Market Snapshot: Gas processing margins low despite low natural gas prices


Release date: 2016-05-06

The fractionation ("frac") spreadFootnote 1 is calculated as the difference between the revenue from the sale of natural gas liquids (NGLs) if removed from a gas stream and the value they would have had if left in the gas stream and sold at natural gas prices. It is an estimate of the profit margin received by a gas processor and is determined by the relative prices of natural gas and NGLs. The chart below illustrates frac spreads since 2012, which has been a period of low natural gas prices. Historically, low gas prices often combined with relatively high NGL prices to create healthy margins for gas processors, and this was the case from January 2012 to late 2014. Since then, NGL prices have fallen sharply, thereby eroding most of this margin.

Figure Source and Description

Sources: NEB calculations, OPIS, GLJ, and Government of Alberta

Description: This line chart illustrates intra-Alberta natural gas prices, and the frac spread in Edmonton for all NGLs (production-weighted) and for propane only from January 2012 to April 2016. Between January 2012 and December 2014, the production-weighted and propane only frac spreads averaged $13.21 and $6.88 per gigajoule, respectively. Since January 2015, the production-weighted and propane only frac spreads have declined considerably, averaging $5.61 and negative $0.96 per gigajoule respectively. The intra-Alberta natural gas price peaked in March 2014 after the polar vortex at $5.40 per gigajoule. Since then, natural gas prices have steadily declined and were trading at $1.25 per gigajoule in April 2015.

The production-weighted frac spread of propane, field butane, and condensate provides an estimate of the overall margin received for gas processing in Alberta by factoring in the percentage that each NGL contributes to the total volume of NGLs produced in Alberta.Footnote 2 After spiking during the winter 2013/14 polar vortex, the production-weighted frac spread declined substantially for the rest of 2014, reaching $5.61 per gigajoule in January 2015 – a drop of 57 per cent from January 2012.

Production-weighted frac spreads reached a low of $3.82 per gigajoule in February 2016. Since then, intra-Alberta natural gas prices have declined 45 per cent to $1.25 per gigajoule in April 2016, while condensate prices have increased 25 per cent. This resulted in the frac spread increasing 40 per cent to $5.37 per gigajoule in April.

Propane prices have been the largest contributing factor to the overall decline in the value of NGLs. After a particularly large spike during the 2013/14 polar vortex,Footnote 3 the propane frac spread dropped dramatically. Since January 2015, it has averaged negative $0.96 per gigajoule, meaning that propane had more value as heat in the natural gas stream than as an extracted NGL. This is a sharp contrast to the average $6.88 per gigajoule propane frac spread between January 2012 and December 2014.

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