HOUSTON--When it comes to the current low price environment for gas and NGL, a great deal of optimism exists when looking to the future of LNG exports and ethane cracking. However, Suzanne Minter, manager of energy analysis at Bentek Energy, told an audience at Platts’ Benposium that she is less optimistic.

“This collapsing value gap [between crude oil, NGL and natural gas prices], in my mind, potentially threatens all of this export that we’re looking for,” she said.

Minter came to this conclusion after years of falling prices across the energy sector led to decreased targeted production, first of natural gas then of NGL, with high crude oil prices instead driving production of associated gas and NGL. When oil prices finally collapsed during the past winter, Minter said two questions were raised: “Is there enough value left at the high end of that value gap for producers to want to produce the crude that will give us the associated natural gas and NGLs, and secondly, is the value gap wide enough to incentivize further midstream infrastructure buildout, to allow the transfer of Btus that we were all looking for?”

This concern is warranted, Minter said, because major investments such as the decision to build ethane crackers occurred around 2010 to 2012, when there was a wide value gap to incentivize infrastructure buildout.

“Ethane was supposed to replace naphtha as the feedstock of choice,” she said. “We’re going to burn LNG, supposedly, because it’s the lowest-cost per Btu, and it can replace more costly fuels such as fuel oil … [and]—ultralow sulfur diesel—these sorts of things that historically set high on the value gap. But now that that value gap’s collapsed, I argue that this is demand-destructive for natural gas, ultimately.”

The other significant challenge ahead, Minter said, revolves around North America’s projected future as a major exporter of LNG and olefins. With oversupply on the continent driving down domestic prices, producers are depending on global markets purchasing those products. The problem with this plan, according to Minter, is that most of the products are in competition with each other.

Looking at the NGL barrel, Minter said current forecasts predict that by 2020 North America will need to export about 33% of the refined NGL products it produces. However, all of those same products are competing for the same end-use, as petrochemical feedstocks.

This problem is compounded by the type of crude oil produced in North America—a mix of condensate and light crude that, when cracked, produce naphtha.

“So I don’t care if we split all the condensate here in North America, or if we send it out to global markets to crack─we’re going to create naphtha,” she said. “The more and more light-end crude we produce will give us more and more naphtha,” which will quickly become competitive with NGL as a petrochemical feedstock as the abundance of naphtha drives the price down. Naphtha is also becoming competitive with condensate and natural gas as a diluent for crude from the Canadian oil sands, Minter said.

“Naphtha, condensate and natural gasoline are effectively like Coke vs. Pepsi,” she explained. “You have a preference, you might like a Coke over a Pepsi, but if you’re buying a whole bunch, you’re going to buy the least cost.”

“They become interchangeable as more and more molecules come to bear on the market, and the consumer gets to set the price,” she said. “I believe that we see continual price pressure on these commodities as they compete for market share.”

The major risk in current projections of NGL and natural gas prices is expecting global demand to boost prices, though there is a “real risk” that may not be the case, Minter said.

“If that happens, this value gap should continue to stay under pressure and collapse, and if so it comes back to this LNG question of we’re all banking on LNG exports of anywhere from 8 [Bcf] to 12 Bcf a day out of North America,” she said. “If that value gap’s not wide enough, am I really going to invest, or continue to invest, to take that LNG, if I can take fuel oil, or diesel or something like that, that happens [to be] at a much lower price at this point?

“I think ultimately it could potentially be really damaging to the overall demand story,” Minter concluded. “And what these collapsed prices are signaling to us is we just have too much.”

Contact the author, Caryn Livingston, at clivingston@hartenergy.com.