Will ethane production from shale plays in Appalachia support all of the ethane projects proposed for the region?
Potentially, but economics could play a much more decisive factor than supply over the coming decade, experts said Tuesday at the Hart Energy Marcellus Midstream Conference and Exhibition in Pittsburgh.
With two pipelines in the works, an overseas shipping option under discussion and tentative plans for a world-scale cracker in the region, "There is no longer an ethane problem in the Northeast," according to Kristen Holmquist, manager of natural gas liquids for Bentek Energy Inc. The question now is whether production levels will allow all four projects -- and possibly others -- to co-exist in the near term.
At current prices, the internal rate of return in the wet gas corridor of the Marcellus is lower than other liquids-rich shale plays across the county, but it's still above 40%, "not too shabby," Holmquist said.
But many of those other plays also include shale oil, making the Marcellus more susceptible to changes in pricing from natural gas and natural gas liquids. For instance, if natural gas liquids prices hypothetically hit zero, the return from the wet gas corridor of the Marcellus would turn negative, while the Niobrara, Bakken and Permian would barely change. If natural gas prices hypothetically hit zero, the wet gas Marcellus would still earn a nearly 20% internal rate of return, compared to the 35-55% from other plays.
"There's still incentive to drill when these prices go down," she said.
Bentek is forecasting ethane production of 390,000 b/d from the Marcellus and 250,000 b/d from the Utica by 2020, but that 640,000 b/d would only account for about 15% of total domestic ethane production.
A joint venture of MarkWest Liberty Midstream & Resources LLC and Sunoco Logistics Partners LP recently sanctioned the 50,000 b/d Project Mariner West to move Appalachian ethane to Sarnia, ON, and Enterprise Products Partners LP recently sanctioned the 190,000 b/d Appalachia-Texas Express (Atex) pipeline to the Gulf Coast (see Shale Daily, March 24;Jan. 5.) On top of that, Shell Chemical LP is now considering a "world-scale" ethane cracker capable of handling as much as 100,000 b/d and MarkWest/Sunoco are considering a 50,000 b/dProject Mariner East that would barge Appalachian ethane from the East Coast to either the Gulf Coast or overseas to hungry European markets (see Shale Daily, March 16;Nov. 11, 2011).
Aither Chemicals LLC and Brazil's Braskem are rumored to be considering ethane cracker projects in West Virginia, with the former possibly making an announcement today, Wednesday (see related story).
Under the Bentek forecast, if both Mariner West and Atex run at full capacity, it would still leave about 90,000 b/d of ethane on the market, enough to feed the proposed Shell cracker or the Mariner East project.
"But the point is there's not enough ethane for all those solutions that have been proposed," Holmquist said.
If Shell follows through on plans to build a world-scale ethane cracker in Beaver County, PA, "that'll probably use up most of the ethane we see over the next few years," said Jerry Swank, managing partner at Swank Capital, an energy infrastructure investment company. But if Atex isn't filled to capacity, Holmquist said, there could be enough ethane for both the Shell cracker and Mariner East.
But, she added, "If you're buying volumes away from Atex, you have to be able to match their economics."
A local cracker would have two advantages over Gulf Coast competitors, she said. First, it would be able to purchase ethane at a lower price than crackers on the Gulf Coast. Second, it is closer to the larger end-market for petrochemical products. That could help it attract uncommitted volumes. But to grab volumes already committed to Atex, a local cracker would have to pay the same rate as the Gulf Coast, losing its advantage.
That means early commitments could drive the market, she said.
That balance, though, depends on prices. "With some of the recent [fractionation] capacity we're probably OK for a couple of years, but if we get an uptick in prices production is going to skyrocket and so we really need somebody, like this Shell program, to be able to come and take all the excess out of the marketplace," Swank said.
"We're going to be long ethane for a couple years and then we're going to be in balance from 2016 on, but these chemical engineers are too good. I would bet there will be a tendency to be long and not short," he said.
And companies are chomping at the bit to export, he added.
With natural gas selling for about $2.50/Mcf in the United States, but closer to $16/Mcf across the Pacific Rim and $10/Mcf in Europe, there is money to be made from buying gas domestically and paying to ship it overseas. "That's a lot of money. That's a big arbitrage. And the ethane market is just the same," he said.
Some companies are more optimistic about supplies, though.
While Dominion Transmission Inc. will be connected to both Mariner West and Atex in the near term, it also "supports a cracker" to help manage the long-term needs in the region, according to Dominion Transmission's Marc Halbritter, managing director. "Our estimates of the available ethane suggest that you could in fact support two crackers in the area," he said, adding that timing, cost, storage and lack of producer commitment has hindered ethane project development until now, but "I would speculate that with Shell's announcement, that's all changing."