Prices for natural gas liquids, or NGLs, have dropped
precipitously this year amid growing supplies, weakening the
profitability of a key driver of the US shale development.
This is according to a quarterly analysis from the oil and
gas division of advisory services firm Ernst & Young, who
released the report on Tuesday.
Extracting NGLs, such as ethane, propane and butane, is
still more attractive than producing dry natural gas, the firm
says. But it's not as robust as it was nine months ago.
NGL production has surged in recent years as oil and gas
producers dramatically changed their drilling focus from dry to
liquids-rich gas in a bid to boost profits.
But supply has outpaced demand, primarily from chemical
plants that use NGLs as feedstock for plastics. The result
has been lower prices.
Companies still have plenty of incentive to produce
NGLs. Prices remain significantly higher than natural
gas. But we're seeing a marked shift in demand, said
Marcela Donadio, Americas oil and gas leader for Ernst &
Young. The market for liquids seems to be leveling
Profit margins for the
global refining business strengthened
compared to the second quarter as product prices stayed
relatively high, the firm said.
Much of the recent strength in the global downstream segment
has come from improved margins from distillates, such as
heating oil, gas oil and diesel fuel. Global distillate demand
growth has remained relatively strong, while gasoline demand
worldwide has been fairly weak.
Looking ahead, the future for the downstream sector
continues to present challenges. A lot of new refining capacity is expected to
come online in the next three to five years, which would erode
refining margins across the board
and could force less-profitable plants in the US and Europe to
Further pressuring the "frac spread" has been the recent
increase in natural
gas prices, which have been driven upward by improving
fundamentals a slow-down in production growth,
increasing demand (particularly in the power sector, where
year-to-date gas consumption is up 30%), and a reduction in the
massive storage overhang that had persisted over most of the
Spot natural gas prices have climbed over $3.25/MMBtu. While
this is about 50% higher than the second quarter, it is still
low by historical standards.
After a long time of being significantly above normal
levels, natural-gas storage levels in the US are approaching a
more average range. This is encouraging for natural gas
producers as prices would be strengthened by a cold, early
winter and lower storage levels.
Oil prices remain high, with UK Brent crude trading over
$110/bbl and US WTI crude trading over $90/bbl.
Despite worldwide economic uncertainty and growing political
tensions in the Middle East, supply and demand have been
relatively balanced, with no real supply shortages or supply
excesses in sight.
An important recent development is the strong comeback of
Iraq's oil production, which reached its highest-level in more
than 30 years. Particularly if global oil demand remains
relatively weak, this is likely to pressure OPEC members to cut
back production in order to make room for Iraq's new output,
the firm says.
US oil production continues to grow amid increased shale
drilling, but infrastructure bottlenecks remain a serious
issue. Defying the historical trend, moving crude by rail has
become a crucial piece of the US energy infrastructure and the
solution continues to gain ground.
Spending by oil and gas producers worldwide is still
cautiously increasing, but at a slower pace. Drilling in the
Gulf of Mexico has come back fairly strongly this year with a
steady increase in rigs count.
In the US, total rig count has declined slightly over the
last few months as new oil and liquids-directed drilling has
not fully offset a continued decline in natural
gas drilling. Globally, except for some offshore drilling,
cost pressures for oil field services are being somewhat
tempered by gains in efficiency.
Oil and gas transaction activity in North America was up
slightly in the third quarter, driven mainly by the
$15.1-billion bid of China's CNOOC for Canada's Nexen. The move
underscored the continuing strong interest of Asian companies
in North American unconventional oil and gas assets.
Merger and acquisition activity is expected to stay strong
as companies with weakened balance sheets and limited cash
flows move toward strategic and/or deep-pocketed buyers
in particular, the majors or NOCs.