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The Decline and Fall of Conway Ethane – Implications of a 75% collapse in price

On Friday, the Conway ethane (in E/P mix) price crashed to 13.5 cnts/gal.  No this is not the Decline and Fall of Western Civilization (neither the actual event or the punk rock movie of that name), but it is an important development for NGL and natural gas markets.  Six months ago the E/P mix price stood at 56 cnts/gal.  That’s a 75% drop.  Last week the price decline was particularly swift – 40% in five days.   

I have a personal connection to Conway ethane.  Since this is a blog, I can talk about such things.  Stay with me, this story has a point that is relevant today.

Many years ago I traded NGLs for Texaco (now Chevron).  My first job in the shop was in NGL Industrial Sales, which meant ethane trader.   I inherited the job from my good friend Jim Roop. He still is a good friend, and permits me to tell the story here.  Along with the job I also inherited a long spec trading position from Jim, 200,000 barrels of Conway E/P mix.  (For the uninitiated, that’s 80% ethane, 20% propane, with the price representing the entrained ethane component).  He told me what a great position it was at 22 cnts/gallon, and what an education it was going to be.

Jim was half right.  By the end of my 2nd day on the job the market was down to 20cnts, so I started working through Jim’s rolodex, just to see what kind of buying interest was out there.  It didn’t take long to figure out that there were no buyers.  Not at any price.  Nor were there any transactions.  The trade press was just picking up notional prices, but there were no deals.  None.  Nada.  The market was completely illiquid.

For the next couple of weeks the E/P mix market in Conway stayed inactive.  And each day the trade press reported down ticks in the price.  Not because of deals getting done.  But because there were NO deals getting done. So the price kept on falling down to 13 cnts/gal.  It stayed at that level for months, and I had the character-building experience of reporting on that position in each and every trading meeting.  That sort of thing sticks with you.

When the price of Conway ethane fell last week from 22 cnts/gal on Monday to 13 cents and change by Friday, it struck a nerve.  Déjà vu all over again.  Has this market gone illiquid, just like in my trading experience?  What got us into this mess?  How long will it last?  And what does it imply for the new ethane infrastructure investment that is planned over the next few years?  Let’s take a look at the numbers.

In the following paragraphs I’m going to assume you know the basics of NGL markets in the U.S.  If you don’t, send me an email and I’ll provide references to some background material.  This graph shows the OPIS Ethane (in EP Mix) Conway In-Well Any Average price for the past five years.  As you can see, this is not the first time Conway ethane prices have crashed since my trading days.  It happened in late 2008.  But of course, everything else crashed then too. 

That was when crude oil dropped to $40/bbl.  The entire NGL complex followed crude down.  Ethane was hit particularly hard by hurricane damage to Gulf Coast ethylene crackers followed by the economic-crash related shutdown of several ethylene plants.  It was a very bad time for ethane in general, and Conway E/P in particular. 

By 2010, Conway E/P was looking good again, hitting 70 cnts/gal for a period of time.  Things stayed healthy until mid-2011 when Conway E/P started to disconnect from Mont Belvieu ethane.  During the first half of 2011 the differential averaged 22 cnts/gal.   But by October the differential had blown out to 60 cnts/gal, with Mont Belvieu ethane about 90 cnts/gal and Conway about 30 cnts/gal. Clearly Conway ethane was vastly oversupplied relative to Mont Belvieu.  The last few weeks has not been kind to either location.  Mont Belvieu is down to the mid-40s/gallon while Conway has crashed 13.5 cnts/gal. 

Those are the facts.  The underlying causes are classic energy market drivers.  

#1 - Lots of new supply is coming into the Conway market from the Rockies on Oneok’s Overland Pass pipeline, and from sources closer to home in Oklahoma. (Recall that broader Conway market is usually defined to include Conway, KS, Bushton, KS, McPherson, KS and Medford, OK). 

#2 – The two crackers in PADD II that take E/P mix (LyondellBasell’s units at Morris, IL and Clinton, IA) consume only a small portion of the available E/P in the region.  The rest must go to Mont Belvieu.  There is not enough pipeline capacity to handle the growing supply.

#3 – New pipelines are being developed to move incremental Conway NGLs to Mont Belvieu, but they are not done yet (Oneok’s Sterling expansions, DCP’s Seaway conversion, etc.).  For now, capacity to move barrels south is constrained. 

#4 – At the same time all of this new supply is hitting Conway, new production is also flowing into the Mont Belvieu market. Think Eagle Ford.

#5 – Several Gulf Coast ethylene crackers are on planned (and unplanned) outages and turnarounds, limiting total petrochemical demand for ethane.

All of this translates to a temporarily oversupplied market in Mont Belvieu, transportation constraints out of Conway, and increasing volumes moving into the Conway region.  In addition, there may be other hiccups in the system that have contributed to the extremely weak market.   We’ll know more about all of these developments in the coming days and weeks.  But at this point we are certain of one thing.  There were few if any buyers of E/P mix last week. The market is spooked.  And that is what got us to 13.5 cnts/gal. 

There are both short term and long term implications of this development.  In the short term they include economic rejection of ethane at gas processing plants feeding Conway, incremental natural gas production from the rejected ethane (that the market needs like a hole in the head), and the impact on relative petrochemical feedstock economics.  In the longer term, what does 13.5 cnts/gal say to wet gas producers from Eagle Ford, to the Bakken, to the Marcellus?  We’ll look at these issues in tomorrow’s blog.  So stay tuned.

[BTW, this blog is coming to you from the lovely Holiday Inn Express in McPherson, Kansas, just eight short miles from Conway.  This is my move from Colorado to Texas.  McPherson is close to the midpoint of the trip.  I drove out to Conway last night and took a couple of pictures.  A not so wide spot in the road, just west of McPherson.  Having great weather here - 25 degrees, light snow, 20 MPH winds]