Natural Gas Liquids (NGLs) and Royalties

Dan Brockett

Penn State Extension

Photo Courtesy Penn State Marcellus Center

What’s Occurring Now?• Gas Prices are sliding

– Production outpacing consumption• Production in the Northeast reached a record

high of 20.4 Bcf on August 24 - Bentek Energy

– New Gas Discoveries & Higher recovery rates

– Warm weather and continued high production

• Oil prices are falling off a cliff– Condensates follow similar path

– Other NGLs affected

– Congress Agrees to End Oil Export Ban; Near-Term Price Impact Limited?

Tighter focus among E&Ps? (Cost-cutting)

• Drilling focused on core areas

• Some wells shut-in/choked

• Not re-working some wells

• Inventories are in uncharted territory.

• Exporting Ethane?• ME1 is a 12” line from Houston to

Delmont. Then an 8” inch to Marcus Hook. It will move propane and ethane. Moving propane now and will have the ability to move both products late 2015.

• How will this effect price?

• Raymond James …" the majority of remaining NGL growth will be coming from the Marcellus and Utica..."

• Pipeline for NGLs… • Cracker Plant decisions in the

Appalachian Basin have not been made yet

Natural Gas Liquids• Natural Gas Liquids (NGLs) are found in “wet

gas” areas of shale gas producing regions. These liquids are used in a variety of ways; as petrochemical feedstocks, as fuel, as a blending product for gasoline, and even for a backyard barbeque.

• Natural gas (dry gas) is mostly methane. The Natural Gas Liquids can comprise 5% to 50% depending on where it is extracted.

NGL Volumes Grow; Cracker, Pipelines

• The five NGLs—ethane, propane, normalbutane, isobutane and natural gasoline (pentanes+)

• Each successive NGL has an additional carbonmolecule and different chemical properties.

– C1H4 – Methane

– C2H6 – Ethane

– C3H8 – Propane

– C4H10 – Butane (and Isobutane)

– C5H12 – Pentane (natural gasoline)

These may be listed many different ways in a royalty statement

NGLs Have Added Value (based on BTU)

Gas: Net Btu Value:

• Methane 1,011

• Ethane 1,783

• Propane 2,572

• Butane 3,225

• Pentane 3,981

• Hexane 4,667• http://www.engineeringtoolbox.com/heating-values-fuel-gases-d_823.html

Look up Btu value on royalty

statement and compare

May see this listed as “Btu

Uplift”

Most to leastIn terms of volume

Who Consumes What?

Source: Envantage

$-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Category 1 Category 2

Natural Gas $2.00

Rich Gas Increment

$.50

$2.50/MCF

Natural Gas $1.40

Ethane $.40

Propane $.46

Iso-Butane $.32

Butane $.30

Natural Gasoline $.33

$3.21/MCF

Processing Deduction

Sometimes the producer will pay per BTU, other times they will pay per product. Products

can be grouped for sale.

Liquids Price Impact (example)(assuming 1250 btu gas)

Assumes 30% shrinkage

0

0.5

1

1.5

2

2.5

3

Category 1 Category 2

Liquids Price Impact (example)(assuming 1250 btu gas)

Natural Gas

$1.94

BTU $.14

NGL’s $.68

Natural Gas

$2.00

BTU Uplift $.50

Processing

$2.50/MCF

$2.76/MCF

The Case for Crackers in This Region • Ethane crackers turn ethane into ethylene, a

starting point for a variety of chemical products. These plants can use either naphtha, a crude oil-based product, or ethane, a natural gas liquid. Where ethane is significantly cheaper than naphtha — such as in swaths of the Marcellus and Utica shales where wet gas is plentiful — crackers using the natural gas liquid have a significant upper hand – but, crude prices…

Infrastructure: Ethane Markets

Transportation Costs:

Marcus Hook - ?

Sarnia – 12-15 cents/gal.

Gulf Coast –15-25 cents/gal.

Local – 2 cents/gal.

This would be listed as Firm transportation cost in royalty deduction

Ethane Market• Current market for local ethane is the gulf

coast and Sarnia, ONT. Mariner East will be available for ethane export in late 2015?

• If there is not a market available ethane is ‘rejected’ (not necessarily a bad thing)

• Ethane rejection–-where ethane is left within the natural gas stream without breaching gas pipeline specification limits

Source: RBN

Price Ceiling

Price Floor

Theoretical Ethane Trading Range

• Ethane Ceiling: Max price for ethane before crackers begin to switch to the next alternative

• Ethane Floor: Natural gas price at the plant tailgate (adjusted for fractionation and transportation costs)

Condensate at the well

What is condensate? (at the wellhead this is sometimes referred to as“lease condensate”)

• Condensates are a group of hydrocarbons that don’t fit easily into mainstream product categories.

• Usually C5 and up

• A lease condensate has an API gravity ranging between 45 to 75 degrees http://www.ogfj.com/articles/2012/10/fifty-

shades.html

– The lower the number, the heavier it is (generally, the lower the number, the better the price) – everything is compared to water, which is a 10 (a number higher than 10, floats on top, lower sinks)

Propane

Butane & Isobutane

Pentane

Hexane

Heptane

Density of liquids

API Gravity

Crude Prices – Ergon Oil Purchasing – Appalachian Basin

Effective Date 2014-07-31 2015-12-11

Marcellus-Utica Medium38.0-49.9 API Gravity

$97.19 $34.62

Marcellus-Utica Light50.00-59.9 API Gravity

$91.17 $28.62

Marcellus-Utica Condensate60.0 API Gravity and above

$75.67 $15.62

Compressor Station

Natural Gasoline at the compressor – natural gasoline or drip gas is generally C4 and up

WaterMay be listed as Petroleum Products or Natural Gasoline, or ?

Natural Gas Liquid Fractionation

Pressure and temperature – the boiling point will be reached by only one product in each tower

This condensate will likely be

different from condensate at

the well.

Might be listed as “Plant Products”, NGLs, or as separate components on a royalty statement

Fractionation Plant Fractionation or separation deduction

Transporting NGLs

Some NGL pipelines carry mixed NGLs to fractionation facilities. Other NGL pipelines transport purity products, many times in batches, from fractionators or storage facilities to end users or related storage.

• Due to its high vapor pressure, ethane is not typically transported by truck or rail. However, heavier NGLsare commonly transported via truck or railroad.

• Ethane may be transported as an ethane/methane, ethane/propane mix in pipeline or as purity ethane

Tanker trains and trucks picking up propane, butane, isobutane, and pentane+

Royalties

Meter Runs – Where the volume of gas is measured per well.

BTU Level may be measured here as well

* Incorrect decimal interest may be the most common mistake that affects royalty owners.

Decimal Interest

8064 80640 801/8 .0125 Decimal Interest

Net Mineral Acres Owned (in the unit)Drilling and Spacing Unit Size (in acres)Royalty retained from the Oil & Gas Lease

• Unit Makes $10,000 in a month, how much of this goes to you… (assume no deductions)

8064 80640 801/8 .0125 Decimal Interest

Answer: $125.00

Same formula should be used for calculating deductionsSame formula used for calculation your share of liquids

Wet Gas Royalties:

• There is no standard format for royalty statements.

– Natural Gas Liquids can be difficult to decipher on royalty statements• Product Codes are peculiar to individual producers

• NGL products are sold in many different ways; by BTU, as NGLmix, as individual products, or as a combination of all of these. This depends on the price, midstream and processing capacity, and marketing.

• Deductions for NGLs can be separate and distinct from dry gas

• Volumes/Measurements can be difficult to decipher

• Gas – Measured in mcfor mmbtu

• Ethane, Propane, and other NGLs – measured in gallons or barrels

• Condensate and oil –measured in barrels (barrel is 42 gallons)

1 ft1 ft

1 ft

• There is no standard format for royalty statements. Codes can be peculiar to individual producers. Deductions can mean different things.

Processing Processing

• NGLs may have different product codes and names (PPROD, COND, Number Codes, etc.)

• NGLs may be sold differently – some may sell NGLs in different mixes, some components are separated

• NGL deductions are often separate and distinct from dry gas deductions

– Examples:

Range Resources Product Codes• 2-GAS: Dry methane• 3-NGL: Includes ethane, propane, butane,

isobutane, and some pentane and hexane• 5-COND: condensate marketed by API

gravity• Deduction Codes (DC):

– PHI – Processing– FCI – Firm Transportation– GAI – Gathering– MH - Marketing

GAI Gathering

FCI Firm

PHI Processing

PC: Product Code

Gross Sales OwnerProd

Date

Prod

Cod

Type

Int

Price Volume Value Deduction Net Interest Paid Int. Value Deduction Net

PROPERTY

07/2014 PRPN R1 0.84 48,604.50 40,830.21 0.00 40,8310.21 0.0050525 0.00050525 20.63 0.00 20.63

08/2014 COND R1 78.56 199.72 15,699.02 0.00 15,699.02 0.0005025 0.0050525 7.93 0.00 7.93

08/2014 ETHN R1 .20 102,494.70 20,643.95 15,233.88 4,410.07 0.00050525 0.0050525 10.43 8.20 2.23

Deduction

FRACT 1,988.45 1

FIRM 10,268.53 5.19

PROC 3,976.90 2.01

08/2014 GAS R1 2.38 118.13 281.45 0.00 281.45 0.00050525 0.00050525 .014 0.00 .014

08/2014 GAS R1 2.52 54,736.24 137,757.60 60,763.42 76,994.18 0.00050525 0.00050525 69.60 3070 38.90

Deduction

FIRM 6,561.01 3.31

GATH 52,524.72 26.54

MARKET 1,677.59 0.85

08/2014 PPRO R1 1.40 59,927.70 83.920.50 15,225.97 66,694.93 0.00050525 0.00050525 42.40 7.70 34.70

Deduction

FRACT ,701.08 3.39

PROC 3,128.28 1.58

ELEC 5,396.51 2.73

08/2014 PRPN R1 0.84 30,384.06 235,524.13 7,564.870 17.959.33 0.00050525 0.00050525 12.90 3.82 9.08

LEGEND

W=Working Interest R=Royalty Interst

R=Royalty Interest M=Makeup Interest

O=Overriding Royalty Interest

Product Code . GAS=GAS, PPRO=NGL, COND=CONDENSATE, OIL=OIL, ETHNE=ETHANE, and PRPNE=PROPANE.

Check Detail Explanation

Place mouse cursor on item to view description

PROPERTY NUMBER PROPERTY NAME COUNTY STATET P MO YR UNIT PRICE BBLS OR MCF GROSS VALUE BTU FACTOR SEV/PROD TAX NET VALUE

YOUR DECIMAL YOUR BBS OR MCF YOUR GROSS YOUR SEV/PROD TAX

YOUR OTHER W/H YOUR NET

*

R

*

R

*

R

*

R

*L

**L

*L

*G

**09

**09

**09

**09

**14

**14

**14

**14

W 0360217.90

.033652858

W 0360217.16

.033652858

W 0360217.91

.033652858

W03602172.1

.033652858

Z UNIT 01H21796.37

733.51

Z UNIT 01H19752.43

664.72

Z UNIT 01H7307.85

245.93

Z UNIT 01H57786.61

1944.68

19702.15663.03

3216.26108.24

6677.55224.72

126001.414240.31

.9785

1.0655

TRANSPORTATIONGATHERING

BUTLER.00

Processing

BUTLER.00

BUTLER.00

BUTLER.00

PA.00

663.03--10.53

PA3216.26

PA6677.55

PA74400.24

108.04

224.72

2503.79

YOUR TOTALS 5236.30 2399.55- 2836.75

PRODUCT

F – FUEL C - CONDENSATEG – GAS I – CARBON DIOXIDEH – HELIUM J – LIQUIFIED NAT. GASO – OIL L – NATURAL GAS LIQUIDSR – RESIDUE N – NET PROFITSS – SULFUR P – PLANT PRODUCTT – INTEREST Q – MINIMUM ROYALTY

OWNER TYPE: W – WORKING R – ROYALTY O – OVERRIDEE – EXCESS ROYALTY P – PRODUCTION PAYMENT

OWNER NAME OWNER NUMBER CHECK DATE11-25-14

XTO ENERGY, INC.810 HOUSTON STREET – FORT WORTH, TEXAS 76103-6298

866-886-2613

DETACH AND RETAIN THIS STATEMENT FOR TAX PURPOSES, DUPLICATES CANNOT BE FURNISHED CHECK NO. _________________

XTO Royalty Statement

Rice Energy Royalty Statement

BTU

MCF

Chesapeake Deductions:

Deductions• Dry Gas Common Deductions:

– Compression deduction – a charge for compression of gas to a sufficient pressure to enter into a gathering or transportation pipeline

– Dehydration deduction – a charge for dehydration of gas, meaning the removal of water vapor from natural gas

– Processing deduction – may include charges for dehydration, line heating, separating sand, others?

– *Gathering deduction – a charge for pipeline gathering of a product to a common sales point

– *Firm transportation – a charge for pipeline to carry gas on interstate pipeline

– Marketing – a charge for the people who are selling gas* Gathering and Firm may be combined as “Transportation” or other…

Deductions• Wet Gas Common Deductions:

– Processing – separation of wet gas, dry gas, water, and impurities (This could vary $ based on how they are separating – cryogenic vs. 3-phase, etc.)

– Fractionation – separation of wet gas into its components; ethane, propane, butane, isobutane, and pentane + (Could be separate deducts for each product or combined for all NGLs)

– Separate “firm” transportation charge (ATEX or Mariner or …)

– Separate “marketing” charge for sale of NGLs– Electric or Demand? (may be from cryogenic plant use?)

FlareStack

Common Flow back Equipment

Source: Manek Energy

3-Phase Test SeparatorLine Heater

Sand Separator

Choke Manifold

May be a “processing”

deduction

The Cryogenic Expansion Process

If it is economic to extract ethane, cryogenic processes are required for high recovery rates

Processing Deduction?

Some Hints From Royalty owners• You may get the quickest response (not equal

to resolution necessarily) with the online ‘chat’ tab

• Talk to neighbors with the same lease

• Don’t wait to ask questions or settle your concerns

• The people working at your well site only know what they know

Summary:

• NGLs are at low prices (and may still there for a while)

• NGLs have added value based on higher BTU, but could have increased value if separated as used as individual components– Not all wet gas is worth fractionating

• Development of petrochemical manufacturing may ramp up NGL production

• NGLs are coded, processed, and sold differently – get to know how your producer does it

– Wet gas deductions are different than dry gas deductions

A few resources for landowners…(and there’s a lot more)• http://www.depweb.state.pa.us/portal/server.

pt/community/oil___gas/6003

• http://www.fracfocus.org

• http://www.naro-us.org/Pennsylvania

• http://www.eia.gov/

• www.naturalgas.psu.edu

• http://shaleroyalty.org/sign-up/

Some Price Info Resources:

• http://www.naturalgasintel.com/dailypoints

• http://ergon.com/prices

• http://www.barchart.com/commodityfutures/Mont_Belvieu_Ethane_5_Decimal_(OPIS)_Swap_Futures/JC0V4

• http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EER_EPLLPA_PF4_Y44MB_DPG&f=D

• https://www.quandl.com/WSJ/BUTANE-Butane-normal-Mont-Belvieu-Texas

Thank You

• www.naturalgas.psu.eduQuestions Contact:• Dan Brockett

dbrockett@psu.edu

814-437-7607

Photo Courtesy Penn State Marcellus Center