|ENTERPRISE PRODUCTS PARTNERS L P filed this Form 10-K on 02/28/2018|
In our natural gas processing business, contracts are either fee-based, commodity-based or a combination of the two. Generally, our natural gas processing agreements have terms ranging from month-to-month to life of the producing lease. Intermediate terms of one to ten years are also common in such agreements. In recent years, our portfolio of natural gas processing contracts has become increasingly weighted towards those with fee-based terms as producers seek to maximize the value of their production by retaining all or a portion of the NGLs extracted from their natural gas stream. As of December 31, 2017, we estimate that the terms of approximately 44.1% of our current portfolio of natural gas processing contracts (based on natural gas inlet volumes) were entirely fee-based, with an additional 26.2% of this portfolio reflecting a combination of fee-based and commodity-based terms. The terms of the remaining 29.7% of our portfolio of natural gas processing contracts were entirely commodity-based. Our commodity-based contracts include keepwhole, margin-band, percent-of-liquids, percent-of-proceeds and contracts featuring a combination of commodity and fee-based terms. To the extent we earn all or a portion of the extracted NGLs as consideration for our processing services, we refer to such volumes as our “equity NGL production.”
The value of natural gas that is removed from the processed stream as a result of NGL extraction (i.e., the “shrinkage”) and the value of natural gas that is consumed as plant fuel are significant costs of natural gas processing. To the extent that we are obligated under keepwhole and margin-band contracts to compensate the producer for shrinkage and plant fuel, we are exposed to fluctuations in the price of natural gas; however, margin-band contracts typically contain terms that limit our exposure to such risks. Under the terms of our other processing arrangements (i.e., those agreements with fee-based, percent-of-liquids and percent-of-proceeds terms), the producer typically bears the cost of shrinkage. If the operating costs of a natural gas processing plant are higher than the incremental value of the NGL products that would be extracted, then recovery levels of certain NGL products, principally ethane, may be purposefully reduced. This scenario is typically referred to as “ethane rejection” and leads to a reduction in NGL volumes available for subsequent transportation, fractionation, storage and marketing.
Our NGL marketing activities entail term and spot sales of NGLs, which we take title to through our natural gas processing activities (i.e., our equity NGL production) and open market and contract purchases. The results of operations for NGL marketing are primarily dependent on the difference between NGL sales prices and the associated purchase and other costs, including those costs attributable to the use of our other assets. In general, sales prices referenced in the underlying contracts are market-based and may include pricing adjustments for factors such as location, timing or product quality. Market prices for NGLs are subject to fluctuations in response to changes in supply and demand and a variety of additional factors that are beyond our control. We attempt to mitigate these price risks through the use of commodity derivative instruments. For a discussion of our commodity hedging program, see Part II, Item 7A of this annual report.
Our NGL marketing activities utilize a fleet of approximately 820 railcars, the majority of which are leased from third parties. These railcars are used to deliver feedstocks to our facilities and to distribute NGLs throughout the U.S. and parts of Canada. We have rail loading and unloading capabilities at certain of our terminal facilities in Arizona, Kansas, Louisiana, Minnesota, Mississippi, New York, North Carolina and Texas. These facilities service both our rail shipments and those of our customers. Our NGL marketing activities also utilize a fleet of approximately 121 tractor-trailer tank trucks, the majority of which we lease and operate, that are used to transport LPG for us and on behalf of third parties.