Shale gas production presents game-changing impact

September 8, 2011 By    

An expected bounty of natural gas harvested from the nation’s abundant shale fields is widely viewed as a game-changer for the propane industry. The increased flow of natural gas liquids production from the shale fields is expected to position the United States as a net exporter of propane while boosting the domestic supply of propane for years to come.

As natural gas is extracted via hydraulic fracturing, the natural gas industry will enhance its network of pipelines to move the product to processing and then onward to market – and it seems likely that propane is set to see a similar pattern of expanded pipelines, terminal sites, rail capacity and other infrastructural needs as this industry’s transporters ponder the possibilities.

“I’m sure they’re spending a lot of time looking at that right now,” says Mike Sloan, principal at ICF International.

Commissioned by the INGAA Foundation, the research arm of the Interstate Natural Gas Association of America, ICF authored a recently released 101-page landmark report entitled, North American Natural Gas Midstream Infrastructure through 2035: A Secure Energy Future.

“Propane marketers will face many of the same challenges of getting the necessary propane to the right location at the right time as they do today,” says Sloan, “but it won’t be as difficult because there will be more sources of domestic supply. The regional markets for propane supply will be more robust.”

While oil extraction through “fracking” has been garnering much public attention of late, in most areas the production will be natural gas in shale deposits covering portions of Pennsylvania, Ohio, Texas, Oklahoma, Louisiana and the Rocky Mountains, reports Harry Vidas, ICF’s vice president of fuels and technology.

“In some cases, you’re getting two products – a dry gas and gas liquids [such as lease condensate, ethane, pentane+, butane and propane],” he explains. “In other cases, you’re getting three products – dry gas, gas liquids and crude oil.”

Through 2020, ICF projects that the natural gas and gas liquids industry will invest $130 billion in new infrastructure, including $16.3 billion in gathering systems, $12.4 billion in natural gas processing facilities and $12.3 billion to establish rail and pipeline routes to market the gas liquids.

“The growth in shale gas production is going to create a great deal of incremental production of natural gas liquids, including propane production,” Sloan says.

“This report shows a vibrant natural gas market in the future, and it also demonstrates the need for additional midstream infrastructure to support it,” says INGAA Foundation President Don Santa. “The good news is that the natural gas industry has a proven track record of constructing and financing this level of infrastructure.”

More pipelines originating from the Rockies and elsewhere may be on tap, ending at locations such as Conway and Mt. Belvieu, according to Vidas.

Pennsylvania could become a key processing and distribution hub due to its proximity to the production from the Marcellus shale and New England’s traditionally high product demand. ICF is not projecting any new production in New England, but they are expecting more than 1.6 billion gallons per year of new natural gas liquids production from the Marcellus by 2015, primarily from Pennsylvania and West Virginia.

“I’m sure there will be investments in new pipelines, new terminals and more rail spurs to bring those new products to market. The new facilities will follow along with the new production,” Sloan explains. “There will be some incremental processing facilities in the region that will lead to beefing up the propane infrastructure in the Northeast.”

By 2015, the U.S. will be producing an additional 1.8 billion gallons of propane per year over 2010 levels; 18 percent more LPG production from natural gas; and 12 percent more propane overall, with these figures expected to double by 2020. Some 3.6 billion incremental annual gallons of propane are expected by then.

“There will be significant new sources of propane supply in the Northeast. It’s starting to happen now, and certainly by 2015 there will be a big impact on the ground as propane marketers see increased supply,” Sloan says. “We’re also projecting a very rapid growth in ethane production,” he notes.

Petroleum chemical companies currently use about 4.6 billion gallons of propane each year, and ICF expects much of the propane that goes into the petchem feedstock to be replaced by the growth in ethane production.

Leveraging the flow
Because the natural gas industry is driving the shale extraction process, might that industry make a major push toward signing up more households at the expense of propane?

“That’s an interesting question,” Sloan replies, “and the answer is not straightforward.”

In serving an area with natural gas, the last mile is the most expensive. “It’s limited by the cost of actually connecting up the customer. The natural gas system tends to go toward dense populations, and nothing happening here is going to change that cost structure,” he explains.

Not surprisingly, a number of cost components are in play. “The gas boom is lowering the price of natural gas at the wellhead, but the cost of moving the gas from the wellhead to the consumer is staying the same,” Sloan adds. “The wellhead price has come down by more than 50 percent, but the price to the residential end user has only come down by 20 percent.”

Propane’s price on the world marketplace is likely to remain tied to oil, given its global role as a commodity that acts as a substitute for oil and gasoline products. The abundance of propane in the United States should drive more overseas sales, however.

“In broad terms, the increase in propane supply will push the price down relative to crude oil,” Sloan says. “However, the price of propane will still be set primarily by the price of oil rather than the price of natural gas. Now that we’re exporting more propane, that has pushed propane prices downward in the United States relative to international crude prices.”

Motoring onward
Increased traction within the domestic propane motor fuel marketplace is another anticipated outcome.

“There’s a real opportunity to grow the autogas business. We are just now seeing enough propane vehicle options available to consumers to have a significant impact in the automotive market,” says Sloan.

For the foreseeable future, he thinks propane’s most effective applications will be focused on small and mid-sized fleets that come back to the same place every night to refuel. Propane-powered taxi fleets could fare especially well going forward.

The natural gas industry is pushing natural gas vehicles as an important new market for that fuel. But Sloan believes the high initial cost of the natural gas refueling infrastructure, plus vehicle range constraints caused by the need for larger and heavier fuel tanks to hold the compressed natural gas, are likely to focus its use and operations to larger vehicles and larger fleets such as municipal buses and garbage trucks.

Fracking controversy
One looming obstacle to shale field development is the heightened public and governmental scrutiny directed at hydraulic fracturing. The drilling technique involves pumping a large volume of water with sand proppants and some other chemicals into wells to break up the shale rock and release natural gas.

The U.S. Departmen
t of Energy’s Natural Gas Subcommittee recently recommended a variety of measures to lessen the environmental impact of fracking, including the elimination of diesel from the hydraulic solution.

Vidas says the restrictions that are commonly discussed – such as fuller disclosures or adjustments regarding the chemicals used, installing tanks rather than pits and more stringent well construction – would increase the pricing structure by a manageable margin of 2 to 4 percent. More extreme measures could cost up to 7 percent. One of the new approaches to fracking uses propane rather than water.

“Economics are driving the gas boom,” says Sloan, emphasizing the game-changing nature of shale gas production and its impact on the nation’s energy future. “It does not rely on government incentives to create the market, and in the absence of a new drilling moratorium, new regulations are unlikely to increase costs by enough to stunt market activity.”

Photo courtesy of Reilly Wilson

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