Wild Ride - NGL Production Growth vs. Constrained Fractionation Capacity - Drilling Down into the Details

To fire on all cylinders — especially during a period of strong high crude oil prices and rising production — the U.S. energy sector depends on midstream infrastructure networks that can efficiently handle the transportation and processing of every type of hydrocarbon that emerges from the wellhead. It’s no secret that rapid production growth in the Permian has left the red-hot West Texas play short of crude-oil pipeline capacity, and midstream companies there have also struggled to keep pace with natural gas takeaway needs too. What’s less well known is that fractionation capacity at the all-important NGL hub in Mont Belvieu, TX, is nearly maxed out, and that some Permian producers — and others — are now scrambling to find other places to send their incremental NGL barrels for fractionation into purity products. We put this issue front-and-center earlier this week in Hotel Fractionation.  Today, we discuss highlights from the first of two planned Drill Down Reports on fractionators and other key assets at the nation’s largest NGL hub, and the potentially broader effects of a fractionation-capacity shortfall.

Let’s cut to the chase. The U.S. NGL market has entered uncharted territory, with what may turn out to be significant implications for producers of crude oil (in places like the Permian, SCOOP/STACK and the Niobrara) and “wet” natural gas (in the Utica and wet Marcellus, for example). The mixed NGLs — or y-grade — that are separated out from natural gas at gas processing plants have no direct uses on their own, and only gain value when they are fractionated into NGL purity products like ethane, propane, butanes and natural gasoline for use at Gulf Coast petchem plants or refineries, or for export. The problem is, U.S. NGL production has been climbing for some time now, and the fractionation capacity at Mont Belvieu — the world’s largest fractionation and NGL storage hub, and located close to purity product end users and export docks — is now fully utilized (or nearly so). This raises some need-to-be-answered questions. For example, if the pace of fractionation cannot pick up until more fractionation capacity comes online, what happens to those incremental barrels of y-grade being produced? How much more y-grade can be squirreled away in underground storage caverns? And what happens if y-grade storage capacity eventually fills up?

As we said in Hotel Fractionation, the situation has clearly worsened in recent months. This is evidenced by a number of things, including (1) rising prices for ethane at Mont Belvieu, (2) widening differentials between purity product prices at Conway and Mont Belvieu; (3) the railcars of “x-grade” NGLs (mixed NGLs with less ethane than y-grade that can be transported by rail) fanning out across the country looking for open fractionator space, including Permian barrels headed for Marcellus/Utica fracs; and (4) hyper-inflation in spot transportation and fractionation (T&F) fees for Permian-sourced NGLs. On this last point, we understand that spot T&F fees now top 70 cents/gallon (c/gal), about five times what they were before all this started. But more significant problems may lie ahead, because y-grade production from gas processing plants has continued to increase — it’s up 500 Mb/d in the past year alone, even in the face of Permian crude and gas pipeline constraints.

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