VettaFi’s head of energy research Stacey Morris provides a primer on natural gas liquids (NGLs).
What are natural gas liquids?
Morris: Natural gas is a mix of hydrocarbon gases, and natural gas liquids (NGLs) are the components that will take a liquid form at the surface when they come out of a well. NGLs must be removed from the natural gas stream at processing plants, typically located in producing regions. They are then transported to fractionation facilities where they are processed into their component parts. NGLs include ethane, propane, butane, isobutane, and natural gasoline.
How do NGLs support our daily lives?
Morris: I think people are familiar with NGLs like butane in lighters, or propane as a cooking or heating fuel, but they are literally all around us, and a number of NGLs are important petrochemical building blocks.
Products derived from NGLs, specifically ethane and propane, are very common in our households. Ethane is used to produce ethylene, which is found in most plastics. NGLs are also used to produce things like acetone and nylon.
Whether you’re in a house, an office, or a car, there are items all around you that come from NGLs. The tennis shoes or clothes that you’re wearing, vinyl siding on a house, carpet, your plastic water bottle or yogurt cup, and even car parts and fuel additives. So we’re constantly in contact with items produced from NGLs, but most people probably don’t even realize it.
What do midstream companies do with NGLs?
Morris: NGLs are attractive for midstream because there are many touch points between the well and the end user. Midstream companies typically have integrated systems across those touch points, and that allows them to collect a number of fees or clip a number of coupons along that value chain.
If we use the Permian as an example, midstream companies will gather natural gas and NGLs from wells and then transport them in smaller pipelines to processing plants in the field. When they’re processed, the natural gas and NGLs are separated. The mixed NGLs will move through another pipeline to fractionation facilities in Mont Belvieu, Texas, a big NGL hub. Then those fractionators in Mont Belvieu will separate NGLs into their component parts: ethane, propane, butane, isobutane and natural gasoline. Once they’re separated, those purity products can then be shipped in pipelines to customers or even exported overseas.
See more: “Midstream Investing in NGLs Amid Record Exports”
What role does the U.S. play in the global market for NGLs?
Morris: The U.S. is a significant producer and exporter of NGLs. The U.S. produces more NGLs than all of OPEC. Last year, specifically, the U.S. exported 2.6 million barrels per day of NGLs, and 60% of those exports were propane. Japan and China are the main customers for U.S. NGL exports.
Interestingly, Energy Transfer (ET) has previously estimated that they represent about 20% of the global export market for NGLs alone.
If you look forward over the next several years, petrochemicals are expected to be a significant driver of global oil demand. So NGL production in the U.S. is going to be important for meeting that growing global demand.
Where does midstream see growth opportunities related to NGLs?
Morris: As NGL production in the U.S. is expected to continue growing, you really need more infrastructure across the value chain. That means the growth opportunities for NGLs are pretty broad based.
Companies are investing in processing plants that initially separate the natural gas and NGLs. They’re building or expanding existing NGL pipelines that take NGLs from producing regions to where they’re fractionated. Companies are also adding more fractionation capacity, predominantly at Mont Belvieu.
If you look at midstream names like Energy Transfer (ET), Enterprise Products Partners LP (EPD), and Targa Resources (TRGP), they’re all expanding their NGL export capacity. Enterprise just recently announced a 300,000 barrel per day expansion to its propane and butane export facility at the Houston Ship Channel.
See more: “Enterprise Underscores Continued Growth in NGL Production in Permian”
How can investors get exposure to NGL growth opportunities?
Some examples of companies with significant NGL footprints in the U.S. include Energy Transfer, Enterprise Products Partners, ONEOK (OKE), Targa Resources, and MPLX (MPLX).
Investors can certainly do more research on those individual companies, or they might consider getting exposure to NGLs through either MLP or midstream-focused ETFs.
See more: “AMLP and MLPA: Which MLP ETF Is Right for Your Portfolio?”
For more news, information, and analysis, visit the Energy Infrastructure Channel.