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Analyst: Marcellus NGL Output Could Support New Pipeline Projects

Growing natural gas liquids (NGL) production from the Marcellus Shale could support one new pipeline project in the near term and possibly a second in about five years, according to Wells Fargo Securities senior analyst Michael Blum.

"Our estimates suggest NGL production in the Marcellus could increase to somewhere around 115,000-120,000 b/d by 2015...based on that, it really looks like you could have one to maybe two pipeline projects that could make it to the finish line when all is said and done," Blum said at the recent Developing Unconventional Gas (DUG) East conference in Pittsburgh.

"As a result of this increase in NGL production, the U.S. fractionation capacity is running pretty much close to full right now...from a supply perspective right now we're somewhat capped, because fractionation is ultimately going to be your bottleneck to supply of NGL," he said.

Despite Wells Fargo predictions of the ethane market becoming oversupplied by 85,000-105,000 b/d on a capacity basis beginning in 2012, the analysts believe recently announced expansion projects could mean an end to the fractionation bottleneck for ethane supply (see Shale Daily, Oct. 27). Until those fractionators come on line, "we're pretty positive on NGL prices," Blum said.

"You saw ethane prices come under pressure in the second quarter when inventories increased because you had a bunch of unplanned outages at petrochemical plants and it's a pretty tight market. Those crackers are back on line now, and what you've seen is record consumption of ethane pulling down on those inventories." Blum said he expects about a 20% increase in the price of ethane in the fourth quarter.

"There's almost a panic on Wall Street when they see all of this [NGL] production. We don't think the sky is falling and we think that prices will be pretty good," he said.

The widening crude oil to natural gas ratio has "really changed the game for the U.S. NGL industry," according to Blum. "As a result of the spread being where it is, we're seeing a real sea change in petrochemical consumption patterns and we're seeing more and more steam crackers consume light end products, chiefly ethane and propane, at the expense of the heavier crude-based products."

The spread between gas and oil has also caused an upturn in NGL production, he said. "E&P [exploration and production] companies are chasing the crude oil in the NGL plays for the obvious reason -- the economics are there."

The question is whether the decline in conventional production will offset the increase in shale production from an NGL perspective. "The new production is producing at least as much NGL as it was before," Blum said. "Right now we're exporting propane and have been for at least six months...in the butane market you've also seen increased exports."

Analysts at Raymond James & Associates Inc. have said an estimated 1.2-1.5 Bcf/d of new processing capacity is expected to be built, targeting the removal from the Marcellus of propane+, but "there is no current solution for the recovery of ethane, the largest and most valuable component of the NGL barrel (as it relates to ethylene margins)" (see Shale Daily, Oct. 28). Raymond James isn't alone in noticing the potential for an ethane offtake challenge in the Marcellus Shale. Bentek Energy LLC recently outlined similar findings in a report of its own (see Daily GPI, Sept. 13).

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