Plummeting oil prices have not just been hitting oil drillers. They’re also hitting the market for natural gas liquids.
The market for ethane, which makes up the largest portion of natural gas liquids production, is oversupplied. In addition, ethane, a feedstock used by the petrochemical industry, is facing stiffer competition from naphtha, a petroleum byproduct, which is cheaper due to falling oil prices.
Since 2010, prices for oil and natural gas liquids have been higher than those for natural gas. That gave drillers an incentive to target liquids-rich shale plays. But the gap between natural gas and NGLs has been shrinking, which could pose a challenge for the U.S. petrochemical industry, according to a report from Colorado analytics firm Bentek Energy.
“One of the consequences of the drop in crude has been a corresponding fall in the NGL barrel and a tightening of the value gap between [natural] gas and liquids,” according to the Bentek Energy report.
NGLs — a term that includes ethane, propane, butane and isobutane — are found with natural gas in so-called liquids-rich shale plays. That includes parts of the Marcellus Shale in southwestern Pennsylvania and northern West Virginia, and Utica Shale in eastern Ohio. The price of ethane is linked to the price of natural gas, which reached historic lows as prolific drilling flooded the market and depressed prices.
The petrochemical industry, bolstered by the supply of lower cost ethane, has proposed investing in cracker plants that process ethane into ethylene, an ingredient in the manufacture of plastics and polyester fibers. In this region, several such plants have been proposed, including one that would be built by energy giant Royal Dutch Shell. The Dutch company has proposed putting a multi-billion dollar Appalachian ethane cracker in Beaver County.
“Maximum ethane rejection”
One method for drillers to handle ethane without a home is to blend a limited amount of it into natural gas pipelines, commonly called “ethane rejection.” This increases the heat value of the gas. But the “chronically oversupplied” ethane market “now requires maximum rejection, fuel demand to replace natural gas, and exports to balance,” according to a report from Wood Mackenzie.
Maximum ethane rejection has resulted in many natural gas pipelines reaching their limits as companies opt to blend ethane in gas pipelines since it is more valuable as a fuel than as a chemical feedstock for petrochemical plants, Wood Mackenzie said.
The firm expects ethane to continue to trade at a 50 cents per million British thermal units to $1/MMbtu discount to natural gas prices “for the foreseeable future.” The Henry Hub spot price for natural gas was $2.73 on Friday.
According to Bentek, ethane rejection in the Marcellus and Utica Shale plays reached 130,000 barrel per day (b/d) in 2014. That figure is expected to climb to 180,000 b/d in 2015.
“Natural gas production won’t pull lower, because even though you have lower oil and gas prices, it’s not very easy to cut production,” said Maria Mejia, NGL analyst for Bentek.
One reason, Ms. Mejia said, is that in the wake of falling commodity prices, many drillers have cut their budgets. With smaller budgets, drillers will focus on their best acreage with the highest initial production rates as they try to maximize their revenue. Producers have also hedged their oil and gas volumes into 2015, so they will receive a higher price on some percentage of their production.
“Producers have not been making much money on ethane for a while now,” said Anne Keller, manager of NGL Research at Wood Mackenzie. “It’s effectively the same value as natural gas.”
But there’s an opportunity for that to shift.
Sunoco Logistics is converting its Mariner East pipeline from shipping crude oil to transporting propane and ethane from the Marcellus and Utica regions. The 70,000 barrels-a-day pipeline, which leads to Marcus Hook, Pa., where the commodities can be exported, now ships propane. Sunoco expects to add ethane transportation by mid-2015.
A sister project, the $2.5 billion pipeline dubbed Mariner East 2 with a proposed capacity of 275,000 barrels a day, will start in Ohio and run to the East Coast. Sunoco said in November it would go forward with the project.
With access to the European market, there is the possibility that ethane contracts with cracker operators will link the price to oil, rather than natural gas. While crude has fallen below $50 per barrel, it’s still relatively higher than natural gas.
“Ethane producers in the Marcellus are looking at their portfolios. It’s like natural gas, where they will want to be attached to as many pipelines as possible so they have optionality,” Ms. Keller said. “Ethane is the same way.
“They can make a commitment to Europe and get an oil-linked price. They can sell to the Gulf of Mexico probably linked to the gas market. If you can also have an outlet to Canada, you have a three-legged stool,” she said.
Cecil-based Consol Energy said it has been developing a diversified approach to managing ethane.
The company executed several deals to move ethane to Mont Belvieu on the Gulf Coast via the Appalachia-to-Texas Express, or ATEX, pipeline, as well as by blending ethane into the natural gas stream, Consol Energy said in its fourth-quarter earnings.
“Employing this multi-faceted approach enables the company to meet pipeline quality specifications, diversify the ethane portfolio, and maximize ethane pricing,” the coal and natural gas producer said. “Consol is actively discussing future outlet opportunities with a number of ethane customers and midstream companies.”
This article was written by Stephanie Ritenbaugh from Pittsburgh Post-Gazette and was legally licensed through the NewsCred publisher network.