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Fitch: Cheap U.S. Ethane Trend to Continue

The North American chemical sector has been enjoying the consequences of the boom in liquids-rich shale gas plays. And an abundance of natural gas liquids (NGL), particularly ethane, is likely to continue, according to an analysis by Fitch Ratings.

"...[T]he trend of ample NGL supply may last for some time, to the benefit of North American chemicals producers," Fitch said in a note published Monday.

The shift to lighter feedstocks -- ethane as opposed to naphtha, for instance -- has been under way in the chemical sector for a while. Naphtha-based ethylene production costs spiked to nearly 80 cents/pound in June 2008 from 26 cents at the beginning of 2007, Fitch noted. Ethane-based production costs climbed, but to only 61 cents, giving the lighter feedstock a 19-cent advantage.

"Light feedstock maintained its cost advantage in the rebound throughout 2010 and in early 2011," the analysts said. "In February 2011 naphtha-based production cost of ethylene averaged an estimated 56 cents compared to ethane feedstock of 31 cents.

"The feed slate used by North American ethylene producers is now highly geared toward light feedstock [see Daily GPI, Dec. 8, 2010; Nov. 8, 2010]."

Last year about 70% of ethylene cracker nameplate capacity used light feedstock. However, European capacity was more than 80% geared to heavy feedstock. The disparity gives North American ethylene producers an advantage.

"This trend has been exacerbated by the recent decoupling between Brent and WTI [West Texas Intermediate] crude oil benchmarks as feedstocks in Europe typically would be benchmarked against the higher-priced Brent benchmark," Fitch said. "...North American production now ranks second lowest on the production cost curve globally, behind only the Middle East and well ahead of Europe and Asia, according to CMAI [Chemical Market Associates] Inc."

North America should continue to enjoy its favored position in the ethylene market, according to Fitch, thanks to the ongoing boom in liquids-rich shale gas drilling.

'The aggressive multi-year capex [capital expenditure] budgets announced by exploration and production companies for onshore liquids-rich shale drilling in North America suggests this trend may not abate for some time,' said Mark Sadeghian, Fitch senior director.

That belief was underscored last month when Energy Transfer Partners LP (ETP) and Regency Energy Partners LP formed a joint venture to acquire NGL storage, fractionation and transportation assets specifically in order to serve producers focused on liquids-rich plays (see Daily GPI, March 24).

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