Gas processors eye contract changes to ease price spike impact
US gas processors are considering modifications or additions to standard processing contracts to avoid or mitigate the impact of future gas price spikes, said analyst Daniel Lippe of Petral Cos. He said a November-December gas price spike caused substantial economic damage to gas processors and ethylene producers.
By the OGJ Online Staff
HOUSTON, Feb. 16�US gas processors are considering modifications or additions to standard processing contracts to avoid or mitigate the impact of future gas price spikes, said analyst Daniel Lippe of Petral Cos.
In an article that will appear in the Mar. 12 issue of Oil & Gas Journal, Lippe said an unusual weather pattern from late November through late December caused a spike in gas prices that also caused substantial economic damage to gas processors and ethylene producers.
Data from the National Oceanic and Atmospheric Administration indicate December heating degree days were 10% higher than the 30-year average.
Petral estimated US gas demand was 83 bcfd in December or about 13 bcfd higher than in November and 8-10 bcfd higher than any December during 1990-1999.
Record withdrawals from inventory in early December pushed gas prices to $10/MMbtu, almost double what prices were in October. A break in the cold weather allowed prices to fall in January.
Lippe said by the second week in December, spot prices for all natural gas liquids (NGL) products were well below their BTU values vs. natural gas. Profit margins for gas processors on a spot/spot pricing basis had collapsed. And surging gas prices gave a clear signal that markets could easily absorb a substantial increase in gas volumes and BTU content.
The Energy Information Administration data indicate gas plant production was 1.93 million b/d in October. Petral estimated it fell to 1.6 million b/d in December and went as low as 1.5 million.
Petral estimated ethane output dropped 185,000 b/d and propane production dipped 60,000 b/d, accounting for two-thirds of the overall decline of 400,000 b/d.
It said ethylene production from LPG crackers averaged 1.96 billion lb in October and November but dropped to 1.73 billion lb in December and 1.4-1.5 billion lb in January.
Lippe said the gas processing industry normally recovers about 1.9 million b/d of gas liquids when operating at full recovery levels. But when gas processing margins collapse, the liquids become much more valuable as natural gas.
He said NGL production volumes are equal to about 6 bcfd on a standard dry natural gas basis. Gas plant production volumes of ethane and propane alone are equal to about 4 bcfd of dry gas production, based on a standard btu content of 1030 btu/cu ft.
When many gas plants were closed in mid-December to mid-January, butanes and natural gasoline in unprocessed natural gas condensed in interstate pipelines and caused operational problems.
The risk of gas price spikes will continue. To keep gas plants operating at minimum recovery levels, processors are considering contract changes that take the form of suspending full keep-whole provisions for percentage-of-proceeds contracts or fee-for-service provisions.