A crew works on a drilling rig at a well site for shale-based natural gas near Zelienople this summer.
By Erich Schwartzel Pittsburgh Post-Gazette
The same hydrocarbons that have propped up oil and gas balance sheets for several months are starting to look less sturdy.
Prices for ethane and propane -- both lucrative liquids that are extracted alongside natural gas -- have fallen significantly over the past year as companies target the hydrocarbons and the high commodity prices they bring with them.
Ethane in July cost about 31 cents per gallon, a drop of about 60 percent from one year ago and the steepest drop among the hydrocarbons extracted from the Marcellus Shale gas formation that underlies much of Pennsylvania.
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An unseasonably warm winter that reduced the need for heaters didn't help things, driving the price of propane down to 88 cents per gallon in July 2012 from the $1.53 seen one year prior, according to figures at the country's main processing plant in Mont Belvieu, Texas. The propane market has endured sudden month-to-month plunges this year, with a 20 percent drop from April to May.
PG graphic: U.S. ethane-ethylene production 2005-12 (Click image for larger version)
The softening in prices is sorry news for drillers that have relied on natural gas liquids to compensate for record-low natural gas prices. Natural gas liquids, or NGLs, are extracted alongside the natural gas and stripped out for sale at prices that tend to follow higher crude oil figures. Their use in manufacturing, particularly in plastics, have made them desirable to a petrochemical industry growing to accommodate the rise in production.
But despite the attention of some of the world's biggest companies, the age-old rules of supply and demand are catching up to the hydrocarbon market.
Ethane and propane production is at the highest level in decades, especially since firms have diverted attention away from "dry" gas portions of shale rock that don't contain the liquids.
In Pennsylvania, for example, rigs have migrated toward the Ohio border in search of the higher-priced commodities, and firms are assembling plans to build massive plants to process the natural gas liquids.
Oil and gas producers often prioritize one energy source over the other to take advantage of high prices, said Andrew Coleman, an energy analyst at St. Petersburg, Fla.-based Raymond James & Associates Inc.
It's like a company that sells "lemonade in the summer and coffee in the winter," he said.
A barrel of natural gas liquids was typically worth 60 percent of the price of a barrel of crude oil, but that ratio has since fallen to 40 percent, according to Peter Staas, an analyst at Investing Daily, a trading analysis group in Falls Church, Va.
At the same time, ethane production has reached record levels, hitting 30 million barrels per month in March 2011 for the first time since the U.S. Department of Energy started recording production.
Some companies with substantial stakes in the Marcellus region, like Oklahoma City-based Chesapeake Energy and Fort Worth-based Range Resources, have been especially bullish on wet gas prospects.
Range Resources started building plants that process hydrocarbons in 2006, investing $2 billion in the region with its processing partner, the MarkWest Energy Group. Chesapeake CEO Aubrey McClendon once said the liquids-rich shale under Ohio might be the biggest thing to hit the state "maybe since the plow."
Larger petrochemical facilities that process hydrocarbons into products have traditionally been concentrated in the south, where it's easier to ship overseas from the Gulf Coast.
"By growing so much in gas production, we sent too much to the processing facilities," said Mr. Coleman. "Those are maxed out."
Several multi-national firms have tried to take advantage of the overproduction elsewhere by building "fractionation" facilities across the Mid-Atlantic and Rocky Mountain states that break down hydrocarbons.
In this region, Royal Dutch Shell has signed a land purchase agreement with a company in Beaver County, for a massive ethane "cracker" plant.
At a recent meeting before the state House Appropriations Committee, Pittsburgh Regional Alliance Executive Vice President Dewitt Peart told lawmakers that nine companies at one point expressed interest in building petrochemical facilities in the area. In addition to Shell Oil, several are still considering the region, he said.
The Regional Alliance started reaching out to petrochemical manufacturers more than two years ago after Murry Gerber, the former chairman and CEO of Downtown-based gas driller EQT Corp., told the organization that the ethane market brought on by the Marcellus was one to watch.
Still, petrochemical facilities take several years to build, and won't solve every problem facing the fluctuating market, said Mr. Coleman.
"The industry's first bottleneck was not knowing how to drill shales. Now, the bottleneck is pipelines and fractionation capacity," he said. "And then the one big bottleneck is the uncertainty in a global market."