Frac Spread: Off The Beaten Path And Beaten Down

It’s not just the U.S. presidential election that has strayed from the path of predictability—energy commodity prices have as well.

The shale boom wreaked havoc on the formerly reliable NGL-to-crude ratio, Kelly Van Hull of RBN Energy LLC wrote this week, a phenomenon that could ultimately cut into margins at the petrochemical crackers now under construction.

RBN defines the ratio as the weighted average of Mont Belvieu NGL prices divided by CME/Nymex front-month crude oil futures prices. RBN’s NGL mix is 42% ethane, 28% propane, 11% butane, 6% isobutane and 13% C₅. By comparison, Hart Energy’s mix is 36% ethane, 30% propane, 12% butane, 6% isobutane and 16% C₅.

NGL supply growth spurred by the shale boom strangled NGL prices, which led to a steep decline in the ratio. From 2007 to 2012, RBN calculated a ratio that was typically around 60%. Since that time, it has hung around the 40% mark.

Shifts in supply and demand indicate that the ratio has bottomed out, Van Hull wrote. NGL production growth will slow and then flatten between now and 2021 as prices rise for West Texas Intermediate crude oil and Henry Hub natural gas.

RBN forecasts an increase in the average benchmark Henry Hub natural gas price to $3.50 per million British thermal units (MMBtu) in 2022. Other estimates have U.S. natural gas at $3.90/MMBtu in 2020 (World Bank); $3.30/MMBtu in 2021 (International Monetary Fund); and $3.60 in 2019 (Economist Intelligence Unit). Prices at Henry Hub closed north of $3/MMBtu this week.

In a more bullish perspective, Bernadette Johnson of Ponderosa Advisors LLC said at the recent Midstream Texas conference in San Antonio she expected $4/MMBtu gas in 2017..

The hypothetical NGL barrel rose in the past week to 11-week highs of nearly $21 at Mont Belvieu, Texas, and $20 at Conway, Kan. This was echoed by 11-week highs for ethane at both hubs.

Propane was up 3.4% at Mont Belvieu and 5.2% at Conway. With Phillips 66’s export terminal in Freeport, Texas, scheduled to come into service before the end of 2016, propane demand will surpass supply and prop up prices, Van Hull wrote.

Butane rose by 2.3% at Mont Belvieu and 3.1% at Conway. Isobutane was stronger, rising 8.6% at Mont Belvieu and 4.9% at Conway to eclipse 70 cents per gallon (gal)for the first time since late June in Texas and early July in Kansas.

C₅ dipped at both hubs after rising sharply at both last week.

Van Hull’s conclusion is that both NGL prices and the NGL-to-crude price ratio will head back up in the next three years. She admits that this is difficult to see now with heavy propane inventories and lots of ethane rejection, but notes that the outlook is long-term, not the projection for Sept. 28.

As for the unfortunate crackers, Van Hull reminds that they are long-term projects as well, planned when oil prices floated between $90/bbl and $100/bbl. That is unlikely to be the market price when they come online.

Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.