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Why natural gas liquids production keeps rising

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Natural gas liquids

Natural gas liquids (or NGLs) are hydrocarbons. They’re produced when wet natural gases, mainly methane and condensable heavier hydrocarbons, are processed in natural gas plants. NGLs mainly include ethane, propane, butanes, and natural gasoline.

According to the U.S. Energy Information Administration’s (or EIA) latest Short-Term Energy Outlook (or STEO), the production of hydrocarbon gas liquids (or HGL) at natural gas liquids plants is expected to increase from 2.6 million barrels per day (or MMBbl/d) in 2013 to 3.2 MMBbl/d in 2015.

HGLs include NGLs and olefins such as propylene and ethylene. Olefin is used to produce polymers. Polymers are used in plastics.

Most of this growth is expected to come from additional ethane and propane production. There’s a growing demand for ethylene and propylene in the domestic petrochemical industry. There’s also a growing demand for exports.

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NGL prices

From the beginning of January 2007 to early 2012, the price of NGLs produced at natural gas processing plants traded in line with West Texas Intermediate (or WTI) crude oil prices. Read Market Realist’s Propane prices remain steady: Investors should keep watching to know the latest about NGL prices.

NGL production

Between January 2011 and November 2014, NGL production, including refinery gas, increased 41%. It increased from 65.5 million barrels per month to 92.3 million barrels per month.

Over the same period, dry natural gas production increased by only ~18%.

NGLs help make drilling for wet gas feasible for producers such as Halcon Resources (HK), Concho Resources (CXO), Laredo Petroleum Holdings (LPI), and Chesapeake Energy Corporation (CHK). Some of these companies are components of the Energy Sector Select SPDR ETF (XLE).

What determines NGL prices?

As a result of the price premium to natural gas, NGL production increased faster than dry natural gas production. This wet-targeted drilling gradually caused NGL prices to move away from WTI crude oil prices. Now the prices are roughly halfway between oil and natural gas prices. However, with crude oil price falling sharply in the last few months, the spread has narrowed between crude oil and NGL prices.

Major midstream operators such as Energy Products Partners (EPD) and DCP Midstream (DPM) produce NGLs in the fractionator plants. EPD is 10% of the Alerian MP ETF (AMLP).

There’s more to learn about the oil industry on Market Realist’s Energy and Power page.

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