Oneok Inc. and its pipeline partnership currently are experiencing more than 90,000 b/d of ethane rejection across the natural gas liquids (NGL) pipeline systems, a level expected to be in place “for much of the year,” a top executive said last week.

A plethora of propane on the Gulf Coast, as well as softer prices, has made it more economical for petrochemical companies to crack propane instead of ethane, and that has led to “historically high and prolonged ethane rejection levels” in several areas that Oneok and Oneok Partners LP service, President Terry Spencer said during a conference call to discuss the latest earnings report.

“As NGL growth continues at a rapid pace, we expect the ethane market to be oversupplied through 2013 with widespread and prolonged ethane rejections. We expect natural gas processors to resume full ethane recoveries during most of 2014 and 2015 with intermittent periods of ethane rejection.”

Some industry experts have estimated that ethane rejection volumes now are between 150,000 b/d and 175,000 b/d, but “we believe the ethane rejection number is higher based upon what we have seen from the Midcontinent and Rockies plants connected to our NGL systems,” Spencer said.

KeyBanc Capital Markets in January projected NGL supplies to increase this year by 33% to more than 765,000 b/d, versus 400,000 b/d in 2009 (see NGI, Feb. 4).

“Propane inventories are still well above the five-year average with almost all of the surplus on the Gulf Coast, primarily from the lack of the winter demand last year and increased production, while propane inventories in the Midwest and Midcontinent are decreasing and are much lower than last year,” said Spencer. “The attractive economics for propane as a petrochemical feedstock has kept ethane prices low, especially at Mont Belvieu [TX], leading to historically high and prolonged ethane rejection levels in the regions we serve.”

Ethane inventories are above historical levels not only because of higher production, but also because of the large number of the petrochemical plant planned turnarounds in the first half of 2012, Spencer noted. “However, the growth rate of ethane inventories at Conway [OK] and Mont Belvieu has been steadily decreasing due to ethane rejection and high petchem utilization rates, and we expect that trend to continue.”

Oneok’s management team has seen Conway-to-Mont Belvieu ethane price differentials “narrow to breakeven levels due to the continued Gulf Coast ethane inventory overhang and Midcontinent buying interest due primarily to ethane rejection in the Rockies and Midcontinent,” said the operations chief. Oneok still expects the Conway-to-Mont Belvieu differentials “to stay relatively narrow as new transportation capacity between these market hubs comes online this year, including our new Sterling III pipeline.”

Based on its outlook for NGL supplies, Oneok updated its 2013 equity composite price assumptions for the natural gas gathering and processing segment to 66 cents/gal. “To be clear, this price is at the market hubs before transportation and fractionation speed deductions,” Spencer said. “For comparative reasons, this 66 cents is calculated on a full ethane recovery basis.

“Assuming reduced ethane recovery in 2013, our realized NGL composite price is expected to be closer to 85 cents/gallon. The updated price assumptions for 2013 ethane at Conway are in the low 20 cent/gallon range and for propane, about 90 cents/gallon. During 2014 and 2015, our equity NGL composite price will be primarily on a Mont Belvieu basin and will range from the upper 80 cents to low 90 cents/gal.”

The changes in Mont Belvieu pricing reflects the expected completion of Oneok’s Sterling III pipeline later this year, which would provide more access to Mont Belvieu markets. “In 2014 and 2015, Mont Belvieu ethane prices are assumed in the mid-to-upper 40 cents/gal range and propane prices are assumed in the $1.10-1.20/gal range.”

Additionally, Oneok is assuming West Texas Intermediate crude oil prices to average $88/bbl in 2013, $100 in 2014 and $102 in 2015. New York Mercantile Exchange natural gas prices are assumed to be $3.75/Mcf this year, $3.80 in 2014 and $4.20 in 2015.

In January the U.S. Energy Information Administration said ethane and propane spot prices in the second half of 2011 were below at or near the bottom of their 2006-2010 range because of an overabundance of supply. Raymond James & Associates Inc. analysts also in January said they expected NGL prices to remain weak this year, averaging 74 cents/gallon and bottoming in 2Q2013 at an average of 68 cents/gallon.

“For propane in the near-term, demand is being created by new export terminals coming online, one in a few weeks and another this summer,” said Spencer. “This should create price strength for propane and allow ethane prices to strengthen as well. Propane heating demand has been stronger, compared with last winter, since this winter has been somewhat more normal than last year. And more important, with the abundant supply of NGLs expected for many years to come at very competitive prices, North American petrochemical companies are in an extremely favorable competitive position around the globe for their products.”

Abundant NGL supplies and their price advantage over oil-based feedstocks “is driving a significant increase in long-term petchem demand for NGLs. With the announced expansions and newbuilds of ethane crackers, ethane demand is expected to increase by more than 700 b/d by 2016 to 2017.”

Into 2016 and 2017, Oneok’s management is forecasting an undersupply of ethane as demand “will increase when these cracker expansions, and new world-class petrochemical facilities, are completed. While growing NGL production has moved ahead of end user demand in the near-term, our strategically unique fee-based and fully integrated midstream assets remain well positioned in basins with abundant and growing supplies of natural gas and NGLs.”

Oneok’s NGL business “remains in an attractive position even in a prolonged low ethane recovery environment as our systems are readily able to accommodate the expected NGL volume growth, should the markets desire more of a lower ethane, higher propane plus blend,” said Spencer.

Oneok Inc. earned $360.6 net in 2012, the same amount of profit recorded in 2011. Oneok Partners, which Oneok Inc. controls, earned $888 million in 2012, versus $830.3 million a year earlier. Both companies profited in 4Q2012, although the numbers were off year/year.

Oneok Inc. now expects net income to rise by 15-20% annually over a three-year period, compared with a previous guidance of 20-25%. The partnership previously had expected to earn up to $1.015 billion in net income this year; it now expects to earn around $870 million. “If industry conditions improve, we will re-evaluate our 2013 earnings guidance and distribution increases,” said CEO John Gibson.

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