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Are Natural Gas Liquids as Good as Oil?

by Michael Levi
July 9, 2012


Technical details sometimes turn out to be just that – details. Sometimes, though, they turn out to be much more. A longstanding technical debate over how to think about natural gas liquids (NGLs) may be in the process of moving from something marginal to something that really matters.

NGLs are the light hydrocarbons other than methane that produced as part of natural gas; the most abundant ones are ethane, propane, and butane. Official statistical agencies tend to lump them together with crude oil when discussing long term trends. Thus, when the EIA or IEA say that world oil production has been rising consistently for the past decade, they are talking not only about crude oil, but about NGLs too. Similarly, the various cornucopians who have been heralding a coming age of oil abundance typically include NGLs in their totals.

This approach has been repeatedly challenged, particularly but not only by peak oil believers. It’s being questioned once again as talk of oil abundance, backed strongly by growing NGL supplies, heats up. Jim Hamilton, in a post last week, put the criticism this way:

“You can’t drive your car with ethane, and it’s currently almost exclusively used to make ethylene for the chemical industry. [Propane…] is currently used primarily for heating and petrochemicals. Ethane and propane between them account for 82% of the increase in U.S. NGL production since 2005…. The bottom line is that it doesn’t make sense to think of NGLs as something that you can simply add to traditional crude oil production.”

I’ve been thinking about this problem for a few months, and while there’s a lot to be said for Hamilton’s view, my sense is that it goes too far. How much so isn’t clear, and would benefit from some solid quantitative analysis.

There are two basic problems with the standard NGLs-aren’t-oil argument.

This first problem concerns what goes into a petroleum refinery. NGL skeptics love to point out that ethane, propane, and butane are of no use in cars and trucks. That’s true, but oil isn’t of any use in cars or trucks either. Drivers want mobility, and for now, that mostly means gasoline and diesel. Those fuels are produced by refineries. The right question to ask, then, is this: how does ethane, propane or butane compare to oil as a refinery feedstock? If they are  interchangeable, then NGLs should be thought of as no different from crude oil. If NGLs are useless as refinery inputs, they should be treated as something different.

It turns out that ethane it pretty useless as a refinery feedstock, but propane and butane aren’t. Both (along with propylene and butylenes, products derived from propane and butane) are inputs into refinery alkylation units that produce high octane blending components for refined products. (They might be useful for something different – I’m whatever you call the opposite of a refining expert, and would love any feedback from people who know more about all this than I do.) What I don’t know is how much new propane or butane could be absorbed into gasoline and diesel manufacturing before the system became saturated. In the short run, the answer is probably “very little”, since alkylation units are expensive and take time to bring online. In the long run, that constraint weakens, which should change the equation. How much so is something that requires some real quantitative work.

The second problem comes when you look at the other end of the refinery, i.e. what comes out of it. One of the biggest products, after gasoline and diesel, is naphtha, a petrochemicals feedstock currently produced at a rate of about five million barrels a day globally. Ethane, propane (converted to propylene) and butane (converted to butylene) are all potential substitutes for naphtha in many industrial processes. Refineries, meanwhile, can install equipment that reduces the amount of naphtha produced while boosting output of other products, including gasoline and diesel for final use. (Yes, this is vague: like I wrote above, I’m sounding through this in the hopes that others will weigh in with more technical information.) Abundant NGLs, then, can shift refiners’ economic incentives toward producing more gasoline and diesel, even if the NGLs themselves never end up in anyone’s tank. Once again, the question isn’t whether this dynamic exists – it does – but how far it can go before the system is saturated.

Bottom line? It’s reasonable to treat small quantities of NGLs as equivalent to crude oil. But as NGL production grows relative to crude oil output, that equivalence should progressively break down. How much, how quickly, and where we are on that spectrum isn’t clear to me. It’s something, though, that some careful quantitative analysis should be able to help us understand.

Post a Comment 10 Comments

  • Posted by MrColdWaterOfRealityMan

    I think the more relevant questions are:

    1) What is the energy density of natural gas liquids by volume compared to regular oil?

    2) In what quantities can they be produced?

    If, as I suspect, the anwers are “less” and “much less” respectively, then natural gas liquids are little more than a sideshow in the world’s energy picture.

  • Posted by Craig Kelley

    Are NGL’s equivalent to oil? Is that the right question?

    NGL’s are the only thing that makes drilling for natural gas economic at these sub $3/mcf prices, Therefore, maybe you should be asking where is pricing going for NGL’s? Currently NGL realizations are less than 50% of oil price (in some cases much lower). Increasing NGL production and lack of pipeline infrastructure is further stressing the market for NGL’s. E.g., ethylene is so plentiful that it currently is being sold into the natural gas stream receiving no premium to methane (natgas), i.e., no value over natural gas. Propane is so cheap it is the preferred feed stock over ethylene for ethylene crackers. Bottom line is that further pressure on NGL prices will hurt wet gas economics and lead to a further decline in natural gas rig count and production cuts. Maybe this is what is needed to get natural gas prices up to a point where it actually makes economic sense to drill for it (excluding hedges).

  • Posted by Steve Hilderley

    i am not sure about the “plastics” industry, but i do know that trying to get automotive fuel out of CNG or Natural Gas or methane is costly and an expensive process. converting an internal combustion engine to run on propane is a different matter. There are, or were lots of sites around that used to fill automotive propane, but with todays fuel injection technology, the cold weather starting issue is a thing of the past. Gasoline for the road can be easily replaced with a much cheaper and cleaner burning fuel that has major benefits for the environment. I am not sure why there are some that hang their “savior” hat on Natural Gas for the Automotive sector when propane has been there all along.

    just untie the red tape and lets get to it. the same stuff that cooks your food can propel your car or truck. with much better engine longevity and emissions as a bonus.

  • Posted by Ron Wagner RN, MA

    Natural gas is the future of energy. It is replacing dirty, dangerous, expensive coal and nuclear plants. It is producing the electricity for electric cars. It will directly fuel pickup trucks, vans, buses, long haul trucks, dump trucks, locomotives, aircraft, ships etc. It will keep us out of more useless wars, where we shed our blood and money. Here are over 300 recent links for you:

  • Posted by Robert Rapier

    Currently about 25% of U.S. NGL production is used as refinery feed. That number could go higher if the price remained low enough for long enough. Basically, what you could do is crack the ethane to ethylene and then use that feedstock in a specially designed alkylation unit.

    There is scientific literature available on using ethylene like this to make high octane gasoline feedstock. The only barrier is the cost of ethane. So the short answer is that NGLs are not as good as oil, but at the right price they could be.

    Robert Rapier

  • Posted by Chris Nelder

    I detailed the composition of NGLs and their utility as transportation fuels in a recent post:

    The bottom line: After discounting NGLs, other liquids, and refinery gains, the 10.1 mbpd of total U.S. liquids production is really only equivalent to about 6.85 mbpd of potential vehicular fuel. But even that doesn’t discount the fact that only about three-quarters of a barrel of crude is potential vehicle fuel, nor the fact that about 20% of the energy embedded in ethanol is derived from crude.

    Counting “all liquids,” including an ever-growing proportion of NGLs from shale operations, overstates our oil supply by at least one-third.

  • Posted by PeteTheBee

    **Chris Nelder**!! Critcising Michael Levi! That’s rich.

    Mr. Nelder’s writing on this subject is so inferior, it could hardly be used as Mr. Levi’s snot rag.

    That said, Mr. Levi – you’re right that there is some real quantitive work to be done here. But whatever you do, don’t count on Mr. Nelder to do it. Really, the only journalist/blogger in America qualified to do such analysis is Mr. Levi himself, as the peak-oil crowd will take their usual hard left turn into progandizing nonsense, as Mr. Nelder’s link so clearly demonstrates.

    In particular Mr. Nelder’s clearly demonstrates a stubborn unwillingness to acknowledge basic facts such as this

    “Abundant NGLs, then, can shift refiners’ economic incentives toward producing more gasoline and diesel, even if the NGLs themselves never end up in anyone’s tank.”

    much less to determine their appropriate due.

    This work needs to go to a “centrist” like Mr. Levi, if it is to be done properly, not to the die-hard doomers.

  • Posted by sam

    I think government should encourage research and development of solar and wind energy as they the ultimate source of clean energy.

  • Posted by abarrelfull

    In the short term they may not be so usefull but in the long term, I view them as almost 100% equivalent, and this is why.

    1) Ethane is a substitute for Naphtha in petrochemical production and Naphtha is the raw material of gasoline. So the more ethylene that is produced from ethane, the bigger the gasoline pool
    2) Propane is utilised in propane dehydrogenation units to produce propylene, another petrochemical product normally produced from naphtha. A recent announcement can be read here
    3) Butanes and Pentanes can be processed in Isomerisation or Alkylation units to manufacture gasoline blending components
    4) NGLs usually contain at least some naphtha, adding directly to the gasoline pool
    5) There are also many countries where significant volumes of LPGs (propane/butane) are used a automotive fuels. Just because you don’t live in one, it doesn’t mean that LPG is not a gasoline substitute. The lower the price the more will be substituted

  • Posted by josh

    Oil reserves can be mined in over a third of all countries in the world. Oil is a never ending supply. Forget all this clean energy that cost so much to capture. IT WILL NEVER RUN OUT!

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