In our world economy, a change in one thing can (and usually does) affect a range of others. As an example: President Trump’s decision to scuttle the Iran nuclear deal and impose sanctions on Iran could limit the NGLs flowing through the Mariner East pipeline system. Does that surprise you? It surprised me too, but as I think about it, it seems likely to happen. Let me explain why.
- President Trump is re-imposing sanctions, including sanctions that will impede Iran’s oil production. Here is a Washington Post article about that.
- The sanctions will reduce the availability of crude oil. Under the sanctions, US companies (and other companies that do business with the US) will pay a penalty if they buy Iranian oil. That will have the effect of reducing the number of customers for Iran’s oil (and therefore, its oil production).
- Reduced availability will increase crude prices. That is already happening. The threat of sanctions has sent crude prices to their highest level in four years.
- Higher oil prices will increase the rate of US oil drilling and production, especially in the Permian Basin in Texas. The Permian basin is currently the biggest source of US crude, and production there is still growing. The situation in Iran will only accelerate that.
- Oil wells in the Permian also produce lots of natural gas. The gas produced by these wells is copious and unavoidable. Texas is experiencing a natural gas glut as a side effect of the wells being drilled for crude oil.
- The glut of Permian natural gas is forcing gas prices down. The Permian drillers don’t care about gas prices. They’ll keep drilling as long as the price of crude oil remains high. Here’s an article about that. In tandem with the natural gas glut, there is an NGL glut in Texas.
- Marcellus gas has to compete with low-cost Permian gas. The Marcellus gas wells don’t produce crude oil, so they require high gas prices for profitability. That probably means drillers will respond to low gas prices and abundant Texas gas by drilling fewer new wells in the Marcellus.
- If Marcellus natural gas production declines, so will NGL production. Since NGLs emerge from the wells mixed in with the natural gas, the volume of NGLs produced is a direct consequence of the volume of natural gas produced. If Marcellus natural gas production declines, so will NGL production.
- If production of NGLs declines, there will be less demand for the Mariner East. Not only would there be less NGL production in Pennsylvania, but demand would drop as well: low-cost NGLs in Texas would mean customers might prefer to buy bargain NGLs there. Mariner East would have less product to carry.
I know that’s a long series of dominoes that would have to fall, one after the other, but doesn’t it make sense? I invite readers to poke holes in my logic. Statistics are freely available about most of the factors listed above, and I’ll be watching them for signs that this cascade of events is actually happening.