Natural Gas Liquids (NGLs)

April 13, 2011

Natural Gas that is burned in your home or in industrial applications is a dry sweet gas that is primarily methane.  However, the natural gas extracted from the ground contains many other components such as water, carbon dioxide, and possibly hydrogen sulfide.
All of which are removed from the gas stream at the point of production, which results in gas production meeting quality pipeline specifications and being suitable for public use. Unfortunately, these components add to the processing costs and the individual elements have little, if any actual value. 

Besides methane, produced natural gas also contains other hydrocarbon components such as ethane, propane, butanes, as well as pentanes and even longer-chain hydrocarbons.  These other components are sometimes found in significant quantities in the gas stream which can add considerable value to natural gas production. These hydrocarbon compounds are extracted by cooling the gas stream to a temperature at which the components condense to their liquid form and are separated from the methane. As a group they are referred to as Natural Gas Liquids or NGLs. Some NGLs may be recovered near the point of production or they may be left in the gas that is transported on the Alberta System. 

The hydrocarbons (named because they consist of carbon and hydrogen) are often referred to as C1, C2, C3 etc, with the number relating to how many carbon molecules are in the component.   For example, methane contains one carbon molecule and hence is often called C1.  Each of the NGL components has a different use and a resultant market value that is almost always higher than their value as a source of heat.

• C2 or Ethane is used almost exclusively in Alberta by the petro-chemical industry for the production of ethylene
• C3 or Propane is often sold as winter heating fuel, and competes in many markets with heating oil or refinery products. Therefore its price generally tends to follow oil prices.
• C4 or Butane is sold to refineries where it is primarily used for gasoline blending. As a result, its price tracks as a percentage of oil prices.   
• C5+ or Pentanes Plus is also often simply referred to as condensate, is mostly used in Western Canada as a diluent where it is mixed with heavy oil to allow the oil to more easily flow through pipelines.   An increase in heavy oil production and a limited supply of condensate has meant that condensate is often priced at a premium to light oil.

The removal of NGLs from the gas stream is called extraction.  For economies of scale, extraction facilities, or straddle plants as they often called, are typically located at the inlet to the Alberta System (field gas processing plants) or where large volumes of gas are being transported on the Alberta System (straddle plants). These locations are serviced by additional NGL upgrading and transportation infrastructure to separate out the individual NGL components and transport them to their respective markets by pipeline, rail, or truck. 

The NGL industry in Alberta is significant.  Based on a 2008 assessment of NGL value at the straddle plant, the value of the frac spread, which is the ratio between NGL prices to natural gas prices, with ethane simply accounted for as energy value, is estimated at $1.6 billion/year.

Extraction rights, which provide the opportunity to recover NGLs from a prescribed volume of the common stream gas available at the inlet of a straddle plant, have always been held by the shippers on the Alberta System.  Historically, shippers held matching receipt and delivery capacity, however after 1989, receipt and delivery contracting became independent of each other.  Delivery shippers however continue to receive extraction rights based on the flows past the Straddle plants, whereas receipt shippers receive no extraction rights. This arrangement has become known as the current Extraction Convention.

The current Extraction Convention does not allow producers and receipt point shippers access to the value of the NGLs they put onto the Alberta System.  Furthermore, the current Extraction Convention does not recognize the varying amounts of NGL received onto the Alberta System from different shippers at different locations which results in cross subsidization among shippers.  

TransCanada is working towards the implementation of a new proposed model called NEXT (NGL EXTraction rights).  NEXT is a receipt-based rather than a delivery-based, natural gas liquids extraction rights allocation model. 

NEXT provides receipt shippers with a more direct link to the value of the NGL components contained in the gas they produce and deliver onto the Alberta System.  NGTL believes that NEXT allocates the value of the actual NGLs to the specific gas producer bringing it onto the Alberta System, which is not only fair, it has a secondary benefit of providing additional incentive for producers to explore for liquids rich gas and bring that production to markets. 

For further information on the NEXT model and how it works, watch for more in Update, or contact Dan Ronsky at 403.920.5581. 

Further Information