The production of natural gas liquids (NGL) in the Permian Basin in West Texas and southeast New Mexico is likely to be constrained though 2012, but pipeline projects should help relieve some of the bottlenecks by 2013, according to Wells Fargo Securities’ “NGL Snapshot” report that was released in July 2011.

During the past several months, plans for NGL pipeline expansion projects in the Permian Basin -- one of the largest and most prolific oil and natural gas producing regions in the United States -- have been announced. DCP Midstream's Sandhills Pipeline and ETP's and RGNC's Lone Star NGL Pipeline have a total proposed capacity of 240,000 barrels per day (MBbls/d).

Based on plans for new pipeline construction, the Wells Fargo report determined that Permian NGL production has the potential to increase to a range of 570-790 MBbls/d by 2016, from a current level of 450 MBbls/d.

“Assuming the proposed pipeline projects are completed, the Permian Basin is likely to become largely debottlenecked by 2013 from an NGL standpoint,” said Michael Blum, Wells Fargo senior analyst. However, Blum said, takeaway capacity could become constrained by late 2016, and even as soon as third-quarter 2014, under a high-growth scenario.

Other than the Sandhills and Lone Star projects, no additional pipelines are expected to be built in the near future to deliver NGLs out of the Permian Basin, Blum said, noting that the industry should be able to absorb such an impact.

“Incremental production could likely be addressed with more economic expansions of existing and proposed pipelines, in our view,” he said. “Notably, both DCP’s Sandhills and ETP/RGNC’s Lone Star NGL pipelines can be readily expandable with pumps if there is sufficient interest from customers. Assuming capacity on both pipelines is increased by 50%, NGL takeaway capacity out of the Permian Basin should be sufficient to handle growth in supply during the next five years, even under our high-growth case scenario.”

And the analyst anticipates significant processing-capacity expansion in the basin. Under Wells Fargo’s base-case scenario, an additional 1.2 billion cubic feet per day (Bcf/d) of processing capacity will need to be constructed during the next five years. Alternatively, under a high-case scenario, an additional 2.1 Bcf/d of processing capacity would be needed.

Other highlights of the NGL Snapshop include:

NGL Market Overview: The composite price for a barrel of natural gas liquids declined 2.6% in June to $1.41 per gallon, down from $1.45 per gallon in May. West Texas Intermediate decreased 4.9% in June to $96.17 per barrel, down 4.9% from May’s $101.14 mark. As a result, the NGL-to-crude oil ratio increased to 62% in June, up from 60% in May.

The processing and keep-whole margin decreased 5.3% in June to $1.02 per gallon, down from $1.08 per gallon in May. The decrease is attributed to a combination of lower NGL prices and a 6% increase in the price of natural gas.

NGL Supply Rises, Production Levels Off: Total U.S. NGL supply averaged 3,098 MBbls/d in April 2011, according to the latest figures from the Energy Information Administration (EIA). That’s a 5.5% increase from April 2010 levels. NGLs sourced through the processing of natural gas continued near record levels in April 2011, as producers concentrate drilling efforts in regions rich in NGLs.

Production from U.S. processing plants averaged 2,157 MBbls/d in April 2011, a figure that is essentially unchanged from 2,168 MBbls/d in March 2011. April’s average production from NGL processing plants was up 8.9% from the 2010 average but down 0.5% from March 2010, the month that set an all-time record for domestic NGL production.

From August 2010 through April 2011, NGL production from processing plants has remained greater than 2,000 MBbls/d.

Higher Demand For Gasoline Blending: According to the EIA, NGL demand in the U.S. averaged 2,744 MBbls/d in April 2011, a 15.7% increase from April 2010. NGL demand from gasoline blending increased 44% to 655 MBbls/d in April 2011 vs. 455 MBbls/d in April 2010. In addition, petrochemical demand jumped 5.4% from April 2010 (1,245 MBbls/d) to April 2011 (1,312 MBbls/d).

Record Demand For Light Feeds: Petrochemical demand for light feeds (ethane, propane, butane) remains at record levels, according to Wells Fargo. The ratio of light feedstock as a percentage of the overall cracker feed slate increased to 85.4% in June 2011, compared with 84.7% in May.

“A number of petrochemical companies have retooled facilities to accept additional NGL feedstock given the relative cost advantage,” Blum said. “Anecdotally, we have heard that additional heavy- to light-feed capacity conversions and expansions could take place that could increase ethane demand by more than 200,000 barrels a day. In addition, several petrochemical companies, including Dow and ConocoPhillips, have noted the possibility of constructing a world-scale ethylene plant in the Gulf Coast.”

Contact the author, Mike Madere, at mmadere@hartenergy.com.

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