The Art of NGL Distribution: Translating Deal-Making into Reality

We’ve talked here frequently about the two ends of the Natural Gas Liquids market.  On one end we have the commercial aspects of the business – things like pricing, differentials, processing economics and feedstock selection calculations.  At the other end, there is the operational infrastructure – processing plants, pipelines, fractionators and downstream demand, including olefin plants.  You may have wondered – what ties the commercial and operational worlds together?  In the NGL world, the answer is Distribution – often the unsung hero of the NGL marketplace.  Where the rubber meets the road.  Where deal-making is translated into reality.   Today we start a series of blogs to examine why NGL distribution is so important to the market, how it works, how Distribution generates value and why it is much an art as it is a science.

The Gnats Patootie

NGLs are complicated.  First of all, there are five different products included under this umbrella: ethane, propane, normal butane, isobutane and natural gasoline.  Each has different physical characteristics and different markets.  With the exception of natural gasoline, all of the NGLs require high pressure and very low temperatures to move in a liquid state. All are highly flammable, heavier than air and require special handling all across the value chain – things like processing, fractionation, high pressure pipelines, insulated trucks rail cars, and salt dome storage.  The total cost of all of this frequently can add up quickly, running over $0.20/gallon or $8/barrel, and occasionally much higher.  It seems mind boggling, and for an amateur it can be.

The good news is there are many talented people behind the scenes working to ensure this is done well and efficiently. They live and breathe in a world filled with jargon terms like pump tickets, tenders, tariffs, fuel adjustments, product losses, pipeline allocations, product specs, late fees, component balancing, Product Transfer Orders (PTO’s), Bill of Ladings (BOLs), Freight on Board (FOB), demurrage, pumpovers,  batch orders, stenched, unstenched, and the list goes on.  It is a world that does not stop at 5pm.  Product is moving 24 hours a day, 7 days a week.  Most of the time things go right.  But sometime things go wrong – mechanical failures, process upsets, product handling errors, and worse.  All of these issues must be handled in a timely, methodical and professional basis.  At the end of the day, all the paperwork (or databases, these days) must reconcile down to a gnats patootie.  That’s a much tighter specification than six sigma.

The folks that inhabit this world are the Distribution experts – who can make or break the economics for NGL transactions.  The job is Distribution.  And the process is mysterious, critical, and truly an art—an art in which the big midstream players make big investments. 

Is it just scheduling product from place to place? No, it’s a long way from that. The process involves understanding and actively engaging in every part of the NGL’s life from production to end use (like y-grade and propane in the Long and Winding Road Part I & Part II) and squeezing out every bit of value possible; down to a small fraction of a cent. It requires understanding the operations of production forecasting, gathering, gas processing and pipelines operations, high pressure tank cars, trucks, waterborne ships and barges, loading docks,  fractionation, storage – salt caverns and above ground bullets,  PTO’s (product transfer orders), computer technology, and cash flow. 

The Art and Magic of NGL Distribution

But the Distribution expert must know more than the physical hardware.  Infrastructure knowledge must be combined with a solid understanding of contract terms/flexibility, market intuition, and negotiating skills.  It is truly an art to pull all of this together in a distribution plan that can be effectively and profitably executed.  But that is still not enough.  This knowledge must be combined with the talent and skill to develop great, dependable and valuable relationships with other people in the Distribution fraternity.  It is these relationships that make the “magic” of this process happen. Some of the best in the industry have been doing this their whole career and are truly masters.

Companies who are serious about making money on NGL’s invest in the best and brightest to do Distribution for them. The large companies have Distribution experts for each product and each piece of the road. Others have experts handling larger pieces or the entire journey.

So what do most of these Distribution experts do? Just think, every time an NGL molecule changes location or changes hands a long chain of activities takes place.  Each movement must be subject to a contract between the parties.  Each transaction must be measured, reconciled and ultimately financially settled.   Frequently (but not always) the triggering event for the physical movement of product is scheduling.  That activity makes up a big part of the Distribution function, and it is a perfect place to start our journey.

Scheduling NGLs: Introducing Scenario #1

In “The Long and Winding Road”…we followed the journey of a molecule of propane from producing well to end-use market, which was a relatively typical journey.  In the background of that story there were a minimum of 7 scheduling points, requiring at least 14 schedulers, tons of technology, phone calls, emails, spreadsheets, and lots of very high (human) energy. If that journey hadn’t been so smooth, those numbers (and Advil consumption) would be on the rise. Rarely does it go that smooth. Let’s look at some other typical winding road scenarios and do a deeper dive into exactly what NGL scheduling is all about.  

“A Midwest NGL Company” (“AMNGLCo”) is a large midstream company that owns NGL assets and owns or controls production all over the US and Canada. Propane expertise has been the foundation for their success and a staple product for decades. They own it, buy it, sell it, transport it, store it, speculate on it, and build assets around it. Similar to other large midstream companies, distribution and scheduling is centralized in their home office, in this case located in Gotham City, Oklahoma. Those experts work via phone and e-mail with the “field” operations (considered all the people who physically make and move NGL’s) out and around the continent. This is an example of a company that understands the complexity and importance of Distribution and has the process down pat.

Here is just one (of many) scenarios that AMNGLCo could face every day.

“Keep (us) Dry!!!”

Remember, propane is produced by both gas plants and refineries. One of the sources of AMNGLCo’s propane is “Midcontinent Refinery Co.” (“MIDCO”) a refinery that resides in PADD II (the Midcontinent region).   In this case, AMNGLCo has a long term (multi-year) agreement with MIDCO to market their propane when it is produced and move it quickly and efficiently leaving them with as few headaches as possible. Pricing is based on the daily Conway OPIS average less an agreed upon location differential the day the loads are lifted.  Their agreement and others like it are complex multi-paged documents that would take up an entire blog to fully understand. Another time.

Like most refineries, propane volumes vary depending upon the season, the refinery configuration and the crude oil feedstocks.   The propane produced at MIDCO is good stuff, known as HD5 propane and MIDCO happens to be one of the most reliable/high quality propane sources in the region. That makes AMNGLCo’s job a bit easier, but far from simple.

In our scenario, the MIDCO refinery operations department has determined that the refinery will have more propane than expected. About a load a day from August 22-31.  Something to do with a batch of super-light shale crude whacking out the top end of the distillation tower. MIDCO has a few bullet storage tanks, but that’s not much and the refinery manager wants the propane gone as quickly as it is produced.  There is no greater hell for an NGL supply or distribution person than shutting down a refinery process for lack of propane storage capacity.

For that reason, refineries typically call the arrangement they have with their NGL marketers “Keep Dry Agreements”.  That means the marketer better keep those storage bullets pretty well empty most of the time.  Thus continuous communication is a very important thing.

Get a Load of that Propane – how about 10 Loads?

So back to our scenario.  MIDCO Operations e-mails its revised projections and estimated timing to the AMNGLCo representatives in Gotham City. The responsible AMNGLCo trader sells those 10 loads (one load is approximately 200 barrels X 10 loads = approximately 2,000 Bbls) to one of his/her local (and dependable) retail propane dealers, Strickland Propane. They must be dependable because they wouldn’t want to be the cause of the refinery going down!  The Strickland rep, Hank Hill is a regular customer and knows the drill, which is outlined below:

The contract between AMNGLCo and Strickland is finalized by phone or by email and executed via email. The contract terms state that the propane will be available one load per day beginning August 22, and ending August 31 at a negotiated price FOB the truck rack at MIDCO.  (FOB or “Freight on Board”, is a term used to describe the exact location the propane product ownership transfers to the buyer, and that the buyer assumes responsibility for transportation.)  Strickland Propane is a pretty big propane retailer, so they own and will use their own tank trucks.

As each Strickland truck loads, the MIDCO truck rack has equipment that measures (“meters”) the propane . The meter generates documentation called a bill of lading (BOL) detailing the load volume, product specs and timing. In this case, the BOLs of all ten loads will be sent to AMNGLCo in Gotham City for further handling.

It’s rare that a truck load of propane (or any petroleum product, for that matter) is exactly 200 barrels. In fact, in this case when the BOLs for the 10 loads were added up, Strickland Propane actually received a total of 2,015 barrels. Nearly all truck contract volumes are stated “approximately” for this reason. AMNGLCo provides Strickland electronic copies of the BOLs, and an invoice for the total of 2015 barrels (84,000 gallons) times the price/gallon agreed upon.

Those same BOLs are also used to settle the transactions between AMNGLCo and MIDCO.  In those transactions, the price is the Conway OPIS average less a differential, as described above.  Once the invoices are paid, these particular transactions are considered complete.

So what happens if product moves on an interstate pipeline and is eventually sold and delivered for home heating in Janesville, Wisconsin?   As you might expect, the plot thickens.  That’s where we’ll go next in this blog series.