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Jane you ignorant ….. Surplus ethane until 2018?

For the past two days I’ve attended the 5th Annual Platts Midstream Development Conference at the JW Marriott in Houston.  After a while you start to get a little tired of phrases like ‘astronomical growth’, ‘unprecedented opportunities’, and ‘game changing technology’.  There was a steady stream of midstream investment projects in every sector of the oil, gas and NGL markets in the U.S.  And there were few disagreements about the trajectory of production or the need for new infrastructure to get the production to market.  That is, except for one issue.  And that issue was ethane.  As documented here on several occasions (most recently this week in Monitor Monitor and  Rock Bottom), ethane production has increased dramatically over the past year and today ethane prices in both Conway and Mont Belvieu are depressed (yesterday 43.4cnts/gal for MB purity and 12.4cnts/gal for Conway E-P).  But the real question is the next five to six years. Will petrochemical producers add enough ethane capacity each year to absorb the expected growth in ethane production, or will producers outrun the petchems and drive prices to fuel value for an extended period of time? 

On Tuesday morning we had point-counterpoint presentations on this topic.  Of course, I was hoping for a little point-counterpoint fireworks like the old Saturday Night Live Jane Curtin/Dan Aykroyd debates “Jane you ignorant s!^t.  Sadly our presenters conducted themselves as professionals.  But the audience got the point.  Right now this issue is far from settled.

On the oversupply side we had Dave Pursell, Managing Director, Head of Securities, Tudor Pickering Holt & Co (TPH).  The Tudor Pickering NGL production forecast assumes that most NGL pipeline capacity problems will be fixed by the late 2013-early 2014 timeframe.  And total NGL production increases from today’s 2.4 MMb/d of total natural gas plant production up to about 3.7 MMb/d in Q4 2018 or 1.3 MMb/d.  The TPH analysis does not anticipate a fractionator bottleneck.  Instead they see the problem as ethane demand.   Here’s the TPH bottom line straight from Dave -  “We think there will be an oversupply of ethane until 2018.  I know that is a controversial call. And I am confident that we are right.  I’ll take our analysis against anybody’s analysis.  What that says is that ethane prices are going to be on top of gas – close to gas – for a long time.”  That’s about as spicy as it gets at these conferences.

Dave’s key slide that was up during this portion of the presentation was titled “Ethane Supply Gets to Gulf Coast before Demand”, and is shown below. 

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