The North American ethane story will continue to improve on the strength of robust natural gas liquids (NGL) production, particularly from liquids-rich gas shale plays that have become so popular with producers of late, according to executives at Oneok Partners LP.

"As a feedstock to the petrochemical industry, ethane is expected to continue to be economically attractive over the heavier oil-based feeds such as naphtha, driven primarily by wide crude oil-to-natural gas price ratios," Oneok Partners COO Terry Spencer told financial analysts Wednesday during the partnership earnings conference call.

"Petchem demand remains strong, and coupled with the price advantage of ethane expected to continue, this creates a strong incentive for crackers to utilize ethane and continue their efforts to convert to NGL feedstocks."

Spencer said the partnership's management believes an additional 100,000 b/d of ethane demand can be had from the conversion of crackers from heavier feedstocks to ethane. There also is another 100,000 b/d of excess ethane cracking capacity available in Canada, he said.

"There's been a lot written about the potential for a glut of NGLs, specifically ethane. In our view, we believe that ethane supply and demand will remain relatively balanced over the next couple of years, especially when you consider that first, according to the production data we have studied, decline rates in many NGL-producing areas are much steeper, certainly in the double digits per year, and have been masked by the increase in production from shale development," Spencer said. "We believe that the decline in existing production, combined with demand growth, will absorb much of the new supplies coming online."

He added that besides converting crackers to use ethane, petrochemical companies are talking about bringing currently mothballed plants back online. Spencer said he's heard of "a large petrochemical company" that has noted that ethylene demand growth is occurring in South America as its economy improves.

"Canadian demand for ethane is also strengthening as projects are emerging that would enable U.S. ethane suppliers to serve available cracking capacity in Canada [see Daily GPI, Feb. 11]," he said.

The Conway, KS-to-Mont Belvieu, TX average price differential for ethane in the second quarter was 16 cents per gallon, compared with 12 cents per gallon in the same period in 2009, the partnership said.

Oneok Partners had second quarter earnings of 75 cents/unit, compared with 81 cents/unit for the second quarter 2009. Net income attributable to Oneok Partners was $105 million in the second quarter, compared with $97.5 million in the same period in 2009.

The partnership reaffirmed its 2010 net income guidance in the range of $450 million to $490 million and its distributable cash flow guidance in the range of $580 million to $620 million. The partnership also increased its 2010 capital expenditures guidance by $115 million.

"All of the partnership's business segments posted solid operating performances in the quarter," said CEO John W. Gibson. "Our natural gas liquids and natural gas pipelines segments continue to benefit from the $2 billion investment program completed late last year in the form of higher natural gas liquids volumes and higher contracted natural gas transportation capacity."

The natural gas gathering and processing segment reported second quarter 2010 operating income of $43.7 million, compared with $40.9 million in the second quarter 2009. Second quarter results increased $4 million due to higher net realized commodity prices and $1.6 million due to higher natural gas volumes processed and sold.

The natural gas pipelines segment reported second quarter operating income of $38.2 million, compared with $31.7 million for the second quarter 2009. Second quarter results reflect a $2.7 million increase from the effect of higher natural gas prices on retained fuel, offset partially by lower natural gas volumes retained; and a $2.5 million increase from higher contracted transportation capacity on Midwestern Gas Transmission as a result of a new interconnection with the Rockies Express Pipeline and the Viking Gas Transmission Fargo lateral.

The NGL segment reported second quarter 2010 operating income of $64.7 million, compared with $52.4 million for the second quarter 2009. Second quarter results reflect a $26.7 million increase due to higher NGL volumes gathered, fractionated and transported, associated primarily with the completion of the Arbuckle Pipeline and the lateral pipelines connected to the Overland Pass Pipeline, as well as new supply connections.

Additional NGL fractionation capacity will become available when a significant contract at the partnership's Mont Belvieu fractionator expires in the third quarter and when a 60,000 b/d fractionation services agreement with Targa Resources Partners begins in the second quarter of 2011. Additional NGL transportation capacity will become available in the second half of 2011 when the recently announced expansion of the Sterling I NGL distribution pipeline is completed.

"While the limited availability of natural gas liquids fractionation and transportation capacity continued to restrict our ability to capture optimization margins in the first and second quarters, we expect these margins to improve when more capacity becomes available beginning in the third quarter," Gibson said.

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