Ethylene Ethylene, Prettiest margin I ever seen

Two weeks ago we took a deep dive into the great 2012-18 ethane debate. Will we make too much of the stuff?  Or not?  Over the next five years, billions will be spend by the petrochemical industry chasing what promises to be huge margins for conversion of ethane to ethylene.  But it will take time to bring most of that capacity online.  What happens in the meantime?  NGL production from wet shale plays is growing fast.  If the ethane cut exceeds the ethylene industry’s capacity to consume the feedstock, then the excess ethane will be ‘rejected’ back into the natural gas stream. When and if this happens, the price of ethane in Mont Belvieu will drop to something near fuel value at the gas processing plant.  The debate is whether or not this is likely to happen.

Our two debaters laid out their cases a the 5th Annual Platts Midstream Development Conference held earlier this month.  Dave Pursell, Managing Director, Head of Securities, Tudor Pickering Holt & Co (TPH), was advocate for the pro-oversupply position, outlined here in Jane you Ignorant.  Peter Fasullo, Principal & Co-Founder of EnVantage took the other side of the issue. In Jane you ignorant II we looked at Peter’s analysis and compared the key differences between the views. 

#1 - TPH sees ethane production increasing faster and higher than EnVantage.  The EnVantage outlook has ethane production ramping up 0.5 MMb/d by 2018.  THP sees an increase of 0.5 MMb/d by Q2 of 2015 (2.5 years earlier), then continuing to increase up to 0.7 MMb/d by Q4 2017.

#2 - The other big difference between the positions is timing of demand.  In the Envantage scenario, the combination of expansions, the new Point Comfort facility and one other cracker get the demand delta to just under 0.6 MMb/d in 2017.   In contrast, TPH numbers for 2017 show a demand increase of only 0.4 MMb/d, not increasing to 0.5 MMb/d until Q4 of that year. . In TPH’s view, demand comes on slower and later.

Which view is right?  Or better said, which view is the more likely view to play out over the next few years?  Two weeks ago we chose to defer judgment, to step back and contemplate things, promising to revisit the issues one more time.  That time is now, and is our mission in today’s blog posting.

But we did one other thing, just to make it interesting.  We took a poll. We do that on RBN every once and a while.  If you voted, you can see the results at the bottom of the Jane you ignorant II posting.  That day we had 480 people hit the site.  The question posed was “Will the U.S. ethane market be oversupplied in the 2014-18 period?”.  A total of 74 people voted.  Of that total, 51 (69%) answered yes, there will be an oversupply while 23 (31%) voted no. For what it is worth, a higher percentage of the early voters answered yes, and more no votes came in as the day went on.  So for our tiny sample, more than two-thirds think ethane will be in an oversupply situation.

I agree with the yes’s. Wet natural gas production is coming on very strong.  The petchems will expand their facilities over the next three years to run more ethane, but it will not be enough.  There may be periods when new capacity comes online when the market balances out, but most of the time during the 2015-16 timeframe, ethane rejection will average between 85 Mb/d and 100 Mb/d.  How do I know this is true? Because Kristen Holmquist, Manager, NGL Analytics at Bentek told me so.

Kristen did a presentation on the issue at Bentek’s Benposium conference last week, and provided a more in-depth version yesterday at the Platts North American Refining and Trading conference in Houston.  The chart below shows the bottom line.

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