Last Friday the price for ethane in E-P mix in Conway dropped to 4.5 cnts/gal for a period of time. According to OPIS, the price averaged 7.25 cnts/gal for the day. Those numbers are all-time low prices for the product, and rock bottom by anyone’s definition. As we discussed here in Monday’s post titled Monitor-Monitor on the Wall, Who’s the Cheapest Hydrocarbon of All, these are prices at the Conway Hub. Most NGLs coming into Conway incur a transportation fee to get there and a fractionation fee to convert mixed NGLs into salable products. That deduct can be between 6 and 12 cents per gallon. Let’s say the deduct is 10 cnts/gal. Subtract that from 7.5 and by my math that’s negative 2.5 cnts/gal. It’s hard to make money selling at negative prices. Fortunately producers and natural gas processors are still making good money churning out propane, butanes and natural gasoline.
Today we’ll look at the numbers a little more carefully to see what rock bottom prices for Conway ethane mean for gas processors, petchem plants and the NGL market in general. For this exercise we’re going to stick with the market prices on Friday, just to make the point. Ethane experienced a recovery of sorts late in the day on Friday which continued through trading on Monday. OPIS average for ethane in E-P on Monday was 12.5 cnts/gal. Rumor has it that some trading outfit is accumulating a physical position in Conway E-P inventories. That certainly seems plausible. In fact, it is probably more than one company doing so. We’ll be watching EIA inventories and price trajectories to estimate how such a trade works out over time. But that’s another story.
First let’s make sure our friends the producers and processors are ok. For that we’ll use the spreadsheet format developed for our series titled Golden Age of Natural Gas Processors. The NGL prices are OPIS average from Friday 5/4/12 and the gas price is ICE Cash Henry Hub also from Friday. Even if our typical producer is stuck with Conway prices and is producing ethane at a negative margin, the plant is still pulling in $6MM/month of value. As you can see from the table below, the butanes and natural gasoline are floating the boat. The $6MM margin is getting split between the producers and the processors based on the processing contracts in place. They are not as happy as they were a few weeks back, but don’t expect to see these folks panhandling for food at the I135 and 59 McPherson turnoff.
Who is really happy? That would be the petchems. That is particularly true for two plants. These are the only two U.S. olefin cracking units that run ethane located north of the Texas border. Both are LyondellBasel. One is the Clinton, IA plant and the other is the Morris, IL plant. Both run a lot of ethane and some propane. Both plants probably get supplies from a variety of sources, but let’s assume a portion of their feedstocks come from Conway or are priced at Conway indices. If you are not familiar with olefin crackers, they make ethylene and propylene out of hydrocarbon feedstocks, here in the U.S. mostly from NGLs.
A few years ago, the operating margin at these plants was in the single digits or worse. Today ethylene is about 63 cents/pound and propylene is about 70 cents/pound. Let’s put our Conway ethane in those terms. At 7.25 cnts/gal, that is equivalent to 2.4 cents/pound. (There are about 2.97 pounds per gallon of ethane). The ethylene yield from ethane is 70% to 80%. So the Lyondell plants could be making 60-something per pound products from a 3 cent/pound feedstock. Now that’s some serious margin. Sure there are lots of other costs besides the feedstock, but the margins are still beyond any historical scale. Even Gulf Coast crackers with 40 cent/gallon ethane are looking at 50 cent/pound margins according to Bentek’s Daily NGL report. Petchems are happy campers indeed.
What about rejection? If Conway ethane at the plant is under water, don’t plant operators have the option to leave some level of ethane in the gas?