Texas and Louisiana, it is not limited to these areas. For example, Williams Partners (WPZ) operates a fractionator in Conway, Kansas while Dominion Resources (D) owns a plant in Pine Grove, West Virginia in the Appalachian Basin.
How do the contracts work?
As I mentioned, NGL fractionation contracts are typically fee-based. EPD states that it simply receives a fee on the volume of NGLs fractionated. ETP explains that its fractionation revenue primarily comes from take-or-pay contracts. This means that customers must meet minimum payment obligations even if they don’t use all the fractionation capacity they’ve planned for. TRGP shares that its fractionation is also fee-based and clarifies that fees are subject to change due to expenses incurred in the fractionation process and energy costs.