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Wet gas development likely to continue boosting the economy

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Essential Energy Insights - October 2021


Wet gas development likely to continue boosting the economy

Despitethe decline in production of crude oil and the slowdown in natural gas outputgrowth, supplies of natural gas plant liquids are likely to continue risingthrough 2040. The increasingly abundant supply will create further stimulus forthe U.S. economy.

In aportion of the U.S. Energy Information Administration's "Annual EnergyOutlook," authors Warren Wilczewski and William Brown discuss thedevelopment of hydrocarbon gas liquids and their impact on industrialdevelopment.

"From2010 to 2015, total HGL production increased by 42%. Natural gas processingplants accounted for all the increase," the authors said in an "Issuesin Focus" portion of the AEO. "[A]lthough the NGPL contribution tothe total Btu value of natural gas produced increased only marginally … itscontribution to the total value of natural gas produced nearly doubled."

Inthe EIA's AEO2016 reference case, production of NGPL is expected to increasefrom 3.5 MMbbl/d in 2016 to 4.8 MMbbl/d in 2025 and reach almost 5.0 MMbbl/d inthe late 2030s.

Thestrong growth in NGPL in recent years has been the result of an increasinglyfavorable ratio of crude oil prices to natural gas. Between 2011 and the thirdquarter of 2014, oil prices had been consistently high, and shale plays thathad significant portions of liquids were favored by drillers over plays thatcontained mostly dry gas.

Shaleplays such as the Utica which underlies the Marcellus Formation bolsteredproduction in the Northeast U.S. and improved the economics for producers.

Sincethe sharp decline in oil prices in late 2014, the premium commanded by NGPLover dry gas diminished, and producers began to shift activity out of areaswith high liquids yield to resources yielding higher quantities ofpipeline-ready natural gas at the lowest net production cost, Wilczewski andBrown said.

Theauthors illustrated the changes that have taken place in PADD 4, which is theRocky Mountain region.

"Theincrease in PADD 4 propane and butanes production, at a time when natural gas productiongrowth is stagnant or falling and when crude oil production is declining,mirrors trends in NGPL production nationwide," Wilczewski and Brown said. "Eventhe reduction of activity in the wettest areas over the past year or so has notslowed the growth of NGPL production, which has exceeded the growth of drynatural gas production."

Continuedgrowth in wet gas production has outpaced demand, which has resulted in severalnew projects dealing with midstream and downstream capacity to process, transportand consume NGPLs in recent years.

"[P]rojectseither completed since 2013 or currently under construction will increase thecapacity to produce ethylene from ethane by 31%," the authors said. "Investmentsmade in propane dehydrogenation (PDH) capacity, which converts propane topropylene, have increased total PDH capacity more than threefold. … Capacity toship propane and butane overseas has grown by more than 550%."

Theincrease in demand for exports of propane and butane has been helped byrelatively wide spreads between U.S. prices of natural gas and internationalprices of crude oil. International consumers also seek to diversify theirsources of supply.

Whilethe price spread has narrowed recently and some consumption projects in theU.S. have been scaled down, there will continue to be a favorable economicimpact from these investments, according to Wilczewski and Brown.

"Withan estimated $33 billion in projects between 2013 and 2017 directly tied to thegrowing availability of HGL feedstock, and billions more in associated upstreamand downstream activities, HGL-related economic activity has become a majorfactor in the U.S. economy," the authors said.