Beware the NGL
In “Not All Barrels Are Created Equal” I wrote about the risk-adjusted values placed upon oil reserves depending on their reserve category, and in “What’s In a BOE?” I described how natural gas volumes are converted and reported as “barrels of oil equivalent” (BOE). In this article I want to differentiate between two distinct types of liquid hydrocarbons (crude oil and NGLs) that are both commonly reported as “barrels of oil.”
Crude oil is produced from sub-surface reservoirs in a liquid form usually along with associated natural gas, and water. The raw production stream is run through a separator where the gas and liquid is separated. The oil and water are subsequently separated where the oil can be sold to a refinery, either through a pipeline or hauled on trucks, and the water can be disposed of. The gas is sent down a pipeline to a gas plant where it will undergo a process to remove the heavier hydrocarbons before the “dry” gas is put into a pipeline and sent to market. The heavier hydrocarbons that have been removed from the “wet” gas stream are referred to as Natural Gas Liquids (NGLs).
With a gas well the process is very similar, but without the crude oil. In the case of a gas well any hydrocarbon liquids produced from the well are referred to as “condensate” which is typically much lighter and volatile than crude oil. If the gas produced is not “dry” enough to be taken directly to market, it will be sent to a gas plant for the extraction of NGLs, just as the gas from an oil well.
The difference between NGLs and crude oil is their chemical makeup. Crude oil is a mixture of hydrocarbons from lighter to very heavy, while NGLs are typically composed of only the lighter hydrocarbons (ethane, propane and butane). The reason this is significant is because the market for these two types of petroleum liquids is different since their chemical composition is different. Some companies report NGLs separately from crude oil, but this is not always the case..jpg)
This is becoming more of an issue lately because of the tremendous surge in development activity of resource plays particularly targeting the “oilier shales.” As oil and gas prices continue to diverge companies are actively moving from pure gas shales to the oilier shales to reap the profits of the recovering oil market. This move can be seen in the graph of recent rig activity presented by Slyvia Barnes (MadisonWilliams) at the Hart A&D Conference last week.
This industry shift, and corresponding increase in supply, is putting pressure on the NGL market. Another graph from Ms. Barnes presentation demonstrates the relationship between crude oil and NGL prices. There is concern in the marketplace that as the attraction of these “oily” shales continues to increase the supply of NGLs, the disconnect between the value of oil and NGLs will expand.
As this industry trend continues to play out it is becoming even more important to understand the difference between an oil play and an “oily gas” play. Some resource plays are oil (Bakken, Wolfberry, etc) while others are either gas or “oily gas.” Here again, we see the need to fully understand the assets we are dealing with and the risk associated with valuing assets solely based on reported BOEs.
