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Shales Helping Drive Ethane Supply Growth

Growing natural gas liquids (NGL) production -- particularly that of ethane -- is a positive story for the petrochemical industry as well as oil and gas producers. However, talk of an NGL glut is growing louder as the industry continues to grow production -- particularly from liquids-rich shale plays -- and build out infrastructure. Opinions vary on what is to come.

"In fact, there are as many opinions as there seems to be consultants, and they're all over the map," Enterprise Products Partners LP COO Jim Teague told financial analysts Tuesday. "For ethane in particular, record high production and consumption have clouded some crystal balls."

Teague is bullish on the domestic NGL outlook, and Enterprise is at work building out its substantial Gulf Coast region gas and NGL infrastructure. To be sure, there will be supply-demand hiccups, he said, but "do not underestimate the U.S. chemical industry's ability to consume more ethane."

Others aren't so sure.

"According to our calculations, the ethane market could become oversupplied by 85,000-105,000 b/d (on a capacity basis) beginning in 2012," analysts at Wells Fargo Securities LLC said in note Monday. While they are optimistic for the near term -- predicting a 22% sequential increase in ethane prices during the fourth quarter -- they are cautious about the long term.

"Notably, recent expansion projects announced by midstream companies [such as Enterprise] suggest that fractionation capacity may no longer act as a bottleneck for ethane supply," the Wells Fargo analysts said. "Instead, we now anticipate that incremental ethane demand from ethylene producers may be insufficient to absorb incremental supplies. With no planned new domestic ethylene plants expected to be built to increase demand, we believe ethane fundamentals could come under pressure in 2012 and potentially as early as 2011."

NGL production has grown 3.5% year to date while ethane production has climbed 7.1%, noted analysts at Tudor, Pickering, Holt & Co. Securities Inc. (TPH) in a note Monday. The growth -- while gas production has remained "essentially flat" -- is due to better gas processing economics, more efficient plants, the impact of liquids-rich shale gas plays and the associated changing NGL barrel, they said.

Since the 2000s the NGL barrel has gone from being about 39% ethane to about 42% ethane today; some of the wetter shale plays, such as the Eagle Ford in South Texas, produce NGL barrels composed of more than 50% ethane, the TPH analysts said. They noted that ethane is the cheapest part of the barrel with ethane price as a percentage of crude at about 25%. "NGL composition and yield is something to keep an eye on going forward," they said.

During an earnings conference call, Teague pointed out that industry metrics continued to favor NGLs and gas processing during the third quarter with the relationship between crude oil and natural gas prices ranging 30-35% on a Btu basis. "That relationship is keeping processing spreads healthy, and producers continue to focus drilling in rich gas plays," he said. "At the same time chemical companies' thirst for light feedstocks [such as ethane as opposed to naphtha] continues to grow. We've seen light feedstock cracking volumes reach new highs in August and September this year, including some published estimates of ethane cracking at over 960,000 b/d in September."

However, Teague conceded that there was a hiccup during the second quarter when planned and unplanned outages at crackers caused a decline in ethane consumption. "And as a result, of course, inventories over the second quarter increased as one would expect.

"In the third quarter supply-demand balances look a lot different. Over the third quarter crackers consumed an average of 933,000 b/d of ethane, operating in the low- to mid-90% range, according to the [midstream operations] Hodson [Report]. At the same time ethane from natural gas processing dropped off to just under 800,000 b/d in July, and this is according to EIA [Energy Information Administration]."

Teague said the drawdown of ethane inventories that were built up during the second quarter is continuing. While he predicted that producer focus on wet gas areas of the Eagle Ford and Marcellus Shale will grow ethane supplies, he said declines in production from legacy wells must also be considered. "So...total ethane production from natural gas processing could reach just over 950,000 b/d by 2015," he said. "This is a very manageable level of production, given that it ramps up over five years."

That outlook anticipates that ethane's price advantage will continue to attract demand from U.S. crackers.

"We have seen ethane cracking creep at multiple facilities in 2010," Teague said. "In addition to the conversions [to lighter feedstocks] completed last year and the projects under way to expand or restart existing capacity, there continues to be evaluations regarding more expansions, debottlenecks and reconfigurations that would add up to over 1 million b/d of ethane cracking capability.

"We recognize that there will be temporary imbalances in the ethane market, such as in the second quarter, but overall we believe that the U.S. market will balance supply-demand and that the glut of ethane that some have predicted will not materialize. That's because the U.S. is becoming more competitive globally due to NGL feedstocks, and U.S. cracker operators will find a way to capitalize on this."

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