It was the natural gas industry's big new thing.
Major producers, long suffering from an industry oversupply of natural gas and ultra-low prices, in the past year or two spent bundles to boost production of obscure energy products such as butane and condensate – also known as natural gas liquids – which had been enjoying solid demand and strong prices.
But the party didn't last long. As companies rushed to ramp up output from fields rich in natural gas liquids, prices tumbled as supplies jumped – dragging down the performance of gas companies using the diversification strategy.
Two major gas producers, Talisman Energy Inc. and Encana Corp., began their shift toward natural gas liquids in late 2010, when prices were buoyant.
The benchmark blended price for a gallon of NGLs was $1.0567 (U.S.) in early January, 2011; it rallied to $1.2983 in May, 2011, and stayed in the triple digits until last February, according to data collected by BMO Nesbitt Burns Inc.
But recently the market has been plunging. On Tuesday, the benchmark price for a gallon of NGLs sold for 68 cents – a 44-per-cent drop from a year earlier.
The natural gas liquids business "is not all it is cracked up to be in some cases," said Luc Mageau, an oil and gas analyst at Raymond James in Calgary.
And the tumble in gas-liquids prices came just as natural gas prices rallied, though they remain at historically low levels.
"Today, you've had almost a 50– or 40-per-cent increase in [natural] gas prices, but the offsetting decline in NGL pricing has effectively made average pricing for a gas-focused producer the same," Mr. Mageau said. "You're realizing the same price today as you were in April."
NGLs – condensate, butane, propane, and ethane – are extracted as producers pump natural gas. Energy companies are paid based on the volume and value of each separate commodity in the mix; the blended price reflects the varying prices and the fact that some NGLs make up a greater percentage of production.
In Canada, condensate and butane are the most valuable liquids, while ethane and propane are weak. Condensate, for example, typically trades at a premium to West Texas Intermediate crude.
Condensate, which is similar to a light oil and can be used to transport bitumen, is a key part of the liquids game. Dean Foreman, Talisman's chief economist, said that in his company's Eagle Ford play, about two-thirds of the production value is wellhead condensate, and the rest is gas and less valuable liquids.
"That's the prize. That's what people are searching for," he said. While ethane and propane supplies are outstripping demand, that will not "fundamentally undermine" liquids-rich plays, he said, given the price that condensate commands.
Talisman, whose shares have lagged other energy companies amid criticism about its strategy, installed Hal Kvisle as its chief executive two weeks ago after abruptly removing John Manzoni from the top spot.
Ethane, which is expensive to extract from the natural gas mix but can be abundant, is a particularly weak slice of the liquids market. It trades in lock-step with natural gas in Canada, Mr. Mageau said, noting that two buyers, Dow Chemical Co. and Nova Chemicals Corp., dominate the market and their plants are running at 70-per-cent capacity. "Ethane doesn't do anything for you," he said.
Encana Corp. believes its long-term contracts to sell ethane to Dow and Nova at a premium to Alberta's gas benchmark will help buffer problems in that market, said Encana spokesman Jay Avrill. He argued that Encana can ride out any bumps in the NGL market. "This is a long-term strategy. It is not to say: 'Hey, let's cash in and get by for the next couple of years until natural gas comes back,'" he said. "We're not going to switch and jump based on short-term volatility and price volatility."
Encana added $600-million to its 2012 spending budget in June, a move aimed at increasing liquids production. It is also searching for oil as it tries to distance itself from dry natural gas. The shift came after Encana spent years married to its strategy to increase natural gas production despite languishing prices. Shares dropped and investors howled, and they remain nervous as Encana chases new plays.
"You've seen a significant increase, particularly in the United States, in natural gas production that is rich in liquids. Probably a 25– to 30-per-cent increase in supply over the last four years or so," said David Smith, chief executive at Keyera Corp., which processes natural gas streams. "So that has created additional volumes of all the NGLs – ethane, propane, butane, and condensate."