Jan. 2001 Vol. 222 No. 1  Production

Perry A. Fischer,  Engineering Editor

Natural gas prices soar

The extraordinary increase in natural gas prices forced NYMEX gas futures trading to shut down for an hour on December 7th, when NYMEX futures prices set an all-time high of $9.00 per MMBTU for natural gas. Profit taking allowed the January price to settle back at $8.40 – more than quadruple what it was in February 1999.

Currently, the market is halted for one hour if the price in one of the first two months’ contracts trades at $0.75 (i.e., fluctuates) for five minutes. When trading resumes, those limits are extended to all months but are moved to surround the previous limit in the direction of the move.

On the same day, the board of directors of the New York Mercantile Exchange approved expanding the initial price limits of its natural gas futures contracts by 200%. Further, it will create uniform limits across all months of trading and abbreviate the trading halt to just 15 minutes. The new natural gas limit would be $1 per MMB. Under the new rules, if a halt occurs during the last two days of trading in a contract, there are no price limits placed on either of the first two nearby contract months when the market reopens.

Exchange Chairman Daniel Rappaport said that the changes will simplify rules and allow the futures market to more closely track cash market movement, while still providing a window for information dissemination and risk assessment during extraordinary price swings. The new rules require approval by the Commodity Futures Trading Commission before taking effect.

Hyde gas prices. In October, U.S. Congressman Henry Hyde (R-Illinois) asked the Federal Trade Commission (FTC) to investigate high natural gas prices. Hyde said, "Last year, when prices were lower, producers cut their production. That production cut has led to the current shortage with corresponding higher prices. Such production cuts could be a legitimate response to market forces. On the other hand, if they were done collusively, they could violate antitrust laws. Consumers need to know whether producers and utility companies deliberately diminished reserves of natural gas to drive the price up."

After Hyde’s request for an FTC investigation of gasoline prices in the Chicago area earlier this summer, prices at the pump plummeted 30%. Hyde said the FTC investigation would send an important signal to producers and utilities that federal regulators are monitoring activity that might be considered anti-competitive.

Inverted NGL valuation. Ironically, the extremes in gas prices and volatility may cause a shortage in natural gas liquids (NGLs). At recent prices, natural gas producers are finding that the value of NGLs decreases if they are removed from the gas – an inverse valuation. The situation has important ramifications for gas producers.

A report by Oil Price Information Service Energy Group (OPIS) predicts tight supplies of NGLs such as propane, butane, isobutane and chemical feedstocks in Louisiana and other markets where gas processing plants have been recently shut down. The plants were closed because the usually more expensive liquids can now be sold for much more if they remain in the gas that is then sold downstream.

OPIS conducted a survey that showed nearly half of all gas plants in the Louisiana region could be completely shut down for December, with the remainder operating at reduced level. Plant closures could even affect gasoline prices, since butane is a key component that raises octane and vapor pressure in winter gasoline blends.

Lack of raw feedstocks has caused two of the largest fractionators to plan shutdowns in December. This, in turn, will have a domino effect; as prices surge for propane and other feedstocks normally produced by gas plants, chemical plants – such as those that make ethylene – are considering production cutbacks. The OPIS report says the market currently has ample supplies of ethylene.

For example, Mitchell Energy & Development announced that it would elect not to process natural gas at Exxon’s Katy plant near Houston during December to take advantage of high gas prices. Gas is processed at the Katy plant under a "keep whole" contract. Despite reducing NGL production by about 14,000 bpd, Mitchell expects the move to favorably impact revenues, operating earnings and cash flows.

Leading executives from top gas liquids companies will address critical supply issues at the OPIS National NGL Supply Summit, April 30, 2001, at Houston’s Omni Hotel.

Egyptian gas development. A report in Gas-to-Liquids News gave some details on developing the world’s largest GTL plant. Shell International Gas, the Egyptian Oil Ministry and the Egyptian General Petroleum Corp. agreed to development protocol terms for a 75,000 bpd GTL plant, which would likely be the world’s largest when completed. It is tentatively scheduled for construction in West Demiatta on the Mediterranean Coast. The project would supply gas liquids products for the growing Egyptian market for at least 50 years.

The GTL plant will also be built in tandem with an LNG facility. The GTL part of the project would require $1.7 billion of Shell investment. Currently, the company operates the world’s only commercial GTL plant – a 12,000 bpd facility in Bintulu, Maylaysia. That operation has been a learning experience for Shell, but a profitable one nevertheless. A spokesperson said, "We’ve had a bit of a breakthrough in our synthesis catalyst performance."

The detail and design phase, finalization of gas supply, project financing and completion of various contracts lie ahead. If all goes well, the plant could begin operating in 2004–2005.

BG/Edison and BP are also planning billion-dollar-plus LNG/NGL projects that will utilize burgeoning Egyptian gas supplies, which are expected to rise to 4 Bcfd by 2003. 

Comments? Write: fischerp@gulfpub.com