Monday, Jan 28, 2008

By Aude Florin

Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--The Organization of Petroleum Exporting Countries' output of liquid fuels produced from natural gas wells is expected to be at its highest level for six years in 2008, providing some relief from tight oil supplies.

Alternative fuel sources are becoming key to meeting booming global oil demand as the industry depletes easy-to-access crude deposits. Natural gas liquids - once considered a low-value by-product of gas production - are increasingly competitive on surging conventional crude prices; OPEC production is expected to climb by 600,000 barrels this year over 2007.

"It's a tiny component but it means a lot," says Perry Fisher, editor of Houston-based magazine World Oil.

Separated from natural gas, the liquids can be used as fuel for heating, gasoline and the chemical industry. They are attractive too because like natural gas they produce energy with fewer noxious emissions than oil and can be mixed with crude to produce lighter, more valuable oil products.

The United States is the world's largest producer of NGLs, pumping 1.8 million barrels a day, 25% of the country's total oil production, according to the Paris-based International Energy Agency.

OPEC countries' production of NGLs has steadily increased since 2002. Last year, they accounted for 15% of its total oil production, or 4.82 million barrels a day. That's expected to climb to 6 million barrels a day by 2010.

The Hawiha NGL recovery program in Saudi Arabia is an example of how Persian Gulf countries have also been developing their NGL industry.

The project, run by the national Saudi Arabian Oil Co. (SOI.YY), should be ready for production within months and will enable the kingdom to "capture more of the refinery market in Asia and the U.S., which prefer lighter oils to the often heavy sour (sulfurous) crudes typical of Saudi exports," the company said in a statement on its web site.

A further advantage to OPEC members is that NGLs aren't included in their self-imposed quotas, production targets that matter less when oil prices and demand are high but are crucial to the group if demand, and therefore prices, fall sharply.

The growing flow of NGLs to the market is directly linked to the increasing production of natural gas itself. However, the separation of NGLs from natural gas incurs additional infrastructure and extraction costs, which some countries are reluctant to spend.

Russia, for example, is one of the world's biggest gas producers but a comparatively small NGL producer. The IEA 2008 forecast for Russian NGL production is 475,000 barrels of oil equivalent compared with 5.4 million barrels of oil equivalent in OPEC countries.

But technological developments and a growing market for NGLs mean their extraction now makes gas fields increasingly profitable.

"We may well see Russia and Caspian republics become important producers in years to come," says IEA supply analyst David Fyfe.

Asia also has a growing demand for NGLs. Propane and butane, two of the most commonly extracted NGLs, are used for heating in China, Japan and many other Asian countries. Propane demand in Asia is now higher than in North America, says the U.S. National Propane Gas Association.

NGL prices have historically been influenced both by crude oil and natural gas prices. But while analysts expect oil prices to average $80 in 2008, NGLs may become more competitive as they compete with crude oil.

The average price of the U.S. benchmark light, sweet crude in December was about $92 a barrel while the average price of a North American NGL mix was some $63 a barrel.

There are drawbacks with NGLs though. Allen Mesch of PetroStrategies, a consulting company specializing in oil and gas, notes that the price of NGLs tend to be even more susceptible to economic and geopolitical concerns than crude, which can make forecasts challenging.

The IEA's Fyfe also notes that there could be "a bit of a hiatus" in natural gas and NGL production when current natural gas contracts end around the end of this decade. Some countries, including Qatar, have expressed misgivings about the costly investments needed to continue such projects.

In the meantime, NGLs are providing an additional margin.

"It's all about little slivers and the slivers seem to be working," says editor of World Oil magazine Fisher.

By Aude Florin, Dow Jones Newswires; +44 20 7842 9343; adam.smallman@dowjones.com

(END) Dow Jones Newswires

28-01-08 1229GMT