U.S. ethane presents a "wall of worry" to gas producers and processors (which fear margin collapse), pipelines (which fret over volumes) and consumers (which fear scarcity and high prices), an industry analyst said in Houston last week. There is always something to worry about, but there's always something on which to disagree, too.
"The biggest worry today is that we'll have a chronic surplus of ethane due to all the drilling of the rich hydrocarbons in the shale plays and all the processing [capacity] that's being put in place to process that rich gas," En*Vantage Inc. consultant Peter Fasullo said at Platts 2nd Annual NGLs conference.
Fasullo said he expects the domestic ethane supply-demand balance to improve for the remainder of this year and into 2013. However, he then foresees more heartache for ethane during the 2014-2015 period when there will be more capacity to put ethane into the market than there will be to crack it to produce ethylene. But after 2015, when several proposed world-class ethane crackers are coming online, the demand will be for more ethane extraction capability to slake the thirst of all the new plants, he said.
Taking a dimmer view of ethane supply-demand at the same conference was Tudor, Pickering, Holt & Co.'s Brad Olsen. "We think we're going to see ethane rejection in meaningful quantities for several years," he said, as demand is taking longer to materialize than supply.
In a note Thursday, Olsen wrote that he was "struck" by the bullish views of others he heard Monday at the Platts conference. By his estimate, about 150,000 b/d of ethane is being left in the gas stream from the Rockies, Midcontinent and Permian Basin because of better netbacks in the Rockies and Midcontinent and capacity constraints in the Permian.
For its part, Bentek Energy LLC noted rising ethane production of 1,000 b/d week over week in a Sept. 20 note and cited increasing NGL raw mix production. This came during a period when U.S. ethane rejection increased to 49,000 b/d and ethane fractionation spreads fell, Bentek said.
"Worse news: we haven't seen much of [the] supply side hit the market yet," Olsen wrote. "Don't be headfaked by EIA [Energy Information Administration] data showing falling ethane production. Ethane is being rejected for economic reasons. Negative 11% year-to-date production growth obscures approximate 5% growth in ethane extraction potential, which will hang over the market once massive infrastructure build in 2013 removes bottlenecks."
Pipelines and fractionators, Olsen wrote, "will increase ethane supply to [the Mont] Belvieu hub by 300,000-plus b/d in 2013-2014, well before major demand expansions." He pegged base production of ethane in the United States at 1.1 million b/d.
Earlier this year ethane demand came under pressure due to a number of ethylene plant turnarounds, Fasullo told conference attendees. Most of those are wrapping up now with a few more to go this quarter, he said. Significantly, Fasullo said the plant shutdowns weren't just for maintenance. "These guys weren't just doing maintenance," he said. "They were, in some cases, doing plant enhancements to crack more ethane."
That's one reason to be more bullish about ethane supply-demand returning to balance sooner rather than later. Another cited by Fasullo is production declines in conventional plays given that producers have all but forsaken them for unconventional drilling in the shales. By way of explaining ethane supply growth, Fasullo pointed to the fact that liquids-rich shale plays "have a lot of ethane content in them," but also, the latest generation of cryogenic gas processing plants is better at extracting ethane, too, achieving levels of more than 90% compared to 70-80% achievable with older plants, he said.
Wells Fargo Securities analysts are eyeing the new fractionators slated to come online. In a note last Monday they predicted a short-term rally in ethane prices next year based on an expected rise in propane prices, stronger demand for ethylene and a return to more normal ethane inventory levels. "Notwithstanding, we anticipate that ethane prices could again come under pressure in Q2 2013 [and beyond] due to incremental supply from eight new NGL fractionation facilities that are scheduled to be placed into service at Mont Belvieu," Wells Fargo said. "By 2017, we believe the ethane market could become essentially balanced."
And in their note on the Eagle Ford Shale, a U.S. NGL breadbasket and neighbor of Gulf Coast petrochemical facilities, Goldman Sachs analysts expressed concern that pipeline and fractionation capacity additions would outpace demand growth in the petrochemical sector. "Eagle Ford is only one of several U.S. shale plays delivering impressive NGL production growth currently," Goldman analysts said. "Producers in many of these other NGL-rich plays will also be looking to Gulf Coast petrochemical plants for ethane demand.
"As a result, we see insufficient demand growth for ethane as a limiting factor for overall ethane production in the United States, with expected Eagle Ford cumulative ethane growth alone filling more than half of the additional Gulf Coast petchem demand growth of 180,000 b/d that we expect through the end of 2013...[W]e could see continued ethane rejection into the natural gas stream for years to come."
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