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Alaska looks at gas liquids Consultant advises state on NGLs from proposed North Slope gas project Larry Persily Petroleum News Government Affairs Editor
Making money from the ethane, propane and other natural gas liquids that come up with the methane in North Slope natural gas isn’t as easy as simply building a gas pipeline and stripping out the liquids somewhere along the way.
A consultant advising the state of Alaska said the challenges include deciding where to strip the liquids from the gas stream; figuring out an affordable way to get the ethane and other liquids to manufacturers; and finding manufacturing capacity for turning the raw materials into plastics and other products — whether building, expanding or using existing plant capacity.
“The petrochemical industry is notorious for some pretty horrendous cycles,” said Lesa Adair, a vice president at Muse Stancil, a worldwide energy industry consulting firm headquartered near Dallas. The Alaska Department of Revenue signed a $90,000 contract with Muse Stancil in March, and company officials presented an initial NGL briefing to state officials the last week of April.
The state wants to learn more about potential uses for the liquids produced from a North Slope natural gas project as it negotiates with producers and others interested in building a multibillion-dollar pipeline to move the gas to market. Muse Stancil’s job is to analyze the economics of possibly creating a petrochemical industry in Alaska, including whether the liquids’ volume would be sufficient to supply a new facility.
The analysis includes looking at a possible liquid-stripping plant in Fairbanks or elsewhere, grabbing the ethane and other liquids from the gas line as it takes the methane from the North Slope and into Canada for distribution across North America. Consultant looks at Alaska economics Muse Stancil’s contract also calls for a review of the advantages and disadvantages of stripping the liquids in Alaska and finding a way to ship the products to markets vs. sending liquids-rich gas to Alberta for processing and then shipment through existing pipe and rail systems to customers.
“It’s one of those balancing acts,” Adair said, measuring the cost of new plants and/or new pipelines vs. using existing or expanded facilities.
Alberta has more natural gas liquids than it needs for its own petrochemical plants and exports a lot of Western Canada’s liquids to U.S. and Eastern Canada plants, Adair said. Much of the liquid production from Canada ends up traveling a long distance to petrochemical plants in Texas. “That’s where the bulk of the demand is,” Adair said in an interview last month.
Ethane is used for petrochemical feedstock; propane for industrial, commercial and retail customers, crop-drying and other farm uses; and butane for gasoline blending, aerosols and fuels.
Depending on market conditions and Btu requirements for the end users of Alaska gas, a North Slope gas project supplying 4.5 billion cubic feet per day, as proposed by the major producers, could create NGL volumes of up to 100,000 barrels a day. That’s about 5 percent of total U.S. demand.
“The natural gas liquid is not the consumable,” Adair said. “It has to have many other things done to it.”
Ethane, for example, is used to make ethylene, which then can be manufactured with other components to make a wide range of products, including polyethylene plastic for packaging, antifreeze and aircraft de-icer, vinyl siding and even garden hoses. Review will consider possible Alaska incentives Many Alaskans have long dreamed of a petrochemical industry in the state, creating jobs and diversification in the oil and gas industry that dominates the state’s economy. The Department of Revenue contract with Muse Stancil pointedly addresses that very issue, asking the consultant to look at what kind of subsidies might be needed to make an Alaska petrochemical complex economic compared to the alternative of sending North Slope liquids to Alberta or elsewhere.
Perhaps the state’s tax structure or pipeline tariff may need to include incentives or a separate rate to assist in bringing NGLs to market or developing an industry in Alaska, Muse Stancil said in its opening presentation to the state. That could include flexibility in valuing the products for royalty or tax purposes.
“They’re really just some thought points,” Adair said in an interview a few weeks after the presentation.
“This (report) does not attempt to advise on any course of action, but rather simply describes the industry into which Alaska gas and NGLs will compete,” Muse Stancil said in its opening presentation.
Utilizing the liquids is a matter of deciding where they have the highest value. Taking out the liquids from the gas stream and breaking them apart — fractionation — into ethane, propane, butane and other components is not always so profitable.
That’s a separate operation from the gas conditioning plant that would be needed on the North Slope to take out the carbon dioxide, hydrogen sulfide, water and other impurities from the gas before putting it into a pipeline. Gas liquids business not always profitable Depending on market conditions, the second step, taking out the gas liquids, is a tough business. A Muse Stancil chart of average net operating margins for NGL plants from 1990 through March 2004 shows U.S. Midcontinent and Gulf Coast plants operated at losses for five periods of several months each over the years — the longest lasting about a year in 1998-1999. The operating margin for Gulf Coast plants, excluding overhead, capital expenditures and return on capital, was under 20 cents per thousand feet of gas fed into the plant for all but two brief periods over the past 14 years.
“The sale of natural gas liquids is certainly not a slam dunk from a profitability standpoint,” said Dave MacDowell, natural gas project spokesman for BP Exploration (Alaska) Inc. in Anchorage.
That’s also what the numbers say in the annual reports of Canadian pipeline operator Enbridge Inc., which owns 42.7 percent of the Aux Sable Liquid Products plant in Illinois. Aux Sable strips the NGLs from the more than 1.5 bcf per day of wet gas delivered through the Alliance Pipeline from Western Canada. Enbridge’s share of the loss from Aux Sable was $6.9 million in 2003, $3.1 million in 2002 and $6.2 million in 2001, according to Enbridge’s annual reports.
Regardless of whether North Slope gas line project developers can turn a consistent, reasonable profit from the liquids, much of it has to be removed from Alaska gas somewhere before delivery to utilities and other customers. Otherwise, the gas would be too rich — too high of a Btu level — for customers, MacDowell said.
Much of the heavier liquids are already pulled from the gas during oil production from North Slope reservoirs and mixed in with the oil down the trans-Alaska oil pipeline, leaving a higher proportion of lighter ethane and propane for later recovery during a gas line project.
The biggest fractionation centers in North America, Muse Stancil explained, are in Sarnia, Ontario, just across the Michigan border and fed by a couple of large pipeline systems reaching from Western Canada, through the Midwest and into Ontario; Conway, Kan., served by multiple pipelines from north and south; and Edmonton, Alberta. The reference price point for North America NGL is at Mount Belvieu, Texas, in the center of the Gulf Coast petrochemical industry. Propane to Midwest, ethane to Gulf Coast NGL markets tend to be geographically isolated, Muse Stancil said, with a lot of the propane going to the Midwest for crop drying and other agricultural uses. Most of the ethane, however, is shipped by pipe or rail to the Gulf Coast to feed the petrochemical plants.
“There is no ethane market in Chicago, never has been,” said Ed Small, a consultant and 30-year veteran of the natural gas industry in Calgary. Depending on market conditions, he said, much of the ethane can often earn more staying in the gas stream than paying its own way from Canada to the Gulf Coast for delivery to a plastics plant.
And though ethane usually sells for more than dry gas, a Muse Stancil chart presented to state officials shows ethane selling at close to natural gas or less in early 1996, 1997 and 1998, and pretty consistently the same or less since natural gas prices started their run-up in early 2001. And while that is good news for gas producers looking for the best price for their liquids, it’s been very hard on U.S. petrochemical plants that need affordable feedstock.
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