Houston — Appalachian Basin natural gas producers have long hoped that natural gas liquids demand growth would relieve the pain of low gas prices, but significant roadblocks remain to getting to market the bulk of NGLs produced in the basin.
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Appalachia's production of NGLs -- including ethane, propane and butane -- has increased significantly in recent years, along with the rise of gas production from the Marcellus and Utica shales. The US Department of Energy projects Appalachian Basin ethane production will surge to 640,000 b/d by 2025, more than 20 times 2013 levels.
Historically, ethane sales in the Northeast have been dominated by contracted deals between producers and buyers, driven by the producers' need to recover the ethane in order to bring their gas to within pipeline specifications, according to S&P Global Analytics. The contracts tended to be advantageous for buyers because of the generally low gas prices in Appalachia.
In the next several years, ethane demand is expected to be boosted by in-region petrochemical projects, the largest of which (and furthest along) is a steam cracker being built by Shell in Monaca, Pennsylvania. The 1.5 million mt/year plant, which will crack ethane molecules to manufacture polyethylene used in plastics manufacturing, is expected to add about 100,000 b/d of ethane demand in the region. Platts Analytics modeling shows the plant as starting up in late 2020 and reaching its full operating rate in early 2021.
Another source for increased ethane demand comes from expansion of existing pipeline projects, such as the recently closed open season on the Appalachia-to-Texas (ATEX) ethane pipeline. Owner Enterprise Products Partners plans to expand the 145,000 b/d pipeline to carry 45,000 b/d of additional ethane to markets in the Gulf Coast region.
There are also two pipelines that can transport ethane out of the Appalachian region to Canada, Energy Transfer Partners' Mariner West pipeline and Kinder Morgan's Utopia Pipeline, which together have an export capacity of about 100,000 b/d.
A third source of NGL demand pull is expected to come from completion of Energy Transfer's Mariner East 2 and Mariner East 2x (ME 2X) pipelines. Platts Analytics projects that Mariner East 2, which is currently in service at a reduced capacity, would deliver 354,000 b/d of ethane, propane and butane to a marine export terminal at Energy Transfer's petrochemical complex in Marcus Hook, Pennsylvania. ME 2X is slated for an end-2019 in service, which will add another 100,000 b/d of capacity to the system
MARINER EAST VOLUMES
Platts Analytics does not expect Mariner East 2 and ME 2x to have a significant impact on demand growth as the ethane volumes shipping on the Mariner East system are under long-term contracts and there isn't enough of a spot market for ethane to increase demand for volumes above what is already under contract.
The story is different for heavier NGLs, specifically for propane and butane, where the upside potentially is substantial, as netbacks to producers are estimated to be 5 cents to 10 cents/gal higher for exports from Marcus Hook compared with those from the Gulf Coast.
In the short term, US producers are not seeing a strong incentive to produce NGLs because current NGL prices are very low, Stephen Ellis, a Morningstar equities strategist, said in an interview. In the longer-term view, however, the demand for US exports of propane and ethylene is expected to be very strong, with the bulk of the exports coming out of ports along the US Gulf Coast, he said.
"Looking at the Appalachian region, it's a little more challenged," Ellis said. While the construction of the Shell cracker in Pennsylvania will help create in-basin ethane demand, most of the build-out of new US petrochemical plants will remain concentrated in the Gulf Coast region, where volumes of NGLs produced in Appalachia will compete with those from more nearby producing basins such as the Permian Basin and Haynesville Shale.
"The problem is, the Marcellus/Utica NGLs cannot move to Texas," he said. With ATEX being the only pipeline that carries NGLs from the Appalachian Basin to the Gulf Coast, even with its planned additional capacity, the pipeline can only handle a fraction of the NGLs produced in Appalachia.
Likewise, transporting large volumes of NGLs to Marcus Hook for export remains problematic, Ellis said.
"The challenge, in my view, is Marcus Hook's export capacity is fairly low. Marcus Hook hasn't really exported more than 35,000 or 40,000 barrels per day on average," he said. "That's where the bottleneck comes."
In an email statement, Energy Transfer spokeswoman Lisa Coleman said the company is "in the midst of conducting further expansion efforts at Marcus Hook for overall capacity expansion" and added that those expansions are not specific to adding export capacity.
Ellis said Appalachian producers currently reject about 500,000 b/d of ethane into the natural gas stream and it is unlikely that this rate of rejection will slow anytime soon.
"It's going to be difficult to decrease that in the next couple of years. Marcellus-Utica production is going to increase, but there's not necessarily going to be new takeaway capacity," he said.
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-- Andrew Neal, S&P Global Platts Analytics, firstname.lastname@example.org
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