What it means
Raw gas coming out of the ground is not only methane, the dry gas that heats homes. It also carries heavier molecules that turn into liquids when cooled or put under pressure, and a processing plant strips these out so the remaining gas meets pipeline quality standards.
The main components are ethane, propane, normal butane, isobutane and natural gasoline (also called pentanes plus). Ethane is used mainly as a feedstock (raw input) for plastics manufacturing, propane for heating and cooking, and butane for fuel blending and chemicals.
For a business reader, the important point is that these liquids often sell at a price linked more closely to crude oil than to gas. A producer drilling in a liquids-rich area can therefore earn more per unit of gas processed than one in a dry gas area, which changes the economics of a well.
Analysts measure richness with a figure called gallons per thousand cubic feet (GPM). The higher the GPM, the more liquids are recovered from each unit of gas, and the more revenue the processing plant can earn on top of the gas itself.
One nuance is that ethane can be left in the gas stream, called rejection, when separating it costs more than it earns. This means a producer's liquid volumes can change with market conditions as well as geology.
Pricing and contracts add another layer. Many producers sell their gas at the wellhead and receive a share of the liquids value back under a processing agreement, so the percentage retained by the producer is a key negotiating point.
Two fields with identical production can therefore generate quite different cash flows.
In practice
Real-world examples.
Example
A midstream company (one that moves and processes energy) builds a plant near new wells and earns a fee for separating liquids, plus a share of the liquid sales, so its revenue depends on volumes processed.
Example
A plastics manufacturer tracks ethane prices because ethane is its main raw material, and it negotiates a supply contract to avoid swings in input costs.
Example
A rural propane distributor buys liquids from the plant in summer, stores them, and sells to homes in winter, relying on the price gap between the two seasons to cover storage costs.
Formula
Calculation
Liquids volume (barrels) = Gas processed (Mcf) x GPM / 42
There are 42 gallons in a barrel, and GPM is the gallons of liquids recovered per thousand cubic feet (Mcf) of gas.
Worked example: a plant processes 126,000 Mcf of gas a day from wells that yield 5 GPM.
Gallons of liquids = 126,000 x 5 = 630,000 gallons
Barrels = 630,000 / 42 = 15,000 barrels a day
If the blended liquids price is $0.50 per gallon, daily liquids revenue = 630,000 x $0.50 = $315,000.
Over a 30-day month that is $315,000 x 30 = $9,450,000 in addition to the revenue from the remaining dry gas.Case study
Seen in the real world.
Harlow Ridge Resources is an illustrative, fictional gas producer that discovered its new field was liquids-rich. Its first valuation assumed all output would sell as dry gas at a low price per Mcf.
The finance team then built a second model that included liquids at 5 GPM. Revenue per unit of gas processed rose sharply, and the project moved from marginal to comfortably profitable, which changed the board's drilling decision.
The team also stress-tested the case for a fall in liquids prices and for ethane being rejected. In this illustrative story, the project still cleared its hurdle rate, but with a much thinner margin of safety than the first optimistic version suggested. The board approved a staged drilling plan, with the second phase only going ahead if liquids prices held above a minimum level for two consecutive quarters. That condition tied capital spending directly to the revenue the liquids were expected to deliver.
Watch out
Common mistakes.
- Valuing a liquids-rich gas well on the dry gas price alone and ignoring the extra revenue from separated liquids.
- Assuming liquids always sell at the crude oil price, when each product has its own supply and demand and its own discount to oil.
- Forgetting processing and transport fees, which reduce what the producer actually receives for the liquids.
Questions
People also ask.
Are natural gas liquids the same as liquefied natural gas?
No, liquefied natural gas is methane cooled into a liquid for shipping, whereas natural gas liquids are the heavier components separated from the gas stream.
Why do producers care about GPM?
GPM shows how much liquid each unit of gas contains, which directly drives the revenue earned per unit of gas processed.
Are they treated as oil or gas in reporting?
Practice varies, and many companies report liquids as a separate line or convert them into oil or gas equivalent volumes using stated conversion factors.
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