While NGL economics have been particularly good of late, they won't necessarily stay that way. Prices could come under pressure as supply grows and demand softens, noted analysts at Tudor, Pickering, Holt & Co. Securities Inc. (TPH) last week.

TPH analyst Becca Followill and her team are predicting bottlenecks for NGLs. The first is likely to be fractionation capacity, and the second will be demand for ethane.

"Both bottlenecks can be cleared -- all it takes is committed [dollars]," the analysts said. "We will see more fractionation expansions/new build, but owners also don't want to destroy some currently great margins. If petrochems perceive that there is going to be a cheap, long-term source of ethane, we will see some additional conversions of heavy crackers to use NGLs and even maybe some expansions/new builds."

Over the last few months the industry has seen a number of new projects targeting NGLs, particularly those produced from the Marcellus Shale (see related story). Among producers touting increased NGL production are Chesapeake Energy Corp. (see NGI, Feb. 22) and EOG Resources Inc. (see NGI, Feb. 15).

"Going forward, trying to predict future NGL production is a daunting task that we're just analytically starting to tackle at this point," the TPH team said. "But our bias is toward a slightly increasing yield, and NGLs growing at a pace higher than gas production."

The TPH analysts noted that since their last update on NGLs in June 2009, production is up 2%, and ethane -- which accounts for 40-45% of the NGL barrel -- has seen production climb 7%; meanwhile, gas production is flat. New processing capacity in the Rockies is one reason, they said. There also could be some uplift in production from producers targeting liquids-rich shale gas. And U.S. liquefied natural gas (LNG) terminals are increasingly able to take rich LNG and extract liquids, they said. "And, on the supply side, about 25% of the horizontal rig count is directed toward liquids-rich gas.

"Unless [exploration and production companies] rein in drilling, low gas and high oil prices mean continued favorable processing economics vs. historic levels. However, fracs should move somewhat lower as 2011/2012 forward curves imply [a] frac spread of $6/MMBtu (NGLs at 50% of crude). Using NGLs at 40% of crude implies fracs of $3.50/MMBtu, still in line with seven-year average spreads of $3.15/MMBtu."

Producers counting on rich gas to pad their bottom lines should be wary of the sensitivity of the domestic market for NGLs and the increasing cost of getting NGL production to market, as well as regional dynamics around NGLs from shale plays, the analysts warned.

"Don't just look at frac spreads, which the industry uses as a gauge of whether processing economics are favorable. Keep your eye on NGL pricing as a percentage of crude and absolute NGL pricing -- particularly ethane," they said.

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