While investors, traders and others await the economy’s turnaround, at least one thing has improved since late last year. That would be the market for ethane. Late last year stocks of ethane were building on shrinking demand from the petrochemical sector, leading to negative frac spreads, according to some. However, “inventories…have stabilized,” Enterprise Products Partners LP’s A.J. Teague, chief commercial officer, told NGI recently.

Ethane is the only one of the natural gas liquids (NGL) that is fully discretionary, meaning it does not need to be removed from the gas stream for operational reasons. Unlike the other constituents of the NGL barrel — propane, normal butane, isobutane and natural gasoline — operators let economics dictate whether they sell ethane to the ethylene market or leave it in the gas stream to increase heating value and volume.

Ethane frac spreads went negative last November, meaning the commodity was worth more to producers as part of the gas stream. “All of a sudden, we’ve got a lot of ethane trying to push into a market that is declining,” Ron Gist, senior principal with Houston-based consultants Purvin & Gertz, told NGI back then (see Daily GPI, Nov. 20, 2008).

Last year’s inventory build was no surprise, Teague said, given hurricanes shutting down petrochemical operations in the Gulf Coast and the weak economy. The petrochemical sector was running at about 56% of capacity in December, Teague said, the lowest utilization he’s seen in 30-plus years in the business. The pull for ethane has improved, though, particularly because it enjoys a cost advantage to its alternative, naphtha. “I still think there’s the potential for some kind of correction in terms of ethane extraction economics,” Teague said. “But I don’t think it will be as dire as what we saw in December.”

Today Teague estimates that the petrochemical sector is running at a little more than 70% of capacity. “If you go back to 2003, which was a pretty tough year, petrochemicals ran at about 80% of capacity,” Teague said. “If we get back to that level of a run rate and NGLs remain preferred, in particular ethane, then I think you could see petrochemicals’ appetite for ethane being close to what we’re able to produce.”

The difference between 2003 and today is the relationship between natural gas and oil prices. In 2003 natural gas was selling “very high” relative to crude on a BTU-equivalent basis, Teague noted. This made naphtha a better deal than ethane. In 2003 the petrochemical industry was using all of its ability to process naphtha at the expense of NGL capacity. “If you look at today, there’s such an advantage for NGLs that they’re cramming every gallon of NGLs in that they can,” Teague said.

He conceded that some players are having problems but said they will recover with the economy. Enterprise is particularly well situated given its integrated structure, which means it doesn’t have to pay third-party fees for pipelines, fractionation or storage, Teague noted. “If things get bad enough, we’re not going to turn off until we get below our variable cost,” he said.

Longer term, Teague is bullish on natural gas and the Lower 48’s productive capacity, particularly from shale and other unconventional plays. “From an Enterprise perspective, we like being tied to the Eagle Ford, to Haynesville to Barnett…It’s one unbelievable opportunity driven by these guys’ ability to bring new technology to the table and consequently bring one hell of a lot of natural resources that this country can capitalize on.”

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