A WTI price at or above $65 per barrel undoubtedly has implications for producers in oil regions across the US, perhaps even testing their resolve after claims of efficiently and conservatively spreading capital across operations. But what are the effects of rising crude prices on gas economics? The most interesting answer lies in regions with a higher concentration of NGLs in the gross gas stream, like in Southwest Marcellus and Utica shale plays. This is because prices for propane, butane, iso-butane and natural gasoline (propane-plus) are typically pegged to the price of crude.
As discussed in BTU’s recent NGL Study, which analyzes NGL production and infrastructure outlooks across the US utilizing a well-level GPM model, falling crude prices in 2014 similarly cratered price for propane-plus. That, combined with increasing differentials to Mont Belvieu due to lack of NGL pipeline infrastructure out of the region, drove producers to shift Northeast investment away from wet gas formations toward drier areas. However, with WTI prices closing above $65 for the first time since December 2014, how much are breakevens improved by the resulting increase in NGL pricing?
As shown in the chart below, WTI and propane-plus have risen an average 50% from lows in June. Ethane pricing, however, which typically moves more in line with natural gas prices, remained relatively flat throughout much of 2017.
Given the rising prices for propane-plus, let’s look at how the economics for wells with greater NGL concentration compare to those in drier areas. While the composition of an NGL barrel can vary between wells, we’ll assume a composition of 64% ethane and 36% propane-plus. Additionally, we’ll assume that 50% of the technically recoverable ethane is rejected and remains in the gas stream.
The table below shows the variances in gas breakevens for actual Northeast wells given different crude strip prices and GPMs, as featured in our E&P Positioning Report to be published next week. At a $45 crude strip, all of these wells breakeven at about the same gas price. However, as the oil price increases, and thus propane-plus pricing improves, breakevens fall rapidly for the higher-GPM wells.
Granted, there are more factors that come into play when operators decide to drill a well. Infrastructure considerations can limit the economic viability of getting NGLs to demand centers, such as the Gulf Coast. This especially rings true as we await the fate of the Mariner East 2 expansion to Marcus Hook, PA. Nonetheless, wet gas wells will only become more attractive in a rising crude environment.
What is BTU’s view on infrastructure constraints in the Northeast? And will rising crude prices lead to a shift back towards wet gas formations? These questions and more can be answered in our Northeast Gas Outlook. Request a sample today.