SHALE BOUNTY GOES BEYOND OIL AND GAS - wsj.com, DECEMBER 18, 2011, 3:11 P.M. ET

By BEN LEFEBVRE

HOUSTON—The U.S. shale-oil and natural-gas boom has cracked open another lucrative market—gas liquids used to make plastics.

The same drilling technologies that have unlocked vast amounts of crude and natural gas from previously unproductive shale formations across the U.S. also are reaping large stores of ethane, propane and butane, known as natural-gas liquids.

This growing bounty has resuscitated the U.S. petrochemical industry, which just a few years ago was being strangled by the high costs of the raw materials.

Processing ethane into chemicals is 50% cheaper than using crude oil-derived naptha and its availability has made U.S. petrochemical companies the envy of overseas competitors. It also brings the prospect of lower prices for auto parts, Styrofoam and other products.

"Now there's tremendous growth in natural-gas liquids, with more growth seen on the horizon," said Adam Bedard, senior director at analysis firm Bentek Energy.

The boom has turned into a potential profit center for oil-and-gas producers, as well as for the pipeline companies that transport the fuel. Demand for ethane grew to about 933,000 barrels a day during the first half of 2011, up from 812,000 barrels a day in 2009, according to Bentek Energy. But like the other fuels extracted from remote shale deposits, the biggest problem is how to get it to facilities that can process it.

A dearth of pipelines created a bottleneck that drove the price that petrochemical companies pay for ethane to 95 cents per gallon in the third quarter, from 60 cents at the start of the year, said Dow Chemical Co. Chief Executive Andrew Liveris. But even with that price spike, chemical companies prefer ethane over other chemicals, he said.

"Ethane is still by far the preferred feed here in the United States and is much more cost-competitive than all of its equivalents," Mr. Liveris said during a conference call with investors.

To free up the flow of natural-gas liquids, about 12,000 miles of pipeline needs to be built by 2035, costing $14.5 billion, according to data from the Interstate Natural Gas Association of America, a trade association.

Until those pipelines are built, higher production will make the market volatile as short-term fixes such as rail transport are used, traders said. Even so, over-the-counter trading for NGLs has grown, said William Paul, head of natural-gas-liquid trading at Macquarie Energy.

"Over the last two years, the market has really evolved where you can trade further out on the curve," Mr. Paul said. "The bulk of that is driven by producers looking to hedge."

Some pipeline operators are working to expand their reach into oil- and gas-producing shale formations. Enterprise Products Partners LP is spending $7 billion on projects, spokesman Rick Rainey said. That includes a 280,000 barrel-a-day pipeline joint venture with Anadarko Petroleum Corp. and Enbridge Energy Partners LP and a wholly owned 125,000-barrel-a-day pipeline, both of which will transport natural-gas liquids from the shale formations in the Northeast and mid-continent areas to the U.S. Gulf Coast, where the bulk of the petrochemical companies are located.

DCP Midstream Partners LLC is also expanding its natural-gas liquids business, building two pipelines with a combined capacity of 350,000 barrels a day from the mid-continent and Texas to the Gulf Coast.

Even that new capacity may be tested. The INGAA expects the supply of natural-gas liquids to grow 2% each year for the next 25 years, while crude-oil supplies are forecast to increase 1.7% a year.

The growing supply of natural-gas liquid is also fueling the propane-export market, as countries in Latin America and Europe increase their take of the low-cost U.S. fuel used for cooking and heating. The U.S. shipped 134,000 barrels a day of propane overseas in September, a 28% increase year over year, according to the latest data from the U.S. Energy Information Administration.

On the other end of the pipeline, demand from petrochemical and plastics producers is expected to accelerate, with several companies planning large new ethane-processing plants, said Bill Waldheim, president of DCP's northern business unit.

The current plants already "can consume more than we can produce today," Mr. Waldheim said.

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Replies to This Discussion

Permalink Reply by Shaleeee on December 18, 2011 at 15:55

Sounds like a WIN-WIN-WIN on many levels including potential pipeline jobs.

Permalink Reply by Skip Peel - Mineral Consultant on December 18, 2011 at 16:09

We don't, or haven't, discussed condensate and ng liquids often on the site because we started out strictly Haynesville Shale focused and it is dry gas.  The potential for some of the newer prospects we follow these days is significant for liquids.  And as the article points out, there is value in liquids and LA. is uniquely positioned to benefit from them.  The economics of liquids is much stronger than that of dry gas.

Permalink Reply by Shaleeee on December 18, 2011 at 16:39

Thanks for enlightening me - I had no knowledge of Ethane or how it is used. I imagine the use of Ethane will snowball and new uses will follow - great news!

Permalink Reply by W. Carter Richardson on December 18, 2011 at 17:12

Skip,

Do you have any information on the production of "wet gas" from the CV in North Desoto

and Southern Caddo?   I believe that Indigo has been the major operator.

thanks,

Carter Richardson

Permalink Reply by Skip Peel - Mineral Consultant on December 18, 2011 at 17:50

Carter, horizontal Cotton Valley development was on the verge of becoming the next major play in NW. LA. before the Haynesville Shale pushed it to the back burner.  The reason that Indigo is concentrating on horizontal CV drilling is because of a Joint Venture agreement with Chesapeake whereby Indigo assigned their deep rights (Mid Bossier/Haynesville) to Chesapeake and Chesapeake assigned their shallow rights (Cotton Valley, particularly) to Indigo.  The best way to see where Indigo is active and to assess the liquids in their wells is a SONRIS Lite search by Organization with key word, Indigo.

http://sonlite.dnr.state.la.us/sundown/cart_prod/cart_con_wellorg6?...

Notice the wells names followed by an "H" beginning in mid-2010.  Indigo has drilled horizontal CV wells in Lincoln Parish in addition to Caddo and DeSoto.  Click on the serial numbers for the Status 10 H wells and review the "oil" Production which is actually condensate in these wells.

Permalink Reply by Robert Griffin R on December 20, 2011 at 9:10

Skip,

If HA units are leased initially by Chesapeake and then the shallow rights are assigned to Indigo in a JV  would any existing CHK lease terms apply to Indigo production? Or, would Indigo need to apply for new shallow units with new negotiable leases for all mineral owners completely separate from the Chesapeake BO/HA deeper leases?  How would we find out what units/sections were included in the CHK/Indigo assignment swap?

Permalink Reply by Skip Peel - Mineral Consultant on December 20, 2011 at 11:27

Robert, Chesapeake is the lessee in potions of the lands covered in the JV agreement and Indigo is the lessee in others.  There is no need for additional leases when units are formed for different formations when a well to the Haynesville is drilled to hold the original lease during it's primary term..  Beyond the obvious sections that have a CHK Haynesville well and an Indigo CV well you'd have to perform a public records search for the instrument of assignment in each parish.  For Caddo Parish there is a Memorandum filed as Instrument #2148433 covering 1,256.07 acres in various sections in 15N-16W, 16N-15W and 16N-16W.

Permalink Reply by Two Dogs, Pirate on December 20, 2011 at 11:34

Robert all the lease terms apply. If you have 1/4 royalty to Chk then you have 1/4 royalty to Indigo.

Permalink Reply by Frank on December 20, 2011 at 15:37

What about payment terms?  I don't think CHK will honor time to payment terms with another closing in the mix.

Permalink Reply by Skip Peel - Mineral Consultant on December 20, 2011 at 15:42

Frank, it is unclear what you mean by "payment terms" and "other closing".

Permalink Reply by Frank on December 20, 2011 at 16:11

A payment term would be the check disbursed within 120 days of production or some other time frame. 

Closings are what accountants do when they count the cash and pay the bills at the end of every month.  Indigo would have to close the books and pay CHK who would have to recieve it before they closed their books and paid the bill due you for production.  It adds one month at best.

 

 

Permalink Reply by essay on December 18, 2011 at 17:14

excess ethane in the NE was actually becoming a very real a problem until an industry heavyweight stepped up to the plate.  i believe it was dow corning but i'm too lazy to go look for it.

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