The natural gas liquids (NGL) supply-demand mismatch could last several years, and a prolonged period of low NGL prices (namely for ethane and propane) could harm the credit quality of midstream gathering and processing companies that rely on cash flows sensitive to NGL prices, Standard & Poor's Ratings Services (S&P) said last week.
While prices for heavier NGLs, such as butanes, natural gasoline and natural gasoline condensate, haven't fallen nearly as much, ethane and propane make up the majority of the NGL barrel (about 70%), S&P noted in the report "Can Natural Gas Liquids Prices Rebound In The U.S.?."
On the NGL supply side, the main theme of the story is that there is more to come. "We forecast that the total supply of NGLs could increase about 30% to 3.3 million b/d by 2015-2016 based on our view that the crude-to-gas pricing ratio remains between 30x and 40x (the 2012 average was 39x) and relatively high crude prices and the NGL uplift will motivate producers to continue drilling in these liquid-rich regions," S&P said.
Additionally, key factors that could influence NGL supply-demand and prices are low gas prices and a high crude-to-gas ratio; a shortage of NGL infrastructure and fractionation capacity; the petrochemical industry's demand for ethane; propane demand, and plans for increased export capacity, said S&P credit analyst Michael Grande.
S&P said about 525,000 b/d of additional NGL takeaway capacity from Conway, KS, to Mont Belvieu, TX, should come online during the second half of next year, which could narrow the Conway-Mont Belvieu spread to about 10 cents/bbl, S&P's estimated cost of transport from the one hub to the other.
"However, we also believe that event risk could widen or narrow this differential, as has been the case historically," S&P said. "For example, planned or unplanned outages at any of the Mont Belvieu fractionators or petrochemical crackers will reduce demand at Mont Belvieu and prices, which will have the same effect in Conway as supply backs up until capacity is restored."
Although ethane price declines of late mainly have been due to ongoing maintenance and turnarounds at petrochemical facilities, S&P said some of the price decline also stems from rising NGL production.
"In 2012, domestic supply and demand of ethane is roughly in balance at about 1 million b/d," S&P said. "However, because the petrochemical industry consumes almost 100% of the ethane produced as a feedstock to make other products, any reduction in demand will result in a sharp, if only temporary, price decline."
S&P noted that ethane cracker capacity expansions are more easily achieved than new build of large-scale cracking capacity, as a number of parties in the petrochemical sector have planned.
"Ethane prices also suffer when fractionators are unavailable...Although there could be some short-term price relief when the cracker turnarounds are complete and the excess ethane inventory of about 35 million bbl from the summer of 2012 is worked down, we think supply could outpace demand until petrochemical companies complete several large ethane crackers in 2016 and 2017, which would add 325,000 b/d of new demand."
S&P said ethane prices "could be subdued through a prolonged period." Ethane rejection has been going on in the Bakken and Marcellus shales where there is a dearth of NGL pipeline infrastructure. "Although it depends on the efficiency of the processing plant, it is generally not economical to process ethane with prices this low, and we hear reports that several gathering and processing companies in the region are rejecting perhaps up to 170,000 b/d of ethane," S&P said.
Projects are under way to relieve the ethane transport constraints in the Bakken and Marcellus regions. The 40,000 b/d Vantage Pipeline, an ethane-only pipeline, will transport product from North Dakota to Nova Chemical Corp.'s plant in Alberta by 2013, S&P noted. Sunoco Logistics Partners LP's Mariner West pipeline will deliver 65,000 b/d of ethane to chemical facilities in Sarnia, ON, where Nova Chemicals and Imperial Chemicals have plants, by the end of 2013.
"We believe that logistical constraints will continue to pressure prices in certain geographic regions until new projects are completed, at which point prices should revert to more normal levels," S&P said.
Last winter's warm temperatures put a squeeze on propane demand, and producers are hoping that predictions of colder temperatures this winter come true. Growing propane export capacity should also lend price support. "...[T]he midstream energy industry plans to triple U.S. export capacity by 2013 to about 420,000 b/d, with expansions by Enterprise Products Partners LP and Targa Resources Partners LP," S&P said.
The Mariner East Project will transport 65,000 b/d of ethane and propane to international markets via Sunoco Logistics' terminal in Marcus Hook, PA, by 2015. Range Resources Corp., the anchor shipper, signed a 15-year agreement for up to 40,000 b/d of capacity. "We believe these export projects will help work off excess supply, which may provide a floor for propane prices when domestic demand is weak," S&P said.
"Another development we will be watching that could help future propane demand was an unintended consequence of low ethane prices. The petrochemical industry's heavy use of ethane as a feedstock has reduced output of propylene -- a by-product of using propane rather than ethane as a feedstock -- putting pressure on the midstream industry to build propane dehydration units to create propylene. It's still unclear if these units will create enough demand to rebalance the market and help prices."
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