RE: NGL prices CERI Report Forecasts Long-Term Growth In NGL Supply
By Elsie Ross
![[Figure 1]](https://www.oilandgasinquirer.com/article.asp?article=magazine%2F120905%2FMAG2012%5FS5000000%2Ejpg)
Despite declining gas production in Western Canada, a number of recent developments could potentially increase natural gas liquids volumes in North America by 2035, says a new study by the Canadian Energy Research Institute.
"Whether these opportunities will be acted upon and realized will be dependent on various investments which will be required to process, transport, and market the NGLs," according to Natural Gas Liquids in North America: Overview and Outlook to 2035, CERI's first NGL assessment in more than a decade.
Natural gas liquids include ethane, propane, butanes and pentanes plus and have a number of sources including natural gas processing plants, crude oil refineries and oilsands upgraders. They are used as feedstock in the manufacturing of petrochemicals, fuel and heating and are essential to oilsands operations and crude oil refineries.
Total Canadian NGL production including natural gas plants (the primary source) and refineries (secondary) averaged 732,000 bbls per day between 2000 and 2010, averaging 681,000 bbls per day in 2010. The study estimates total liquids production to average 564,000 bbls per day this year, reaching a low of 498,000 bbls per day in 2014 and then steadily increasing to 790,000 bbls per day by 2035 as natural gas production volumes recover in the long-term.
The primary goal of the study authored by Carlos Murillo is to "make sense" of all the changing market dynamics and developments that surround the supply and demand of natural gas liquids in North America, while providing an outlook for NGL supply and demand to 2035, says CERI.
The report points to advances in crude oil and natural gas stimulation, completion and production techniques that are resulting in a substantial growth in NGL supply in North America. In some cases, traditional demand or market areas for NGLs have the potential to bring on substantial supply volumes making them self sufficient, it says.
Further, the development of a wide price differential between high crude oil (global) prices and low natural gas (local) prices, which is expected to continue over the long term, has created incentives for producers to monetize NGLs, whose prices tend to follow oil prices but for which the feedstock price is that of natural gas, according to the report.
While until recently Alberta petrochemical producers were concerned about a shortage of ethane feedstock for ethylene crackers or petrochemical plants, the CERI report suggests that at some point ethane supply could exceed demand, which could encourage the development of new petrochemical projects in Alberta. Potential new sources of ethane include oilsands offgases, the liquids-rich Montney play in British Columbia and associated gas from the Bakken shale oil play in North Dakota.
"Definitely on the feedstock side there would be room for a fourth ethylene cracker eight to 10 years from now," Peter Howard, CERI president and chief executive officer, said in an interview. However, there's no guarantee that will occur as it would depend on the demand for ethylene at that time, he added.
With the growing demand for natural gas in Alberta for industrial uses, gas exports have declined, reducing volumes at export straddle plants. Ethane supply has declined by 13 per cent to about 221,000 bbls per day in 2011 from a peak of 253,000 bbls per day in 2004, which indicates a continued shortfall in the ethane supply in Alberta, says the study.
CERI estimates petrochemical facilities in Alberta owned by Dow Chemical Canada ULC and NOVA Chemical Corporation have the capacity to process up to 257,000 bbls per day of ethane with smaller volumes used for miscible flood purposes (enhanced oil recovery) in Alberta. At present, domestic consumption is limited by available supply.
In 2007, the Alberta government introduced its Incremental Ethane Extraction Policy in order to encourage increased production of ethane from natural gas and other unconventional sources such as oilsands offgases. Seven projects have already been approved with an estimated additional 33,000 bbls per day of ethane. Another 10 projects are in the application stage or pending approval, which would add another 64,000 bbls per day of ethane for total incremental volumes of 97,000 bbls per day -- more than enough for a new world-scale ethylene cracker in Alberta, the report says.
Another potential source of incremental ethane -- along with other NGLs -- is synthetic gas liquids (SGL) extraction from oilsands upgrader offgases.
"As oilsands operations continue to grow and crude bitumen continues to be upgraded to synthetic crude oil in Alberta, upgrader offgases have the potential to become a significant source of liquids in the future," according to the report. Synthetic gas liquids include the combination of both paraffinic (ethane, propanes and butanes) as well as olefinic (ethylene, propylene and butylene) liquids. The composition of the offgases will depend on the type of upgrading process -- coking, catalytic cracking and hydro-cracking, it notes.
CERI's analysis indicates that by the earlier part of the next decade as much as 170,000 bbls per day of SGLs will be available on the oilsands upgrader offgases stream. This mix is expected to be about a 50/50 split between an ethane/ ethylene mix (C2/C2+) and a propane plus (C3+) mix that includes propane, propylene, butanes and butylene, as well as olefinic condensate.
The analysis also indicates that about 60 per cent of these potential SGLs will be entrained in the offgases produced in the Athabasca area, while the remainder will be produced by upgraders in the Industrial Heartland north of Edmonton.
The CERI study cites Energy Resources Conservation Board data that indicates that in 2011 Williams Energy Canada produced about 12,000 bbls per day of a SGL mix from an average 87 mmcf per day of process gas from its recovery plant at the Suncor Energy Inc. upgrader at Fort McMurray.
Williams currently produces about 15,000 bbls per day of a propane plus mix and has estimated that it could extract up to 10,000 bbls per day of ethane or ethylene at current levels of offgas intake.
When natural gas prices were high it made economic sense to burn the offgases because as far as the oilsands operators were concerned it was almost free energy, said Howard. However, at today's natural gas prices of about $2 per mcf those offgases actually have value in the liquids that makes it worthwhile to recover them. "We are just at the front end of that recovery but I think you may see more of that happening, especially if gas prices stay low."
The growing focus on liquids-rich gas plays in Western Canada also will provide additional sources of ethane, he said. At the Empress straddle plants that extract ethane from gas flowing past on the TransCanada Corporation mainline, operators are noticing an increase in ethane volumes despite reduced gas volumes overall.
"We are starting to see the leading edge of the drilling in the last 24 months in the liquids plays," Howard noted.
Another emerging source of ethane is from Saskatchewan and North Dakota. The Canadian leg of the Vantage pipeline has received National Energy Board approval for an initial 40,000 bbls per day, expandable to 70,000 bbls per day, of ethane (DOB, Jan. 20, 2012). With the new source of ethane, NOVA is planning a third polyethylene plant at Joffre, Alberta, to match its existing three ethylene crackers.
In oilsands mining operations, CERI estimates that for every bbl processed in an upgrader, about 0.5 mcf of process (offgas) is produced. With a rise in SCO production to 863,000 bbls per day in 2011 from 654,000 bbls per day in 2008, offgas production has increased to 445 mmcf per day from 354 mmcf per day, respectively.
Of the 445 mmcf per day of offgas production in 2011, about 356 mmcf per day (80 per cent) represents an opportunity for SGL extraction, says CERI. Assuming a ratio of 250 bbls of liquids per mmcf and no efficiency constraints, the current offgas production could potentially provide an additional 111,000 bbls per day of liquids. That volume is equivalent to the pentanes plus produced by gas plants and fractionators in Alberta in 2011, the study notes.
In 2011, about 20 per cent (89 mmcf per day) of the produced offgas was sent to two offgas processing and liquids extraction plants (Williams and Aux Sable, which processes gas from the Shell Canada upgrader at Scotford). About 70 per cent was used to run the oilsands plants' operations while the remaining 10 per cent was used for the upgrading process itself or flared.
While propane supplies have also declined in recent years to about 275,000 bbls per day in 2009, the rate of decline has been slower than that of ethane because a larger proportion of total production is extracted at field plants. Producers also have upgraded field facilities to extract a growing share of the propane, motivated by the strong spread between the values of propane in the gas stream compared with propane itself, says the study.
Although propane is exported to the United States, mainly in winter, for heating purposes, exports have declined significantly for the past three years, indicating the reduced supply available in Canada.
The CERI outlook indicates that supply will exceed amounts required by local markets and there will be increased opportunities for exports over the forecast period. Kinder Morgan Canada, though, is proposing to reverse the flow on the Cochin pipeline which has historically been used to export propane. This has implications for producers in Western Canada as those markets previously served by pipeline will now need to be served via rail or truck, which will be more costly and will tend to widen the basis differential, squeezing Alberta propane prices, says the study.
Propane demand in Alberta also has the potential to grow in the long run as new oilsands production projects consider the use of solvents such as propane and butane for in situ operations, Additionally, some oilfield service companies also are looking at the use of LPGs (propanes/butanes) in fracturing oil and gas wells as a substitute for fluids, according to the study. "These new demand sources create opportunities for LPGs producers in Canada," says CERI.
Canadian butane production has remained relatively stable at about 130,000 bbls per day, declining slightly. Gas plants account for about 77 per cent of production with refinery production stable at about 30,000 bbls per day with imports increasing in the last couple of years.
Increasing demand for butanes driven by its use as an oilsands solvent will keep the local market tight for the next few years, and by 2018 it is anticipated that imports of butanes would be required, said Howard. Alternatively, more NGL mix could make its way to the fractionators in the Edmonton/Fort Saskatchewan area, thus increasing the supplies of spec butanes, or field plants could increase extraction efficiencies.
"In the case that imports become the norm, it is possible for butanes to get a price premium over current prices," the study concludes.
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