CHAPTER 3 GAS PROCESSING AGREEMENTS
| Jurisdiction | United States |
(2001)
GAS PROCESSING AGREEMENTS
Winstead Sechrest & Minick, P.C.
Houston, Texas
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I. Introduction
Natural gas processing is a major segment of the oil and gas industry, distinct from either crude oil or natural gas production, separate from oil refining and gas distribution. Yet, it is critical to the smooth functioning of the petroleum industry. As a separate and distinct function, it is probably the least known and least understood segment of the petroleum industry.
In simple terms, the gas processing industry gathers, treats and refines natural gas into a useful, saleable gaseous fuel. In the process of refinement, the industry extracts and refines valuable liquid products for a variety of important energy and feedstock applications. In addition, the gas processing industry produces a major portion of the world's supply of sulphur, and extracts significant quantities of carbon dioxide and nitrogen for enhanced recovery operations. Gas processing is also the primary source of helium for industrial and scientific applications.
Natural gas occurs naturally in two principal forms: associated gas and non-associated gas. Associated gas is found in crude oil reservoirs, either dissolved in crude oil or in conjunction with crude oil deposits. Associated gas is produced from oil wells along with crude oil. It separates or is separated from crude oil at the casinghead of the well, which leads to the synonymous term "casinghead gas." In the early days of the petroleum industry, virtually all processed gas was produced from oil wells.
On the other hand, non-associated gas occurs in pure gas reservoirs that contain little, if any, crude oil. Non-associated gas production is not incidental to crude oil. It is commonly called "gas-well-gas" or "dry gas." Today, in the United States, 82% of all natural gas produced is non-associated gas. Therefore, non-associated gas is normally not used as feedstock for the
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production of natural gas liquids ("NGLs") but is sold as natural gas for pipeline deliveries directly.
From whatever reservoir, natural gas as produced from the earth has widely varying compositions, depending on the field, the geologic formation or the reservoir from which it is produced. The principal constituents of natural gas are methane and ethane, but nearly all gas streams also contain varying amounts of propane, butanes, pentane and heavier hydrocarbons that may be extracted by any of a number of processing methods.
The removal and separation of individual hydrocarbons is possible because of the differences in physical properties. Each component has a distinctive molecular weight, boiling point and other physical characteristics, which make its separation from other components a relatively simple physical operation.
Natural gas processors describe natural gases as rich ("wet") or lean ("dry") depending upon the amount of recoverable hydrocarbons contained. These are relevant terms, but as commonly used in the industry a very rich gas may contain 5-6 gallons or more of recoverable hydrocarbons per thousand cubic feet; a lean gas is usually one obtaining one gallon of recoverable hydrocarbons per thousand cubic feet. Natural gas may also contain water, hydrogen sulfide, carbon dioxide, nitrogen, helium or other components that may be dilutants or contaminants or both. In any case, natural gas as produced in its raw form from the earth is rarely suitable for pipeline transportation or commercial use. Gas must be conditioned or processed for long distance transportation and to achieve a constant heat value. Natural gas that is distributed to residential and commercial customers is composed almost entirely of methane and ethane, with moisture and other contaminants controlled rigorously to very low concentrations.
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Therefore, almost all natural gas is processed in some manner to remove unwanted moisture or other constituents that would interfere with pipeline transportation or marketing of the gas. In addition and equally important, natural gas is processed to separate from the gas heavier hydrocarbons that may have higher value as separate products.
The basic steps of the natural gas processing industry are to remove excess water from the gas, followed by extraction of liquid components by compression, by low temperature separation or by contact with an absorbing oil. The NGLs may be further processed at a fractionation plant into three main product groups:
• ethane (C2H8) exists as a liquid only under very high pressures (800 psi) or very low temperatures (-130°F) — it is used as feedstock for production of ethylene, arguably the most important and versatile basic petrochemical produced today.
• liquefied petroleum gases (LPG) propane, butanes and natural gasoline are recovered, transported and stored as liquid used for heating in rural areas not serviced by natural gas chemical feedstocks for production of propylene and ethylene, industrial fuel, motor fuel blending and agricultural uses such as crop drying.
• condensates (C5 and heavier) (light naptha or crude oil) used for chemical feedstocks and for gasoline blending.
The purpose of this paper is to provide (i) an overview of the gas processing industry; (ii) the types of gas processing methodologies; (iii) the types of commercial contracts used in the natural gas processing industry; (iv) royalty treatment of natural gas liquids ("NGLs") under private and federal leases and (v) an examination of a few of the more interesting operational and legal issues that arise in the context of negotiating a natural gas processing contract and operating a natural gas processing plant.1
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II. Overview of Gas Processing Industry Operations
A. Functions and Types of Gas Processing Plants
1. Functions of Gas Processing Plants
The primary functions of a gas processing plant are:
• Removal of water ("dehydration")
• Removal of CO2
• Removal of H2S and elemental sulphur ("sweetening")
• Removal of liquid hydrocarbons from the gas stream ("fractionation")
Natural gas processing usually consists of two functions: initial treating of the bulk NGL mixed stream to remove contaminants such as water, carbon dioxide and hydrogen sulfide, and processing to extract the liquid hydrocarbons, C2, C3 and higher, from the natural gas stream. Natural gas is a single carbon and four hydrogen molecule. Methane is the largest constituent of natural gas followed by ethane, propane and numerous other hydrocarbons listed on Exhibit 1. The amount of NGL products recovered from any particular natural gas stream is dependent on (i) the volume of gas coming into the plant; (ii) the concentration of recoverable liquid hydrocarbons entrained in the natural gas stream; and (iii) the technical efficiency of the gas processing equipment at the plant which determines the percentage of recoverable liquid hydrocarbon products which can actually be removed.
The natural gas remaining after the propane-plus mixed stream has been removed is marketable natural gas, containing primarily methane, which is known in the industry as "residue gas" and which is used commercially and domestically as fuel. Residue gas may also be used for lease operations or for fuel for operation of the gas processing plant.
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2. Types of Gas Processing Plants
Processing plants used to extract liquid hydrocarbons vary considerably in size and complexity, ranging from the simple "drip tank" in which pentanes plus are condensed out of gas at atmospheric pressure and temperatures are drawn out of the pipeline to complex processes to extract ethane (the lightest of the hydrocarbons except for methane). In some areas producers have entered into the gas processing business on a large scale gathering gas from many wells and reselling it at the plant tailgate after removing contaminants like water, carbon dioxide, and hydrogen sulfide and extracting the liquid hydrocarbons. Typically processing facilities might range from plants able to handle 1-2 MMcf/day to 1,000 MMcf/day size. In certain locations along the Texas and Louisiana Gulf Coasts, the gas stream is so rich in liquid hydrocarbons that the producers in the field also wish to own an interest in the processing plant, resulting in joint ownership and operations.
B. Economics of Gas Processing
A natural gas stream is considered "lean" when it contains low proportions of recoverable liquids and "rich" when it contains high proportions of recoverable liquid hydrocarbon products. The treatment to remove contaminants and the processing to remove liquid hydrocarbons causes the gas streams contained entrained liquids to "shrink" in both heating value, MMBtu (million British thermal units) and volumes, Mcf (thousand cubic feet). The calculation and allocation of "shrinkage" is very important to both the gas producer's and processor's overall economics.
A producer can sometimes negotiate a processing deal where a processor bears the economic cost of shrinkage and fuel and the producer pays a flat processing fee or has a favorable netback arrangement. In other situations though, the processor will have the leverage to force the producer to bear the economic cost of all of the Btus lost to the gas stream and surrender to the processor a share of the NGL products produced. Also, the compressors and
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other machinery in the processing plant normally use the inlet gas stream as fuel for their operation.
In addition to considering the relative shrinkage, plant fuel costs and plant capacity, a producer should take other costs and factors into consideration when evaluating the economics of a processor's offer. A key cost is compression at both the inlet and outlet side of the processing plant. Compression may be necessary to boost the inlet stream of gas to the pressure necessary for processing. Also, depending on the...
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