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Natural Gas Liquids - How Canadian Markets Work

Natural gas liquids (NGLs) is a term for liquid hydrocarbon products including ethane, propane, butane, and pentanes plus that are extracted from natural gas. Liquefied petroleum gas (LPG) is propane and butane derived from crude oil refining. Often, the term LPG is used to refer to propane and butane, whether derived from natural gas or crude oil refining.

Figure 1 - Alberta Natural Gas and Ethane Price Comparison

Figure 1 - Alberta Natural Gas and Ethane Price Comparison

Notes: 1 Mcf Natural gas = 1.05 GJ
Source: Alberta Energy

Figure 2 - Propane and Butane vs. WTI Price

Figure 2 - Propane and Butane vs. WTI Price

Source: Alberta Energy

In general, NGLs are priced higher than natural gas to cover the cost for extraction. Figure 1 shows that ethane prices closely track natural gas prices. Figure 2 shows that crude oil prices influence propane and butane prices. Crude oil prices help set the price ceilings for propane and butane because they compete with oil-based products (in particular, naphtha, heating oil and gasoil) in major markets. Since 2000, there have been several periods when natural gas prices have been equal to or above crude oil prices (on an energy equivalent basis). When this happens, propane and butane prices tend to follow natural gas prices and NGL extraction becomes less economic.

Supplies of NGLs are determined by the level of natural gas production, the amount of liquids in the gas and by imports. Production of propane and butane also rises and falls with crude oil refinery output. The two largest contributors to demand are weather, since propane is used in home heating, and the petrochemical industry's requirement for ethane.

Asia has replaced North America as the largest NGL market because of strong growth in demand for propane and butane for home heating, particularly in China. This competition for propane supplies has occasionally contributed to higher prices in North America.

The Canadian NGL sector is part of an integrated North American market. Since Canadian propane exports represent a small portion of North American and U.S. demand, Canada does not set the price. Mont Belvieu, Texas is the price reference point for North American NGL markets as it is the largest consuming region. Its strategic location on the Gulf Coast allows access to supplies from Europe, Africa and the Middle East. Mont Belvieu also has significant storage and pipelines to transport liquids to market, and is close to large crude oil refineries. Petrochemical demand is the main factor affecting Mont Belvieu NGL prices.

There are three other major North American NGL trading centres located at Edmonton, Alberta; Sarnia, Ontario; and Conway, Kansas. These locations have substantial underground storage and are connected to NGL supply, as well as to pipeline transmission and distribution systems. Edmonton and Conway serve the U.S. midwest market while Sarnia and Mont Belvieu serve the U.S. northeast market.

 

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Date Modified:
2012-01-02