Prices headed up!! That’s something that you haven’t heard much lately. But big changes are just over the horizon for NGLs as new petrochemical plants and export projects come online. These projects will encounter a market environment far different than what was expected when they were being planned. Instead of an oversupplied market driving NGLs lower relative to crude oil and natural gas, the projects will confront a tight market, with NGL prices higher relative to the other hydrocarbons. In today’s blog we explain why what must go up must come down, and vice versa.
In the first installment of Spinning Wheel we assessed the rapid descent of propane stocks since late November, in spite of the 2015-16 El Nino “winter of no winter”, as a result of extremely strong export volumes. The week before that we highlighted the inaugural waterborne ethane exports in Ethane: Boat On The Water!! First US Overseas Ethane Exports Ready To Set Sail. Today, we are going to take a look at how increasing ethane exports and growing petrochemical demand will impact NGL prices.
Starting with ethane exports, over the next three years those volumes are going to sextuple. That is no suggestive reference. It just means an increase of six fold. In fact, it is an even bigger deal than that. Before 2014 there were no U.S. ethane exports at all (see Changes in Longitudes). In that year, U.S. ethane exports were inaugurated when the Sunoco Mariner West pipeline started deliveries from the Marcellus to Sarnia, ON. Later the same year, Pembina’s Vantage pipeline came online, delivering Bakken ethane to Alberta. According to EIA, in 2015 ethane exports to Canada on these two pipes averaged 65 Mb/d. As shown in Figure #1 below, that was just the opening act. The graph includes projected volumes to Canada on those pipes plus a surge of waterborne ethane exports out of Marcus Hook, PA (starting with that initial cargo referenced above) and then a huge ramp up in exports from Enterprise’s Gulf Coast Morgan’s Point facilities due online Q3 2016. The graphic also shows the possibility of still more ethane barrels moving to Canada from Ohio on Kinder Morgan’s planned UTOPIA (Utica To Ontario Pipeline Access) pipeline. Add up all those committed export volumes (from companies like NOVA, Ineos, Borealis, Reliance, SABIC, and most recently Braskem) and that’s the sextuple – about 390 MB/d – six times the 65 Mb/d moving today. That’s a big increase in demand, but there is still more ethane demand on the way. Much more.
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About the song
"Spinning Wheel" is the title of a popular song from 1969 by the band Blood, Sweat & Tears. The song was written by the band's Canadian lead vocalist David Clayton-Thomas and appears on their self-titled album.
Comments
What about increased LNG export volumes and the ethane associated with this producing this methane.
In reply to LNG Export Volumes - Ethane Supply by Blake Roberts
Hi, Blake,
If you mean the additional production of ethane that could result from addint 9 or 10 Bcfd of new NG market through LNG exports, that's just more fungible ethane that will be removed or rejected, based on the economics at the time. So the amount that comes to market will be a function of which basins are producing at the margin, whether they're dry or wet.
In terms of what reaches the LNG projects, all the LNG projects are served by pipelines that have pretty strict quality standards, so there's no room to reject ethane to result in higher levels than "pipeline quality," which is very dry. Meanwhile, there is the potential for using ethane to fine-tune heating values in LNG for particular markets. No telling where that may go, but if it happens it would just be one more market for removed ethane--they can't leave it in the pipelines above pipeline specs, since the same pipes serve a lot of other customers.
If my math serves me right the ca. 5 million tons of announced ethane cracker capacity after 2017, when ca. 8 mill. tons come on-line, change the market from long to short in Ethane. Wouldn't this mean that none of those projects will be realised as there is no cheap Ethane available to justify the invest?
Michael
In reply to Announced capacities too high in light of the Ethane balance? by Michael Traeger
Hi Michael -
All of these projects are being built along with downstream derivative capacity or they are tying into existing deriviative capacity (PE, MEG, PVC) so you have to do the math all the way downstream to decide if the project economics make sense. Also, these projects are designed to run for decades so you need to consider sunk costs and where the market is heading longer term.
Kelly
Thank you for another great post. I was wondering about your thoughts on operating rates for the export terminals, and how sensitive they are to ethane price increases starting in 2017-2018. How are the takeoff contracts typically structured? Would Ineos or Reliance take the hit on contracted volumes and find other sources of ethane at a lower price point/before U.S. domestic crackers would start switching feedstocks?
Andrey
In reply to Operating Rates for Exports by Unknown Unknown
Hi Andrey -
Enterprise indicates they are 90% contracted and Marcus Hook has contracts for 51 Mb/d out of the east coast. INEOS, Reliance, Borealis, etc all have long term supply contracts (10 to 15 years), they've invested in ships, cyrogenic storage tanks, pipelines from import terminals to crackers, and cracker modifications so they have significant sunk costs. In addition, historically there has not been a waterborne ethane market so there are not really other large volume waterborne supply options.
Kelly