Shale Daily / NGI All News Access

Marcellus Producers Struggle to Manage Ethane

The rich gas corridor of the Marcellus Shale is attracting producers even at low natural gas prices, but while most natural gas liquids (NGL) command a premium in the Northeast, the lack of ethane markets in the region is a challenge, according to several industry players.

The liquidy acreage in southwestern Pennsylvania and northern West Virginia -- estimated to cover between 3,000 and 5,000 acres, or roughly the size of the core area of the Barnett Shale -- is shifting old logic in the region about what products are worth chasing and how to chase them, the heads of several midstream players told an audience in Pittsburgh on Wednesday at Hart Energy's Midstream Marcellus conference, presented by Midstream Business magazine.

NGLs make the Marcellus Shale perhaps the most economic shale play in the country, they said.

A producer in the Appalachian Basin that can get $3.75/Mcf on the netback of lean gas can get $7.10/Mcf on the netback of rich gas, according to Jack Lafield, CEO of Caiman Energy LLC. The problem is that while the Northeast is a strong market for propane, pentane and, to a lesser degree, butane, it doesn't have a market for ethane.

That also was the conclusion of a report issued last September by Bentek Energy LLC (see Daily GPI, Sept. 13, 2010).

Lafield said lower prices are the result of new shale plays flipping the balance between supply and demand for ethane.

The limited market in the Northeast comes from the lack of petrochemical plants and fractionation facilities, according to Bob Parks, founder of Superior Pipeline Co., a midstream player in the Midcontinent and Appalachia.

Because of the existing liquid infrastructure in the Midcontinent, producers are able to capture the full profit potential of the gas stream, one of the reasons that the Granite Wash tight sands in Oklahoma and Texas have proven to be so economic.

"The pie is just bigger and the pie up here [in Appalachia] is just not that big until you can go after ethane," he said.

For that reason, Superior Pipeline continues to focus on dry gas in the Marcellus.

"We firmly believe that the cure for low gas prices is low gas prices," Parks said, saying that the economics of dry gas in the Marcellus are still good and once prices increase the region will bounce back faster than other shale plays.

Meanwhile, many midstream players are looking to fill those infrastructure gaps in the market.

For instance, when Dominion Transmission Inc. upgraded its Hastings Extraction Plant in northern West Virginia in 2003, it eliminated the ability to remove ethane because the market for the product disappeared in the early 1990s.

"Of course now we're looking to see if we need to put it back in," said Marc Halbritter, managing director of commercial activities for Dominion Transmission, the midstream arm of the major downstream player.

The two new processing plants that Dominion expects to bring online this year -- the 40 MMcf/d Lightburn plant and the 10 MMcf/d Schultz plant -- got started before development of the Marcellus Shale really took off.

Now, the company is responding to demand from Marcellus producers.

Last November, Dominion filed an application with the Federal Energy Regulatory Commission to convert its TL-404 pipeline in northern West Virginia from a dry transmission service to a wet gathering service and hopes to have the $20 million project complete and online in 2012. As part of that project, Dominion recently announced plans to build a 300 MMcf/d Natrium plant where it can extract 45,000 b/d of NGLs, about half of which could be ethane. The plant is expected to come online in two phases between December 2012 and April 2013 (see Shale Daily, Jan. 14).

"The reason producers are following NGLs is they're just following the money," Halbritter said.

However, Halbritter noted, while NGLs typically track oil prices, ethane began to decouple from oil in January 2009 "and instead of following everything back up, it has tended to trend in a much narrow range, almost a flat band."

With limited regional markets, that can create a problem for producers.

Dominion estimates that only 26-38% of the ethane in the gas stream must be removed to meet pipeline specifications, but Halbritter noted that increasing rich gas production will making blending an increasing nonviable option.

Dominion is looking for ways to use ethane for boiler fuel and power generation, but Halbritter said at least three ethane crackers are under consideration and at least six companies want to build pipelines to market Marcellus ethane.

One of those, the Marcellus Lateral Pipeline proposed by Kinder Morgan Energy Partners, would connect the West Virginia panhandle to the Cochin Pipeline, allowing the company to sell NGLs in Sarnia, ON, as well as Chicago.

"We're looking at ethane initially because that's the required product of the day," Karen Kabin, director of business development for Kinder Morgan Products Pipelines, said, noting that the project could also handle other NGLs.

Kinder Morgan is eying those markets because while the Northeast is a premium market for propane, there is limited demand for ethane, and liquidy shale plays in Texas are closer to Gulf Coast markets than the Marcellus.

By aiming to come online in 2012, to offer shippers commitments starting at 25,000 b/d for 10 years at 9-17 cents per gallon, and to keep costs down by using 150 miles of existing pipeline on the Cochin Pipeline, Kinder Morgan hopes it can beat out several other midstream projects proposing to connect the Marcellus to the Gulf Coast (see Shale Daily, March 24).

The limited ethane market in the Marcellus is even causing producers to try new ideas.

Through its acquisition of liquids-rich Marcellus Shale acreage in northwest West Virgina in February 2010, Magnum Hunter Resources Corp. also picked up the Eureka Hunter pipeline and is now building a new 200 MMcf/d cryogenic processing plant, a system primarily designed to serve its own production in the region (see Shale Daily, Feb. 23).

"We're really an upstream company that's gotten into the midstream business as a necessity," said CEO Gary Evans.

This year, Magnum Hunter is expanding its system, first by connecting Eureka Hunter to various interstate pipelines in the region and then by constructing its processing plant. Evans said the plant could be used for ethane extraction.

Until more infrastructure is in place, though, even midstream companies are having to be clever about their ethane.

Keystone Midstream Services LLC, a joint venture of Stonehenge Energy Resources, Rex Energy Gas Development and Summit Discovery that operates a gas processing plant in southwestern Pennsylvania to serve Rex production in Butler and northeast Beaver counties, uses the ethane from its gas stream to power its internal combustion engines.

"Without a market it does cost some money, but there are advantages: We are able to operate," said Mike Brinkmeyer, general manager for Keystone.

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