Understanding Natural Gas Liquids (NGLs): Types, Uses, and Challenges

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Natural gas liquids (NGLs) are hydrocarbons that occur alongside methane in raw natural gas and are separated out and condensed into liquids. The five main NGLs are ethane, propane, normal butane, isobutane and pentanes plus (also called natural gasoline). These products feed plastics plants, heat homes, fuel vehicles and get blended into gasoline. They also cost more to store and move than refined fuels, because they stay liquid only under pressure or refrigeration.

What natural gas liquids are

A hydrocarbon is a molecule made only of carbon and hydrogen. Raw natural gas coming out of a well is mostly methane, the lightest hydrocarbon, with one carbon atom. Mixed in with it are heavier hydrocarbons with two to five or more carbon atoms. Once these heavier molecules are pulled out of the gas stream, they are the natural gas liquids:

Gas with a high share of these heavier components is called “wet” gas. Gas that is nearly all methane is “dry” gas. A wet-gas field produces both pipeline-quality gas and a stream of liquids that can be sold separately, and the separate products are often worth more than leaving them in the gas.

NGLs are not the same as LNG

The two terms are easy to mix up. Liquefied natural gas (LNG) is methane chilled to about -260°F (-162°C) so it can be shipped by tanker. It returns to gas at its destination and is burned like pipeline gas. Natural gas liquids are different molecules (ethane, propane, butanes and heavier) removed from the gas before it is sold. They go into separate markets with their own prices and buyers.

NGLs also overlap with liquefied petroleum gas (LPG), a term for propane, butane or a mix of the two kept liquid under pressure. LPG can come from gas processing or from crude oil refining, so not every gallon of propane is an NGL in the strict sense.

How NGLs are extracted and separated

1. Extraction at a processing plant. Raw gas travels through gathering lines to a gas processing plant. There, water, carbon dioxide and other impurities are removed, and the gas is cooled or put through absorption processes so the heavier hydrocarbons condense. What leaves the plant is dry methane, which enters the pipeline grid, and a mixed liquid stream often called “Y-grade” or raw mix.
2. Fractionation. The mixed stream moves by pipeline to a fractionator, a plant that separates it into individual products. Fractionation works because each NGL boils at a different temperature. The mix is heated in a series of towers, and the lightest product comes off first: a deethanizer removes ethane, a depropanizer removes propane, and a debutanizer removes the butanes. A butane splitter then separates isobutane from normal butane. What remains is pentanes plus.

After fractionation, the purity products go to storage, often in underground salt caverns. From there they move by pipeline, rail car, truck or ship to petrochemical plants, refineries, propane distributors and export terminals. Mont Belvieu, Texas, near the Gulf Coast’s chemical plants and export docks, is the best-known U.S. NGL storage and pricing hub.

Types of NGLs and their uses

The NGLs are chemically similar, but their uses differ widely. Industry also groups them by vapor pressure, which describes how readily a liquid turns to gas and determines how a product must be stored and shipped:

• Low vapor pressure: condensate
• Intermediate vapor pressure: natural gasoline
• High vapor pressure: liquefied petroleum gas (propane and butanes)

Ethane

Ethane is mainly a petrochemical feedstock. Steam crackers break ethane into ethylene, the building block for polyethylene and other chemicals. End products include plastic bags, water bottles, packaging film, antifreeze and detergents. Ethane is rarely used as a fuel in its own right, so its value depends heavily on demand from chemical plants.

Propane

Propane is the NGL most consumers recognize. It is used for residential and commercial space heating, cooking, camp stoves, grills, water heaters and crop drying. Some vehicles, including forklifts and fleet vehicles, run on propane. Propane is also a petrochemical feedstock: it can be cracked or converted into propylene for plastics.

Normal butane

Butane can be blended into gasoline and mixed with propane. Refiners add butane to gasoline to adjust its vapor pressure, with more allowed in colder months when fuel needs to vaporize easily for starting. Butane also goes into synthetic rubber for tires and into lighter fuel. In its purest form, it serves as a refrigerant.

Isobutane

Isobutane has the same chemical formula as normal butane but a branched structure. Refineries use it as feedstock in alkylation units, which produce a high-octane gasoline blending component. It is also a petrochemical feedstock, and end products include aerosol propellants and refrigerants used in household appliances.

Pentanes plus (natural gasoline)

Pentanes plus is the heaviest NGL fraction. It is blended into motor gasoline and used as a blowing agent to make polystyrene foam. A significant use is as a diluent: pentanes plus is mixed with heavy bitumen from Canada’s oil sands so the bitumen can flow through pipelines, which is why some of it is exported for that purpose.

Challenges in NGL production and handling

Storage and transport costs. Ethane, propane and the butanes are gases at room temperature and normal pressure. To keep them liquid, they must be held under high pressure, kept very cold, or both. That requires specialized pressurized trucks, rail cars, ships and storage tanks, which makes handling more expensive than for fuels like gasoline or diesel.

Flammability and volatility. NGLs are highly flammable and evaporate easily. Leaks can form explosive vapor clouds, so equipment, facilities and transport are built and operated to strict safety standards. The same volatility limits the number of markets where NGLs can be delivered and used practically.

Processing capacity. As drilling brings more wet gas to the surface, the liquids need somewhere to go. Production growth increases demand for processing plants, fractionators, pipelines and export terminals. If that infrastructure falls behind, producers in a region may be unable to move their liquids or may have to accept lower prices.

Ethane rejection. When ethane is worth less as a chemical feedstock than as part of the natural gas stream, processors can leave much of it in the gas and sell it for its heating value instead. This practice, called ethane rejection, means ethane output depends on prices and plant economics, not only on what comes out of the ground.

Why NGLs matter to producers and investors

The U.S. shale boom changed the NGL market. Horizontal drilling combined with hydraulic fracturing, which uses high-pressure fluid to crack rock and release gas, opened up large wet-gas formations. NGL production rose steadily as a result, and the U.S. became a leading producer and a growing exporter of NGLs.

For producers, NGLs add a revenue stream on top of methane sales. A well in a wet-gas area earns money from the dry gas, from the liquids and sometimes from crude oil as well. That mix spreads a company’s revenue across several commodities. Propane, butanes and pentanes plus compete with or substitute for oil-derived products, so their prices can relate more closely to crude oil than to natural gas. Ethane, which can be left in the gas stream, often trades with a closer link to natural gas.

For investors, NGL exposure shows up in several parts of the energy sector:

• Producers in wet-gas basins, whose results depend partly on how much of their output is liquids and what those liquids sell for.
• Midstream companies that own gathering lines, processing plants, fractionators, storage and pipelines. They often earn fees based on volumes handled, which can make their revenue less sensitive to commodity prices than producers’ revenue.
• Petrochemical companies that buy ethane and propane as feedstock. For them, cheap NGLs lower input costs.

Production mix, contract structure and infrastructure ties are useful starting points for fundamental analysis of any of these companies.

Example: from wellhead to end user

In a hypothetical example, a company drills natural gas wells in Texas and finds wet gas rich in ethane and propane. At the processing plant, impurities are removed and the gas is chilled so the heavier hydrocarbons condense. Dry methane enters the interstate pipeline system, and the mixed liquids travel by pipeline to a fractionator. There, ethane boils off first, then propane, then the butanes. Ethane goes to a chemical plant that turns it into ethylene for plastic bags and water bottles. Propane goes to local distributors for home heating and cooking, and to commercial and industrial customers.

Large integrated energy companies such as Exxon Mobil (XOM), one of the largest U.S. natural gas producers, operate across several of these steps, from drilling through processing and chemical manufacturing.

FAQs

The Bottom Line

NGLs matter to investors in wet-gas producers, midstream operators and petrochemical companies, since each group earns or spends money on these liquids differently. Propane, butanes and pentanes plus often track crude oil, while ethane tends to follow natural gas. Before judging any of these companies, look at its production mix, contract structure and access to processing, fractionation and export infrastructure.