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Oneok: Ethane Inventories Declining Through Year

Excess ethane inventories are being worked off as maintenance at petrochemical facilities is completed. Ethane inventories are expected to decline for the remainder of the year while petrochemical plants operate at high utilization and rely upon ethane as their primary feedstock, Oneok Partners President Terry Spencer said during an earnings conference call last Wednesday.

"Ethane continues to be the preferred petrochemical feedstock versus oil-based feeds due to ethane's continuing price advantage driven by the continued low ethane-to-crude oil price ratio, which is now well below 20%," Spencer said.

"With near record ethane consumption of well over one million b/d, we expect U.S. ethane inventories in terms of days of supply to be back to within normal ranges as early as year-end. We expect the price of ethane, particularly at Mont Belvieu [TX] to continue to strengthen in the near and longer term as it has recently. In particular, U.S. Gulf Coast petchem demand for purity ethane feed continues to grow, and supplies of the traditional ethane-propane mix continue to grow as well."

Spencer said the Oneok system is seeing an imbalance with excess ethane-propane mix and not enough purity ethane to serve petrochemical demand. This has caused the gap between the price of ethane-propane mix and premium priced purity ethane to periodically widen to historical levels, he said.

To meet demand for purity ethane, Oneok plans to construct a new facility at Mont Belvieu, a specialized fractionator that will fractionate an 80:20 ethane-propane mix into purity ethane, Spencer said.

Propane inventories also have been running high lately due to diminished demand from mild temperatures last winter. The oversupply and reduced price relative to crude oil-based feedstocks led some petrochemical plants to crack more propane than during previous years, Spencer said. However, with the petchems resuming normal operation, Oneok is seeing some facilities reduce their propane feed in favor of ethane.

"We do expect the propane surplus to decline as additional export capacity is developed over the next 12 months, with propane exports being maximized due to the continued pricing incentive for international propane buyers to purchase U.S. Gulf Coast propane," Spencer said.

NGL fractionation capacity will remain short, with the deficit decreasing as new units come online, he said. Capacity in the Gulf Coast is particularly dear as NGLs from shale plays seek the premium Gulf Coast market, he said.

This is driving the buildout of NGL pipeline capacity from Conway, KS, to Mont Belvieu. "We continue to believe the NGL price differential between the market hubs will narrow to the cost-to-build range of 8 cents to 10 cents per gallon over the next couple of years," Spencer said.

Oneok Partners reported second quarter earnings of 69 cents/unit, compared with 67 cents/unit for the second quarter of 2011. Net income attributable to Oneok Partners increased 21% for the second quarter to $206.5 million, compared with $171.1 million for the same period in 2011. The partnership increased its 2012 net income guidance to $860-910 million, compared with previous guidance of $810-870 million.

"Our natural gas liquids business segment continued to benefit from favorable natural gas liquids price differentials and higher natural gas liquids volumes gathered and transported as a result of the recent expansion of our Midcontinent natural gas liquids gathering system," said CEO John Gibson. "Our natural gas gathering and processing segment continued to experience higher Williston Basin natural gas volumes gathered and processed associated with the startup of our new Garden Creek natural gas processing plant late last year but was affected by lower natural gas and NGL product prices."

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