Energy Investor Monthly – November 2024

INSIGHTS OF THE MONTH

NGLs – The Liquids We Can’t Live Without

Natural gas liquids, also known as NGLs, play an essential and underappreciated role in our daily lives, both as a fuel and as a chemical precursor for thousands of consumer goods. For example, the average pair of running shoes contains several different NGL-derived petrochemicals. The outsole and midsole are made from durable polyurethane foam, a derivative of the petrochemical propylene. What about the insole that cushions your feet? It’s made of ethylene vinyl acetate (EVA), a derivative of the petrochemical ethylene. Finally, what about the top and sides? They are often made of nylon, a derivative of the petrochemical benzene. In that one case alone, we’ve identified at least three different NGL-derived petrochemicals, and there are thousands of others. NGL derivatives aren’t just limited to plastics and clothing; however, they are a key ingredient in just about everything we use or interact with in our daily lives, including building materials, plastic bottles, shopping bags, car parts, carpeting, synthetic fabrics, medications, and even baby diapers – the list goes on and on. So, what exactly are NGLs, and where do they come from?

NGLs: What Are They?

When it comes to oil and gas production, the stream of hydrocarbons that comes from the ground is often more than crude oil and natural gas. In fact, in addition to “dry” natural gas, or methane (CH₄), the production stream frequently contains liquids or condensates. Sometimes called “wet” gas, these natural gas liquids, commonly called NGLs, are known by any number of designations or nicknames, including condensate, y-grades, and refinery gases. At their most basic level, however, NGLs are simply chains of carbon (C) and hydrogen (H) atoms, called alkanes, that are named after the number of carbon atoms that make up their individual molecules. For example, the NGL, known as propane, has 3 carbon atoms per molecule. Therefore, it is sometimes referred to as C3.

As the diagram below shows, the most common NGLs – in ascending order based on their number of carbon atoms – are ethane C2, propane C3, butane and its isomer (Isobutane) C4, and pentane C5. NGLs beyond pentane C5 are generally grouped with pentane as pentane plus C5+.

Since NGLs are a byproduct of oil and gas production, they are typically separated during the refinery process or by stripping (i.e., their physical removal) at gas processing plants near the wellhead. In fact, many of these NGLs must be removed before the remaining oil and natural gas can be transported by pipelines and sold to the end consumer.

NGLs produced during the refining process, such as propane, are either marketed directly or sold as naphtha – a mixture of multiple NGLs – that must be further processed by the petrochemical industry. On the other hand, NGLs produced (or stripped) by gas processing plants tend to be of higher quality. Therefore, they can be sent to other facilities, known as fractionators, where they can be further separated into their individual NGL components. However, because NGLs produced in this way are more pure, they are often used directly as fuels, feedstocks for petrochemical plants, or as fuel additives.

Other than the simplest form of natural gas, methane (CH4), ethane C2 (C₂H₆) is the next most common NGL. Since it contains only 2 carbon atoms, it is also the “lightest” of the NGLs. Sometimes, due to economics, ethane is not removed from the natural gas stream – through a process known as “ethane rejection.” This occurs when the price of ethane and the cost of its removal is less than the thermal content equivalent (MMBtu) of the price of natural gas in the marketplace. However, when separated, pure ethane is most commonly used to make ethylene, a petrochemical used as a feedstock to make plastics.

Propane C3 (C₃H₈) is the next most common NGL, and it contains 3 carbon atoms. It is also the most well-known of all the NGLs as it is commonly used as a fuel for homes, gas grills, and commercial heating and cooking. Propane is also a petrochemical feedstock, and it is often used to make propylene for plastics, as a component for certain motor fuels, and even as a refrigerant. To learn more about propane and its many uses, please see our September 2023 Energy Monthly.

Butane and isobutane C4 (C₄H₁₀) are the next most common NGLs, with both containing a total of 4 carbon atoms. Butane is used primarily as a petrochemical feedstock, a blending agent for gasoline or propane, a base for synthetic rubber, and even lighter fluid. As the name implies, Isobutane is an isomer (i.e., has a different molecular arrangement) of the more common butane, with different chemical characteristics and, therefore, different uses. Isobutane is most often used as a petrochemical & refinery feedstock, a refrigerant, a blending agent for motor fuels, and as an aerosol. In the U.S., it is common to mix butane and isobutane with propane to form liquid petroleum gas LPG (aka bottle gas) for export purposes.

Pentane C5 (C₅H₁₂) is the last of the prominent NGLs, and it contains 5 carbon atoms. Unlike the others, however, pentanes are often used directly as a fuel, in the production of ammonia, olefin, and hydrogen, as a refrigerant, and as a blowing agent for plastics and foams like polystyrene. As an NGL, pentane is usually classified in combination with its other, more complex NGL components (pentanes C5, hexanes C6, etc.) as pentane plus (C5+). Derivatives of pentane plus include naphtha and natural gasoline. Collectively, these NGLs have a variety of uses, including as a blending agent for fuels and as a dilutant in the production of asphalt and oil sands.

NGLs: Both Energy and Economic Security

In summary, given how essential NGLs are to the U.S. economy and their important role in our daily lives, it is worth repeating that the abundant supply (and relatively low price) of domestic NGLs is ultimately a byproduct of an active U.S. oil and gas industry. While there are some controls over the volumes of ethane C2 and, to a lesser extent, propane C3 that can be produced, the demand for these associated NGLs is not the primary driver of their availability. Put another way, there are no E&P (exploration and production) companies that are solely in the business of drilling for NGLs. Because of this, the future U.S. supply of NGLs can only be reliably depended upon as long as domestic oil and gas production activity remains strong. Therefore, how can we ensure that both consumers and the U.S. economy continue receiving the many benefits of domestic NGL production? The only logical answer seems to be, “Drill, baby drill.”

Sources:

1. https://www.eia.gov/todayinenergy/detail.php?id=5930
2. https://www.kindermorgan.com/getmedia/96a33ed6-dc57-4d37-b79a-87d3f3f9cf61/White_Natural_Gas_Liquids.pdf
3. https://www.synmax.com/energy-newsletters/an-unexpected-source-of-us-supply-increase-ethane-rejection#
4. https://www.sciencedirect.com/topics/engineering/naphtha#
5. https://en.wikipedia.org/wiki/Natural_gasoline

Images:

1. https://en.wikipedia.org/wiki/Natural-gas_processing
2. https://www.opdepc.com/projects/ngl-fractionation-unit-south-texas/
3. https://www.williams.com/2020/06/24/back-to-the-basics-ngls-101/In

ENERGY MARKETS BY THE NUMBERS

U.S. Total Crude Oil Production and U.S. Crude Rotary Rig Count (as of November 15, 2024):

1. West Texas Intermediary (WTI) oil price was $66.92 per barrel (-2.0% m/m)
2. U.S. oil production was 13.2mm bbl/d (-2.2% m/m)
3. U.S. oil rig count was 478 (-0.83% m/m)

The U.S. Commercial Crude Oil Inventories (excluding those in the Strategic Petroleum Reserve) and Inventory Changes (As of November 15, 2024):

• Inventory increased by 4.3 million barrels month over month to 430.3 million barrels (4.8% below the 5-year average).
• Total crude stockpiles, including the Strategic Petroleum Reserve (“SPR”), increased by 8..8 million barrels month over month to 819.5 million barrels.

U.S. Imports and Exports (as of November 15, 2024):

1. U.S. crude oil 4-week average imports were 6.6 mm bbl/d, up 6.4% month over month.
2. U.S. crude oil 4-week average exports were 3.7 mm bbl/d, down 6.2% month over month.

U.S. Refinery Inputs and Utilization Rates (as of November 15, 2024):

1. U.S. crude oil refinery inputs averaged 16.2 mm bbl/d for the week of November 15, 2024. Four-week inputs averaged 16.3 million bbl/d, 6.1% higher than the same time a year ago.
2. Refinery Utilization Rate was 90.2%, up from 89.5% for the previous month. This is higher than the same period last year, which was an 87.0% utilization rate.