Outlook Positive for U.S. NGL Production and Exports

News
As outlined by Wells Fargo Securities, and with the arrival of the first ethane shipment from Enterprise Products Partners’ terminal in Morgan’s Point, Texas, Oil & Gas 360 reports that total U.S. NGL supply averaged 4,509,000 bbld in May 2016, representing a 10.6% increase from the prior year. NGL production from natural gas processing accounted for 82% of supply while imports and refinery outputs accounted for 3% and 15%, respectively. NGL demand rose to 4,054,000 bbld, a 15.3% increase from the previous year. Most of the increase was attributable to higher exports—414,000 bbld—that currently account for 29% of demand. Forty percent of demand was driven by the petrochemical industry, which uses NGLs as feedstock in steam crackers to produce ethylene and other products. Eighteen percent goes to gasoline blending and the remaining 13% is used for heating and fuel, primarily propane.

Petrochemical demand for light feeds—ethane, propane, and butane—remains high at 93.8% of the overall steam cracker feed slate, above the five-year average of 89.9%. Many companies have retooled existing facilities to accept additional NGL feedstock, given its relative cost advantage. July ethylene production decreased 3.4% from the prior year to 56.7 million lb. The average steam cracker operating rate was 91.7%, which is slightly above the 91% five-year average.

NGL fractionation facilities process NGL streams to extract pure products, including ethane, propane, normal butane, isobutene, and natural gasoline. The average mix of a barrel of NGLs produced in May was split 38% ethane, 32% propane, 9% normal butane, 9% isobutene, and 12% natural gasoline (pentanes). For comparison, the standard breakdown of the same components used in pricing a Mont Belvieu NGL barrel is 37%, 32%, 11%, 6%, and 12%.

In recent years, the NGL mix has shifted toward the lighter end of the barrel due to higher ethane content being produced from unconventional development. In many shale plays, ethane can comprise more than 50% of produced NGLs. Increased levels of rejected ethane, which is left in the natural gas pipeline stream and not marketed, has resulted in a lower proportion of ethane per NGL barrel in the past few years, according to Wells Fargo. Whether ethane is rejected or recovered depends on current prices, demand, and availability of facilities to remove it.

Owing to its higher heat content than methane, increased ethane rejection into a natural gas stream is indicated by higher overall heat content of the stream. According to the Energy Information Administration, heat content has decreased since the beginning of 2016 in states receiving gas from Marcellus and Utica production. This indicates producers are increasingly extracting ethane and coincides with the start of ethane exports from Marcus Hook, Pa.

Higher U.S. ethane production has resulted in increased ethane exports, both by pipeline to Canada and by ship overseas. Both the 35,000-bbld Marcus Hook terminal near Philadelphia, which will provide an outlet for Marcellus and Utica NGLs, and the 200,000-bbld Morgan’s Point terminal in Houston, are the first ethane export terminals in the U.S. and will help gas producers such as Range Resources find more favorable NGL pricing in international
markets.

A total of 5.2 MMbbld of NGL fractionation capacity is believed to exist across the U.S., with 60% located in Mont Belvieu and Louisiana. Fractionation expansions are expected to be small in the next two years after the period of 2011 through 2016 seeing capacity increase 82%. Wells Fargo estimates that the average utilization rate of fractionation assets were lower than average at 78% in the first half of 2016 due to new capacity and ethane rejection. Further noted is that with about 1.7 MMbbld of excess capacity, ethane will be able to be quickly recovered out of the gas stream when new crackers are placed into service over the 2018-2019 time frame, without the need for large-scale fractionation expansions.

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