Five years ago it was unthinkable that U.S. ethane supplies could be shipped overseas, but advantaged domestic natural gas supplies have opened new opportunities, an expert said Tuesday at the annual meeting of the Gas Processors Association in Dallas.
Peter Fasullo, who in 1999 co-founded Houston-based energy consultant EnVantage Inc., shared his research on U.S. natural gas liquids (NGL) markets at the packed meeting. All of the growth or decline revolves around the "real workhorse," gas processing, which provides more than 95% of ethane supply. With about 600 gas processors in the United States and only 37 ethylene plants, the domestic market is secure. To balance still-expanding supplies and demand outside the country, the logical direction is overseas.
"Between 2000 to 2004, we had high gas-to-crude ratios, and that just ground everything to a halt," Fasullo said. "The petrochemical industry was threatening to shut down because processing margins were very bad during this period of time. We need to keep this liquids growth going for the foreseeable future. I think we can."
Since 2006, U.S. ethane extraction capacity has increased 69%, or 5,000 b/d. Last year, the domestic NGL market could have reached an estimated 1.23 million b/d of ethane capacity, "but we only extracted about 1 million." Ethane output was rejected on low prices.
Output is going to remain correlated to natural gas prices, too. "We could have occasional price surges when inventories dip too low, as we're starting to see now. It's going to be quite volatile for ethane. It's going to be economic to extract at some times and others when you don't want to."
At the end of 2013, the United States had the capability to put much more ethane on the market. Barclays Capital analysts last summer said that in the Appalachian Basin alone, about 200,000 b/d of ethane could be entering the region's pipelines by the end of 2014 (see Shale Daily, July 29, 2013).
"The inverse correlation has broken down," said Fasullo. "We've started to build up gas fractionation [frac] spreads...When we put all of the ethane on the market, we drove those spreads to basically nothing...Right now, we have minimal frac spreads at Mont Belvieu, and ethane prices are correlating very close to gas prices at Henry Hub."
With ethane discounted to crude, it now is selling at around 10-13% of West Texas Intermediate prices at Mont Belvieu and a little less at Brent, Fasullo said. "We have driven everything down to about the lowest level we can for ethane."
In January about 1,000 b/d of ethane was being rejected, 15% at Gulf Coast facilities.
"If you go into the Rockies, the Appalachian regions, these are the transportation-disadvantaged regions," said the EnVantage executive. "We are rejecting a lot in those regions, and it takes about 20 cents/gallon to get volumes down to the Gulf Coast. We need at least 20 cents/gallon more..."
As ethane inventories drop, short-term improvements to balances should come. Inventory hit a high of about 36,000 bbl in 2012; now it's down to about 26,000 -- a drop of more than 25%.
"Inventory-wise, we're not in such bad shape," Fasullo said. "Demand is much higher than in the past. But ethane supply is much lower than people think. The problem is, we have all this...ethane being rejected. The market still is not viewing U.S. ethane as a very tight market..."
That tight market could turn into a "short squeeze" this summer if demand expands. Meanwhile, 100,000 b/d or more may continue to be rejected because producers can't fetch the price they want.
"We have to come up to get incremental demand, but how much remains to be seen. We could have higher prices coming into summer" on higher gas prices because inventories have fallen so low.
With NGL supplies continuing to rise, more gas processing additions are scheduled to come online through 2020. As much as 10.1 Bcf/d in gas capacity expansions could be ramping up in 2016, Fasullo said. More are probable through the rest of the decade.
"The really interesting thing is, 740,000 b/d of this ethane extraction capacity is in regions where there are very high transport costs to get to the U.S. Gulf Coast," such as the Marcellus/Utica and some in the Rockies. However, "it's not like this ethane can turn on economically..."
An informal survey of Appalachian producers by EnVantage indicated that the "minimum" amount of ethane they have to extract is 15-30%. "They don't have to take the ethane out, but the capacity is certainly there to extract it." He estimated that ethane extraction capacity could reach 2.2 million by 2020.
Fasullo noted several new ethane systems recently online or soon to ramp up that include exports to Canada:
Mariner West is exporting Appalachian ethane to Canada. It has capacity of 50,000 b/d and it now is moving 20,000 b/d (see Shale Daily, March 25, 2013) ;
Vantage Pipeline was commissioned in 1Q2014 to carry 40,000-60,000 b/d from the U.S. Bakken Shale to Alberta (see Shale Daily, July 22, 2013);
Appalachia-to-Texas Express ramped up in late 2013 to carry 125,000 b/d to the Gulf Coast; it now is moving 20,000-40,000 and is expandable to 260,000 b/d (see Shale Daily, Dec. 5, 2013);
Aegis is an ethane header by Enterprise Products Partners LP that would be able to tie ethylene plants from Corpus Christi, TX, to Mississippi River facilities for export (Shale Daily, Oct. 3, 2013);
Mariner East is being built to export NGLs overseas; it starts up in 2015 and initially would carry 40,000 b/d (see Shale Daily, Sept. 4, 2013); and
Kinder Morgan Inc. is constructing a 50,000-75,000 b/d liquids line to the Sarnia facility in Ontario (see Shale Daily, Jan. 16).
"There's also the possibility of an ethane export terminal to be developed by 2017 on the U.S. Gulf Coast," Fasullo said. "If you listen to Enterprise, [executives] have been talking a lot about that. If anyone does that, it's likely to be Enterprise if they decide to do so [see Daily GPI, Dec. 30, 2013]."
More liquids expansions are coming from increased petrochemical interest as existing crackers are converted to expand their ethane capabilities. There's also a "high probability" of five new crackers coming online between 2017 and 2019. The point is, said the EnVantage executive, "we've got a lot of ethane that could be put on the market...There's plenty of room to export."
If U.S. producers continue to reject 300,000 b/d, Fasullo still expects to see surplus ethane supplies in the 2018-2020 period. "If all of the crackers come on, you'd have to pay a higher price to get rejected volumes back on the market."
About two-thirds of ethylene is made from ethane, putting the United States at a huge advantage globally. The rest of the world is just the opposite, with 61% of ethylene output based on naphtha, 26% on ethane. Another U.S. advantage: it costs U.S. operators about 10 cents/pound to produce ethylene from ethane. In Europe, it costs 50 cents/pound. "The major difference in cost is driving foreign petrochemical companies to look at the U.S. to see if they can get cheap ethane..."
It's not going to be an inexpensive endeavor. The logistics to receive exported ethane include unloading docks and storage facilities capable of handling cryogenic ethane. The importers also need plants to crack the ethane.
"All of the factors to export/import need to be coordinated," he said. "It's not like exporting propane. You have to have petrochem on the other side...to make an export terminal work."
Europe has about 43 crackers, with 15 that are coastal. Inland facilities wouldn't work. That means that it's "most likely" that the European market would not exceed 100,000-150,000 b/d. The possibility also exists to export polyethylene pellets, which are around 14 cents/gallon on an ethane-equivalent basis, versus 25-30 cents/gallon if exporting ethane by ship. However, "social and political" reasons may prevent it.
"These are regional issues as governments want to preserve their local petrochemical value chain and jobs. They don't want imports to be disruptive." Asia is a possible ethane market for petrochemical feedstock and as fuel to blend into imported liquefied natural gas.
"Overseas exports will be needed to help balance U.S. ethane markets, but there are logistics and economic issues...It's going to require large investments and commitments on the export and import sides to make a U.S. project feasible...And don't discount pipeline exports to Canada that could increase. We could have another 75,000 b/d of more ethane going to Canada" as other operators, including Nova Chemicals, consider expansions.