Jane you ignorant II - Surplus ethane until 2018?

Last Thursday we looked at one side of the great 2012-18 ethane debate. Will we make too much of the stuff?  Or not?   Will the petrochemical industry have the capacity to chew up rapidly increasing ethane production. Or could producers and processors churn out so much ethane that the price will be forced down to fuel value (a price equivalent too natural gas), resulting in massive ethane rejection at gas processing plants. 

I was hoping for a robust, point-counterpoint exchange like the Saturday Night Live Jane Curtin/Dan Aykroyd debates “Jane you ignorant s!^t from the mid-1970s.  That way today’s blog could be titled “Dan, you pompous a$$”, which was Jane’s retort to Dan.  Unfortunately for the Platts Midstream Conference audience, our two debaters didn’t get down and dirty.  But they did present two opposing viewpoints on an important issue.  That is pretty spicy for these industry conferences. 

The pro-oversupply position was articulated by Dave Pursell, Managing Director, Head of Securities, Tudor Pickering Holt & Co (TPH), and was documented here in Jane you Ignorant.  Basically TPH sees the ethane surplus growing to about 100 Mb/d in Q4 2014, then to 200 Mb/d in Q1 2016.  The 200 Mb/d surplus situation continues until Q3 2017 when it starts to decline.  The oversupply situation is not finally worked off until Q4 2018.  During this almost  7 year period there are huge increases in pLast Thursday we looked at one side of the great 2012-18 ethane debate. Will we make too much of the stuff?  Or not?   Will the petrochemical industry have the capacity to chew up rapidly increasing ethane production. Or could producers and processors churn out so much ethane that the price will be forced down to fuel value (a price equivalent too natural gas), resulting in massive ethane rejection at gas processing plants. 

I was hoping for a robust, point-counterpoint exchange like the Saturday Night Live Jane Curtin/Dan Aykroyd debates “Jane you ignorant s!^t from the mid-1970s.  That way today’s blog could be titled “Dan, you pompous a$$”, which was Jane’s retort to Dan.  Unfortunately for the Platts Midstream Conference audience, our two debaters didn’t get down and dirty.  But they did present two opposing viewpoints on an important issue.  That is pretty spicy for these industry conferences. 

The pro-oversupply position was articulated by Dave Pursell, Managing Director, Head of Securities, Tudor Pickering Holt & Co (TPH), and was documented here in Jane you Ignorant.  Basically TPH sees the ethane surplus growing to about 100 Mb/d in Q4 2014, then to 200 Mb/d in Q1 2016.  The 200 Mb/d surplus situation continues until Q3 2017 when it starts to decline.  The oversupply situation is not finally worked off until Q4 2018.  During this almost  7 year period there are huge increases in Petchem capacity added, totaling almost 800 Mb/d of new ethane demand.  The problem according to TPH is that ethane supply grows even faster.  The result is a period of almost six years of ethane surplus.  Consequently ethane at natural gas processing plants with high transportation and fractionation costs (like those far away from Mont Belvieu, for example) will likely be faced with upside-down ethane processing margins, and where it makes economic sense, ethane rejection.

On the other side of the fence was Peter Fasullo, Principal & Co-Founder of EnVantage, Inc.  The following are my notes from Peter’s presentation, including a couple of his graphs and tables.

• Some other analysts (presumably Dave and a few other industry observers) are predicting that a surplus of NGLs will occur:  (a) Specifically looking at a chronic oversupply of ethane by 2013; (b) They (the other analysts) believe NGL markets, particularly the petrochemical market, can’t expand fast enough; (c) They feel that the current environment heralds an impending surplus.
• The current NGL market is about 2.8 MMb/d.  Demand is shifting more to petrochemical production and to export markets.
• The primary NGL growth products (from gas processing) are ethane and propane
• Ethane’s floor value, set by gas, is declining, allowing its market value relative to crude to drop to remain the preferred feedstock.
• Although ethane production is growing, that growth is mitigated by declines in traditional – non-shale – supplies. For example, in the South Texas region the increases in shale gas production are not keeping up with the declines in conventional supplies, resulting in overall declining volumes. 
• The gas processing industry’s NGL extraction capability should increase from 2.3 MMb/d in 2011 to about 3.2 MMb/d by 2020.  Ethane extraction capability could increase from 1 MMb/d in 2011 to 1.5 MMb/d by 2020. 
• The EnVantage forecast is below.  The yellow area is ethane.

Difference #1.  Eyeballing Peter’s production graph, ethane pretty much gets to 1.5 MMb/d in 2018.  That’s a change of 0.5 MMb/d.  THP sees an increase of 0.5 MMb/d by Q2 of 2015, then continuing to increase up to 0.7 MMb/d by Q4 2017 and hanging at that level.  Thus we have identified the first difference between the projections.  TPH sees ethane production increasing faster and higher than EnVantage.

More notes from Peter.

• The industry’s capability to crack ethane at year-end 2011 was 1.05 MMb/d. 
• Capacity at existing plants is ramping up.  So total capacity is expected to increase from furnace conversions, plant expansions and a plant restart, rising to 1.3 MMb/d by 2016.
• Then there are the new ethylene plants. At least 13.6 billion lbs/yr of new-world scale capacity is being considered, representing 408 Mb/d of ethane cracking capability.
• EnVantage sees at least 3 new plants being built, representing 251 Mb/d of ethane cracking capability.
• Add that number to the 1.3 MMb/d of existing + expansion capacity and you get 1.55 MMb/d, or an increase of 0.5 MMb/d in demand.   See the detailed numbers below.

• EnVantage also includes another 0.1 MMb/d to be exported to Canadian crackers on the Vantage and Mariner West pipeline projects, and Kinder Morgan’s project to move ethane up Cochin into Sarnia.  So that gets to 0.6 MMb/d total demand increase.