Europe crackers may buy US ethane on wide gap with naphtha

02 October 2012 17:49 Source:ICIS News

Europe crackers may buy US ethane(recast with added paragraphs 8-9)

By Al Greenwood

HOUSTON (ICIS)--The large gap between naphtha and ethane costs could encourage more European producers to buy US ethane and ship it overseas to their crackers, analysts said.

INEOS already has announced such an arrangement, reaching a supply agreement with Range Resource-Appalachia.

Under a 15-year agreement, Sunoco Logistics will ship the ethane through its Mariner East pipeline to Marcus Hook, Pennsylvania, delivering the ethane to INEOS's European crackers in the first half of 2015.

INEOS did not specify how much ethane it would buy or how it would structure the ethane contracts.

However, even with the costs involved with shipping ethane overseas, exports from Marcus Hook would be feasible as long as ethane prices are low when compared with naphtha.

"This is the first time that it has really been exported over long distances like this," said Peter Fasullo, a principle at En*Vantage, a consulting firm. “It's a start. It is probably a major milestone for this to occur.”

Since the ethane is from the US, it is likely that the contract will be based on prices at the nation's natural gas liquids (NGL) hub in Mount Belvieu, Texas.

In one scenario, Mount Belvieu ethane prices could act as a floor, Fasullo said. In other words, the Mariner East ethane would most likely be priced on a formula based on European naphtha prices.

Marcellus and Utica producers would receive the Mount Belvieu related price if the European naphtha formula falls below that price, Fasullo said.

Earlier this week, Mount Belvieu ethane prices were about 34 cents/gal, or 11 cents/lb ($243/tonne, €189/tonne). Meanwhile, European naphtha prices were at $968/tonne, or about 43 cents/lb.

Along similar lines, US ethylene margins were 48.90 cents/lb – or $1,078/tonne – using ethane as a feedstock, according to the ICIS margin report.

Using naphtha as a feedstock, European ethylene margins were €449/tonne – or $576/tonne (26.13 cents/lb). For European liquefied petroleum gas (LPG), ethylene margins were even lower, at €253/tonne.

Such low margins in Europe could make Marcellus ethane competitive, even after producers pay shipping costs and other fees.

Although shipping such a large amount of ethane is unprecedented, international chemical producers have been shipping waterborne ethylene for years. In fact, there is even a class of ships used to ship ethylene overseas.

“This could absolutely catch on,” Dan Lippe, president of Petral Consulting.

Given the economics, Lippe expects more gas producers in Marcellus and Utica will consider shipping US ethane overseas to use as feedstock for crackers.

Even if the crackers have naphtha furnaces, they could still use lighter feedstocks, he said. While the yields will not be as high, the lower costs could still justify the switch.

"It could open the door for other crackers that depend on naphtha to find a way to get Marcellus and Utica ethane over to them," Fasullo said.

One obstacle holding back overseas ethane shipments is infrastructure, said John Boepple, principal at Nexant. The US needs specialised storage and terminal facilities to ship ethane overseas, and customers need the infrastructure to receive the shipments.

Nonetheless, the INEOS agreement illustrates how quickly the petrochemical industry has reacted to what had once been considered stranded gas, Fasullo said.

Mariner East will become the third outlet for ethane produced from the Marcellus and Utica shale.

Sunoco's Mariner West pipeline will bring Marcellus ethane to Sarnia, Ontario, by mid-2013. Once in Sarnia, NOVA Chemicals will use the ethane as feedstock in its upgraded crackers.

Enterprise Products plans to start up its Appalachia-to-Texas, or ATEX Express, pipeline in 2014. It will deliver ethane from the Marcellus and Utica Shale to the Mount Belvieu storage hub in Texas.

($1 = €0.78)

By Al Greenwood