RBN Energy

Ethanol from corn as a motor gasoline blend stock seems like a good idea.  As an oxygenate it is supposed to clean up the air, and as a U.S grown renewable it reduces our dependence on fossil fuels and foreign oil.  The catch is that ethanol is being mandated under a morass of mind-numbingly complex government regulations, some of which conflict with each other, or worse yet are out of step with the realities of the market.  For example, the mandatory volumes of ethanol required may soon exceed the quantity that the market can use.  At the same time, high corn prices have driven margins on ethanol manufacture into the red forcing many ethanol producers to shutter their operation, reducing ethanol supplies.  And if that were not enough, a government program created something called the   renewable identification number – RIN – a 38-digit serial number that ‘tags’ batches of renewable fuels and has resulted in all sorts of complications.  Today we’ll begin an examination of the ethanol market to understand how we got in this predicament and where we go from here.  In Part I we tackle one of the most intractable problems – the Blend Wall.

Three years ago the predicted onslaught of Marcellus NGL production kicked off a horse race to build new ethane pipelines out of the region.  At one time, at least seven different projects were being promoted. Since then most of the projects have dropped by the wayside, yielding to Mariner West (MarkWest/Sunoco) and ATEX (Enterprise).  Do those two projects provide enough capacity?  Perhaps too much?  What about possible competition from a new Marcellus/Utica NGL pipeline project that hit the radar screen last week?  Could that be a signal that a lot more liquids are on the way?  

By 2013, nearly 300Mb/d of incremental NGL supply will flow to Mont Belvieu from the burgeoning U.S. wet gas shale plays. Belvieu continues to dominate the NGL universe because of its critical location at the center of NGL gathering systems, product distribution pipelines and the Gulf Coast petrochemical feedstock market.  Is this hub big enough to handle the huge production growth?  Who stands to benefit from all of the infrastructure expansion?   In Part I of our series on Mont Belvieu titled Can Mont Belvieu Handle the NGL Supply Surge? we’ll examine this thing called Mont Belvieu and look at the “Big Four” Belvieu players to see how their assets dictate trading terms at the hub.

In just over a month, purity ethane prices in Mont Belvieu are off 41%, falling from 50 cnts/gal on 4/30 to 29 cnts/gal on Friday, 6/8.  During the same period, non-TET propane was down 35% from 116 cnts/gal to 75 cnts/gal (see left graph, below).  Last week when we looked at petrochemical feedstock economics, propane was the preferred feedstock for the first time in years.  But a couple of days later that relationship flipped back to ethane.   At first glance, that seems strange.  Both ethane and propane increased during the first half of the week, then came back off (see right graph).  But feedstock economics went from favoring propane by more than a nickel per pound of ethylene to favoring ethane by just over a penny on Friday.  To understand how and why this shift happened we’ll need to break out the spreadsheets again.

Yesterday we started our series on the economics of petrochemical feedstocks.  With NGLs driving the natural gas market, it is critically important to understand the factors that influence NGL prices.  The #1 factor is the petrochemical market that consumes more than half of all NGL production and 100% of the ethane.  In Let’s Get Cracking we did a brief overview of olefin crackers including how they work, what they make and where they are located.  We also introduced the fundamental fact of feedstock acquisition of the ethylene cracker industry:  the best feedstock is the one that will produce the highest margin possible, after deducting byproduct credits.  On the surface this seems simple – just make your product out of the cheapest stuff possible.  But below the surface it can get quite complex.  Of course, deep dives into energy analytics are what we live for here at RBN, so let’s get into the details. 

Two weeks ago we took a deep dive into the great 2012-18 ethane debate. Will we make too much of the stuff?  Or not?  Over the next five years, billions will be spend by the petrochemical industry chasing what promises to be huge margins for conversion of ethane to ethylene.  But it will take time to bring most of that capacity online.  What happens in the meantime?  NGL production from wet shale plays is growing fast.  If the ethane cut exceeds the ethylene industry’s capacity to consume the feedstock, then the excess ethane will be ‘rejected’ back into the natural gas stream. When and if this happens, the price of ethane in Mont Belvieu will drop to something near fuel value at the gas processing plant.  The debate is whether or not this is likely to happen.