In their second-quarter earnings presentation last week, Energy Transfer said that they and their joint venture (JV) partners, Satellite Petrochemical, expect the first commissioning cargoes from their new 180-Mb/d ethane export facility in Nederland, TX — formally known as Orbit Gulf Coast NGL Exports LLC — to begin in November, only three months from now. This new outlet for U.S.-sourced ethane comes at a time when production of oil, gas, and NGLs faces near-term declines due to reduced drilling activity resulting from low crude prices. With those declines, will there be enough ethane supply to meet the capacity of the new Orbit export dock and other upcoming ethane-related projects? The short answer is, yes … for the right price. Today, we examine the latest supply and demand dynamics shaping the U.S. ethane market.
Over the past week (Jan 13-20, 2013) the ethane-to-gas ratio has recovered slightly from 0.99 to 1.05, mostly due to a 3 cnt/gal increase in the price of purity ethane at Mont Belvieu (OPIS 24.5 cnts/gal). [See today’s Spotcheck “Ethane to Henry Hub Gas Ratio” graph. Click here if you have trouble accessing Spotcheck.] But that does not change the fact that the ethane market is still deep in ethane rejection territory. What does it mean for gas processing economics? And how do different gas streams impact NGL recoveries, ethane rejection and tailgate gas volumes. That’s what we’ll examine today.
Last week in Ethane Asylum Big Time we looked at the implications of ethane rejection at a typical Eagle Ford plant, using as our example the model developed a few weeks back in our blog series titled How Rich is Rich – Gas Processing Economics – Part 3. In order to get to the market implications and conclusions in “Ethane Asylum Big Time”, we skipped over some of the details of our calculations, promising to get back to the model this week. So that’s where we are going today – deep into the gas processing model abyss. Follow only if you dare.
Ethane in Mont Belvieu posted at 22.5 cnts/gal on Friday, continuing the NGL’s descent into the abyss that started mid-2012. The last time we saw ethane at this level was back in 2002. With natural gas prices hanging in there above $3.00/MMbtu, there is no doubt about it. We are deep into ethane rejection economics. Not just for the Conway market like we had last summer. But wide spread, across the board, knock-out-the-ethane style rejection, unlike anything we’ve seen in the last five years. In fact, this is something new. Impending widespread rejection in the world of shale… a world of ultra-rich gas, deep ethane cuts, and constrained infrastructure. Today we’ll drill down deep into the numbers. It’s enough to make you crazy.
EIA NGL natural gas plant production statistics were posted on Wednesday and showed something we have not seen for a few months – a decline in volume. It was not a huge decline. And with the price of Conway ethane in the dog house over the past three months, it was not unexpected. But given the importance of NGLs to both the natural gas and petrochemicals industries these days, it definitely warrants a careful examination of the numbers. We can expect to see this trend to accelerate over the next few months.
Last Thursday we looked at one side of the great 2012-18 ethane debate. Will we make too much of the stuff? Or not? Will the petrochemical industry have the capacity to chew up rapidly increasing ethane production. Or could producers and processors churn out so much ethane that the price will be forced down to fuel value (a price equivalent too natural gas), resulting in massive ethane rejection at gas processing plants.
For the past two days I’ve attended the 5th Annual Platts Midstream Development Conference at the JW Marriott in Houston. After a while you start to get a little tired of phrases like ‘astronomical growth’, ‘unprecedented opportunities’, and ‘game changing technology’. There was a steady stream of midstream investment projects in every sector of the oil, gas and NGL markets in the U.S. And there were few disagreements about the trajectory of production or the need for new infrastructure to get the production to market. That is, except for one issue. And that issue was ethane. As documented here on several occasions (most recently this week in Monitor Monitor and Rock Bottom), ethane production has increased dramatically over the past year and today ethane prices in both Conway and Mont Belvieu are depressed (yesterday 43.4cnts/gal for MB purity and 12.4cnts/gal for Conway E-P). But the real question is the next five to six years. Will petrochemical producers add enough ethane capacity each year to absorb the expected growth in ethane production, or will producers outrun the petchems and drive prices to fuel value for an extended period of time?
Last Friday the price for ethane in E-P mix in Conway dropped to 4.5 cnts/gal for a period of time. According to OPIS, the price averaged 7.25 cnts/gal for the day. Those numbers are all-time low prices for the product, and rock bottom by anyone’s definition. As we discussed here in Monday’s post titled Monitor-Monitor on the Wall, Who’s the Cheapest Hydrocarbon of All, these are prices at the Conway Hub. Most NGLs coming into Conway incur a transportation fee to get there and a fractionation fee to convert mixed NGLs into salable products. That deduct can be between 6 and 12 cents per gallon. Let’s say the deduct is 10 cnts/gal. Subtract that from 7.5 and by my math that’s negative 2.5 cnts/gal. It’s hard to make money selling at negative prices. Fortunately producers and natural gas processors are still making good money churning out propane, butanes and natural gasoline.
Yesterday the price of ethane in E/P mix in Conway dropped again, now down to 14.5 cnts/gal, or $6.09/Bbl. A lot of the ethane barrels that move down the ONEOK Overland Pass NGL pipeline from Opal, WY to Conway, KS get priced out based on Conway ethane numbers. We talked about this situation last Wednesday in Not Gonna Lie.
On Friday, the Conway ethane (in E/P mix) price crashed to 13.5 cnts/gal. No this is not the Decline and Fall of Western Civilization (neither the actual event or the punk rock movie of that name), but it is an important development for NGL and natural gas markets. Six months ago the E/P mix price stood at 56 cnts/gal. That’s a 75% drop. Last week the price decline was particularly swift – 40% in five days.