Low natgas pricing complicates selling of Marcellus Shale ethane

20 October 2010 22:25  [Source: ICIS news]

HOUSTON (ICIS)--The low price of natural gas is forcing natural gas producers in the Marcellus Shale to seek revenue from natural gas liquids (NGL) to pay for lease acreage and operations, an analyst said on Wednesday.

However, the lack of infrastructure in the US northeast means producers would have to create transporation for moving ethane to the market move the ethane.

“Bottom line is not all [the projects] will survive,” said Anne Keller, president of Midstream Energy Group. “The ‘winners’ will be determined by which companies ultimately have the right to decide where the barrels go. That is not always the producer.”

Keller said producers would opt for having the most money at the wellhead and maximising the volume of gas they can sell without being shut in.

They would also seek to avoid risks such as the construction of excess pipeline capacity that could result in a lack of pressure for efficient flow, unused product or loss of revenue, Keller said.

A midstream aggregate, which pools the resources of multiple producers, often has greater say in the final project, said Keller. Producers commit to the construction of midstream assets like gathering, processing, NGL fractionation and NGL marketing as part of a combined solution.

In a situation where each company is for itself, one company’s investment decisions to commit barrels to a project could swing the balance in favour of that project despite the fact that another option makes more economic sense.  In addition, if a company has a contract to buy NGLs from the producers at a specific location where the fractionation occurs, the producer would choose a project that targets their specific market.

“It’s a big tug of war at this point with the producers ultimately paying for whatever does get built,” Keller said.

When investing in a project, most producers use a “take or pay” contract to avoid paying pipeline and construction costs upfront.  However, this means the producer guarantees that the pipeline will earn a certain amount of money. Therefore, the producer must either take the capacity in the pipeline or pay the difference.

To ensure a risk-free loan to the pipeline builder, banks may ask for collateral, but doing so counts against the producer’s credit rating for other projects.

Keller said a solution to the ethane situation is needed within the next 12-18 months, by which time producers expect to have so much ethane that they are forced to stop producing.

“Eventually, one of the projects will probably become the preferred choice,” said Ron Gist, senior analyst for Purvin & Gertz. “We doubt that more than one or perhaps two options will be built.”

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By: Sheena Martin
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