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Lower crude prices will erase all expected US natural gas liquids production growth through 2021
09 April 2020Veeral Mehta
The combined one-two punch of ongoing demand destruction wrought
by coronavirus (COVID-19) and obstinate overproduction by several
key countries has sent crude prices reeling. As of early April, WTI
was pricing in the mid-20 dollars per barrel range, with some
heavier crudes in the teens or even single digits. And given that
the demand impact will linger after COVID-19 has been brought to
heel - and that US crude production is particularly vulnerable to
low prices - IHS Markit is forecasting a significant (>26%)
decline in American oil output.
This, in turn, will have a significant impact on the production
of "associated" natural gas. That is, natural gas production that
comes from the same well as crude oil. IHS Markit expects such
associated US gas output to fall by around 20% over the next two
years. Some of this will be offset by higher "non-associated"
production but, overall, US gas output is still poised for a major
pullback in the coming years due to the ongoing low-price
environment.
Lower natural gas output will, unsurprisingly, have an impact on
production of the natural gas liquids (e.g. ethane, propane) that
are derived from the gas stream. These natural gas liquids (NGLs)
are a relatively important - and lucrative - link in the
hydrocarbon value chain. They have myriad uses, perhaps most
irreplaceably as precursors in the production of petrochemicals and
plastics. And mirroring the surge in US natural gas output
recently, field NGL production increased by 27% between 2017 and
2019.
Figure 1: US natural gas liquids production outlook
Prior to COVID-19, IHS Markit had expected US NGL production to
continue its strong growth, with a nearly 19% increase forecasted
by 2021. This growth will stall in the wake of COVID-19 but,
notably, US NGL output is not expected to decline significantly
between 2019 and 2021. Natural gas output will, as noted, decrease
but a lower rate of ethane rejection (ethane being left in the gas
stream) will keep total NGLs production more or less flat over the
next two years. However, given that US and (especially) global
demand for NGLs is still forecast to grow in the next two years,
this US NGL "reset" could spell trouble for the petrochemical
supply chain.
Veeral Mehta is a director on the Midstream Oil and
Natural Gas Liquids (NGL) group at IHS Markit.
