Escalating ethane and the implications for midstream companies

By Luke Geiver | October 16, 2018

The following is perspective from Alerian’s Director of Energy Research, Stacey Morris. 

 

How has US production of natural gas liquids (NGLs) grown and what’s driving this?

Production of NGLs in the US has grown alongside the production of crude and natural gas. Crude, natural gas, and NGLs were all at record high production levels for the most recent monthly data (July 2018) from the EIA. NGL production of 4.4 million barrels per day represents an increase of more than 15 percent from July 2017. The EIA forecasts that NGL production will grow by 10% next year relative to 2018. Much of this growth is coming from the Permian and Eagle Ford. The management of Enterprise Products Partners (EPD) recently cited forecasts for Permian NGL production to more than double in the next four years.

 

What is ethane, and how is it used?

Ethane is one of the natural gas liquids (NGLs) produced through fractionation – the name of the process that converts raw or mixed NGLs into usable products. Other NGL purity products produced from fractionation include propane, butane, isobutane, normal butane and natural gasoline. Ethane is arguably the humblest of NGLs given its lower value relative to other NGLs. Ethane is typically used as a feedstock for ethylene crackers. Ethylene crackers process ethane into ethylene, which can be used to produce plastics like polyethylene (the most used plastic globally) and PVC. On the heels of the shale revolution, petrochemical companies began making plans to build ethylene crackers in the US to take advantage of anticipated growth in NGL production and the cost-competitive nature of the supply. Several of these projects have begun operations or will start-up in the 2017-2019 timeframe.

 

What are the drivers behind the spike in ethane prices in recent months?

While normally taking a backseat to oil and natural gas, natural gas liquids have garnered increased attention lately as prices have increased. NGL production growth from the Permian and Eagle Ford has tightened the availability of fractionation capacity on the Gulf Coast at Mont Belvieu – the NGL hub in Texas. Meanwhile, recent ethylene cracker start-ups in Texas have led to increased demand for ethane. Specifically, the recent startup of Exxon’s (XOM) ethylene cracker in Baytown in July following CP Chem’s startup of its Baytown ethylene cracker in March has driven greater ethane demand. The result has been a sharp increase in ethane prices to levels not seen in more than five years, with Mont Belvieu ethane prices gaining 67% during the third quarter of 2018. 

How long could Mont Belvieu fractionation capacity remain tight, supporting NGL prices?

In response to increased demand, midstream companies have recently announced projects to add fractionation capacity at Mont Belvieu, but capacity additions will take time. The management of Targa Resources (TRGP) indicated that they expect fractionation capacity at Mont Belvieu to remain tight through next year on their 2Q18 earnings call. 

Where are we seeing this price spike?

The current tightness and ethane price strength is specific to the Gulf Coast. The ethane/propane price mix at the Conway NGL hub in Kansas was trading at roughly a quarter of the ethane price at Mont Belvieu as of early October. Prices at the Conway hub are likely to remain discounted relative to prices at Mont Belvieu for some time. 

Describe the export opportunity for ethane.

Ethane exports from the US have grown from less than 100 thousand barrels per day (MBpd) in 2015 to approximately 250 MBpd in 1H18. Energy Transfer’s (ETP) Mariner West system can export ethane to Canada, as can Kinder Morgan’s (KMI) Utopia pipeline, which began service in January. In terms of overseas exports, ETP’s Marcus Hook facility in Pennsylvania began exporting ethane in 2016. EPD’s Morgan’s Point ethane export terminal on the Houston Ship Channel, which is supplied by its Mont Belvieu assets, also began operations in 2016. Earlier this year, ETP announced plans to partner with Satellite Petrochemical for a new Gulf Coast ethane export facility that would supply Satellite’s crackers in China upon start-up expected in 4Q20. 

How does this benefit midstream companies?

Clearly, growing NGL production necessitates more energy infrastructure – pipelines, fractionation capacity, and export terminals. Rising NGL prices and tightness in fractionation capacity also create a constructive backdrop for signing up customers for new fractionation plants and potentially negotiating more attractive processing economics. For those midstream companies with fractionation contracts based on percentage of proceeds or percentage of liquids (which provide exposure to NGL prices), higher NGL prices should be positive. Using the Alerian Midstream Energy Index (AMNA), which is comprised of US and Canadian midstream corporations and MLPs, 25.6 percent of AMNA was categorized as gathering and processing companies and 37.4% was categorized as pipeline transportation – natural gas as of September 30th.