CERA: NGL Market Must Be Rebalanced

In anticipation of the release of its North American NGL study next month, IHS CERA held a webinar, “Rebalancing NGLs in an Unconventional North America,” to discuss several findings of the study. Much of the report will focus on how the marketplace is expected to handle increased volumes from liquids-rich shale plays.

Frank Nieto, Editor, Midstream Monitor

In anticipation of the release of its North American NGL study next month, IHS CERA held a webinar, “Rebalancing NGLs in an Unconventional North America,” to discuss several findings of the study. Much of the report will focus on how the marketplace is expected to handle increased volumes from liquids-rich shale plays.

“An NGL market with a surplus of NGLs may face a challenge of finding markets if the traditional markets get oversaturated. For users of NGLs, there is an opportunity to optimize returns, but with this are tough capital expenditure decisions,” Ken Fung, the company’s associate director, North American Gas, said.

He noted that while areas such as the Bakken and Marcellus shales represent tremendous opportunities, realizing this potential might be difficult due to the lack of infrastructure in those regions.

It is easy to understand why midstream players have been playing catch-up to production in some regions that haven’t traditionally been hotbeds for natural gas or liquids production. In five years, North America has gone from being short on natural gas supplies to the current state of being oversaturated due to the evolution of horizontal drilling and hydraulic fracturing that unlocked the potential of many shale plays.

“Very quickly from 2007 to the present, the lower 48 states grew production by over 20%. This is over 10 billion cubic feet per day of incremental supply, mostly attributed to production from shale plays,” Fung said. There is a similar increase in production for NGLs, which have grown 12%, or 200,000 barrels per day, in the same time period.

Although production of gas and liquids are booming in the United States, the opposite is true of Canadian production. Despite such unconventional plays as the Montney shale in British Columbia, Canada is being forced to offset the decline in conventional gas basins.

Fung said that one of the early findings of the report is that three plays -- the Marcellus, the Eagle Ford and the Montney -- will be the main drivers for NGL production during the next decade.

“Older players such as the Barnett and emerging plays such as the Granite Wash will contribute to overall growth, but not at the magnitude of these three plays,” he said.

While various analysts anticipate that increased focus on liquids-rich plays over dry-gas plays will help to balance the natural gas market, William Veno, senior director at IHS CERA, said that there will need to be more done to rebalance the market.

“There needs to be adjustments in production, demand and prices to reconcile excess supply while creating additional demand,” he said. The most likely sector that will be able to take on more supply through increased demand is the petrochemical industry, according to the company.

Demand from the U.S. petrochemical industry has quickly climbed in the past year, but greater ethane cracking capacity will be needed to foster demand growth. The company noted that this capacity is expected to increase substantially by 2020 with demand up to one-third higher.

Although ethylene demand will continue to grow in North America with increased cracking capacity, IHS CERA noted that polyethylene consumption will not keep pace with it due to a manufacturing trend toward biodegradable and smaller packaging.

While the greatest petrochemical demand in North America is found in the Gulf Coast, much of the NGLs will be produced from other regions aside from the Eagle Ford. This means that transportation solutions, both to the Gulf Coast as well as to Canada, are also necessary to rebalance the market.

“Essentially there is an important role for transportation in the future for gas liquids, and it’s a critical one,” Veno said.

Contact the author, Frank Nieto, at fnieto@hartenergy.com.