Thursday, December 20, 2018
A surge in production of associated and non- associated natural gas from U.S. shale gas and tight oil plays, combined with a wave of new petrochemical steam crackers coming online, has created a major pinch point for producers and purchasers of ethane due to a lack of adequate NGL fractionation capacity to separate the mixed natural gas liquids, or Y-grade, stream into purity products, according to market analysis by IHS Markit.
“The U.S. upstream shale gas and tight oil revolution has translated into a petrochemical feed- stock bonanza and significant cost advantages for U.S. chemical producers, but a misalignment between ethane purity product supply capacity and demand has driven a tight ethane market and a spike in price,” said Yanyu He, executive director, Asia and Middle East NGLs and global NGL pricing at IHS Markit. The author of IHS Markit Midstream and NGLs Analysis Ethane—What Went Wrong? added that “we expect purity-product ethane supply and demand to be tight through 2020, and ethane market price volatility is expected to persist through 2020.”
He observed that the energy industry strives for alignment, but the unconventional upstream industry is much more nimble and responsive to price signals than the midstream sector. “We are now seeing the fallout of underinvestment in midstream infrastructure that occurred during 2014 to 2016, after oil prices cratered and put the brakes on NGL-centric midstream infra- structure buildout.”
The executive director pointed out that U.S. shale gas and tight oil producers have drastically improved their efficiency and can now bring a well into production in a matter of months, while adding capacity at a natural gas processing plant can take 12 to 18 months. Expanding Y-grade pipelines and purity-product NGL fractionation capacity can take up to three years, and steam crackers require four to five years to commence operations from final investment decision to completion.
“From an investment standpoint, you have a months-versus-years cycle that causes misalignment across the upstream through midstream to downstream value chain. Ironically, the increasing efficiency of the U.S. unconventional upstream energy sector has rapidly increased oil, natural gas, and correspondingly, by-product Y-grade NGL production rates. The current production has surpassed the midstream supply chain’s capabil- ity to receive, process, produce, and deliver purity-product ethane supply to the new U.S. Gulf Coast ethane crackers.”
And there is more demand coming as the industry is in the middle of the first wave of new U.S. ethane cracker-capacity additions built to consume advantaged ethane, IHS Market said. Several new ethane-based cracker additions on the Gulf Coast will come online this year and next year. At the same time, demand is outpacing the capability to supply purity ethane.
According to IHS Markit, natural gas produc- tion rates have, and will, continue to rise during the next several quarters, mainly from associated gas derived from tight oil plays like the Permian Basin, the Oklahoma SCOOP and STACK, and the Bakken, and from the Marcellus and Utica natural gas plays in Appalachia.
The business information provider’s Yanyu He outlined that the midstream industry is largely in the business of serving the needs of upstream producers and operators. The NGL-centric midstream supply chain is rather complex, with several key links. Once natural gas is produced from the well, it is gathered and then sent to natural gas processing plants, which separate the raw natural gas stream into residue gas and a raw NGL mix. The residue gas is delivered into natural gas pipelines, while the raw NGL mix is transported to fractionation facilities where natural gas liquids are separated into different purity products such as ethane, propane, butanes, and pentanes. From this point, the various purity products can be stored and transported to chemical plants, refineries, or to commercial distributors.
The IHS Markit analysis identified three con- temporaneous factors behind the rapid ethane price increase: congestion on inter-Petroleum Administration for Defense District (PADD) transport corridors, high Gulf Coast fractionator utilization, and rising demand for ethane from both domestic producers and exports. The first challenge, Yanyu He said, is that two of the key PADDs, established in wartime to organize the allocation of fuel to different regions of the U.S. but now serving purposes of data collection, are experiencing extreme congestion, which is restricting the supply of ethane to fractionators and also to petrochemical plants reliant on ethane as feedstock. The congestion observed on the transportation corridor between PADD 2, the Midwest, and PADD 3, the Gulf Coast, significantly widened NGL price differentials between Conway, Kan. and Mont Belvieu, Texas. The Conway-Belvieu differentials had averaged 3 to 5 cents per gallon, more or less reflecting the pipeline tariff, but since February 2018 the NGL pipeline system constraint has resulted in a period of “scarcity pricing,” He said.
The second primary constraint is the NGL fractionation capacity at Mont Belvieu. “Low oil prices caused upstream producers and operators to halt financial support and spending on midstream infrastructure and, as a result, there was no NGL fractionation capac- ity added in the U.S. in 2016 to 2017, He explained. “Upstream financial support and spending has since resumed, and we expect more purity-product NGL fractionation capacity to come online in Mont Belvieu in 2019, but not enough to alleviate market tightness and price volatility. As a result, the Y-grade supply is discounted while the scarcer supply of purity ethane is at a premium.”
“In the meantime, U.S. ethane demand has outpaced supply since the end of 2017, putting pressure on the Mont Belvieu ethane inventory,” added Todd Dina, executive director of light olefins at IHS Markit and coauthor of the ethane analysis. “Between December 2017 and July 2018, we’ve had three world-scale
U.S. Gulf Coast steam crackers start operations—Dow Chemical, Chevron Phillips Chemical, and ExxonMo- bil Chemical—with five more crackers coming online next year. All these crackers translate to a massive 52% increase in purity-product ethane demand above aver- age levels consumed just two years ago. In addition, U.S. ethane exports have been increasing during this period, too.”
By mid-2019, IHS Markit calculates more than 10 million metric tons of ethane steam cracking capacity will come online. “We expect ethane inventory to tighten until the system sees some relief in mid-2020,” Dina said. “What that means for petrochemical producers is near-term volatility in ethane prices trending toward overall higher ethane feedstock cash costs, which will further erode steam cracker profitability.”
(SOURCE: The Weekly Propane Newsletter, December 17, 2018)
“The U.S. upstream shale gas and tight oil revolution has translated into a petrochemical feed- stock bonanza and significant cost advantages for U.S. chemical producers, but a misalignment between ethane purity product supply capacity and demand has driven a tight ethane market and a spike in price,” said Yanyu He, executive director, Asia and Middle East NGLs and global NGL pricing at IHS Markit. The author of IHS Markit Midstream and NGLs Analysis Ethane—What Went Wrong? added that “we expect purity-product ethane supply and demand to be tight through 2020, and ethane market price volatility is expected to persist through 2020.”
He observed that the energy industry strives for alignment, but the unconventional upstream industry is much more nimble and responsive to price signals than the midstream sector. “We are now seeing the fallout of underinvestment in midstream infrastructure that occurred during 2014 to 2016, after oil prices cratered and put the brakes on NGL-centric midstream infra- structure buildout.”
The executive director pointed out that U.S. shale gas and tight oil producers have drastically improved their efficiency and can now bring a well into production in a matter of months, while adding capacity at a natural gas processing plant can take 12 to 18 months. Expanding Y-grade pipelines and purity-product NGL fractionation capacity can take up to three years, and steam crackers require four to five years to commence operations from final investment decision to completion.
“From an investment standpoint, you have a months-versus-years cycle that causes misalignment across the upstream through midstream to downstream value chain. Ironically, the increasing efficiency of the U.S. unconventional upstream energy sector has rapidly increased oil, natural gas, and correspondingly, by-product Y-grade NGL production rates. The current production has surpassed the midstream supply chain’s capabil- ity to receive, process, produce, and deliver purity-product ethane supply to the new U.S. Gulf Coast ethane crackers.”
And there is more demand coming as the industry is in the middle of the first wave of new U.S. ethane cracker-capacity additions built to consume advantaged ethane, IHS Market said. Several new ethane-based cracker additions on the Gulf Coast will come online this year and next year. At the same time, demand is outpacing the capability to supply purity ethane.
According to IHS Markit, natural gas produc- tion rates have, and will, continue to rise during the next several quarters, mainly from associated gas derived from tight oil plays like the Permian Basin, the Oklahoma SCOOP and STACK, and the Bakken, and from the Marcellus and Utica natural gas plays in Appalachia.
The business information provider’s Yanyu He outlined that the midstream industry is largely in the business of serving the needs of upstream producers and operators. The NGL-centric midstream supply chain is rather complex, with several key links. Once natural gas is produced from the well, it is gathered and then sent to natural gas processing plants, which separate the raw natural gas stream into residue gas and a raw NGL mix. The residue gas is delivered into natural gas pipelines, while the raw NGL mix is transported to fractionation facilities where natural gas liquids are separated into different purity products such as ethane, propane, butanes, and pentanes. From this point, the various purity products can be stored and transported to chemical plants, refineries, or to commercial distributors.
The IHS Markit analysis identified three con- temporaneous factors behind the rapid ethane price increase: congestion on inter-Petroleum Administration for Defense District (PADD) transport corridors, high Gulf Coast fractionator utilization, and rising demand for ethane from both domestic producers and exports. The first challenge, Yanyu He said, is that two of the key PADDs, established in wartime to organize the allocation of fuel to different regions of the U.S. but now serving purposes of data collection, are experiencing extreme congestion, which is restricting the supply of ethane to fractionators and also to petrochemical plants reliant on ethane as feedstock. The congestion observed on the transportation corridor between PADD 2, the Midwest, and PADD 3, the Gulf Coast, significantly widened NGL price differentials between Conway, Kan. and Mont Belvieu, Texas. The Conway-Belvieu differentials had averaged 3 to 5 cents per gallon, more or less reflecting the pipeline tariff, but since February 2018 the NGL pipeline system constraint has resulted in a period of “scarcity pricing,” He said.
The second primary constraint is the NGL fractionation capacity at Mont Belvieu. “Low oil prices caused upstream producers and operators to halt financial support and spending on midstream infrastructure and, as a result, there was no NGL fractionation capac- ity added in the U.S. in 2016 to 2017, He explained. “Upstream financial support and spending has since resumed, and we expect more purity-product NGL fractionation capacity to come online in Mont Belvieu in 2019, but not enough to alleviate market tightness and price volatility. As a result, the Y-grade supply is discounted while the scarcer supply of purity ethane is at a premium.”
“In the meantime, U.S. ethane demand has outpaced supply since the end of 2017, putting pressure on the Mont Belvieu ethane inventory,” added Todd Dina, executive director of light olefins at IHS Markit and coauthor of the ethane analysis. “Between December 2017 and July 2018, we’ve had three world-scale
U.S. Gulf Coast steam crackers start operations—Dow Chemical, Chevron Phillips Chemical, and ExxonMo- bil Chemical—with five more crackers coming online next year. All these crackers translate to a massive 52% increase in purity-product ethane demand above aver- age levels consumed just two years ago. In addition, U.S. ethane exports have been increasing during this period, too.”
By mid-2019, IHS Markit calculates more than 10 million metric tons of ethane steam cracking capacity will come online. “We expect ethane inventory to tighten until the system sees some relief in mid-2020,” Dina said. “What that means for petrochemical producers is near-term volatility in ethane prices trending toward overall higher ethane feedstock cash costs, which will further erode steam cracker profitability.”
(SOURCE: The Weekly Propane Newsletter, December 17, 2018)
