The Fuse

NGLs to Temper Demand Growth in Petrochemical and Refined Product Markets

by Matt Piotrowski | April 21, 2017

In the day-to-day commentary of oil market coverage, the main focus is typically on crude futures prices, production levels—whether in the shale patch or in OPEC countries—or what consumers are paying at the pump. But over the years, the hydrocarbon mix has seen major shifts beyond crude and the key products, with a surge of natural gas liquids (NGLs) production which is poised to endure and complicate market balances moving forward. Expect this growth to occur particularly in the U.S. and key Mideast OPEC producers.

NGLs will continue to grow from two main sources—they are derived from U.S. shale oil and gas, and Middle East Gulf countries plan to significantly increase gas production. This growth has the potential to help moderate global oil prices for some time since NGLs compete with refined products, but their effect will be limited since they are not a substitution for key transportation fuels, such as gasoline, diesel, and jet fuel. NGLs will play a bigger role in offsetting crude to meet demand growth for petrochemicals and other industrial activity.

“NGLs do not compete for exactly the same markets as crude, but they do serve as a supplement and competition in the refined product balance.”

“NGLs do not compete for exactly the same markets as crude, but they do serve as a supplement and competition in the refined product balance,” John Auers of refining consultancy Turner, Mason, & Co. told The Fuse.

In the U.S. alone, NGL output has doubled since 2011 to about 3.5 million barrels per day (mbd), fueled by the shale oil and gas revolution. OPEC, which produces some 32-33 mbd of crude, has roughly 6.6 mbd of NGL supply, which is not subject to country quotas when determining production curbs. From 2016-22, the cartel’s NGL output is estimated to rise by 340,000 barrels per day (b/d), partially offsetting cuts in crude the cartel makes. Since 2009, OPEC NGL production has surged by 36 percent, totaling 1.7 mbd, though from 2013-16, the pace slowed to about 10 percent. That was, however, still above the 6.5 percent rise in annual crude output from 30.6 mbd to 32.6 mbd.

ngls

Since 2009, OPEC NGL production has surged by 36 percent, totaling 1.7 mbd.

Overall, in the next five years, according to the International Energy Agency (IEA), NGLs are expected to grow by more than 1.2 mbd (see below), making up about a quarter of total liquids capacity growth and helping to meet 16 percent of global demand increases. Still, despite their importance, NGLs make up only about 13 percent of the world oil market, making the cuts in long-term conventional projects all the more worrisome.

nglsiea

NGL markets are complicated because their definitions overlap with other hydrocarbons and they can either be formulated into refined products or derived from field extraction of natural gas and oil. NGLs, which are fed into fractionators to separate the different components, can be broken down into the following categories: Ethane, propane, butane, isobutane, and pentane. Each is similar, but they serve a variety of overlapping purposes. Propane is a key heating fuel in the U.S. Midwest and a big export market, but can also be a petchem feedstock. Ethane and butane are also petchem feedstocks, but butane is primarily blended into gasoline. Isobutane works as a refinery and petchem feedstock, while pentanes are typically mixed into gasoline.

The EIA sees NGL supply expanding by 270,000 b/d this year (versus +136,000 b/d growth in 2016) and another 420,000 b/d in 2018 to rise above 4.1 mbd.

One of the key drivers of higher NGLs is a lighter crude slate in the U.S., meaning supply levels will be closely tied to shale production growth. The higher the API of the crude, the NGLs are produced during extraction and processing. NGL output grew modestly in 2016 amid crude production declines, but volumes are set to rise at a sharper pace this year as drilling activity picks up and new export and petchem facilities come online. The EIA sees NGL supply expanding by 270,000 b/d this year (versus +136,000 b/d growth in 2016) and another 420,000 b/d in 2018 to rise above 4.1 mbd. Ethane is the biggest supply source of NGLs at close to 1.5 mbd, while propane exports reached a record of 1 mbd in February, a new record, and up from about 72,000 b/d earlier this decade.

US NGL

In addition to NGLs coming from shale oil and gas plays, they are also refined products, but only make up about 2-5 percent of total U.S. downstream output and therefore are dwarfed by the supply from processing plants. Refiners tweak their yields to produce more butane and pentanes in the summer to help gasoline meet specifications requirements, but cut back in winter months.

Condensates are different

There’s also condensate, which should not be confused with NGLs. Condensate is an ultra-light oil that is mostly a gas beneath the ground but can be converted into a liquid and blended into crude streams. Therefore, it is included in crude production in EIA data, even though some analysts say it’s closer to a refined product than crude. Any oil above 45 API gravity is considered a condensate. Condensates received critical attention before the crude oil export ban was lifted in late 2015. The Commerce Department allowed shipments of condensates prior to the liberalization of exports as production exploded, thanks to high output in shale plays such as the Eagle Ford. Iran, when it was under international sanctions, got around its limit on crude exports by selling more condensates to its customers.

OPEC’s NGL challenge

While it appears that OPEC members are set to continue their strategy to restrain crude output by 1.2 mbd throughout the second part of 2017, NGL production growth is an often-overlooked part of the global supply story. NGLs among OPEC countries should rise by about 170,000 b/d this year, obfuscating the cut’s impact on global fundamentals. The biggest growers will be the Saudis, Angola, and Iran. This pulls some 6.6 mbd of the cartel’s production out of production restraints. Although OPEC’s NGL output will grow in the coming years, the global market can’t rely on sustained high increases. For instance, the IEA says growth will be only 4,000 b/d in 2022. By contrast, U.S. NGLs are set to soar through 2030, rising by 35 percent, or a total 1.2 mbd.

NGLs among OPEC countries should rise by about 170,000 b/d this year, obfuscating the cut’s impact on global fundamentals.

Another important detail is that despite the massive growth seen in NGLs, a key source of supply for petchems, a global oil supply gap could still form early next decade, the IEA warns, as a result of the lack of investment in conventional crude projects. Petchem demand is set to rise by 2.4 mbd over the next five years, which means NGLs can meet only half that. Nonetheless, NGLs have provided a big market cushion throughout this decade, thanks in large part to the rapid increases in shale oil and gas, and will remain a key contributor to supply growth.

 

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