Pricing for US natural gas liquids (NGLs) will likely continue to be weak and range-bound through 2015 and for the medium term despite several new sources of incremental demand, according to Fitch Ratings.
NGLs, which comprise ethane, propane, butanes and natural gasoline, remain oversupplied in the US due to the fast ramp-up in liquids production from the shale revolution. As of early August, propane, butane, and natural gasoline prices were down approximately 60% year-over-year, outpacing the decline in West Texas Intermediate (WTI). Ethane, which had collapsed in 2012, was down 6%. Low realized prices for NGLs continue to be an issue for US exploration and production (E&P) producers as well as midstream issuers and have contributed to the weak results seen in the second quarter.
Fitch expects ethane prices to get some support from the wave of new ethane crackers being built by the chemical industry. It anticipates a significant number of the announced ethane crackers to come online in 2017–2018 despite the decline in the cost advantage of NGL-based feedstocks over naphtha-based feedstocks in producing ethylene with the recent price drop in oil.
NGL exports represent a second source of incremental demand for ethane, propane, and butane. Propane exports, in particular, increased sharply over the last few years, rising from 2011 to 2014 by 292,000 bpd (barrels per day), according to US Energy Information Administration (EIA) data, while annual propane production rose by 376,000 bpd over the same period. Increased export capacity is under construction and expected to reach completion soon, which will help balance some of the current surplus. These projects include Enterprise Product's expansion of its Houston NGL export terminal (expected completion by year-end 2015), and Phillips 66's export facility in Freeport, Texas (expected completion mid-2016). Stronger seasonal demand as a result of crop drying and a cold winter heating season could help prop up propane prices near term, but we believe any improvement is expected to be limited.
Weighing against these positive factors are the ongoing efficiency gains seen in US shale. These gains – seen through faster and cheaper well completions, longer laterals, and improved frack designs – are still playing out despite lower industry capex levels. As a result, US shale producers continue to improve unit economics and migrate down the cost curve, which allows them to operate at lower breakeven prices and tolerate low NGL prices.
Fitch remains concerned that NGL price weakness could linger for a protracted period or prices could exhibit further downside in the midstream space, particularly if there is significant macroeconomic weakness. A lower-for-longer scenario for NGL prices could negatively affect Fitch's ratings or outlook for midstream energy issuers with gathering and processing operations. Gas processors with contract profiles heavily weighted toward percent of proceeds, percent of liquids, or keep-whole type contracts are being significantly affected in the current low price environment and have been underperforming. Ratings pressure on these processors would likely increase if NGL prices remain low. Fixed-fee processors remain stable across their operations, though volume exposure is a rising concern, particularly if production declines.