West Coast NGLs – The Wild West of Natural Gas Liquids Markets

The West Coast natural gas liquids (NGL) market is an island unto itself. Unlike the world east of the Rockies where pipelines link together producing and consuming regions, the West Coast NGL market is marooned except for rail tank cars and a few waterborne cargos.  It is a fiercely independent market with its own unique players playing their own ballgame.  But like the rest of the NGL world, big changes are rippling through that market.  Today we begin a series looking at those changes and how West Coast NGLs are likely to evolve over the next few years.

Overview

When we talk about the West Coast, we mean PADD V. That covers a huge area from Washington to southern California. Unlike other NGL regions, it looks lonely, but it’s far from quiet. The components that make the world go round out west include older gas processing plants with limited fractionation capacity, a few refineries, and one waterborne import /export facility in Washington.  And there are lots of rail tank cars, tank trucks and terminals.  There are few pipelines and those are short, product specifications are “loose”, ethane is unheard of, Conway and Mont Belvieu might as well be on another continent, and the only storage is above ground pressurized bullets and spheres.  On top of that, they live with some of the strictest environmental scrutiny in the nation.

Production/Supply

According to June 2012 data reported by the Energy Information Administration (EIA), the West Coast supplies 4.5 percent of US NGL production or about 144 MB/d out of the US total of 3176 MB/d. West Coast NGL production comes from two sources – natural gas processing (62 MB/d) and refinery production (82 MB/d). There are also limited imports of butane (133 MB/d in June 2012) and propane (26 MB/d in June 2012). The relatively small scale of the market explains why there has never been significant investment in NGL infrastructure such as interstate pipelines and Mont Belvieu-like processing/fractionation facilities. In contrast to the rest of the US where new shale based liquids production is booming, West Coast crude and natural gas production are expected to decline over the next decade. NGL production from both natural gas processing and refining will likely follow suit.

Digging into the details of current production, Chart #1 below shows the NGLs from gas processing since the start of 2006. The first thing to note is that there is no ethane produced because there is no West Coast market for ethane. Next thing to note from Chart #1 is that normal butane production is relatively low compared to isobutane (that is not normally the case). This is a quirk of the EIA data because a good portion of the normal butane from gas processing is being converted to isobutane in two isomerization plants (a.k.a. butamer plants) owned by midstream companies (Inergy and Plains All America - more on these guys later). As we discovered previously (see Carbon Rich Value High – Part I) isobutane is mostly used as a refinery feedstock to make alkylate – a high octane gasoline blending component. 

The second chart (#2) shows West Coast propane production from refineries – about 5 times higher than the quantities produced from NGL processing. Chart # 3 shows West Coast refinery normal butane production – that turns negative during the winter months because butane can be blended into the gasoline pool during the colder months and refiners bring in more butane than they can produce. Refineries produce a surplus of butane in the summer. These seasonal swings mean that storage is critical for the butane market.

Demand

West Coast propane is distributed to meet local residential heating and cooking demand and there are some exports to Mexico. Normal butane is either upgraded to isobutane in isomerization units or blended into gasoline by refiners during the winter. Natural gasoline production is now mostly exported to Western Canada for use as the diluent component in Dilbit – a synthetic crude made from bitumen (see It’s a Bitumen Oil) or used for motor gasoline blending.  There are occasional waterborne butane exports from the West Coast to the Far East and rare movements all the way to Mont Belvieu through the Panama Canal. 

Trading Opportunities

The seasonal market for butane and the consequent price swings provides one of the best opportunities for traders to benefit from West Coast NGLs. Companies with access to storage facilities and product are able to buy at lower prices during the summer and sell back during the winter. The lack of pipelines and scarce storage make this harder that it sounds on paper. In the absence of pipelines, trucks and rail tank cars take on a higher level of importance.

The Players

The West Coast NGL community is a special club with limited membership. They have learned and “earned” their NGL stripes and make a good living doing what they do best. They are producers, refiners, transporters, processors and a few traders. Like all good “members only” clubs, there are competitive rivalries, but at the end of the day everyone knows each other and ends up needing help some day so they learn to operate pretty cooperatively. The players fall into the following five categories:

#1 The Refineries

West Coast refineries supply the majority of NGL production (57 percent in June 2012) in the form of butane and propane.  Refineries also consume additional butane in the winter and isobutane for alkylation.  Despite this interdependency, refiners generally see NGLs as more of a headache byproduct (remember “Keep us Dry” in The Art of NGL Distribution) or a source of must-have-now feedstock if they run short of butane during the winter. The following are the major West Coast refiners – all of them located on the coast:    

• Chevron - El Segundo, CA (285 MB/d) and Richmond, CA (240 MB/d – currently disabled after a fire in August)
• BP- Cherry Point, WA (225 MB/d), Carson City, CA (166 MB/d recently sold to Tesoro);
• Exxon/ Mobil – Torrance, CA (155 MB/d)
• Tesoro – Anacortes, WA (120 MB/d), Golden Eagle (Martinez), CA (166 MB/d) and Los Angeles, CA (97 MB/d)
• Shell – Anacortes, WA (145 MB/d) and San Francisco, CA (165 MB/d)
• Valero – San Francisco, CA (170 MB/d) and Los Angeles, CA (135 MB/d)
• Phillips 66 – Ferndale, WA (100 MB/d), San Francisco, CA (120 MB/d), and Los Angeles, CA (139 MB/d).

There are four additional West Coast refineries - owned by: Alon USA (Los Angeles, CA 94 MB/d); US Oil (Tacoma, WA 39 MB/d); Kern Oil (26 MB/d) and San Joaquin (24 MB/d) – both the latter located in Bakersfield CA.

#2 Producers

These companies produce what is considered the closest thing to purity NGLs originating on the West Coast. Sometimes their propane is only 88-90 percent pure and their butanes are varying degrees of iso/normal butane mix.  That’s what you get in the Wild West.      

• Occidental Petroleum (Oxy) – Oxy owns a majority interest in one of the largest oil and natural gas reserves in the U.S. - the Kern County Elk Hills field. Processing natural gas production from Elk Hills makes Oxy the biggest NGL player in the region. Oxy’s largest NGL processing plant is their Elk Hills facility where they recently completed a new 200 MMcf/d cryo unit.
• Chevron - Apart from their two West Coast refineries, Chevron has been a big oil and gas producer in the region since the “Seven Sister” days. They also own and operate processing facilities associated with oil and gas production in the San Joaquin Valley. Chevron also owns and operates the Ferndale storage facility (see below under storage).

#3 Midstream Service Providers

Unlike the NGL hubs at Belvieu and Conway, there are only two major NGL midstream service providers on the West Coast – both built up by acquiring good assets over time.

• Plains All American (Plains) - Plains is a significant NGL player on the West Coast. They own and operate the Shafter fractionation (12 MB/d) and isomerization (14 MB/d) plants near Bakersfield, CA (previously owned by Andrews Petroleum). This facility has 200 MBbl of refrigerated and bullet storage capacity. Plains provide tank car and truck terminalling services and own and operate an NGL truck fleet. Plains also operate the San Pedro, CA terminal near Los Angeles that used to handle waterborne movements but is now no longer permitted to do so. Plains recently (April 2012) purchased BP’s Canadian NGL assets.  
• Inergy L.P. - Inergy owns and operates the North Coles Levee Plant (a.k.a. Tupman) and the Rogas terminalling facility - both located near Bakersfield, CA (previously owned and operated by Arco and later by EOTT).  Facilities at North Coles and Rogas include 20 MMcf/d processing capacity, 7.5-8.5 MB/d fractionation capacity, 5.6 MB/d of butane splitting capacity (mixed butanes come in, normal and iso go out) and 8.5 MB/d  isomerization capacity. Inergy has refrigerated storage tanks (110M Bbl propane and 350 MBbl butane) and above ground storage spheres for propane (37.5M Bbl), natural gasoline (37.5 Mbl) and butane mix (two X 28 MBbl). Inergy also has a significant distribution system including 30 rail car loading/unloading spots, 8 truck racks and 75 trucks.   

#4 Storage

West Coast storage is almost entirely limited to above ground bullets and spheres that are small compared to salt cavern storage on the Gulf Coast at Belvieu. Limited storage in a market dominated by seasonal products such as normal butane and propane, puts a premium on these facilities and in two cases described below - encourages unconventional solutions. Three major storage facilities are:

• Ferndale – The Chevron owned and operated Ferndale storage and terminal facility in Bellingham, WA is the only waterborne NGL import export facility on the West Coast. Chevron leases the majority of the facility to BP. Ferndale has significant storage capacity that serves West Coast refineries. Ferndale has also been home over the years to a lucrative import/export business. Exports began in the late 1980’s headed to Latin America. Now the export market is the Far East and a butane cargo is exported every two months or so (1.3 MMBbl so far in 2012)
• Enterprise Adamana – The Adamana NGL storage and terminal facility is located Southwest of Flagstaff, AZ.  The facility has a throughput of approximately 5.5 MB/d. NGLs are received by rail and trucks, transferred to pressure tank (“bullet”) storage and then pumped into underground salt caverns.
• Plains Bumstead – The Bumstead storage facility near Phoenix, AZ was acquired by Plains in 2007 and is located close to major road and rail links to Los Angeles and Phoenix. Bumstead has 3.16 MMBbl of storage capacity including three salt-dome caverns, a 24-car rail tank rack and three tank truck racks.

Using either the Adamana or Bumstead salt cavern storage facilities involves shipping NGLs out from the West Coast to Arizona to park them during the summer, then shipping them back West again come the winter. That’s a lot of shipping to find a decent parking spot.

#5 Other West Coast Players

Rail tank car NGL movements are significant business in the Wild West – especially across the US/Canada border. These additional players worthy of mention understand the West Coast well and know how to move tank cars:

• Elbow River – Elbow has been around a long time. They are experienced railroad shippers that own a large fleet of tank cars and great relationships with the railroads.
• NGL Energy Partners -   NGL has been growing by leaps and bounds. Their most recent acquisitions include High Sierra, Centennial and SemStream all known for their tank car savvy. NGL now has 2400 tank cars of their own and considers them part of their core business.

Recent Wild West Developments

In spite of endangered grey kit foxes and other environmental restrictions, Oxy and Inergy recently successfully completed three pipelines to transport propane, mixed butanes and natural gasoline from Oxy’s Elk Hills new Cryo unit, to Inergy’s North Coles Levee loading rack at Rogas. Oxy will be able to load 4 MB/d for truck delivery and 10 MB/d by rail. Oxy is also working on pipeline connections from Elk Hills to the Plains Shafter plant loading facilities.

Next Time

Well folks, that all about does it for the supply/demand situation and describing the cowboys players in our Wild West NGL tale. Stay tuned to this station for further episodes about the unique West Coast pricing and the importance of rail cars and trucking to this market. Don’t forget, next time you are driving on a dark desert highway, cool wind in your hair  - the “shimmering light” up ahead in the distance might just be – a propane tank truck on its way to the Rogas terminal.  Drive on past that hotel up ahead.