Understanding Natural Gas Liquids and Frac Spread

Saw another good post on Frac Spread 101 from an economic perspective. Figured I would add to the post by linking to a post I made a couple years ago. Based on 12 years of NGL and frac spread market experience, along with building a producer financial hedge.

Frac Spread is simply the value received on the sale of propane, butane and condensate (collectively, natural gas liquids or NGL or C3-plus or C3+) LESS the cost of the natural gas used to extract the natural gas liquids.

NGL is typically considered to be more valuable than natural gas given the other multitude of uses for NGL and its price relationship to oil, rather than gas.

A blended Alberta- and British Columbia based barrel of C3+ contains 68% propane, 23% field butane and 9% condensate. Based on the heat value equivalent of propane, field butane and condensate, one cubic metre (m3) of C3+ contains 26.47 GJ of natural gas equivalent or 4.2 GJ per barrel of C3+ (more below in the "Measures and Conversion Factors" section).

Between 2000 and 2007, the average frac spread, for a typical Alberta-based barrel of C3+ was approximately $10 per barrel (CAD). From 2008 to 2010, frac spread averaged $26.75/bbl. First quarter 2011, Alberta-based plant gate frac spread averaged $41/bbl. In Mt. Belvieu, Texas, the most liquid market for buying and selling ethane and NGL, spot average frac spread has been between $55-$60/bbl. The premium for NGL compared to its feedstock natural gas has reached all-time highs based on my records that go back to 1996.

However, frac spread can also be negative, which has occurred several times in the past 12 years and has lasted for several weeks in duration (ie. Katrina caused natural gas prices to spike above $12/GJ, while the value of the NGL did not increase as much). Physically, frac spread cannot remain negative for long periods of time. Companies that extract and fractionate NGL within the midstream sector would reinject NGL or bypass the NGL completely, and therefore the NGL would end up in the natural gas transmission system. This would result in immediate supply reduction of NGL all together. These operating decisions can happen very quickly at the plant level.

Frac Spread is also known as NGL Margin. However, it is important to note that NGL margin when referencing Frac Spread does NOT contain ethane within its mix--products are limited C3+;

Some extraction plant companies report frac spread after deducting the extraction premium paid to producers or shippers of natural gas to obtain the rights to remove NGL from the natural gas stream. In this case, frac spread would be equal to sale of C3+ LESS the cost of replacement natural gas LESS premium paid to obtain the right to extract NGL from the natural gas stream used.
Details covering the above short explanation have been included below for those that want to dig deeper.

EXTRACTION and FRACTIONATION PROCESS

Extraction plants recover and process NGL in four main steps (see Figure A below):
Cooling the inlet processed natural gas to condense the NGL
Recompressing the residue natural gas for redelivery to a gas transmission systems
Fractionating the NGL into pure components and treating the components to meet commercial specifications
Terminalling of the NGL products.

An extraction plant typically routes natural gas off of high pressure gas transmission systems and is cooled in a series of heat exchangers. The cold inlet stream then flows through gas/liquid separators where condensed NGL are recovered. The cold vapour stream flows to an expander where the gas pressure is decreased, resulting in additional cooling and liquid condensation. The process temperature is such that the bulk of the NGL condense to a liquid and are recovered.

The methane and the unrecovered ethane form a residue gas stream. The residue gas flows first to the expander-compressor, which increases the pressure of the residue gas by recovering energy from the expander operation that was used to cool the natural gas. The residue gas is then further compressed, using electric drive gas compressors, so that it meets the receipt pressure of the specified gas transmission system.

The recovered NGL mixture flows to fractionation towers where the components, ethane, propane, butane and condensate, are separated and treated to meet commercial specifications.
The ethane is shipped by pipeline to petrochemical markets. Propane is shipped to market by rail, truck or pipeline. The butane is also shipped by rail or pipeline. The condensate is shipped by truck or pipeline. The NGL that are not fractionated into their constituents are shipped as part of a mix.

The ethane is shipped by pipeline to petrochemical markets. Propane is shipped to market by rail, truck or pipeline. The butane is also shipped by rail or pipeline. The condensate is shipped by truck or pipeline. The NGL that are not fractionated into their constituents are shipped as part of a mix.

For an excellent overivew of the midstream business, which includes gas processing, NGL extraction and fractionation, and storage see Keyera's website for "Midstream 101".

TERMS

Natural Gas - A naturally occurring mixture of hydrocarbon and non-hydrocarbon gases found in porous geological formations beneath the earth’s surface, often in association with petroleum. The principal constituent is methane.

Raw Natural Gas - Natural gas directly from the well head that has not been processed. Raw natural gas contains methane, other hydrocarbons called natural gas liquids, nitrogen and impurities such as sand, water, carbon dioxide (CO2), hydrogen sulphide.

Processed Natural Gas - Raw natural gas that has been dehydrated (water removed) and filtered to remove other impurities. Processed natural gas may contain to various degrees other gaseous hydrocarbons called natural gas liquids. The composition of the natural gas is dependent on the type, depth and location of where the underground deposit was drilled and produced up through the well head.

Sales or Residue Gas - Processed natural gas that is nearly all methane and has had nearly all natural gas liquids removed. Sales gas is delivered through transmission systems and some minor facilities so that the gas can be used for heating residential and commercial homes. If the natural gas liquids were NOT removed, there would be black smoke coming from our homes' chimneys, due to the extra carbon molecules that were released through burning. Also, our furnaces would need to be replaced more often, due to the buildup of "oils" and carbon layers.

Natural Gas Liquids - most natural gas contains, to varying degrees, other hydrocarbons, which under pressure or at underground pressures, exist in a liquid state. However, these molecules will become gaseous at normal atospheric pressures. Collectively, these liquid/gases are called "natural gas liquids" or NGL. The liquids are comprised of ethane, propane, butane and heavier hydrocarbons known as condensate. These components typically can be sold at values higher than the residue natural gas or methane. Based on data gathered in 2007, a typical million standard cubic foot (mmscf) of processed natural gas that was transported within Alberta on the Transcanada system (TCT) had a composition as follows:

Ethane 44.8 barrels (bbls)
Propane 8.6 bbls
Field Butane 1.8 bbls
Condensate 0.5 bbls

Northeast British Columbia 2007 averages were as follows:

Ethane 29.0 bbls
Propane 13.3 bbls
Field Butane 5.1 bbls
Condensate 1.6 bbls

Dry Natural Gas - Raw natural gas that is produced from a zone in which there are few NGL within the stream. The composition of natural gas is deemed to be "dry".

Wet or Liquids-rich Natural gas - Raw natural gas that is produced from a zone in which the composition is high in NGL.

Sweet Gas - natural gas that is not considered to be sour gas.

Sour Gas - natural gas that contains a significant amount of hydrogen sulfide (H2S). Natural gas is usually considered sour if there are more than 5.7 milligrams of H2S per cubic meter of natural gas, which is equivalent to approximately 4 ppm by volume.

Acid Gas - the combination of hydrogen sulfide (H2S) and carbon dioxide (CO2) that has been removed from the raw natural gas stream.
Extraction - the method by which natural gas liquids is removed from raw or processed natural gas and produces an NGL mix.

Extraction Plant - Facilities that can remove natural gas liquids from raw or processed natural gas. An absorption tower or "demethanizer" is used to remove the NGL mix from the natural gas (see Figure A above, which show full NGL extraction and fractionation). The processed natural gas is fed into the tower at the bottom of the tower, while an oil/chemical is fed from the top. As the gas rises/bubbles up through the tower through a series of trays, the oil/chemical spills down on those same trays. The oil/chemical attracts the NGL and methane (or combination of methane/ethane) continues up the tower into another pipe. The NGL and absorption oil is taken to another vessel where through a combination of pressure and temperature, the oil/chemical is removed from the mix to be used again in the absorption tower. The NGL mix is then set to other fractionation tower or by pipeline to fractionation facilities in other markets. Deep-cut extraction plants can remove the greatest amount of NGL from natural gas. Deep Cut Extraction Plants can also remove ethane, which is the lightest NGL, by cooling the gas to a temperature (at least -110 degrees celsius) where the ethane changes from gas to liquid. A deep cut extraction plant can produce an "ethane-plus" NGL mix or C2+. Extraction plants can remove an NGL mix, but cannot split the NGL into its separate components which requires fractionation towers and separate component storage facilities.

Extraction Premium - the price paid above the local market price for natural gas by the extraction plant operator to the producer or shipper of natural gas in order to obtain the rights to extract the NGL from the natural gas stream.

Fractionation - the method of separating an NGL mix into its different components of ethane, propane, butane and condensate, or different mixes thereof.
Fractionation Plant - facilities that can separate an NGL mix into its different components. A deethanizer tower along with a turbo expander can chill natural gas to less than -110C to isolate ethane from the other NGL (see Figure A above, which show full NGL extraction and fractionation). The process to split the other products (propane, butane and condensate) is chained together by using a depropanizer and debutanizer. The figure also shows the process to split butane by using a C4 splitter which takes field butance and separates into normal and iso butane. Most Canadian based factionation plants do not split butane. This process is left to refineries or the petrochemical facilities.
Methane - The primary hydrocarbon within natural gas which has the chemical symbol/formula CH4 (Water has the chemical formula H20). Methane is the shortest and lightest hydrocarbon molecule.

Ethane or C2 - is a hydrocarbon component of NGL used by petrochemical facilities. Ethane is transported in gas form through pipelines. Within Alberta, the Alberta Ethane Gas System or AEGS, is the primary method of transmission. Ethane from Alberta and British Columbia is used primarily by NOVA Chemicals and Dow Chemicals to make ethylene, which is in turn used to make other ethylene structures, such as polyethylene which is the base substance for plastics. The chemical symbol/formula for ethane is C2H6 and looks like:

Propane or C3 - is a hydrocarbon component of NGL used for heating, commercial drying applications (such as corn dried to make feed) and of course BBQ. Propane burns clean and can be transported by truck, rail or pipeline, making it a versatile fuel. The more hydrogen atoms a molecule has the hotter the hydrocarbon will burn. However, the more carbon atoms a molecule has, the more carbon released (smoke) and more carbon dioxide will be formed. The chemical symbol/formula for propane is C3H8 and looks like:

Butane or Field Butane - is a hydrocarbon component mix of NGL and is used in numerous applications with the petrochemical industry, gasoline or oil additive. Butane from most fractionation facilities is a mix of normal butane (nC4) and iso butane (iC4), called field butane. In Alberta a typical field butane volume split is 70% normal or 30% iso. Both butane molecules have four carbon atoms, but the hydrogen atoms are configured differently:

Condensate or Light Crude Oil or Pentanes or Natural Gasoline - is a combination of hydrocarbon components of NGL that have five or more carbon molecules, such as pentane (C5H12) and hexane (C6H14). Condensate is used to assist oil and oilsands as a diluent to allow the oil or bitumen to be transported by pipeline.

C3-plus or C3+ or NGL Mix - natural gas liquids, excluding ethane. Propane has three carbon atoms hence the chemical formula notation C3. The "plus" refers to those natural gas liquids that have 4 or more carbon atoms, such as butane (iC4 or nC4), pentane (iC4 or nC5) and condensate (hexanes, etc.).

MEASURES and CONVERSION FACTORS

1 barrel (bbl) (petroleum US) = 42 US gallons = 0.158987 cubic metres (m3)
1 cubic metre (m3) = 6.2898 barrels

1 standard cubic foot (scf)
1,000 scf = 1 mscf
1,000,000 scf = 1 mmscf

35.30 scf natural gas @ 14.73 psia and 60F = 1 m3 (101.325 kilopascals and 15C)

1 mmBTU = 1.054615 GJ
1 GJ on Westcoast-NW system = 1.055056 mmBTU

1 MMBtu = 0.9649 Mcf (sales quality natural gas)

NGL Physical properties:

Physical properties
C3 liquid GJ/m3 25.56
nC4 liquid GJ/m3 28.93
iC4 liquid GJ/m3 27.80
fC4 liquid GJ/m3 28.61
C5+ liquid GJ/m3 31.32
Synthetic Weighted Avg C3+ Heat Value GJ/m3 26.47
Gallons/bbl 42
bbl/m3 6.2898
GJ/mmBTU 1.0551

PHYSICAL PROPERTIES
Ft*3/gal BTU/gal BTU/ft*3 liq GJ/m3 Gas HV Gj/e3
Helium
Nitrogen 91.41
Carbon Dioxide 58.81

Another key proxy, especially in western Canada is that there is 4.25 GJ of natural gas per barrel of typical C3+ (propane = 70%; field butane = 21%, comprised of 70% n-butane and 30% iso-butane; condensate 9%).