Daily Blog

The Decline and Fall of Conway Ethane – Part II

This post continues yesterday’s review of the Conway ethane market.  If you did not see that one, please go to The Decline and Fall of Conway Ethane – Implications of a 75% collapse in price.  Otherwise the paragraphs below won’t make much sense.

Before getting to the implications of Conway ethane’s fall from grace, I should address one of the comments received yesterday.  One reader pointed out that, unlike my trading experience back in the dark ages, there were trades being done last week.   That is absolutely correct.  While the market was light, there were some trades done on ICE and those are easily viewable by all.  But they were few and far between.  The paucity of transactions basically supports the illiquidity thesis of yesterday’ blog.  First, Conway is a thin market.   Second, the pattern of trading indicated that traders were pulling back from the market. So the market may not have gone completely illiquid, but the activity level was definitely low.   It would be very difficult to move significant positions in this kind of market.  And that was the main point.

Let’s get back to the current E/P Mix market situation.  The following graph shows the price behavior over the past six trading days (courtesy OPIS) – a collapse down to 13.5 cnts/gal on Friday, followed by a slight recovery yesterday.  But at 14.625 cnts/gal, the market is far from out of the woods. Let’s look at two factors that may or may not influence the short term market: rejection economics and petrochemical feedstock economics.

Rejection.  In the short term, E/P Mix prices at this level imply some ethane rejection.  The math says that a producer is better off leaving ethane in the gas stream rather than extracting the ethane and incurring the necessary transportation and fractionation costs to get the product to market.  However, there are many circumstances that make these economics irrelevant.

For any barrels that can make it to Mont Belvieu where the price is 39.375 cnts/gal, rejection is out of the question.  But if a producer is stuck with Conway spot prices, it probably makes sense to leave as much ethane in the gas stream as possible.  Even if the economics make sense on paper, various obstacles can restrict how much rejection can really happen, including:

#1 - Inadvertent rejection of propane. Depending on a plant’s capability, some propane usually gets rejected along with the ethane.  That’s a bad thing with propane prices above $1.20/gal.

#2 – quality spec of tailgate gas.  When ethane is rejected, the btu content of the residue stream increases.  Depending on the gas quality, rejection can result in violation of natural gas pipeline specifications.

#3 – When plant co-owners and/or multiple processors are involved in a plant, it can be difficult to get consensus on rejection strategies, particularly in the middle of a month.  In recent years, this has become less of an issue due to more efficient contracting.

For these reasons and others, the level of ethane rejection in the short term is constrained to only about 25% of total ethane in E/P feeding the ethane market.  BENTEK’s Daily NGL Market Monitor estimates that the last time Conway ethane economics went upside down, total rejection was only 52 Mb/d, with 20 Mb/d of that total in PADD IV and the balance in PADD II.  For this reason, it will take more than ethane rejection to correct the market imbalance.

[Note: BENTEK’s Ben MacFarlane estimates that this level of rejection will only throw off about 140 MMcf/d of increased natural gas production across pads 2 and 4.   Not a good thing in today’s surplus natural gas market, but probably not enough to cause a big problem.]

Relative Feedstock Economics.   With ethane so cheap, petchems should be running more of it, right?  Not really.  There are only two crackers with direct access to Conway priced barrels, and they have no ability to take incremental supplies.  Down in Mont Belvieu, ethane runs are also maxed out.  In fact, they are cut back. Last week OPIS reported scheduled turnarounds at Exxon Mobil Baytown and Dow St. Charles, and downtime at the Flint Hills Port Authur plant.  These outages have been responsible for a lot of the weakness in the Mont Belvieu market, and have been a big factor in backing up barrels into Conway.  That’s a bad thing.  Because there are a lot more turnarounds planned over the next few weeks.  So it doesn’t look like increasing demand will help much either, at least in the short term.   

However, over time the strong preference for ethane as a feedstock – plus the highly profitable environment of Gulf Coast petchems running ethane – will eventually correct today’s short term market imbalance.   The Mont Belvieu versus Conway differential will stay wide until the long term issues are resolved, but cash prices will get out of the dog house they are in today – for a while.

Longer Term Issues.  The more important question is- What happens over the longer term?  

Ethane production is increasing across the U.S.  BENTEK’s recent report “The Great NGL Surge” has ethane production from gas plants increasing more than 50% over the next five years.  The Marcellus is ramping up from essentially zero to some number near 150 Mb/d.   PADD III (the Gulf Coast) will increase more than double that number.  Some of this production will go to Canada, but the rest will need to be consumed in the U.S. – or rejected in significant quantities.  Almost all of the petchem capacity to chew up this ethane will be on the Gulf Coast.

So the ethane producer has two problems.  First, pipeline access to Gulf Coast markets.   And as we’ve seen over the past few days, the further away you are from the Gulf, the more of a problem you’ve got.  Second, enough of a market in the Gulf region to soak up the growing production volumes.

Let’s take the “easy” problem first.  There is a lot of pipeline capacity being developed to get Conway barrels, or barrels that might come to Conway to Mont Belvieu. If all of the capacity that has been announced gets built, there will be more than enough to handle the barrels that need to move south to the Gulf.  Most of these projects are expected to be up and running between now and year-end 2013.

That may correct the Conway imbalance, but the problem has just been moved south to Mont Belvieu.  That’s the second issue.  Unfortunately the new ethylene crackers needed to absorb the excess won’t be completed until late 2016 or early 2017. Could there be enough incremental expansions of existing ethylene units to keep the market in balance in the 2014-15 period?  Possibly.  But a lot of things must go right.  Remember, it is actually in the petchem’s best interest to keep these prices low.  It is equally possible that we could see a couple of years of very low ethane prices. 

What will this market look like?  We may have just seen a sneak preview over the past few days.