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U.S. Capital: More Ethane Rejection Coming in 2013

Producers gored natural gas prices with the drillbit and have done the same to natural gas liquids (NGL) prices. Ethane rejection -- seen last year in the Rockies and Midcontinent -- could be "widespread" this year, and the Northeast could see gas production shut-ins as pipeline specification limits are tested, according to a midstream outlook prepared by U.S. Capital Advisors.

Abundant supplies of rich gas broke the back of natural gas liquids (NGL) prices last year, and a market rebalancing is in order. However, this time around, the historically self-correcting NGL business faces a new wrinkle due to so much rich gas production, wrote U.S. Capital's Becca Followill, senior managing director; and James Carreker, research analyst.

"...[W]e think that for the first time, we may hit a threshold on ethane rejection due to pipeline spec limitations," they wrote. "And exports alone won't solve the propane problem in 2013. As a result, we see the potential for gas shut-ins in the Northeast as pipelines pull their BTU waivers, and sub-spec gas just doesn't have a home (Texas Eastern Btu content has been running as high as 1070 lately versus 1100 limit)."

U.S. Capital is assuming natural gas prices will average $3.75/Mcf during 2013, provided weather is "normal."

For now, U.S. Capital sees ethane rejection as still being a regional phenomenon. However, "Mont Belvieu ethane prices now at about 23 cents/gallon are at a threshold that favors more widespread ethane rejection, something that could happen in a meaningful way during 2013 if supplies continue to increase and high inventory levels keep a lid on propane," Followill and Carreker wrote.

According to the firm, the industry saw 28,000 b/d of ethane rejection in 2012, yielding ethane production of about 1,013,000 b/d. Ethane rejection in 2013 is expected to increase to 62,000 b/d, yielding production of 1,038,000 b/d. Cracking demand in 2012 was 978,000 b/d and is expected to be 1,050,000 b/d in 2013. Stocks saw a build of 35,000 b/d in 2012 but are expected to be drawn down by 12,000 b/d in 2013, according to the firm.

"...[W]e are assuming only modest incremental ethane rejection of about 35,000 b/d," they said. "If forced, our bias would be to the upside (with potentially 50,000 b/d of additional rejection) in 2013." The behavior of flexible crackers, which can choose whether to crack ethane or propane, will play a role, too. U.S. Capital said its bias is to expect lower ethane demand as propane is currently the favored feedstock.

Propane production is expected to increase to 1,326,000 b/d from 1,246,000 b/d in 2012, while total net demand (including exports and imports) rises to 1,348,000 b/d in 2013 from 1,205,000 b/d in 2012. While propane inventories were built at a rate of 41,000 b/d last year, they are expected to be drawn down by 23,000 b/d this year, the firm said. The biggest "wild cards" are weather and propane cracking activity.

And what will be hot in the midstream this year?

According to Followill and Carreker, crude-by-rail's popularity will continue as shippers seek more optionality to move product. Conversion of natural gas pipelines to crude service will gain increasing attention, they said, and there will be more interest in flowing natural gas southward. Refining, crude storage and coal exports will be popular topics, as will finding markets for condensate. Capital markets will be looking to new classes of master limited partnership assets. And the Jones Act -- which requires U.S. port-to-port shipments to be carried on U.S.-flagged vessels -- will get another look. 2013's popular plays: Utica, Eagle Ford, Permian Basin, Marcellus and Bakken.

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