The LPG Echo of the Shale Gas Boom

• Increased US production of LPG and natural gas liquids is an outgrowth of the shale gas revolution and a key ingredient for translating its benefits into industrial growth.
• The infrastructure investments, export opportunities and price relationships for these liquids represent a microcosm of the similar issues for shale gas and LNG.

An article in the Wall St. Journal last month on the impact of a Midwest propane shortage on farmers trying to dry their corn harvest caught my attention. How could propane be in short supply, when US production is soaring due to shale gas? While it turns out that the shortfall in question was localized and temporary, it prompted me to take a closer look at LPG supply and demand than I have in many years. I found yet another market that is being transformed by the shale gas revolution.

Like most Americans--except for those in the roughly 5% of US homes heated with it-- I normally think about LPG only when I have to change the tank on my barbecue grill. That wasn't always the case; early in my career I traded LPGs for Texaco's west coast refining system. I'm happy to see that some of my former colleagues from that period are still involved and frequently quoted as experts on it. Although the LPG market is obscure to many, it represents a microcosm of the issues of reindustrialization and product exports arising from the recent turnaround in US energy output trends.

In order to follow these developments, we first need to clarify some confusingly similar acronyms, starting with LPG. Although often used synonymously with propane, it actually stands for "liquefied petroleum gas" and covers mainly propane and butane, though some in the industry include ethane in this category. The term reflects the oil refinery source of much of their supply, both historically and to an important extent today.  LPG overlaps with natural gas liquid (NGL)--ethane, propane, butane, isobutane and "natural gasoline"-- that has been separated from "wet" ( liquids-rich) natural gas during processing. NGLs are entirely distinct from the anagrammatical LNG, or liquefied natural gas, which consists mainly of methane that has been chilled until it becomes a liquid. By contrast, NGLs and LPG are typically stored at or near ambient temperature but under pressure to keep them in the liquid state.

LPG and NGLs make up a distinct segment of US and global energy markets, falling between the markets for natural gas and refined petroleum products. They are also linked to these larger markets, both logistically and economically. For example, gas marketers vary the amount of liquids they leave in "dry gas" to meet pipeline natural gas specifications based on price and other factors, and oil refiners blend varying quantities of butane into gasoline, depending on seasonal requirements. Propane and butane are mainly used as fuels, while ethane and isobutane are chiefly chemical feedstocks.

The development of shale gas in the US and Canada has affected the supply of NGLs and LPG in several important ways. First, starting around 2007 increasing shale gas output helped to halt and then reverse the decline in US natural gas production from which US NGLs are sourced. Then, following the financial crisis, diverging natural gas and crude oil/liquids prices pushed shale drillers toward the liquids-rich portions of shale basins like the Eagle Ford in Texas, in order to maximize their revenue. The resulting surge of US NGL production in late 2009 reinforced the decline of US LPG imports that began with the recession. According to US Energy Information Administration data, the US became a fairly consistent net exporter of LPG in 2011.

The current US LPG surplus is around 100,000 bbl/day, out of total production of around 2.7 million bbl/day. That surplus and its expected growth provides the basis for a number of announced LPG  export projects, as well as the anticipated development of new domestic chemical facilities such as ethylene crackers that would consume substantial portions of new supply, particularly of ethane.

The success of those projects depends on significant investments in new infrastructure, including gas processing, NGL fractionators to split the raw NGL into its components, and pipelines to deliver NGL to fractionators and LPG to markets. This is particularly true for the Marcellus and Utica shale gas in the Northeast, from which little or no ethane has been extracted due to limited local demand. Not only is that a missed manufacturing opportunity, but it constitutes a potential constraint on further liquids-rich gas development, since leaving too much ethane in the marketed gas would cause it to exceed pipeline BTU specifications.

In the meantime we're left with a situation that's analogous to the growth of tight oil production from the Bakken  shale. New sources of production have come on-stream faster than the infrastructure necessary to deliver them efficiently to where they can be processed or consumed. That puts a growing US surplus of propane and other NGLs in tension with tight regional markets for these fuels in the Midwest and Northeast, where residential propane prices are running well ahead of last year's at this time.  The resolution of this apparent paradox will depend on which infrastructure and demand projects are eventually completed, and how soon.

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.