NGL

Ethane has been in the doghouse for years since the shale gas boom kicked in, with production greatly exceeding demand and hundreds of thousands of barrels per day being “rejected” into the natural gas stream – owing to the fact that netbacks for liquid ethane are lower than pipeline natural gas. One way to understand that relationship is to track the price ratio of ethane at Mont Belvieu, TX to natural gas at Henry Hub, compared on a BTU basis.  That ratio of ethane-to-gas languished at 95% between Q1 2014 through the summer of this year, and in November 2014 dipped to only 61%.  That means that the BTU value of ethane at that point was only 61% of natural gas. Ethane that cheap is an awesome value for steam crackers using the feedstock to produce ethylene and other petrochemicals.  But a couple of months ago (September 2015), the price of ethane started to ramp up relative to gas, blasting through 140% in late October.  Is that bad news for future ethane prices? What does that portend for ethane once all the new steam crackers being built come online and overseas exports – also coming soon -- ramp up.  Today we look at the recent rebound in the ratio of ethane to natural gas and consider whether this is a signal that ethane is out of the doghouse.

U.S.-based companies soon may have expanded opportunities in Mexico’s liquefied petroleum gas market—not just in supplying LPG from U.S. natural gas processing complexes and oil refineries but in storing and delivering the propane/butane mix to customers. The emerging opportunities are tied largely to Mexico’s efforts to open up and deregulate its energy sector, whose LPG sub-sector has long been dominated by the government-owned Petroleos Mexicanos and hamstrung by LPG price controls. Today, we conclude our series on propane/butane supply, demand and infrastructure South of the Border.

In a $38 Billion transaction announced September 28, 2015, Energy Transfer Equity (ETE) agreed to gobble up The Williams Companies in a deal expected to close during the first half of 2016. The combination of these two companies creates a U.S. midstream giant that will own infrastructure including gas pipelines carrying as much as 45% of U.S. Lower 48 dry gas production, processing capacity producing16% of domestic natural gas liquids (NGL’s) and crude oil pipelines in the Permian, Eagle Ford and Bakken. Today we take a look at the liquids infrastructure assets in this giant deal and provide a download of RBN’s maps of the infrastructure involved.

With increasing production near demand regions, better connectivity from both pipeline and rail, and export volumes that can be bid away from global markets, the U.S. propane industry is in a much better position to handle a “Perfect Storm” of extreme demand events than it was in the winter of 2013-14.  Nevertheless, today’s propane market brings with it a number of challenges, including greater exposure of domestic propane to global markets, more complex inter-regional supply dynamics,  a more diverse supply chain, all in the context of limited domestic demand growth. In today’s blog we conclude our analysis of the U.S. propane market.

The opening up of Mexico’s retail liquefied petroleum gas (LPG) market could provide significant opportunities for U.S. propane and butane producers, as well as midstream companies and exporters. If exports of U.S.- sourced LPG are to increase, though, it would help to have a more robust and efficient system than presently exists for transporting the fuel to the U.S.-Mexico border and, from there, to key LPG consumption markets within Mexico. Today, we continue our look at Mexican LPG imports with a review of existing and planned pipelines.

The U.S. propane industry is evolving rapidly in response to increasing production and the resulting development of new market demand sectors in exports and PDH plants to make “on-purpose” propylene. Two years ago in the winter of 2013-2014 all the new production growth could not prevent a perfect storm of weather events from causing severe shortages and price distress for domestic customers in the Mid-Continent and East Coast regions. Today we describe how the propane market is now much better equipped to endure a similar spell of extreme demand.

Traditional domestic propane markets were dominated by seasonal consumer demand in the Northeast and Mid-Continent and petrochemical industry demand in the Gulf Coast region. Today domestic demand is still dominated by these two sectors although consumer use is declining slowly while new propane dehydrogenation (PDH) plants look set to boost chemical demand. Meantime the bounty of shale production has swamped domestic consumer needs – making exports by far the largest growth sector. Today we continue our deep dive review of the propane market.

Surging domestic propane production in PADD 1 (East Coast) and PADD 2 (Mid-Continent) over the past four years is unlikely to result in an increase in traditional consumer propane demand in those regions, even with today’s lower overall domestic propane prices.  Most propane use in those markets is from the residential and commercial sectors, and that demand has been in a slow, steady decline for years due to competition from electricity and natural gas, efficiency improvements and the general population shift to warmer states.   In fact, the only sector of the U.S. market expected to see an increase in propane demand in the next few years is for its use as a feedstock to produce petrochemicals.  Most petrochemical demand has traditionally been centered at the Gulf Coast but is projected to expand on the East Coast as well. Today we detail current and projected propane demand.

Surging production of natural gas liquids (NGLs) from the prolific Northeast Marcellus/Utica, the North Dakota Bakken and the Texas Permian and Eagle Ford basins over the past four years has transformed U.S. propane supply. More than half of that growth has come from the Northeast (PADD I) and the Mid-Continent (PADD II), which is particularly significant for the propane market since those two regions make up almost 80% of U.S. consumer propane demand.  That makes these two regions far more self-reliant than they were before the shale era. Today we look at RBN’s propane production outlook to 2025.

Most of the increase in U.S. propane production in recent years has come from plants processing natural gas to extract natural gas liquids (NGLs). The rich (wet) gas those plants process is either produced with crude as associated gas or from wet gas wells that target NGLs. In either case propane supplies are produced regardless of U.S. demand – and that demand is relatively static although subject to significant weather related seasonal variation. There are two important consequences of this supply/demand imbalance with important implications for the propane market.  First, the U.S. can produce about twice the propane it needs, so the surplus must be exported.  Second, most production growth is next door to the largest propane demand regions in the country. Today we describe the scenarios used to build our model of propane supply and demand used to analyze these developments.

Over the past two years, propane production has grown like crazy, and in several past blogs we’ve discussed the impact of those increased supplies on exports.  That has been a very big deal for propane markets. But an equally significant development is the location of that production growth.  Because much of the new propane supply is right next door to the two largest propane markets in the U.S. – the Northeast and the Midwest.  Considering what happened to the propane market during the Polar Vortex winter of 2013-14 (shortages and price spikes), the importance of production growth near to demand cannot be overstated.  It is very good news, both for the market in general and propane consumers in particular.  Today we start a new series examining what has happened to propane supply and what it means to propane markets.

Mexico has become an important market for U.S. natural gas exports, and it is now opening up as a market for U.S.-sourced crude oil exchanges. There’s also potential for more exports of liquefied petroleum gas, particularly now that national oil company Pemex’s monopoly as LPG-import middleman is about to end and Mexico is planning to deregulate retail LPG prices. Today we continue our analysis of Mexico’s LPG market with a look at how the vast majority of U.S. propane and butane is transported to Mexican consumers.

Fast-rising propane production in the Marcellus and Utica shale plays, the reversal and repurposing of the Cochin Pipeline and other factors have exposed gaps in the midstream infrastructure that shuttles and stores large volumes of propane within the U.S.  Perhaps one of the most obvious of those gaps is the inability to pipe propane from Ohio/West Virginia/southwestern Pennsylvania to big propane consumption areas in the nation’s heartland.  Enterprise Products Partners has been working on a fix—a relatively short pipeline across northern Illinois that it seems would add a lot of flexibility per mile.Today, we consider Enterprise’s planned propane takeaway project and how it might affect the propane market.

With crude oil prices just over $40/bbl you might think producers would be reducing capex and cutting their 2015 production estimates.  But not so.  RBN’s analysis of second quarter guidance in 2015 indicates that 31 E&Ps as a group kept their capex outlook at about the same level as they indicated in Q1.  And as a group they still expect oil and gas production in 2015 to increase versus last year. But there were significant differences between the peer groups we examined. The Small/Mid-Size Oil-Weighted E&Ps upped 2015 investment by $730 million versus Q1 and now expect 2015 production to be up 16% over last year versus the 13% increase expected last quarter.  The Large Oil-Weighted E&Ps slashed capex by another $630 million, yet production is still expected to rise, in this case by 4% versus a 3% growth expectation last quarter.  In contrast, capital spending and production guidance were little changed among the gas-weighted peer groups. Today we provide an update to our Q1 analysis of capital spending and production trends.

U.S. production of propane from gas processing has more than doubled since 2010 and now exceeds 1.1 MMb/d.  Together with another 300 Mb/d from refineries, that is far more propane than the U.S can use.  Consequently, U.S. exports of propane have been booming, reaching more than 700 Mb/d in July.  But that has not been enough exports to keep propane inventories from filling to the brim, now up to more than 90 million barrels, about 10 million barrels over the five year high.  About the only thing that has been holding back even more exports is shipping costs.   The cost of ships that move most of the propane to overseas markets, called Very Large Gas Carriers, or VLGCs (gas meaning LPG, not natural gas), have been high since U.S. exports started ramping up and then blasted to the moon this summer in response to huge export volumes and logistical tangles in global markets.  But that’s all about to come to an end.  There is a flotilla of new LPG vessels that were ordered many months ago that are scheduled to hit the market in 2015 and 2016.   In today’s blog we review how U.S. LPG exports are likely to respond to the coming massive increase in VLGC shipping capacity.