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U.S. shale-oil and natural-gas boom opens another lucrative market—gas liquids used to make plastics

The hydraulic fracturing (fracking) method used to unlock vast amounts of crude and natural gas from previously unproductive shale formations across the U.S. is also are reaping large stores of ethane, propane and butane, known as natural-gas liquids. This is resuscitating the U.S. petrochemical industry, which just a few years ago was being strangled by the high costs of the raw materials.

Methane is the main component of natural gas, usually accounting for 70%–90% of the total volume produced. If gas contains more than 95% methane, it is sometimes termed dry or lean gas, and it will produce few, if any, liquids when brought to the surface. Gas containing less than 95% methane and more than 5% of heavier hydrocarbon molecules (ethane, propane, and butane) is sometimes called rich gas or wet gas. This gas usually produces hydrocarbon liquids during production.

Natural gas liquids include propane, butane, pentane, hexane and heptane, but not methane and ethane, since these hydrocarbons need refrigeration to be liquefied. The term is commonly abbreviated as NGL.

Processing ethane into chemicals is 50% cheaper than using crude oil-derived naptha and its availability has made U.S. petrochemical companies the envy of overseas competitors. It also brings the prospect of lower prices for auto parts, Styrofoam and other products.

The boom has turned into a potential profit center for oil-and-gas producers, as well as for the pipeline companies that transport the fuel. Demand for ethane grew to about 933,000 barrels a day during the first half of 2011, up from 812,000 barrels a day in 2009, according to Bentek Energy. But like the other fuels extracted from remote shale deposits, the biggest problem is how to get it to facilities that can process it.

A dearth of pipelines created a bottleneck that drove the price that petrochemical companies pay for ethane to 95 cents per gallon in the third quarter, from 60 cents at the start of the year, according to Dow Chemical Company.  But even with that price spike, chemical companies prefer ethane over other chemicals.  Ethane is still by far the preferred feed here in the United States and is much more cost-competitive than all of its equivalents.

To free up the flow of natural-gas liquids, about 12,000 miles of pipeline needs to be built by 2035, costing $14.5 billion, according to data from the Interstate Natural Gas Association of America, a trade association. Until those pipelines are built, higher production will make the market volatile as short-term fixes such as rail transport are used.

Some pipeline operators are working to expand their reach into oil- and gas-producing shale formations. Enterprise Products Partners LP is spending $7 billion on projects. That includes a 280,000 barrel-a-day pipeline joint venture with Anadarko Petroleum Corp. and Enbridge Energy Partners LP and a wholly owned 125,000-barrel-a-day pipeline, both of which will transport natural-gas liquids from the shale formations in the Northeast and mid-continent areas to the U.S. Gulf Coast, where the bulk of the petrochemical companies are located. DCP Midstream Partners LLC is also expanding its natural-gas liquids business, building two pipelines with a combined capacity of 350,000 barrels a day from the mid-continent and Texas to the Gulf Coast. (WSJ, 12/19/2011, NatgasInfo, Schlumberger)