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Introduction

This study complements the Baker Institute’s “LNG Exports: Truth and Consequence,” highlighting a major “consequence”: The buildup of US gas production will promote a parallel sustained expansion of Natural Gas Liquids (NGL) output. For even dry gas, i.e. gas output containing minimal NGLs, will produce some liquids. As cats meow and dogs bark, increased gas production, based on the Shale Gas Revolution, will also result in an enormous buildup in NGLs – ethane, Liquefied Petroleum Gas (LPG also known as propane, butane/iso-butane) and condensate. We believe this surge of incremental NGL cannot be fully absorbed in the US market and that a NGL structural supply overhang in the US will provide a Yin, to Asia Pacific’s attempt to lessen its structural dependence on Mideast supply, a complementary Yang.

This sustained NGL increase will impact many sectors, most notably petrochemicals, industry and transport, while converting the US into a NGL export powerhouse. Under current US Federal regulation, the export of crude oil is prohibited and the sale of gas abroad, in the form of LNG, is allowed under permit and with conditions. Other than the contentious issue of condensate, NGLs, like petroleum products, can be freely exported with minimal government review. We will focus on the problems and opportunities facing the US through 2020, due to this NGL drive.

What has been surprising over the course of 2012 is how little attention the trend has attracted – particularly by those, such as the US Department of Energy (DOE), who have the responsibility of tracking changes. DOE released two LNG studies in 2012, the latest in December by NERA Economic Consulting, looking at the broader economic impacts of LNG exports. The NERA Report did not even list NGL in this study’s glossary.

We expect the buildup in LNG exports to sustain longer-term shale gas development, but NGL production has already begun to balloon. The DOE’s Energy Information Agency provisional 2012 figures showed gas production up 7.4% from 2011’s 65,853.02 MM CFD level. It should be noted that sales abroad of propane, butane and condensate will continue to grow, this before the first LNG export cargo departs.

NGL terminology is confusing; to further complicate the topic, American usage often differs from international norms. Ethane (C2 by the number of carbon molecules in this hydrocarbon) is not considered a NGL in many markets, particularly in Asia Pacific, in part because it can be burned just as easily as methane (C1), or what is known as natural gas. The US DOE does not track all condensate output, only condensate separated (i.e. stripped) in gas processing. This plant condensate, known in the US as “Natural Gasoline,” an archaic term abandoned long ago elsewhere, usually makes up half or less of total condensate output. Field condensate, precipitating, or falling out of gas streams naturally at wellhead, is normally pushed back into black oil production and accounted crude and so banned from export. The latter makes up most output in condensate exporters as Qatar.

In early 2013, there were 20 LNG export proposals pending. How soon they will be built and how quickly they will reach full working capacity, will be shaped by a number of variables. We expect the NERA study, which concluded only a minimal rise in domestic gas prices due to LNG exports, will break the deadlock in LNG project permitting. Tudor, Pickering and Holt in 2012 forecast 5-6 BN CFD in LNG exports by 2020-2025. APEC’s basic LNG outlook is for 8 BN CFD of LNG exports, about 60 MM MTA, at least test-running by 2020-2022. This implies wellhead output of up to 67.4BN CFD once gas is cleaned and NGLs stripped, producing a sustained rise in NGL production.

While many treat LNG exports as a completely separate issue from NGLs, gas production goes hand-in-hand with NGL output. We will only summarize rising gas consumption, but assume the domestic market’s gas needs will support a sustained rise in NGL output. Gas used in power generation will continue to rise from a record high of 25.1 BN CFD in 2012 to 29 BN CFD by 2017 and account for 32% of power generation fuel, according to consultants Bentek. This will provide demand to prompt further project expansion.

The Shale Revolution will continue to unfold, and with careful establishment of guidelines on field operations, fracking will continue to unlock the potential of Marcellus/Utica shale, despite it being located in the densely populated Northeast US. Shale development on the US West Coast (defined under federal energy definition as PADD-5) will likely only occur post-2020. It will take some time before green opposition is persuaded, but the Shale Gas Revolution is here to stay.

A different objection comes from opposition to LNG exports. There have been concerns raised – and addressed directly by the NERA study – that exports would cause domestic gas and NGL supply to become too expensive for home use. Putting aside as to how legislation could compel companies to invest in unprofitable projects, this ignores analysis showing that optimum exports will be dictated by prices, with rising US gas prices eroding export competitiveness.

Industrial lobbying group “America’s Energy Advantage,” led by Dow Chemical chairman George Biltz, argued against exports, claiming that while US markets are free, their pricing is tied to global oil prices and they are “set by cartels in a non-transparent way.” Unexplained is how then gas consumers were clever enough to detect this cartel’s actions through opaque pricing of oil.

A major focus, the view of NGLs inside the US market, is very different from a world view, not only Western markets. Different pricing systems for gas and NGLs outside the US can offer a significant incentive for American shale NGL producers to mount a far more substantial export drive. By mid-2012, it became clear that a structural oversupply of shale-derived NGLs would keep prices for these products soft for the medium term. NGL exports – parallel and complementing LNG sales – will be a basic support for continued NGL development. Without regular and growing exports, domestic NGL demand will tend to lag incremental supply for the foreseeable future.

We believe that the now decades-old US crude export ban has warped American producers’ worldview, turning their marketing outlook inward. Even as this tidal wave of NGL output gathers, most US producers remain generally unaware of the emerging opportunities beyond American shores. We hope this study reveals some of the possible new directions in US NGLs and their future use in world markets.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.