A New Favorite in Natural Gas Supply
by David Fessler, Investment U Senior Analyst
Tuesday, September 20, 2011: Issue #1604
By now, everyone should know about America's abundance of natural gas. Most of the new supplies are coming primarily from the development of major shale plays.
The Marcellus, the Haynesville, the Barnett and others are examples of where most of the new gas is coming from. Once a new well is producing gas, it can't simply be connected to the main transmission line and piped to the end user.
It has to be treated first. While processing and treating natural gas is far less complicated than processing crude oil, it's just as necessary. Unless and until a company's gas can get treated, it's going nowhere.
Processing "Pipeline Quality" Natural Gas
The natural gas we use is composed almost entirely of methane. While the gas that flows from the wellhead is composed primarily of methane, it also contains numerous impurities like water vapor, carbon dioxide, helium, nitrogen, hydrogen sulfide and other substances. These must be removed.
The methane is also mixed with other hydrocarbons commonly referred to as natural gas liquids (NGLs). These include propane, butane, ethane and pentanes. Once separated from the gas, NGLs can be further processed and sold.
All of these substances must be separated and removed before the gas can be transmitted to the end user. Some processing can be done right at the wellhead, but most of the more complicated separation is accomplished at natural gas processing plants.
The diagram below, courtesy of the EIA, depicts the flow of raw wellhead gas through a typical processing flow.
Plants that process natural gas are critical links between wellhead production and end-user markets. The gas that results from the processing is termed "pipeline quality," and can be transmitted and sold to customers.
The Growing Natural Gas Processing Sector
As production shifted from the Gulf of Mexico to onshore shale plays, additional processing facilities were built. Most of these are in areas closer to the shale plays.
As you can see from the graph below, courtesy of the Energy Information Administration (EIA), the main growth in natural gas processing plants has indeed been in non-Gulf Coast areas.
In 2009 to 2010, natural gas operators added 13.3 billion cubic feet per day (Bcfd) of processing capacity. Fully 86 percent of that was in areas away the Gulf of Mexico.
As you can see from the chart above, overall treatment capacity grew from 77.5 Bcfd to 90.8 Bcfd.
The Continued Expansion of Natural Gas Production
With the continual expansion of natural gas production in shale plays, new processing plants and pipelines will be needed in these areas to support their additional production.
The EIA reports that a potential bottleneck to increasing production from the Marcellus Shale boils down to a lack of processing facilities in the area.
Take a look at the map below, courtesy of the EIA. It shows all of the natural gas processing plants in the United States.
There's only a handful in western Pennsylvania, the heart of the Marcellus play. Overall, total processing capacity kept up with increases in production. Many newer plants are smaller than existing ones located in the Gulf region.
The good news is that some of these plants are mobile, and can be set up in a given area to process gas, and moved when the wells are exhausted. This is an important consideration as dynamics of gas supply rapidly change with the advent of shale field production.
A Key Player in the Natural Gas Processing Market
As oil prices continue to rise, so do the prices for NGLs. That's a real incentive for natural gas processing companies to build additional processing plants, particularly around NGL-rich plays like the Eagle Ford in Texas, the western part of the Marcellus and the newest condensate-rich play, the western part of the Utica shale in Ohio.
Who's doing the building? Some of the larger natural gas companies, like Chesapeake Energy Corporation (NYSE: CHK), Range Resources Corporation (NYSE: RRC) and Devon Energy Corporation (NYSE: DVN), do some or all of their own processing.
But Energy Transfer Partners, L.P. (NYSE: ETP) is a little different. This limited partnership owns over 17,000 miles of pipelines, and three natural gas storage facilities.
But its real business is the processing of natural gas for other customers.
- It owns three natural gas processing plants, 17 natural gas treating facilities and 10 natural gas conditioning plants.
- Its network of processing plants and pipelines serves every major gas-producing area in the country, including all of the major shale plays.
- It's one of America's top three producers of propane, serving 40 states. Propane is only produced as a byproduct of natural gas processing.
In the last year, Energy Transfer Partners acquired a processing plant serving the Haynesville shale play, and announced plans to spend $300 million to construct another processing plant to serve the Eagle Ford shale play.
As America continues to use more and more natural gas, more processing capacity will need to be constructed. Energy Transfer Partners is one of the key players in the natural gas processing market, and it deserves consideration for the energy sector of your investment portfolio.