Too much propane and butane; not enough pentanes plus.
That is the story being told by a new Canadian Energy Research Institute (CERI) study that examines the natural gas liquids (NGL) market in North America between the present day and 2035.
Although a new focus on liquids-rich plays and advances in hydraulic fracturing and horizontal drilling are creating a glut of NGL such as propane and butane in the United States and western Canada, there may still be a shortage of pentanes plus and condensate, diluents that are necessary for transporting oil sands bitumen by pipeline.
CERI predicts that pentanes plus and condensate amounting to about 1.4 million barrels per day will be required for oil export projects such as Enbridge’s Northern Gateway and Kinder Morgan’s Trans Mountain Expansion (TMX) by 2035, volumes that can’t be supplied by western Canadian resources.
“We are under-supplied with domestic production right now,” said CERI president and CEO Peter Howard, noting that domestic production is presently about 130,000 barrels per day.
Imports will have to pick up the slack.
“We’re bringing condensate in from the west coast by rail into Edmonton,” said Howard, adding that a pair of pipelines is also now bringing diluent into Alberta from the United States.
One of those projects, Enbridge’s Southern Lights pipeline, ships pentanes plus from the Chicago area to Edmonton. The other project is the Cochin pipeline, which had previously been used to ship products such as propane and butane between western Canada and eastern Canada.
“That pipeline was bought by Kinder Morgan,” said Howard, “and will be reversed to bring condensate from the North Dakota area back into Alberta.
“That will be used to get bitumen out of the province,” he added.
Howard remarked that Cochin could be an important piece of the diluent puzzle, particularly if heavy oil projects such as TMX and TransCanada’s Keystone XL pipeline – which would transport Alberta oil to Gulf Coast refineries – gain approval, but Northern Gateway is left on the sidelines. Northern Gateway is the only one of the pending heavy oil transport projects that includes plans for a pipeline that will bring imported condensate into Alberta.
“And that’s kind of where the Cochin pipeline partially fills the bill, because it does bring condensate back into the province,” said Howard.
“It’s probably simply stated that if we can get a pipeline out of here to take the bitumen to market, we will be able to figure out how to get it there,” he continued. “Whether it actually means we use imported condensate or in fact we actually can fall back and use synthetic crude oil – SCO – as the diluent. That’s possible too.”
The primary source of pentanes plus in western Canada is natural gas production, which is declining because of current low prices for dry natural gas.
“The vast majority of the pentanes plus that are domestically produced in the system right now come from the old gas fields,” said Howard. “The economics of those fields is, basically, as long as the market price is above the variable operating cost, then they’ll produce it.”
That conventional production will eventually be replaced by production in the liquids-rich plays of what Howard calls the Rockies Trend.
“This would be west of Edmonton, west of Calgary and just south of Grande Prairie,” said Howard.
“The producers are migrating over to the NGL primarily to enhance the economics of drilling wells,” he continued. “And here in Canada – especially in western Canada – it is just so blatantly obvious that they’ve abandoned all dry, conventional resources and have moved up against the mountains into the liquids plays.”
NGL prices are closely aligned to oil prices compared to dry natural gas prices.
Howard noted that about 95 per cent of the 723 gas wells licensed in western Canada by September 9, 2012 were along the Rockies Trend.
“That’s where the NGL plays are,” he said.
Interestingly, the study really began with an interest in ethane, which is converted into ethylene at ethylene crackers, primarily for manufacturing chemicals such as plastics.
“Two significant events have taken place in the last two years, which – plus or minus – contribute to that question,” said Howard. “First of all, the gas streams are declining quite significantly. And that’s more to do with markets than anything else. And the question is: is there the potential of a resurgence, rebound, growth, flatlining, whatever?”
The second of those significant events is the Williams pipeline that moves off-gases, including ethane, from the Alberta oil sands to the petrochemical industry in that province.
“Here in Alberta, we have three world-scale ethylene crackers,” said Howard, noting that NOVA Chemicals is also adding a third polypropylene cracker.
“What it means is if you actually capture and recover ethane, there is a market for it here,” he added.
While the domestic ethane supply may be low enough to necessitate imports from the Bakken tight oil play in North Dakota to satisfy the Alberta market, the situation is quite different when it comes to propane and butane.
“When you look at propanes and butanes,” said Howard, “I think, in its simplest form, the industry basically drilled the heavy liquids plays looking to capture the economic rent from the liquids market, but not recognizing the potential to over-supply that market. And that is now starting to materialize.
“It’s not just forecasting anymore,” he continued. “Even some of the actuals is starting to suggest that the market – North American market – will become over-supplied in propanes and butanes. With the relief from that being primarily exports.”
There is also potential for using propane and butane as solvents in oil sands operations.
“That’s a positive,” said Howard. “That would require those streams to be directed towards the oil sands as opposed to being directed outside of the province in the export market.”