Shale Gas Liquids & Shell Gas Liquids

Larry Persily, the head of the office of the Federal Coordinator for Alaska Natural Gas Transportation Projects has an article in the Alaska Dispatch about shale gas economics (article link). The article focuses on the value stream from shale gas ethane and touches on the possibility of Gas-to-Liquids (GTL) projects in North America.

He quotes Harold York of Wood Mackenzie:

To illustrate just how important the revenue from gas liquids can be for a shale gas producer, York ran through some numbers:

A typical shale well needs $5 to $6 per thousand cubic feet (mcf) of output to make money.

Methane has been priced at about $4 most of the past year.

But the added value of the liquids makes the entire flow from the well worth about $7 to $8 per mcf.

"The natural gas liquids contribution is carrying the well," York said.

The same theme runs through the Chesapeake investor presentation. Page 16 of this presentation (LINK) Quoting:

Many reasons to be bullish on intermediate and long-term natural gas prices:

• U.S. natural gas producers are rapidly moving to an oilier production base. Once producers convert to drilling wells that produce $10-17/mcfe units and finish natural gas drilling to HBP land, why would they go back to drilling natural gas wells if prices increase from $4/mcf to $5/mcf to $6/mcf to $7/mcf? CHK believes this is the single biggest misunderstood aspect of the future bull case for U.S. natural gas...
  

• Conversion of U.S. liquefaction import facilities to LNG export facilities U.S. will be exporting gas via LNG by 2015, when this becomes obvious in 2012, out year strip prices will go up as clear pathway develops for U.S. to receive world natural gas prices
  

• Growing industrial demand U.S. natural gas prices are lowest in the industrialized world and well below oil-based naphtha prices
  

• Quickening momentum for CNG vehicles $4+ gasoline and diesel prices will cause the market to force policy changes
  

• Continuing and accelerating shift from coal to natural gas for U.S. electrical generationElectrical generation natural gas demand could increase 10-15 bcf/d over the next decade
  

• Construction of U.S. GTL plants. Several will be built in U.S. by 2015-16, when this becomes obvious in 2012, out year strip prices will go up as clear pathway develops for U.S. natural gas to receive world oil prices

Both Persily, and Chesapeake discuss future GTL plants. I'm interested to see if a North American GTL plant materializes. If it does I'll bet on a lower 48 plant location. Either way all the factors listed support higher gas prices and improved economics for an Alaska Gas Pipeline.

So what about ethane? This week I learned that Shell is looking at a lower 48 ethane cracker to take advantage of shale ethane (LINK), quote:"

Building an ethane-fed cracker in Appalachia would unlock significant gas production in the Marcellus region by providing a local outlet for the ethane," said Ben van Beurden, Shell Executive Vice President Chemicals. "This fits well with our strategy to strengthen our chemicals feedstock advantage and would be another step in growing our chemicals business to meet the increasing demand for petrochemicals."

I expect this plant to be sited somewhere in West Virgina or Ohio. In the odd math of the natural gas world the shale gas glut causes a ethane glut, ethane prices plummet hurting the economics of shale gas wells, less shale gas is produced and the price of natural gas rebounds.

Long story short - markets are re-normalizing to the available volumes of shale gas and shale gas liquids. New opportunities abound including the Alaska Gas Pipeline.