The price of crude oil is so tightly woven into the economics of natural gas that if the ability to export crude is denied, the NGL market could eventually suffer a significant hit as well, an energy consulting service forecasts.

Maintaining the ban on exports will drive the price of a barrel of benchmark West Texas Intermediate oil below $80 a barrel (bbl) by 2020, applying particularly significant pressure on operations in the Niobrara Shale, Anadarko Basin and the Rockies.

The NGL market would experience a more substantial impact than crude on a percentage basis, predicts Bernadette Johnson, director, research and analytics at Denver-based Ponderosa Advisors LLC. That’s because most natural gas is produced as a byproduct of crude oil production.

“Since 2011, we’ve seen a steady increase in the percentage of gas coming from oily areas as gas producers have migrated from dry areas as a result of the low natural gas prices,” Johnson told attendees at the recent Platts NGLs Conference in Houston. “In 2011, the percentage was 53%; in 2020, we expect it to be 68%.”

Discount for light

With continued growth anticipated from the Permian Basin, Eagle Ford and Bakken Shale, the supply side would appear to be set. The demand side brings its own complications.

The first is quality. The lighter crude produced in the major shale plays is no longer a natural fit for refiners, Johnson said. That’s because they spent billions retooling to handle heavier imported crudes from Mexico and Venezuela before the shale boom suddenly changed the rules of the game.

“If a refinery can take heavies, it can also take lights,” Johnson said, but the economics make it less palatable. “When you put light crude through a refinery, you get less high-value refined products. They will take your light crude, but they’ll give you a discount for it. Those discounts that I’m seeing on the Gulf Coast are $10.”

That’s just the reality of how light works. The second reality is quantity. Johnson’s expectations for increasing oil production are:

  • Eagle Ford: From 1.5 million barrels per day (MMbbl/d) now to 3.9 MMbbl/d in 2020;
  • Permian Basin: From 1.7 MMbbl/d now to 2.9 MMbbl/d in 2020; and
  • Bakken: 1.2 MMbbl/d now to 1.8 MMbbl/d in 2020.

“Now, the question is,” she asked. “Will all this crude find a home?”

Magic number

The magic number in domestic production is 12 MMbbl/d. That’s because, even though U.S. refining’s nameplate capacity is 18 MMbbl/d, much of that is reserved for Canadian heavy crudes and oil imported by foreign companies that own part of the U.S. refining complex.

The magic number will be reached by late 2016 or early 2017, Ponderosa predicts, meaning that by 2020, there could be as much as 2 MMbbl/d of crude oil with nowhere to go.

“Prices will have to decrease to push out remaining imports,” Johnson said. “So between now and 12 MMbbl/d, prices have to compete to push out imports. Once you get to that 12 MMbbl/d mark, then it’s domestic crude competing with domestic crude to push out marginal drilling.”

Johnson’s analysis shows Brent priced at $100 by 2020, and WTI at $78. That is her “constrained” scenario, in which there is too much oil on the U.S. market to sustain global market prices because of the ban on exports. Long-term prices for gas, now hovering around $4, will remain in the $4 to $6 range.

‘Unconstrained’ scenario

Of course, Johnson has also developed an “unconstrained” scenario, in which the ban is lifted and U.S. crude oil can be exported. In this case, WTI still experiences a price discount but it is not as severe: $87/bbl by 2020.

“The type of barrels that we expect to send out are 42˚ API to 50˚ API, and 50˚-plus, and those barrels are much lighter than the global refineries can currently handle,” she said. “So again, it’s a question of economics. They’ll take our lighter crude, but there’s a discount associated with it and that’s what’s driving the $13 quality discount.”

The cost of the ban to gas production by 2020 will be 4.7 billion cubic feet per day; the cost to NGL production will be 300,000 bbl/d, in spite of significant structural demand coming online in the form of LNG facilities, GTL plants, methanol plants and fertilizer plants.

Exports will continue to rise for ethane and propane, but production for both will lag behind what could have been produced if crude oil had been allowed to be sold abroad.