CERI's NGL outlook: market will struggle

Production of gas and liquids has increased significantly in the past five years as production has shifted from conventional resources to unconventional resources, but production could be even greater except for delays in midstream infrastructure build out.

This new production isn't just providing vast increases in resources in North America, it is doing so in regions that have not traditionally been hotbeds for gas and liquids. Consequently, the need for new infrastructure is even greater as there isn't much for the midstream to work with in many shale plays.

In its Natural Gas Liquids In North America: Overview And Outlook To 2035, the Canadian Energy Research Institute (CERI) stated that although new wells can be brought online in a few weeks, infrastructure can take anywhere from one to three years to build.

The report stated that such construction delays have hampered production out of liquids-rich plays such as the Marcellus and Bakken. "The midstream business is playing catch-up to add sufficient gas processing plants, Natural Gas Liquids (NGL) pipelines and fractionation facilities to keep up with liquids-rich gas additions," Carlos A. Murillo, the report's author said.

He added that ethane and propane production is forecasted at high enough levels to warrant the continued expansion and construction of new ethane crackers, propane export facilities and fractionation units throughout North America.

According to the report, ethane production out of PADD I on the East Coast will reach as much as 150,000 barrels (bbl.) per day of ethane by 2015. This production will eventually grow to more than 250,000 bbl. per day in order to support the Mariner West export pipeline to Canada, pipelines to the Gulf Coast and at least one world-scale ethane cracker.

Propane growth out of the East Coast isn't expected to grow at such a rapid pace as ethane, but CERI anticipates production to increase to 82,000 bbl. per day by 2015 and 143,000 bbl. per day by 2035. These supplies are expected to displace imports and volumes transported to the region from PADD II (Midwest) and PADD III (Gulf Coast) and won't require new infrastructure to be built in the region.

Like the Marcellus, the Bakken shale is also experiencing rapid liquids production growth with the play expected to grow from 160,000 bbl. per day to 216,000 bbl. per day during this forecast period as associated gas from the play's oil production. After this peak, this ethane production will begin a slow decline.

However, the Midwest market does not have the ethane demand nor the transportation capacity of the Northeast market. This situation is further exacerbated by the fact that the region is home to the Aux Sable Channahon facility, which extracts NGLs from the Alliance Pipeline out of Canada.

On the propane side, the Midwest is a huge market for the product during the winter, when it peaks at approximately 600,000 bbl. per day before dropping below 200,000 bbl. per day in the summer. The market is seasonally balanced through a combination of Canadian imports and transfers from PADD IV (Rockies) and PADD III.

"At this time, the increased PADD II supply plus transfers received from PADD IV exceed available pipeline capacity from PADD II to the Gulf Coast. Until pipeline expansions currently under development are complete, the Conway area is facing a supply glut with heavily discounted ethane and propane prices when compared with Mont Belvieu, Texas. Pricing pressures are expected to ease by 2014 after completion of the various pipeline developments," the report said.

PADD III has been best able to handle the change in the North American NGL market, as the Gulf Coast has been able to absorb not just its own increased production, but also supplies throughout the continent. However, the market has reached an oversupply situation. In the past five years, PADD III has expanded its ethane supply by 197,000 bbl. per day to 872,000 bbl. per day in 2011.

"These supplies have been absorbed by preferentially cracking eth¬ane over heavier hydrocarbons and retrofitting of heavier hydrocarbon crackers to run on ethane. The combination of transfers of excess eth¬ane from PADDs I, II, and IV along with growth in local supply are ex-pected to increase total available supply to 1.145 million bbl. per day by 2017, representing a 256,000 bbl. per day increase in available ethane," according to the report.

This increase in available ethane will not be able to be absorbed in the market until 2017 when new ethane cracking capacity is brought online. "In the meantime, surplus ethane has depressed prices to the point that ethane is being re-injected to reduce supply to meet available demand. Ethane prices are expected to recover as this incremental cracking capacity comes on line," Murillo said.

The Gulf Coast is also experiencing a surplus in propane supplies, as demand has remained stable while production has increased and created the need for additional export capacity out of the region. Since 2007, propane exports have increased from 32,000 bbl. per day to 110,000 bbl. per day in 2011. In 2012, propane exports out of the Gulf Coast have increased to 160,000 bbl. per day, which is at or near physical export capacity.

Once the midstream has caught up to the increase in NGL production, the report forecasted a market that will experience consistent ups and downs throughout the early portion of this outlook. However, once this infrastructure is brought online it is expected that the North American NGL market will be able to reap the full benefits of its vast resource base.