FocusEthane feedstock advantage immune to price swings

05 November 2010 15:32  [Source: ICIS news]

By Sheena Martin

HOUSTON (ICIS)--Strong chemical demand for ethane will likely persist for years even if there are substantial price swings, an industry analyst said on Friday.

Ethane has seen record demand in the past months with low prices amid low natural gas values. Prices are typically tied to natural gas processing economics and the economics of the chemical industry.

Natural gas producers have two options for dealing with the ethane in the gas stream. When ethane prices narrow to natural gas levels, it is more economical for producers to leave ethane in the gas stream. When the spread of ethane over natural gas is wider, producers can profit by extracting the ethane to sell, said Ron Gist, an analyst with Purvin & Gertz.

Many chemical companies have forecasted ethane to be the favoured US chemical feedstock for three to five years amid lower prices. Prices are expected to be resulting from a supply glut when shale production accelerates.

Dow Chemical CEO Andrew Liveris said during the company’s third-quarter earnings conference call that ethane’s advantage over natural gas has increased during the past few months - compared with the advantage of naphtha to oil.

“We believe that’s going to continue for the next several years,” Liveris said. “Right now, I think we’re looking at natural gas to shale gas as being an oversupply for several years to come and that would widen the arbitrage.”

Another benefit of ethane is that, despite strong volatility in the energy market, it could still be the preferred chemical feedstock even with price swing of up to 50 cents. In October, spot market ethane - which averaged about 59 cents/gal– could have traded at a range of 35-89 cents/gal and held strong demand in the US chemical industry.

 If ethane prices dropped so they were flat with the price of natural gas, processors would lose money in paying to extract ethane. In that case, processors leave ethane in the gas stream, Gist said, leading to less ethane for chemical consumption.

“The current problem is that ethane prices are in a ‘never-never land,’ between very low natural gas extraction values and very high competitive feedstock economics,” Gist said.

Amid low natural gas prices, the profit for extracting ethane has increased in some locations to nearly double the norm, giving producers’ incentive to remove and isolate ethane.

For processing plants to break even in October, the spot price for ethane had be 35 cents/gal or more. Spot ethane prices could have dropped to 35 cents/gal, while remaining available on the market.

Other potential chemical feedstocks also can be a factor in whether ethane is preferred by chemical manufacturers.

The cost to crack ethane for ethylene production recently averaged about 21 cents/lb ($463/tonne, €324/tonne). The next cheapest feedstock for ethylene production was propane, which cost about 41 cents/lb to crack. Based on cracking economics, propane costs 20 cents/lb – or 30 cents/gal – more than ethane.

“Thus, ethane prices could increase until its cash cost matches propane’s cost,” Gist said. At that time, spot ethane cost were 59 cents/gal, while propane prices were $1.17/gal in the spot market.

Since propane costs 30 cents/gal more to crack than ethane, chemical companies would not consider cracking propane, or view it as a competitive feedstock, unless ethane prices reached 89 cents/gal.

 ($1 = €0.70)

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By: Sheena Martin
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