OUTLOOK ’11: Ethane demand to continue to overshoot supply

24 December 2010 22:00  [Source: ICIS news]

By Sheena Martin

HOUSTON (ICIS)--Ethane demand in the US has overshot supply for most of 2010, and is expected to continue through 2011 to a point where chemical plants eventually may have to soften consumption of the feedstock.

The strong demand will keep it profitable for producers to extract ethane from the natural gas stream. But with the robust production in US shale fields, inventories would likely grow and prices would be pressured lower.

An unclear factor would be the pace at which shale production continues in light of possible environmental and legislative obstacles, in addition to infrastructure problems.

The strong demand would keep prices profitable for producers to extract ethane from the natural gas stream. However, robust production in US shale fields could eventually bring inventories higher and prices lower.

“Ethane demand has been outstripping gas plant supply for a while now, as estimated [national] gas plant production is around 850,000 bbl/day,” said Anne Keller, president of Midstream Energy Group, a Houston-based consultant group.

Total US ethane demand has been running in excess of 950,000 bbl/day. Keller said that if demand continued at this high level, ethane inventories would be depleted.

“At some point, we may see reductions in ethane demand simply due to the [natural gas] plants’ inability to get enough barrels to market via existing infrastructure, and find out what the current maximum sustained demand really is,” Keller said.

Another round of construction would be needed to provide processing plants, natural gas liquid (NGL) pipelines, and fractionation capacity to handle the additional NGLs that would be available from shale gas production, said Keller.

Just from the Marcellus shale play, which stretches across the states of West Virginia, Pennsylvania and New York, the projected volume of ethane gas production would yield 50,000-80,000 bbl/day. This takes into account the ability to blend ethane gas and a slow in drilling activity amid low natural gas prices and hydraulic fracturing legislation, Keller said.

The Marcellus faces an ethane supply glut with no ethane pipelines or crackers on the east coast and no foreseeable method to transport ethane to market for at least a year.

“New build projects [for ethane] will take 18-24 months if the dirt was turned tomorrow,” Keller said. “So unless another solution is in place fairly soon, drillers won’t be able to produce those high ethane content wells.”

There are several projects under discussion for moving ethane out of the northeast.

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

With northeast ethane stranded until 2012-2013, the ethane price is not expected to crash in 2011.

Although ethane prices change daily, it is one of the few spot traded chemicals that have a lower and upper limit to its price.

Through much of November and December 2010, prices for ethane ranged from 60-70 cents/gal on average.

If the price of ethane falls too low, then it becomes uneconomical for producers to extract ethane from the natural gas stream. On the other hand, if demand pushes the price of ethane to its zenith, then chemical companies will turn demand to heavier NGLs, such as propane or naphtha.

“Ethane prices are in a ‘never-never land,’ between very low natural gas extraction values and very high competitive feedstock economics,” Purvin & Gertz's Gist said.

Another factor that could affect the supply and production of ethane in the coming year depends on how legislation on hydraulic fracturing plays out.

To access oil and gas in shale formations about a mile below the surface, the industry uses a 60-year-old technology called hydraulic fracturing. Hydraulic fracturing involves high-pressure injections of water, sand and chemical additives to free oil and natural gas from deep rock formations.

Environmentalists honed in on the 0.5% of chemical additives in the fracturing process, mainly biocides and corrosion inhibitors, which help with preventing contamination of the oil and gas.

States already started to regulate hydraulic fracturing as communities worried over water contamination and the boom of drilling in their backyard. But the federal government jumped in.

US Representative Diane Degette (Democrat-Colorado) introduced a bill in 2009 that would regulate hydraulic fracturing with a second attempt to control it under the Safe Drinking Water Act. This soon became known as the “Frac Act.”

Many think the “Frac Act” is less of a threat with the new Republican congress coming to Washington, DC.

Most of the state legislation, as more than 30 states have varying degrees of shale production, has been based on rules laid down by Colorado after a year of stakeholder discussions.

The Colorado laws include a comprehensive drilling plan, minimising the effect on communities; drilling at a required distance from residences; and reporting chemical identities in case of environmental or medical incident.

New York, Wyoming and Pennsylvania have been active in creating similar regulations, and Pennsylvania passed regulations on hydraulic fracturing in November.

Such legislation could slow drilling in shale plays across the US, so the increase in ethane inventory would be delayed. This would put the brakes on falling ethane prices caused higher ethane inventory, and allow more time for infrastructure to be built in order to handle the excess ethane.

To discuss issues facing the chemical industry go to ICIS connect

By: Sheena Martin
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