Ethane Asylum Revisited - New U.S. Cracker Demand, Exports Will Strain Ethane Supply, Part 2

In the Energy Information Administration’s (EIA) latest ethane production stats — for the month of May — gas plant production of ethane exceeded 1.4 MMb/d for the first time. In the same month, ethane exports also hit a record at 191 Mb/d, and ethane demand for petrochemical production — you guessed it — hit still another all-time high, topping 1.2 MMb/d. All this is just the beginning. These numbers and the throughput of any midstream infrastructure transporting or fractionating ethane will continue to increase over the next two years as new, ethane-only crackers come online, ethane rejection dwindles and overseas exports of ethane ramp up. By 2020, U.S. ethane demand is expected to reach 2 MMb/d — up by two-thirds from where it stands now. Today we continue our series on rising ethane demand, how the new demand will be met and what it all means for ethane prices.

As we covered in Part 1 of this series, ethane is a unique market — it’s the only energy commodity that can morph from being sold as natural gas (for its Btu content) to being sold to petrochemical plants as a liquid feedstock. This chameleon-like attribute contributes to ethane’s volatility, both in terms of production volume and pricing. Because of ethane’s one-of-a-kind niche (and our fondness for ethane in the RBN blogosphere), we’ve been posting lots of blogs on the topic for years, going back to the original Ethane Asylum, which heralded the ramp-up in ethane rejection in the Shale Era. Also in Part 1, we discussed one of the most important market factors that will indicate how the ongoing ethane market transformation will play out. This is the ratio of the Mont Belvieu price of ethane to the Henry Hub natural gas price on a per-Btu basis — an indicator of the relative value of ethane as a petrochemical feedstock versus ethane sold as natural gas (ethane rejection). As a general rule, the higher the ratio of the ethane price to the natural gas price, the greater the volume of ethane recovered as a liquid feedstock for the petrochemical industry.   This time last year, the ratio was about 1:1, that is, ethane at Mont Belvieu was worth about the same as natural gas at Henry Hub. Today, that ratio is closer to 1.4:1, so ethane is worth 40% more than natural gas on a per-Btu basis. That’s a big difference, and so it’s no wonder that ethane production is on the rise.  The ratio (which we track each day in our Spotcheck Indicators, available to Backstage Pass subscribers) will be one of the most important factors to watch on the supply side of the equation.

There are equally important metrics to follow on the demand side, including new steam cracker in-service dates; how quickly exports ramp up; and the cents-per-pound margin for producing ethylene from ethane versus other feedstocks. Demand for ethane into the steam cracker market can swing hundreds of thousands of barrels a day depending on these factors. So we’ll get into some detail on how these metrics signal what is happening in the ethane market.

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