US ethane volatility to persist
US Gulf Coast ethane demand could potentially exceed supply until 2021 if crackers decide to use as much of the feedstock as possible – a trend that points to increased volatility for the feedstock through the end of this decade, according to forecasts by LyondellBasell.
Ethane is important to the US petrochemical industry because it is the primary feedstock for its crackers. Higher ethane prices can squeeze margins for producers.
LyondellBasell’s ethane scenario becomes less dire once one factors in the feedstock flexibility of many of the older crackers on the US Gulf Coast, including LyondellBasell’s.
If companies exercise that flexibility and use different feedstock, then ethane supplies should remain above expected demand.
LyondellBasell’s forecast of US ethane supplies is conservative, and it only considers fractionation projects that are under way, said Bob Patel, CEO of LyondellBasell, on the company’s third quarter earnings conference call. The company showed a chart illustrating the tight balance between supply and demand for ethane, a trend that caused prices to rise from 24.50 cents/gal at the start of the year to more than 55 cents/gal by the end of September.
There are several factors behind the run-up in ethane prices. Demand for the feedstock has spiked because companies have started up several new ethane crackers. Also, the US has continued to export ethane.
While energy production is rising, midstream infrastructure has not kept up with the increase.
In particular, midstream companies have not built enough pipelines to ship the natural gas liquids (NGLs) out of the production basins, and they have not built enough fractionators to separate those NGLs into ethane and other products.
Instead, they have concentrated on building natural gas processing plants, which processes raw gas produced from oil and natural gas wells into methane and a mix of NGLs called y-grade. These processing plants allow oil companies to dispose of gas without having to flare it and violate clean air regulations. However, the resulting y-grade still needs to be further refined before most petrochemical companies can use it as feedstock.
This is where fractionators come into play, and the US needs more of them to process all of the y-grade coming out of the new natural gas processing plants.
Even if the midstream companies did build a lot of fractionators, they would face pipeline constraints. Right now, there are not enough pipelines to carry all of the y-grade material coming out of the production basins to the fractionators in Mont Belvieu, Texas. Mont Belvieu is the main NGL hub in the US.
The pipeline constraints are especially pronounced in west Texas, home to the prolific Permian basin, where oil production has soared.
Companies in west Texas are addressing this problem by leaving large amounts of ethane in the natural gas stream, a phenomenon known as ethane rejection, Patel said.
By rejecting ethane, midstream companies can make the most of the limited capacity of the Y-grade pipeline capacity leaving the production basins, he said.
Petrochemical companies did not expect midstream companies to reject so much ethane, and the phenomenon caught them by surprise, Patel said.
Several trends can ameliorate this shortage of ethane.
The simplest is to increase fractionation and pipeline capacity, he said. Midstream companies are already doing this, and the new fractionators should start up in 2019.
In fact, a day after LyondellBasell released its earnings, Enterprise Products announced that it would increase fractionation capacity at Mont Belvieu, Texas by 150,000 bbl/day. This comes on top of a fractionator that Enterprise is already building at the complex. It too will increase capacity by 150,000 bbl/day.
Both will come online in the first half of 2020.
Another midstream company, ONEOK, is building two fractionators in Mont Belvieu that will increase capacity by a total of 250,000 bbl/day by 2021.
Cracker turnarounds can reduce ethane demand, and the next big maintenance season will take place in spring, Patel said. A slowdown in new ethylene expansions could also lower demand for ethane.
While the new crackers can use only ethane as a feedstock, a lot of the older ones have much more flexibility. Patel said many of LyondellBasell’s crackers can switch from ethane to propane or butane feedstock within hours and to naphtha feedstock within days.
Naphtha can make up as much as 65% of the company’s feedstock slate. Ethane can make up as little as 25%.
The company even has the ability to crack y-grade, Patel said. The company is making some relatively low-cost investments to increase that capability.
If crackers switch feedstock, this could rapidly lower ethane prices, Patel said.
Currently, companies continue to optimise ethane use, but this could change as the industry seeks the best way to mitigate ethane volatility, Patel said.
Some crackers are insulated from this volatility because of their location.
LyondellBasell has two plants in the mid-western US that have access to mixed ethane and propane feeds coming out of the hub in Conway, Kansas. Prices were as low as 13 cents/gal in October, several cents below those in Mont Belvieu, which serves the Gulf Coast.
Still, LyondellBasell does have exposure to ethane prices. Patel estimates that LyondellBasell has about 5.5bn lb (2.5m tonnes) of annual ethylene production that can be affected by higher ethane prices. For this volume, a 20 cent/gal change in ethane prices results in $380m change in annual earnings before interest, tax, depreciation and amortisation (EBITDA).
This estimate assumes that LyondellBasell cracks about 80% of ethane and does not take into account benefits from feedstock flexibility, Patel said. It also assumes that prices for ethylene derivatives do not change.
For ethane as a whole, Patel said the main reason behind the run-up in prices is a misalignment in investment cycles for new crackers and midstream projects.
The price volatility should be temporary, and most supply-and-demand forecasts indicate that current ethane prices should resolve by the end of the decade.
“What we’re seeing today is just a little bit of mismatch in timing of new cracker capacity for ethane consumption and new fractionation and pipeline that brings ethane to market,” Patel said.
Long term, the US should maintain its feedstock advantage against much of the world.