"The worry on NGL realizations is real as the focus on higher margin production has driven exploration and production companies toward higher liquids rich drilling," analysts George O'Leary and Dave Pursell said. "A couple of years ago realizations were 65% of West Texas Intermediate [crude] and now realizations range from 38% to 46%."
Across the US, the bank now believes NGLs will trade at 40% of WTI prices, the analysts said Monday.
A big reason behind this price drop isn't just that more NGLs are coming to market, the Houston-based analysts said, but the compositions of a barrel of NGLs has gotten lighter, with more ethane and slightly less propane, butane, and natural gasoline.
"At first glance, these might appear to be minor changes," the analysts said.
But "they're not" because lighter ethane only trades at 30% of the price of crude oil whereas the heavier propane and butanes trade at 60% and 70% of the price of crude, TPH said.
The amount of ethane in a barrel of NGLs keeps growing because of better fractionation, TPH said, but demand from the petrochemical industry -- ethane is used in plastics manufacturing -- has remained modest.
US producers delivered an average of 820,000 b/d of ethane to the market, which uses 815,000 b/d when operating at 85% capacity, they said, adding: "Cracking capacity looks tight."
But with all the liquids-rich drilling planned, NGL production will grow another 130,000 b/d in 2010 and 2011, and assuming 50% of that NGL production is ethane, the market will be flooded, TPH said. Producers will turn to ethane rejection -- mixing the ethane back into their natural gas flows to get some return there, TPH said.
Already the US produces more propane than is required domestically, in 2010 the US became a net exporter of propane, shipping it elsewhere in the globe, the analysts said.
"We just don't see a bullish case for NGLs," TPH said. "Belief in NGL demand growth or pricing strength is essentially a bullish bet on future US GDP growth."
"How low can it go?" they asked. "If ethane prices collapse and fall to parity with gas (assuming $4/Mcf gas), ethane prices would be 27 cents/gallon" compared with the current 50 cents/gallon, they said, that low being intertwined with natural gas prices: the higher the gas price, the more ethane
is worth as a "gas" than as a liquid.
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