Natural gas liquids (NGL) economics continued to improve in October, and the petrochemical industry’s conversion to lighter feedstocks, namely ethane, has been happening more quickly than expected, analysts at Wells Fargo Securities said last week.

As if to make their point, Dow Chemical Co. announced that it would boost its ethane cracking capabilities on the Gulf Coast over the next two-three years. The company’s cracking capacity will grow by 20-30% during the period, Dow said last Thursday. And separately, Enterprise Products Partners LP brought online another natural gas liquids (NGL) fractionator at its Mont Belvieu, TX, facility, it’s fourth. The midstream player has a fifth fractionator planned.

Dow also said it is reviewing joint venture options for building a fractionator to secure ethane supply. The company has three existing fractionation joint ventures in the United States, Canada and Argentina, a spokesman told NGI. Dow claims to be the world’s largest ethylene producer, and the company said it plans to use its infrastructure to participate with producers in fractionation, transportation and storage of NGLs. The spokesman said the company “will review its options over time regarding reassigning [ethylene] capacity.”

“Ethane is an advantaged feedstock in the United States, and we anticipate a favorable oil-to-gas ratio to continue,” said Raja Zeidan, global business vice president for Dow Hydrocarbons. “Bringing additional fractionation capacity online and expanding our ethane cracking capabilities will further improve Dow’s feedstock flexibility and competitive positions in the United States.

“Couple that with our feedstock flexibility in Europe and with our advantaged feedstock positions in the Middle East, Western Canada and Argentina, we truly have a competitive advantage — evidenced by the strong returns delivered by Dow’s ethylene derivatives this year.”

Dow produces about 55% of its ethylene from ethane, and the competitive U.S. cost position provides an advantage for its higher-margin specialty plastics businesses, such as linear low-density polyethylene, as well as its performance and advanced materials businesses, the company said.

Enterprise COO Jim Teague has been bullish on the petrochemical industry’s ability to absorb more U.S. ethane production (see NGI, Nov. 1).

“Strong fundamentals on both sides of the supply-demand equation continue to create a favorable environment for incremental NGL fractionation capacity…” Teague said last week. “Production from liquids-rich natural gas plays remains brisk, while the favorable price differential for natural gas and NGLs compared to crude oil is leading several petrochemical companies to modify their ethylene facilities to increase their ability to crack NGL feedstocks such as ethane.”

While NGL producer economics look good for now, the Wells Fargo analysts reiterated their cautious longer-term outlook.

“…[W]e are more cautious on ethane pricing based on our expectations for increased supply and limited incremental demand,” the Wells Fargo team said. “We believe the ethane market could become oversupplied by approximately 40,000-95,000 b/d [the range is dependent on whether Marcellus (Shale) ethane reaches the Gulf Coast] in 2012, based on identified projects by midstream companies.”

However, October saw a 10.2% increase in the composite price for the NGL barrel to $1.15/gal from $1.05/gal in September, the analysts noted. “Crude oil prices increased by 8.9% in October, to $81.82/bbl from $75.17/bbl in September. The NGL-to-crude oil ratio increased slightly, to 59% from 58%. Processing margin increased 20.7% in October, to 86 cents/gal from 71 cents/gal in September, due to the increase in NGL prices combined with a 12% decrease in natural gas prices.”

“Notably, conversions of heavy- to light-end feedslate capacity by petrochemical plants appear to be progressing faster than our initial expectations,” the Wells Fargo analysts said. “Demand for ethane reached a record high of 961,000 b/d in September 2010. We forecast that 2011 ethane consumption could increase even higher, to approximately 970,000 b/d by year-end, which would represent an estimated 10% year/year increase.”

The new Enterprise fractionator began operating ahead of schedule and under budget at its nameplate capacity of 75,000 b/d, which is intended to accommodate growing NGL volumes from the Barnett Shale in North Texas and the Rockies. Enterprise’s nameplate capacity at Mont Belvieu is now 305,000 b/d.

The addition of Enterprise’s fifth unit at Mont Belvieu, which is expected in early 2012, will increase fractionation capacity at the complex to approximately 375,000 b/d, Enterprise said in June when it announced plans to develop infrastructure to serve producers in the Eagle Ford Shale in South Texas (see NGI, July 5).

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