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Expanding NGL markets likely to affect Appalachian producer decisions

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NGL demand expected to grow inside and outside of basin

Ethane rejection decisions based on price, contracts

Houston — Expanding markets for natural gas liquids produced in the Appalachian Basin should provide an extra financial incentive for Appalachia natural gas producers to maintain robust production in the long term, although concerns over low gas and NGL prices continue to dominate short-term planning.

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S&P Global Platts Analytics finds that while gas production in the Northeast is not directly linked to NGL demand, the latter factor does impact producers' break-evens on drilling. Low NGL prices will pressure well economics and may cause producers to look elsewhere for higher returns.

Demand for NGLs produced in association with gas production in the basin is expected to increase dramatically in the next several years. In the short term, the demand growth will come from NGL pipeline projects being built or expanded to take NGLs such as ethane, propane and butane to markets far removed from Appalachia. In the longer term, in-basin NGL demand is expected to be generated by the construction of large-scale NGL manufacturing projects, such as the ethane cracker being built by Shell in Monaca, Pennsylvania.

On Monday, Enterprise Products Partners began soliciting shipper interest in a proposed expansion of its ATEX ethane pipeline that would move more supplies from the Appalachian Basin to its NGL storage complex in Mont Belvieu, Texas.

The 1,200-mile ATEX, or Appalachia -to-Texas, pipeline transports ethane from the Marcellus and Utica shale plays in Pennsylvania, West Virginia and Ohio to Enterprise's Mont Belvieu complex. Depending on demand, Enterprise would add up to 50,000 b/d of incremental capacity by 2022, through a combination of pipeline looping, hydraulic improvements and modifications to existing infrastructure.

Another pipeline option to transport NGLs out of the Appalachian Basin is Energy Transfer's 350-mile Mariner East 2 pipeline. The pipeline, which went into service late last year, has a 345,000 b/d capacity to carry a mixture of ethane, butane, pentane, propane from the tristate gas producing region to the Marcus Hook petrochemical complex and export facility in eastern Pennsylvania.

A second source of NGL demand, this time in-basin, is being created with the development of a petrochemical manufacturing industry in the region identified by industry advocates as the Shale Crescent, the area surrounding the northern stretch of the Ohio River, comprising parts of the states of Pennsylvania, West Virginia and Ohio.

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The most advanced of these projects is the 1.5 million mt/year steam cracker that Shell is currently building near Monaca, Pennsylvania. The plant, which will use ethane to manufacture polyethylene used in plastics manufacturing, is expected to cost up to $6 billion.

In addition, a joint venture led by Thai-owned PTTGC America and Daelim is planning to site a petrochemical complex in southeastern Ohio, though that project has not been given a final investment decision.

'GOING TO SEE GROWTH': JAMES

"We're going to see a growth from natural gas liquids," Jerry James, co-founder of Shale Crescent USA, the group promoting the creating of a petchem industry in the region.

James, who also serves as president of Artex Oil, an Ohio-based oil and gas producer, said the demand for ethane should provide gas producers with the financial incentive to remove the NGL out of the gas column as a way to produce another revenue stream.

Currently the choice as to whether to strip the ethane out of the gas stream through processing or to allow it to remain in the gas stream is a "company-by-company decision," he said. "A lot of companies have committed to the processing and they have to fulfill those contractual commitments," James said.

With current prices for ethane relatively low, many of the Appalachian producers with the ability to do so are allowing the ethane to remain in the gas stream, he said.

In recent months, natural gas prices in the Northeast have been depressed, largely as a result of the strong production coming out of the Appalachian and Permian basins.

In recent weeks, Northeast prices have been trending downward as the region moves out of summer and into shoulder season, according to S&P Global Platts data. Meanwhile, production has been at near-record levels.

August has seen a glut of supply staying within the Northeast region as a result of a force majeure on Texas Eastern Transmission pipeline, which came to a partial end on Monday. The partial restoration of capacity could lend support to prices, according to Platts.

Several large Appalachian producers have announced plans to cut back on drilling in the second half of the year in response to the low gas price environment. This is not expected to have an immediate effect on production in the basin, which still continues to grow, because production declines usually are not seen until several months after drillers have begun to cut back.

-- Jim Magill, newsdesk@spglobal.com

-- Austin Rial, newsdesk@spglobal.com

-- Humza Jamal, newsdesk@spglobal.com

-- Edited by Gail Roberts, newsdesk@spglobal.com