Over supply of NGL triggers budget cuts among oil and gas firms

Energy firms in the United States, especially those whose bread and butter come from natural gas liquids (NGL), may resort to cost cutting or even asset disposal amid current oversupply of the commodity.

As prices of natural gas remained at protracted low levels, the industry drilled for NGL (propane, ethane, butane and larger condensates). When these are stripped, they can fetch market prices that are close to those of current crude oil prices.

Unfortunately, over production has triggered prices of ethane to drop. Profits from selling the commodity have dwindled.  Moreover, oil prices also slumped by 20 percent during the last three months while prices of NGLs went down by 15 percent during the first three months of 2012.

Oil expert Andrew Coleman predicts that if crude oil prices and those of NGL remain at very low levels, oil and gas firms may be forced to dispose of some assets.

True enough, owing to cheap natural gas prices, oil firm Chesapeake Energy Corporation disclosed that it intends to sell oil assets located at the Eagle Ford shale.  According to Chesapeake, it has a relatively large exposure to NGL.

While Chesapeake is selling oil assets, some have been negotiating for discounts on oilfield services. If granted, this would mean savings on the cost of drilling oil wells.

As oil and gas firms face dwindling profits on NGL sales, earnings forecasts for the succeeding year have to be adjusted.  Barclays’ experts projected lower earnings next year for North American oil and gas firms.  The dismal crude oil price per barrel prediction was one of the bases for cutting 2013 projected profits by more than 20 percent.

Chevron Phillips Chemical CEO Peter Cella said he wouldn’t be surprised if the market does not rebalance in the long term. Despite the rise in supplies, a great number of firms are expected to pay out more for crude oil and NGL production.

Meanwhile, NGL production is expected to continue growing. Based on stats from Energy Information Agency (EIA), NGL output last year was close to 2.2 million bpd.  This year, EIA expects this level to reach 2.35 million bpd, a 7 percent increase from 2011 levels.

Indeed, many oil and gas firms will certainly need to take concrete steps to offset the NGL price declines.  Obviously, cutting down on spending is one immediate course of action.