Propane, Ethane Gains Deepen Natural Gas Glut: Energy Markets

Rising prices for natural gas byproducts such as propane, which touched an 11-month high this week, are encouraging energy companies to boost gas output even after the market’s biggest annual slide since 2008.

Propane, a liquid used in home heating and outdoor grills, has surged 42 percent since reaching last year’s low on July 12. Ethane, used as a feedstock in the production of plastics, has climbed 40 percent from a 2010 low on June 23.

Profits from liquids are encouraging U.S. companies to shift to fields where they are more abundant, boosting natural gas production at the same time. Gas, which can account for 60 percent of supply at such locations, dropped 21 percent in New York last year, the third straight annual decline, as stockpiles of the fuel increased to an all-time high.

“If you are moving to liquid-rich plays that have a gas component to them, that liquids-rich portion is subsidizing the play, and that gas will eventually hit the market,” said David Kistler, a director at Houston-based Simmons & Company International. Gas supply may exceed demand by 1.8 billion cubic feet a day this year, Simmons said.

The shift to liquids can also lead to increased production of crude oil, which is trading near a two-year high. Oil prices are about 20 times higher than natural gas, up from an average of about 10 times during the past decade.

‘Stronger Economics’

“The ratio of oil prices to natural gas prices means that liquids-rich plays have much stronger economics than dry gas drilling,” said Tim Dove, president and chief operating officer of Pioneer Natural Resources, an oil and gas producer in Irving, Texas. “We’ve been diverting money to higher-return projects.”

Natural gas for February delivery rose 5 cents, or 1.1 percent, to settle at $4.531 per million British thermal units, or Btu, on the New York Mercantile Exchange. Oil for February delivery gained 75 cents, or 0.8 percent, to $91.86 a barrel. Crude futures touched $92.58 on Jan. 3, the highest price since October 2008.

Texas, the biggest gas-producing state, issued almost 11 times more drilling permits last year than in 2009 for the Eagle Ford shale formation, according to the Railroad Commission of Texas, the industry’s regulator. The formation is about 400 miles (644 kilometers) long and 50 miles wide, stretching from Mexico through eastern Texas, according to the commission.

Gas production from fields such as Eagle Ford, Granite Wash in Texas and Oklahoma, and Marcellus in the Northeast, which have higher liquids content, will rise as much as 5 billion cubic feet a day by 2014, or about 8 percent of U.S. output, according to Macquarie Energy Markets in New York.

Breakeven Costs

Chesapeake Energy Corp., the second-largest U.S. gas producer, plans to boost liquids output by 80 percent this year, John Kilgallon, the Oklahoma City company’s manager of investor relations and research, said at a Jan. 5 conference in San Francisco.

Increased liquids prices can lower gas producers’ breakeven costs by $2 per million Btu, which may boost U.S. output by more than 8 percent through 2014, according to Sriram Vasudevan, a New York-based director at Macquarie Energy Markets.

Propane at the Mont Belvieu hub in Texas gained 3 cents, or 2.3 percent, to $1.36 a gallon on Jan. 10, the highest price since Feb. 3, according to DTN, a unit of Telvent GIT SA, a Madrid-based information provider. Ethane at Mont Belvieu was unchanged at 60.75 cents a gallon. Ethane fell to 43.5 cents on June 23. Butane climbed 31 percent since early July to $1.70 a gallon.

Influenced by Crude

Prices for the liquids, which can also be a byproduct of petroleum refining, are “strongly influenced” by oil, according to Bentek Energy LLC of Evergreen, Colorado.

“If crude stays above $85 a barrel, you make attractive rates of return in the Eagle Ford even with gas prices well under $4,” said Vasudevan. “It’s about how we can move supply towards lower marginal cost basins.”

The breakeven price for “wet” gas wells in the Eagle Ford is $2.04 per million Btu, according to Rocco Canonica, director of energy analysis at Bentek Energy.

“In a high-oil and liquids-price environment, drilling economics improve even with low gas prices,” Canonica said. “In some plays producers will continue producing associated gas even if gas prices are at or even below $3 because of the benefits of high oil and liquids prices.”

Even at shale wells that yield larger-than-normal quantities of liquids, natural gas can comprise 40 to 60 percent of production, according to Dove. Output from the Eagle Ford shale was about 49 billion cubic feet through October 2010, more than triple the output from that area in all of 2009, according to the Railroad Commission.

Record Supplies

Shale-gas production has boosted inventories even as below- normal temperatures drive demand for the heating fuel. Unless gas prices fall to $4 per thousand cubic feet, fanning demand for the fuel in power plants as an alternative to coal, stockpiles may end the summer at a record 4.2 trillion cubic feet, David Pursell, a managing director at Tudor Pickering Holt & Co. in Houston, said in a Jan. 5 report.

U.S. working gas storage capacity is designed to hold about 4.36 trillion cubic feet, according to the Energy Department. Gas inventories were 3.097 trillion cubic feet as of Dec. 31, 6.5 percent above the five-year average for the week, according to the Energy Department. Supplies rose to a record 3.84 trillion cubic feet in the week ended Nov. 5.

To contact the reporters on this story: Christine Buurma in New York at cbuurma1@bloomberg.net; Moming Zhou in New York at mzhou29@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.