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Strategy of going for liquids is not working out for natural gas companies [ClearOnMoney]
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Strategy of going for liquids is not working out for natural gas companies

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Commentary

Strategy of going for liquids is not working out for natural gas companies

20 Jun 2012 by Jim Fickett.

Over the last couple years, as prices for natural gas kept falling, most gas companies starting attempted to drill in areas where the methane of natural gas was mixed with higher priced ethane, propane, and butane – so-called natural gas liquids. Now the temporary nature of this strategy is becoming apparent: the prices of NGL have fallen as well. From the Financial Times:

US producers have tried to offset the impact of depressed gas prices by shifting their drilling from so-called “dry gas” wells, which produce only gas, to “wet wells”, which produce a mix of gas and more expensive oil liquids for the petrochemical industry. …

The US Department of Energy estimates the country’s NGL production rose in March – the latest data available – to an all-time high of 2.3m barrels a day, up about 50 per cent since 2009. “The same drilling boom that recently drove natural gas prices down to 10-year lows is now depressing the prices of NGLs as well,” Francisco Blanch, strategist at Bank of America Merrill Lynch, said.

The price of the benchmark basket of ethane and propane, the two commodities that account for the bulk of NGL output, has fallen to the lowest in a decade, according to Bloomberg data.

It is taking a long time, but the obvious conclusion is that loss-making production will slow.

Industry analysts say that the combination of ultra-low natural gas prices and now falling NGL prices will force energy companies to slow down their investment or, in the worst case scenario, cut production.