by Carlos A. Murillo | Canadian Energy Research Institute



Natural gas liquids, or NGLs, are a group of light gaseous and liquid saturated (paraffinic) hydrocarbons that are generally extracted from the processing of raw natural gas, crude oil, and crude bitumen.
Within the Canadian context, the primary sources of NGLs include liquids recovered at gas processing plants (gas plants liquids), refineries (liquefied petroleum gases or LPGs (LPGs are a subset of NGLs; the term normally refers to propane or butanes or a combination of both), at the field/ wellhead level at both natural gas and crude oil operations (condensate), but also at crude oil bitumen upgraders.
These liquids include ethane (C₂H₆, or C₂), propane (C₃H₈, or C3), butanes, including normal butane (n-C₄H₁₀, or n-C₄) and iso-butane (i-C₄H₁₀ or, i-C₄) - (together, C₄s), pentanes plus (C5H12-C12H26, or C5+), and field condensate (C5H12-C30H62).



Because each of these liquids have different numbers of carbon and hydrogen atoms, they have unique physical properties which makes them harder or easier to extract, transport, and store, but also determines their optimal end-use. As an example, at room temperature (or about 25 degrees Celsius) and atmospheric pressure, ethane, propane, and butanes exist as gases, while pen - tanes plus/condensates exist as liquids.
In 2012, 677 thousand barrels per day (kb/d) of NGLs were produced in Canada, with about 91 per cent of these liquids extracted at gas plants (gas plant liquids) and at the wellhead - meanwhile, 99% of these NGLs were extracted in Alberta (90 per cent) and British Columbia (9 per cent) in Western Canada; these are also the provinces where the majority of natural gas is produced in Canada - followed by refinery LPGs at seven percent of the total, and synthetic gas liquids (SGLs) from upgraders accounting for 2 per cent of the total. The production shares by NGL for ethane, propane, butanes, and pentanes plus/condensate for 2012 were 32, 33, 14, and 21 per cent, respectively.
To put these numbers into a regional and global context, using data from the International Energy Agency and the United States Energy Information Administration, CERI estimates that worldwide production of gas plant liquids and refinery LPGs in 2012 was 15.9 million barrels per day (Mb/d), or 18 per cent of total petroleum production in that year (of 90.4 Mb/d). Meanwhile, the US produced about 3.0 Mb/d of NGLs (or about 19 per cent of the world’s NGLs production) in the same year.



And, while Canada’s 4 per cent share of the world’s NGLs production might appear small, Canada is in fact one of the world’s largest producers of NGLs (behind the Gulf States, the US, and Russia), consistent with its output of natural gas and crude oil, on a global scale. Data from the Canadian Association of Petroleum Producers (CAPP) and CERI estimates indicate that NGLs production represented 17 per cent of total petroleum production in Canada in 2012 (of 4 Mb/d).
In the context of a supply and disposition (S/D) analysis, the total supply of NGLs in Canada consists of local production volumes from upstream sources, and changes in stocks (together, domestic supply), plus imports, primarily from the US.
In 2012, total supply of NGLs in Canada was estimated to be 902 kb/d, of which 76 per cent (684 kb/d) was domestic supply, while the remaining 24 per cent (218 kb/d) was imports primarily from the US, with the majority of those imports (91 per cent) being pentanes plus/condensate.
Figure 2 also shows that imports of NGLs to Canada have increased rapidly between 2002 and 2012, while domestic production decreased steadily between 2007 and 2010. After that point, NGLs production started to once again increase.
To understand the changes of the production trend, it is important to remember that the majority of NGLs produced in Canada come from processing raw gas, and therefore, NGLs production levels are primarily driven by the quality of the gas being produced (dry or liquids-poor vs. wet or liquids-rich), but also, overall production volumes, amongst other factors.



Over the 2007 to 2012 timeframe, production of Canadian natural gas decreased from 16.9 billion cubic feet per day (bcf/d) to 13.8 bcf/d or by 19 per cent. This was due to decreased exports to the US, which historically relied on Canadian gas imports (10.5 bcf/d in 2007 but 8.5 bcf/d in 2012). However, over the last decade the US started to ramp up domestic gas production from shale plays such as the Bakken, Barnett, Eagle Ford, Fayetteville, Haynesville, Marcellus, and the Utica (amongst others), at an unprecedented pace (from 1.1 bcf/d in 2002 to 25.7 bcf/d by 2012).
With production increasing faster than demand in the US, imports of overseas gas (as liquefied natural gas), and Canadian pipeline gas, were needed less and less. And while Canadian domestic demand has increased over the last few years, driven by demand for gas for industrial processes and power generation, this incremental demand has not been enough to offset declines in export flows from Western Canada to both Eastern Canada (where US gas is now being imported), and to the various US markets, thus resulting in lower production volumes in Canada.
This helps explain the declining trend in overall NGLs production from 2007 to 2010, but also the increasing focus of Western Canadian natural gas producers on diversifying markets whether through the expansion of domestic demand or via LNG export opportunities to countries in the Asia- Pacific region and Europe.



Meanwhile, as North American natural gas prices have remained relatively low over the last few years, and with increased competition from US shale gas in North America and changes in transportation costs (pipeline tolls), Western Canadian gas producers have looked for ways to remain competitive and profitable. This has meant cutting production costs through innovations, but also high-grading (focusing on the best quality and most productive resources) while also maximizing revenues by extracting and monetizing the NGLs in the raw gas stream.
Thus, while overall Canadian gas production continued to fall between 2010 and 2012, NGLs production started to increase once again as more NGLs were available in the gas stream and were being extracted and monetized. This is a trend that has generally continued to date and drives some of the major assumptions in our analysis of future production volumes.



The midstream sector of the NGLs industry includes the complex series of processing, extraction, and marketing facilities (transportation and storage) required to get the NGL products from their sources (raw natural gas, crude oil, and bitumen) to end-users. These facilities include gas gathering, transmission, and distribution systems, refineries, and upgraders, gas processing, re-processing (straddling) and NGLs extraction plants, NGLs-mix gathering pipelines, storage facilities (both above ground (tanks/spheres) and below ground (caverns), NGLs fractionators, and specification or purity product NGL delivery pipelines, rail cars, and trucks.
Canada has a robust and extensive midstream infrastructure that connects NGLs producers with end-users across the continent. Given a generally upbeat sentiment pointing to the increasing availability of NGLs in Western Canada, evolving market dynamics and conditions, including some provincial government support programs, have led producers to focus on upstream investments and midstream companies to provide additional processing, extraction, and marketing solutions for gas and NGLs. It is estimated (as of yearend 2014) that between 2011 and 2016, 12.8 billion dollars are being invested in NGLs-specific midstream infrastructure in Western Canada. This estimate includes 6.2 billion dollars in investments in gas extraction plants (including 1.4 in divestiture of producer-owned assets), 3.4 billion dollars in NGLs pipelines, 1.8 billion dollars on fractionation capacity, and over 1.3 billion dollars in other marketing assets (such as storage and logistics).



The downstream sector within the NGLs context refers to the end-users of each NGL. In the context of a supply and demand (or disposition) balance for specific NGLs, total disposition includes domestic demand plus exports (primarily to the US). Domestic (Canadian) demand for NGLs in turn can be subdivided into energy and non-energy uses.
Energy uses include the use of NGLs for fuels, and within the energy category there are two sub-categories of users including retail end-users (users in the commercial/institutional, residential, transportation, and agriculture sectors of the economy), and wholesale or industrial users including the oil, gas, and mining industries, manufacturing, and construction industries. In Canada, energy use of NGLs is applicable primarily to propane, and to a lesser (and indirect) extent to ethane, as a large portion of the ethane available (about 45 per cent in 2012), is left in the sales or dry natural gas stream (also known as ethane rejection).
Non-energy uses for NGLs in Canada include the use of NGLs as a petrochemical feedstock for the production of plastics and other everyday consumer products (primarily ethane with minor volumes of propane, and butanes), solvents for enhanced oil recovery (all NGLs can be used for this purpose, depending on the application and reservoir conditions), blending for gasoline in re- fining operations to enhance the product blend for seasonal requirements (primarily butanes), and used as a diluent or blending agent to transport heavy conventional and crude bitumen from the fields and marketing hubs to refineries in end-use markets across Canada and the US (primarily pentanes plus/condensate, and some volumes of butanes).
In 2012, 86 per cent of Canadian NGLs disposition was attributed to domestic demand, while 24 per cent of NGLs supplies were exported to the US. Domestic demand is dominated by nonenergy demand (662 kb/d, or 85 per cent of total domestic demand), where the primary use is for diluent for heavy oil/ oil sands operations (354 kb/d), followed by the use of NGLs as a petrochemical feedstock (276 kb/d). Energy demand for NGLs in Canada was estimated to be 113 kb/d in 2012 (or 15 per cent of total domestic demand), and to be split evenly between wholesale and retail end-users.
Following investments in the midstream sector of the NGLs supply chain, CERI estimates that between 2013 and 2016, 3.6 billion dollars are being invested in downstream facilities (including petrochemical facilities and LPG export terminals) designed to monetize Canadian NGLs in new (LPG) and expanded markets (petrochemicals).



On an individual NGL basis, the outlook for each liquid is unique and reflects the availability and end-use market dynamics for each commodity. In the case of ethane, supply is expected to continue to grow given the increase in deep-cut extraction capacity in Western Canada - the purpose of deepcut extraction plants is to maximize NGLs recovery including up to 90 per cent recovery of ethane available in the raw gas stream - commissioning of projects that extract ethane from off-gases in upgrading projects, increasing ethane imports from US shale gas plays (Bakken and Marcellus/Utica) to both Western and Eastern Canadian petrochemical clusters, but also the potential extraction of ethane entrained in natural gas produced for future LNG projects. These increases in ethane extraction will offset continued declines in ethane extraction at gas-reprocessing (straddle) plants due to lower gas flows at export points.
On the other hand, demand for ethane will be limited by the expansion and modifications of existing petrochemical facilities (ethylene crackers and derivatives), that will be mostly completed by 2017. Beyond this incremental demand, ethane will not be extracted. It will be left in the gas stream for its fuel value.
Our analysis suggest that by the early 2020’s enough ethane will be available to be extracted in Western Canada (beyond expected demand levels) to support the construction of a new world-scale ethylene cracker. However, feedstock availability is but one of the many considerations of such a multibillion dollar investment decision. Alternatively, the opportunity exist to export the ethane from the Canadian West Coast in similar projects as the ones being planned in the US.
These alternatives, in our view, provide more economic value than simply burning ethane for its fuel value. The market for Canadian LPGs is one which is experiencing the same fate as that for natural gas. Supplies are increasingly available in excess of local demand. In 2012, imports of propane and butanes into Canada were minimal (4 kb/d and 8 kb/d, respectively) indicating that supply is primarily from local production sources. 40 per cent of propane supplies were exported to the US while 26 per cent of butanes supplies were exported to the US in the same year. As a means of comparison, in 2012, 18 per cent of Canadian gas supplies were imports from the US (mainly in Ontario and Quebec) while exports of Canadian gas to the US accounted for 51 per cent of total disposition. And even though local demand is increasing - driven by fuel and non-fuel uses across the oil and gas (including oil sands), petrochemical, and refining sectors - Canada’s primary export market (the US), is shrinking as their domestic supplies continue to increase driven by shale gas production. And just as in the case with natural gas, producers now find themselves in a situation where markets need to be diversified with the alternatives including:

► expansion of existing operations or application of new production technologies (solvent/diluent use for oil sands operations);
► the creation and expansion of propane use as a petrochemical feedstock (such as propane de-hydrogenation petrochemical facilities, or increased use of propane for ethylene production);
► increased demand of energy uses to substitute other fuels (such as diesel fuel oil);
► LPG exports out of the West Coast to markets in the Asia-Pacific region, one of the fastest growing LPG, consumer and energy markets.



Pentanes plus/condensate supplies are increasingly being imported from the US and other sources in order to meet demand for diluent in Western Canada. In fact, CERI estimates that in 2012, 59 per cent of the total supply of C5+/condensate were imports. While production of local supplies is expected to rise over the coming years, with the largest uncertainty being the potential volumes of condensate being produced in areas of Western Canada such as the Durvernay, increasing production from oil sands projects indicate that this market will increasingly be expected to be served by a larger share of imports.
In sum, each commodity faces different opportunities and challenges within the context of different outlook scenarios that generally point to increasing overall availability of NGLs in Western Canada, and in North America in general.
Taking into account the recent sharp drop in oil prices there are further uncertainties that need to be addressed.
Natural gas production will continue to be the main driver of NGLs supply growth in Western Canada (together with NGLs imports from the US), and the current slump in energy prices (crude oil, NGLs, and natural gas), makes the economics of continued local production growth challenging. Additionally, shale gas production in the US continues to beat analyst expectations, implying further potential erosion of market share for Western Canadian natural gas both in Eastern Canada and US markets. Furthermore, Canadian LNG projects could be a major driver for increased natural gas production, but the current price environment suggest that those projects will face challenging economics.



On the disposition side, the primary drivers for NGLs demand are the opportunity to expand the domestic petrochemical industry, and the possibility of exporting LPG to markets in the Asia-Pacific region.
Both of these alternatives rely in a wide spread between natural gas and crude oil prices, and discounted North American prices compared to world prices, both situations which were persistent since after the 2008-09 recession, but that have generally dissipated in the latter half of 2014. Another major driver of NGLs demand will be activity in the oil sands industry, which faces challenges of its own and a slower growth outlook under the current crude oil price environment.
Without a question, NGLs affect a broad-range of industries across the economy, locally, regionally, and globally. The relationships across all these energy commodities are complex and intricate in nature, and the outlook for increasing availability of NGLs in Canada points to the existence of various opportunities to expand domestic industries and to diversify and reach new markets. These opportunities will be met with challenges related to required investments in infrastructure, particularly in a low energy price environment. However, understanding those unique opportunities and challenges are the first step to effectively dealing with future uncertainty.
Here at CERI we will continue to monitor, analyze, and make sense of these issues, and will strive to provide independent and objective expertise to decision makers, as well as the citizens of Canada and abroad.

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