Gas Processing Plant Models
Executive Summary
Key Takeaways
- ✓ Gas processing plant models centre on the extraction of natural gas liquids, ethane, propane, butane and natural gasoline, from raw wellhead gas, and the plant's recovery rate for each NGL component.
- ✓ Processing contracts typically take one of three forms, fee-for-service, percent-of-proceeds, or keep-whole, each allocating commodity price risk differently between the processor and the producer.
- ✓ A fee-for-service contract exposes the processor to minimal commodity price risk, while a keep-whole contract exposes the processor to the most, and the model must reflect the specific contract type actually in place rather than a generic processing margin.
- ✓ Plant recovery rate, the share of each NGL component actually extracted from the raw gas stream, directly determines processing economics and should be modelled against the plant's specific technical configuration rather than an industry-average assumption.
Objective¶
This guide sets out how gas processing plant financial models are structured, within Oil & Gas Financial Modelling.
NGL Extraction and Recovery Rates¶
Gas processing plants extract natural gas liquids, ethane, propane, butane and natural gasoline, from raw wellhead gas before it enters transport or sales pipelines. Recovery rate, the share of each NGL component the plant actually extracts, is specific to the plant's technical configuration and directly determines processing economics, and should be modelled against the plant's actual specification rather than an industry-average assumption.
Contract Structures and Risk Allocation¶
Gas processing is typically compensated under one of three contract structures:
Fee-for-service. The processor is paid a fixed fee per unit of gas processed, regardless of NGL value, exposing the processor to minimal commodity price risk.
Percent-of-proceeds. The processor retains an agreed share of the value of NGLs extracted, sharing commodity price exposure with the producer.
Keep-whole. The processor keeps the extracted NGLs but must replace the equivalent energy content in the gas returned to the producer, exposing the processor to the greatest commodity price risk among the three structures, since NGL and gas prices can move independently.
The model must reflect the specific contract structure actually in place, since applying a generic processing margin without distinguishing between these structures misstates the processor's actual exposure to commodity price movements.
Common Structuring Pitfalls¶
- Applying an industry-average recovery rate rather than the plant's specific technical configuration.
- Modelling a generic processing margin without reflecting whether the actual contract is fee-for-service, percent-of-proceeds, or keep-whole.
- Failing to represent the independent price exposure to both NGL and gas values under a keep-whole contract.
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Frequently Asked Questions
What does a gas processing plant financial model need to represent?
The extraction of natural gas liquids, ethane, propane, butane and natural gasoline, from raw wellhead gas, the plant's specific recovery rate for each component, and the contract structure under which the plant is compensated for processing.
What are the main gas processing contract structures?
Fee-for-service, where the processor is paid a fixed fee per unit of gas processed regardless of NGL value, exposing the processor to minimal commodity price risk; percent-of-proceeds, where the processor retains an agreed share of the NGL value extracted, sharing commodity price exposure with the producer; and keep-whole, where the processor keeps extracted NGLs but must replace the equivalent energy content in gas returned to the producer, exposing the processor to the most commodity price risk among the three structures.
How does recovery rate affect processing economics?
Recovery rate, the share of each NGL component actually extracted from the raw gas stream, is specific to a plant's technical configuration and directly determines how much value the plant can capture, so it should be modelled against the plant's actual specification rather than an industry-average assumption.
Why does contract type matter so much to a gas processing model?
Because the three common contract structures, fee-for-service, percent-of-proceeds, and keep-whole, allocate commodity price risk between processor and producer very differently, and applying a generic processing margin without reflecting the specific contract in place misstates the processor's actual exposure to NGL and gas price movements.
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