Ethane-to-Gas Ratio Drops Below 1.0 For the First Time in 2023 – Here Comes More Ethane Rejection!

After years in the doldrums, ethane prices are increasing, not so much in absolute terms, but where it counts — relative to the price of natural gas. That means less ethane will be rejected — sold as natural gas — and more will be recovered as liquid ethane and sold as a petrochemical plant feedstock. As still more new ethane-only petrochemical plants come online over the next couple of years, ethane demand will increase, boosting ethane prices and resulting in still less ethane rejection. Does that mean ethane rejection will be a thing of the past? No, not even close. U.S. natural gas production, especially gas with a high ethane content, is growing so fast that ethane supply will continue to outstrip demand for the foreseeable future, with important consequences for ethane prices. Today, we continue our review of NGL market developments.

2012 has not been a good year for natural gas liquids prices.  Spring was a particularly brutal season, with prices falling to levels not seen since the bad ole days of 2009.  This summer prices have recovered from late-June lows, but the numbers are still in the dog house relative to the past couple of years.  Although this is hardly something that sprung up overnight, lately it seems like there has been a rash of hand wringing by analysts, rating agencies and not a few companies warning about the consequences for midstream businesses and NGL producers.  Our friends at Tudor Pickering called it a ‘Blood Bath’.  Is it really that bad?  Our blog series in March called 2012 the ‘Golden Age’ of gas processors. Have we gone from a Golden Age to a Blood Bath in six months?  It seems like it’s time for another deep dive into gas processing and NGL production.

Ethane has been in the doghouse for years since the shale gas boom kicked in, with production greatly exceeding demand and hundreds of thousands of barrels per day being “rejected” into the natural gas stream – owing to the fact that netbacks for liquid ethane are lower than pipeline natural gas. One way to understand that relationship is to track the price ratio of ethane at Mont Belvieu, TX to natural gas at Henry Hub, compared on a BTU basis.  That ratio of ethane-to-gas languished at 95% between Q1 2014 through the summer of this year, and in November 2014 dipped to only 61%.  That means that the BTU value of ethane at that point was only 61% of natural gas. Ethane that cheap is an awesome value for steam crackers using the feedstock to produce ethylene and other petrochemicals.  But a couple of months ago (September 2015), the price of ethane started to ramp up relative to gas, blasting through 140% in late October.  Is that bad news for future ethane prices? What does that portend for ethane once all the new steam crackers being built come online and overseas exports – also coming soon -- ramp up.  Today we look at the recent rebound in the ratio of ethane to natural gas and consider whether this is a signal that ethane is out of the doghouse.