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Downstream expansion offers potential to boost ethane prices

Asseaborne exports of ethane from the U.S. begin to ramp up, they will combinewith increased consumption from the petrochemical sector to soak up excessethane supplies, especially in the Northeast. Development in the downstreamindustry could tighten supply/demand dynamics and potentially offer long-termsupport to prices.

NGL production soars, exportsfollow

Shaleproduction of natural gas and natural gas liquids began increasing sharply inlate 2008 as the start of the "shale revolution" began.

Productionof natural gas liquids from gas processing plants reached a low around thattime in September 2008 at 1.51 MMbbl/d and was last reported in June at arecord 3.62 MMbbl/d, according to data from the U.S. Energy InformationAdministration. Similarly, production of the lightest NGL component, ethane,fell to 575 Mbbl/d in September 2008 and rose a similar proportion to reach arecord 1.38 MMbbl/d in June.

Whilethe rise in NGL production was initially the result of increased shale drillingfor natural gas and crude oil, it has been helped by weakening economics fordry natural gas. In the Northeast, that pushed producers to prioritize drillingin areas with large volumes of wet gas such as the wet portion of the MarcellusShale and large portions of the Utica Shale in Pennsylvania, Ohio and WestVirginia.

Oneresponse to the surge in NGL production has been to boost exports of theindividual components, with propane and butane first to react. Exports of propanewere 20 Mbbl/d in September 2008 and averaged 52.7 Mbbl/d during the full year,but have since increased to a record 894 Mbbl/d in May, according to the EIA. Asimilar trend took place in butane, where exports jumped from an average of14.6 Mbbl/d in 2008 to a record 148 Mbbl/d in May.

Exporterslater built infrastructure to accommodate exports of ethane, which haveincreased requirements for refrigeration and underground storage. Terminalsoperated by Sunoco LogisticsPartners LP and EnterpriseProducts Partners LP began operations this year.

Exportsof all NGLs increased from an average of 101 Mbbl/d in 2008 to a record 1.37MMbbl/d in May while ethane exports started from nearly zero in 2013 and roseto a record 94 Mbbl/d in May.

Theterminal operated by Sunoco Logistics in Marcus Hook, Pa., loaded itsfirst cargo on March9, with the cargo destined for the INEOSGroup Ltd. petrochemical complex in Rafnes, Norway.

OnSept. 1, Enterprise Products announcedthat its first cargo of ethane departed its new terminal in Morgan's Point,Texas. The cargo also went to the INEOS facility in Rafnes.

Petchems reacted too

Thesurge in NGL production was most conspicuous in the Northeast, where growthfrom the Marcellus far outpaced other shale plays. The resulting decline in pricesof ethane in turn helped improve the economics for petrochemical crackers.

announced June7 that it would build an ethylenecracker in Beaver County in southwestern Pennsylvania, withconstruction due to begin approximately 18 months from the announcement. Theplant is likely to consume roughly 90 Mbbl/d of ethane.

Whilethe Shell cracker will represent an outlet for excess ethane supplies, petrochemicalactivity in Sarnia, Ontario has continued to grow in recent years as well.

"Sarniahas become one of the biggest beneficiaries of Marcellus/Utica production ofethane and other natural gas liquids, the mother's milk of the petchem sector,"Housely Carr, analyst at RBN Energy, said in a note.

Carrsaid that NOVA Chemicals Corp.'sCorunna petrochemical plant near Sarnia had used naphtha as a feedstock for itsethylene, but switched some of its furnaces in 2006 to run on propane andbutane shipped from Alberta via the EnbridgeEnergy Partners LP pipeline system. Some supplies are now alsoshipped by rail from the Marcellus and Utica.

In2014, the naphtha-consuming furnaces were reconfigured to use ethane piped infrom the Marcellus and Utica via the Mariner West pipeline operated by SunocoLogistics. The pipeline entered service to take advantage of the excess supplyof ethane and is the main supplier of ethane to NOVA.

Thepipeline now operates at a rate near 50 Mbbl/d, according to Sunoco Logistics.A second pipeline, the Utopia, is under construction and will be operated byKinder Morgan Inc.sometime in 2018. It will carry ethane from the Utica and eventually to Sarniathrough other pipelines at a capacity also near 50 Mbbl/d. The second pipelinewill not only supplement quantities of ethane but is also meant to diversifysupplies to NOVA.

Thedemand for ethane in Sarnia will grow further, as NOVA will convert furnacescurrently utilizing heavier feedstocks such as propane and butane to runcompletely on ethane. The project is expected to be completed around the sametime that the Utopia pipeline enters service in 2018.

NOVAis evaluating a decision to build a polyethylene plant near the cracker, with adecision expected in 2017/18 and startup in 2022. The company has alsodiscussed a potential 50% expansion in its cracking capacity if it green lightsthe polyethylene plant.

Carrsaid the Sarnia region benefits from nearby salt-cavern storage, which is abetter storage medium for ethane because it can't easily be stored inabove-ground tanks. Abundant supplies of ethane are also beneficial because itis a preferred feedstock for ethylene production; yielding about 78% ethylene,compared to 40% to 42% ethylene from crackers fed with propane or butane and30% from naphtha-fed crackers.

"Thecity is within what you might call a petchem/marketing sweet spot, in that … itis within 500 miles of half the population of North America," Carr said. "Inother words, close to a few hundred million people who use all kinds ofethylene-based plastics and other products."

Prices could react

Ethanehas become viewed as a worthless byproduct of natural gas production in recentyears, as its value fell below that of natural gas despite having a higher Btuvalue. Excess ethane was rejected by leaving it in the natural gas stream,although producers were forced to reduce output when pipelines became saturatedwith ethane.

Pipelineshipments of ethane to the Gulf Coast began in 2014 via the ATEX Expresspipeline, with the pipeline offering capacity of 125 Mbbl/d. The Mariner Eastpipeline began shipping ethane to the East Coast in February, with SunocoLogistics saying that it would use around two-thirds of its 70 Mbbl/d capacityfor ethane and the remainder for propane. Combined with Mariner West, the threepipelines could potentially remove 220 Mbbl/d from the oversupplied ethanemarket in the Northeast in addition to the 100 Mbbl/d consumed by NOVA.

Rejectionfigures are approximated and can vary widely by estimate, but Btu levels inNortheast pipelines imply that ethane rejection is declining.

Inthe EIA's "Today in Energy" column on Sept. 22, analyst WarrenWilczewski showed that the pipeline heat content has fallen in states thatreceive gas from the Marcellus and Utica.

"Sinceearly 2016, the natural gas heat content in these states has trended downward,indicating that producers have increasingly been extracting ethane,"Wilczewski said. "The lower heat content has coincided with the start ofethane exports out of Marcus Hook, which sources all of its ethane from theMarcellus and Utica formations."

Theprice of ethane was near $2.70/MMBtu on Sept. 23 and slightly below natural gasfutures at $2.955/MMBtu, according to data from SNL Energy, an offering ofS&P Global Market Intelligence. While trading at 25.5 cents below naturalgas, it is still above the discount that it traded to natural gas of $1.48reached in December 2014. Given the extent of these projects, it may narrowfurther.

Market prices and includedindustry data are current as of the time of publication and are subject tochange. For more detailed market data, including powerand naturalgas index prices, as well as forwardsand futures,visit our Commodities Pages.