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No Particular Place to Go? What Will Happen to the Tsunami of Marcellus/Utica Ethane Production?

Over the next three years, the production of natural gas liquids (NGLs) from the Marcellus/Utica could octuple (8X) to more than 650 Mb/d.  Nothing like that has ever happened in the NGL business before.  It has already started.  Last month MarkWest officially inaugurated the Appalachian ethane business. From 5 Mb/d today we could see 200 Mb/d by this time next year if the economics to move that much ethane made sense.  But they won’t.  Because there is nowhere for the additional ethane to go.  Already up to 250 Mb/d of U.S. ethane is being rejected – pushed back into natural gas in the Rockies, Midcontinent, and other regions.  That number will be getting a lot bigger.  Today we will begin an examination of the ethane tsunami and what it means for NGL markets in the Northeast and in the center of the NGL universe – Mont Belvieu, TX.

This posting is Part 3 of our series on NGL markets that we started last month, with Part 1 titled Dirty Deeds Done Dirt Cheap – Will NGL Prices Continue to Drop?   In that posting we surveyed each of the NGL markets and how all NGL prices had hit the skids, with the light ends (ethane and propane) taking the brunt of the hit, while the heavies (butanes and natural gasoline) fared slightly better.  In Part 2, She Don’t Lie, She Don’t Lie, Propane. Exports Take Off! we looked at projections for huge increases in propane production and why surplus volumes will need to move to overseas markets to balance supply and demand in the U.S.  (Already those increasing export volumes have been a key factor in the 25 cnt/gal increase in the price of Mont Belvieu propane over the past eight weeks.)

What Changed Since Last Time We Looked At Ethane?

Over the past couple of years we’ve probably done more than 20 blogs that covered some aspect of the evolving ethane saga, including The Ethane Asylum: Big Time Ethane Rejection in the Shale Gas World, Whoville, the Big New NGL Hub in Marcellus/Utica, and Field of Dreams or Production Planning? Building Out Northeast NGL Infrastructure.  So as we enter the Fall of 2013, what could be new?  A lot.

·         First, ethane in the Marcellus is finally a reality.  In their Q2 earning call, MarkWest announced that the company began delivering ethane into the Mariner West pipeline on July 21 for delivery to Nova in Sarnia, ON.  We understand they will be ramping up flows to about 20 Mb/d later this year, eventually getting up to 50 Mb/d in early 2014 when Nova is ready to receive the barrels into its petrochemical facility.

·         Second, every time we look at our NGL volume forecasts, the numbers get bigger.  Projections of wet gas production are higher, the gas being produced is richer (higher NGL content) and the geography is expanding deeper into Ohio and West Virginia.  Simultaneously more infrastructure is being announced to bring all of this production to market, with more plants and fractionators announced.  In the pipeline department we even have a dog fight with the recently announced Appalachia-to-Gulf Coast pipeline from Kinder Morgan and MarkWest competing directly with Bluegrass from Williams/Boardwalk to move mixed NGLs from Appalachia to the Gulf Coast.

·         And third there is price.  Or lack thereof.  Purity ethane in Mont Belvieu has averaged less than 25 cnts/gal over the last three months (See Figure #1 below).  On a BTU basis, that’s $3.76/MMbtu (25/6.65).  Yes, that’s more than the price of natural gas at the Henry Hub which has been running around $3.50/MMbtu lately.  But don’t forget that the ethane must be moved to Mont Belvieu from wherever it is produced and then fractionated.  Figure at least 12 cnts/gal if the ethane is within a couple of hundred miles of Mont Belvieu and the producer has a friendly fractionation deal.  Subtract that from 25 cnts/gal and now you’ve got an ethane netback to the plant of 13 cnts/gal, which equates to $1.95/MMbtu.  At that price it clearly makes more sense to sell the ethane as natural gas rather than as ethane – the phenomenon known as ‘rejection’.

Deep into Ethane Rejection

And so the U.S. has been deep into ethane rejection for the past 18 months.  Figure #2 shows what that looks like in terms of gas plant production.  After peaking over one million barrels per day of U.S. ethane production in February 2012, the most recent EIA figures showed 912 Mb/d in May.  We figure that ethane production would probably be 1,150 Mb/d if it were not for rejection, which implies a little less than 250 Mb/d is getting rejected.  About half of that amount is happening in the Rockies with the rest from the Midcontinent and other regions.

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