If 2011 was the "golden age" for propane and other natural gas liquids (NGLs), the next few years could be their dark ages, according to a bearish outlook released by FirstEnergy Capital analyst Steven I. Paget.
As North American natural gas prices have plummeted, many producers in the US and Canada have responded by switching drilling from dry gas plays such as the Haynesville Shale in Louisiana to liquids-rich plays like the Eagle Ford Shale in Texas (WGI Feb.1'12). And as NGL production has risen, prices of propane and ethane have also taken a tumble, prompting fears of a slowdown in NGL-directed drilling. Nevertheless, today's prices are still well above the near-zero levels at the end of 2008.
Bentek Energy senior NGL analyst Ben MacFarlane points out that NGLs still are worth three times as much as natural gas on a Btu basis. "So, prices would have to come down a lot more to make the internal rate of return low enough to curtail drilling, especially in a place like the Eagle Ford Shale," MacFarlane tells WGI.
Paget takes the negative view: "Our Mont Belvieu [Texas hub] and Edmonton [Alberta hub] fraction spread forecasts are once again near-term bearish, as we have cut our estimated Mont Belvieu propane-plus margins to US 90Â¢ per gallon in Q3 2012 versus our previous estimate of US$1.25/gallon. We expect
Edmonton spreads to average US 66Â¢/gallon in Q3 2012, while our previous estimate was $1.04/gallon."
MacFarlane acknowledges that drilling and developing liquids-rich gas is more expensive, but says it is still more profitable than dry gas. "With NGL-rich gas you get more costs because of processing, fractionating and transporting, but you still net three times more. You could get down to a low enough level where operators start cutting back, but we are not there yet. It keeps everyone in the money."
Last week, however, Enterprise Products Partners disclosed plans to build one of the world's largest propane dehydrogenation (PDH) units on the Texas Gulf Coast, with the capacity to consume up to 35,000 barrels per day of propane to produce polymer grade propylene (PGP), a key petrochemical intermediate product used in the manufacture of packaging material. The PDH facility would integrate with Enterprise's existing NGLs and propylene facilities in the Mont Belvieu area.
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