Domestic natural gas liquids production is expected to remain more resilient over the next few years, possibly not slowing through the end of the decade, Raymond James & Associates Inc. said Monday.
The analyst team of J. Marshall Adkins, Graham Price and J.R. Weston offered their view for the U.S. natural gas liquids (NGL) market after issuing two other forecasts earlier this month regarding domestic oil and natural gas (see Daily GPI, Sept. 21 and Shale Daily, Sept. 14). NGL production, an often overlooked part of the U.S. hydrocarbon supply formula because it is "not quite oil, not quite gas," represents about 25% of total U.S. liquids output.
NGLs today trade at a 60% discount to oil and a 25% premium to gas, and while trading could trend toward parity with other liquids as demand-driven responses develop, this may not occur for several years, said the Raymond James trio.
"In fact, we don't see U.S. NGL production slowing down year/year (y/y) through the end of the decade." By 2020, average U.S. NGL production may be 30%-plus higher from current levels to 4.3 million b/d, with peak y/y growth coming in 2018.
Raymond James is forecasting 8% annual NGL growth, or a minimum of 700,000 b/d of y/y growth, from 2017-2020, when giving NGLs 50% credit versus oil.
Most NGL growth areas are tracked and modeled in Raymond James' production-by-play mode, but analysts also track NGLs by Petroleum Administration for Defense Districts (PADD) locations. The largest NGL region is PADD 3 (Texas and surrounding states), representing more than half of the U.S. NGLs, while the fastest growing region is PADD 1, the Marcellus/Utica area, 72% higher y/y. The northern PADD 2, which is up 117% y/y, is boosted by the Bakken Shale's contribution.
The biggest takeaway from recent Energy Information Administration production data is that PADD 3, which includes the Permian Basin and Eagle Ford Shale, posted only a 34,000 b/d y/y gain, analysts noted.
"This equates to just 1.8% y/y growth, a data point we've seen steadily decline for several months in a row," said analysts. "Intuitively, there may be more economic incentive to recover ethane in plays near the Gulf Coast compared to the takeaway-constrained Bakken and Marcellus/Utica, but the data is trending in the other direction."
Raymond James still sees associated gas adding significant NGL supply growth over the next few years, backstopped by gas and liquids growth in the Northeast, which "means the majority of remaining NGL growth will be coming from the Marcellus and Utica..."
Analysts reduced their U.S. NGL pricing assumptions based on demand growth.
"For the remainder of 2015, we are forecasting the composite U.S. NGL price will increase only slightly to 46 cents/gallon. In 2016, we expect that composite U.S. NGL barrel pricing will track about 10% higher, in line with our modest oil price improvement expectation to 50 cents/gallon," a downward revision.
If U.S. oil prices strengthen to $65-70 longer term, domestic NGL prices "should bounce up to 60 cents/gallon," said analysts.
At those prices, exploration and production companies "won't be hitting home runs, but there should be enough production to keep midstream assets adequately utilized and spur strategic, demand-pull infrastructure projects. In our view, the petrochemical industry remains the key beneficiary of plentiful, low-cost supplies even into 2020."