The Shale Revolution has had a profound impact on U.S. NGL markets by vastly increasing production and by lowering NGL prices relative to the prices of crude oil and natural gas. That has been good news for the nation’s steam crackers, the petrochemical plants that have enjoyed low NGL feedstock prices since 2012. But NGL markets are in for some big changes as new U.S. steam crackers coming online over the next two years will be competing for supply with export markets, raising the specter of higher NGL prices—a good thing for NGL producers, but not so for petrochemical companies. How this plays out will be determined by the feedstock supply decisions petrochemical producers make as NGL prices respond to rapidly increasing demand. Today we begin a series on how steam cracker operators determine day-by-day which feedstocks are the most economic, and on the factors driving the value of ethylene feedstock prices.
NGL production, the pricing of NGL “purity” products (ethane, propane, normal butane, isobutane, and natural gasoline), and steam cracker economics are frequent topics in the RBN blogosphere. Nearly five years ago, when U.S. NGL production was just beginning to take off, we ran a series on feedstock economics (Let’s Get Cracking) that provided a primer on ethylene production and discussed this underlying principal of feedstock acquisition in the steam cracker industry: The best cracker feedstock is the one that will produce the highest ethylene margin possible, after deducting byproduct credits. Two years later, in the midst of the biggest run-up in NGL production in U.S. history, we took an even deeper dive into the NGL/steam-cracker world with our What’s Crackin’ With Steam Crackers Drill Down Report (available to RBN Backstage Pass members). In that report, we discussed the fact that the margin for producing ethylene with ethane (the lightest and most prolific NGL) had just hit an all-time high (~70 cents/lb—a record that still stands today) due to the combination of a low ethane price (~24 cents/gal) and a high price for ethylene (76 cents/lb). Well, a lot’s changed since then. NGL production volumes remain high and ethane prices are still on the low end, averaging only 19.5 cents/gal in 2016 (although just last week ethane prices hit a two-and-a-half-year high of 28 cents/gal). However, ethylene prices have tumbled (to about 25 cents/lb) and so has the margin for producing ethylene with ethane––that margin averaged ~19 cents/gal for 2016, and now stands at only ~15 cents/lb, down nearly 80% from the September 2014 pinnacle. Over the past year or so we’ve posted several blogs covering the changes affecting the NGL/steam cracker world, including Beyond Hypothermia (on how the falling price of crude oil and naphtha—an oil-based feedstock alternative, especially overseas—slashed worldwide ethylene prices), and our Drill Down Report on NGL/steam cracker infrastructure, It’s Not Supposed To Be That Way Drill Down/Part 1 and Part 2. In that report, we discussed our view that the three key assumptions behind the build-out of new U.S. ethylene production capacity and NGL export terminals—1) U.S. NGL production would continue to grow, 2) U.S. NGL prices would remain low, and 3) crude oil and naphtha would stay expensive—may no longer hold water. A year and a half have passed (a lifetime in “NGL-market years”) and the addition of new ethylene-production and NGL-export capacity is looming ever closer, so it’s high time to take a fresh look at the economics of steam cracker feedstock selection.
We’ll begin with a brief review of where things stand with NGL and steam crackers and how we got here. As mentioned above, U.S. NGL production has increased significantly during the Shale Era, rising from just over 2 MMb/d in 2008 to more than 3.7 MMb/d in 2016 (Figure 1).