Why ethane stopped trading like crude and started trading like nat gas (part III)
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Natural gas processors, many of which are master limited partnerships (MLPs), such as Targa Resources (NGLS) and Regency Energy (RGP), would generally prefer ethane prices to be higher relative to natural gas rather than to engage in ethane rejection. This is because many gas processors have contracts that are linked to commodity prices in which they benefit from higher NGL (such as ethane) prices and lower natural gas prices. For more on this please see “Why fractionation spreads affect some MLP stocks.”
Effect on natural gas producers
Due to the shale boom and the surge in production of natural gas, the price of dry natural gas decreased dramatically over the past several years. As a result of this, upstream energy names started to target “wet gas” formations, that is areas with a larger proportion of natural gas liquids, as NGLs received better pricing than dry gas; ethane historically received significantly more advantageous pricing than dry natural gas. However, as ethane prices eventually followed the price drop of natural gas prices, the price realizations that upstream companies received in their production began to decrease. For more on this, see “Lower NGL prices on the week hurt rich gas producers.”
Effect on petrochemical industry
As stated, much of ethane is used by the petrochemical industry to make end products such as plastics. As ethane is a major feedstock (therefore, input cost) for the petchem industry, the new abundance and cheapness of ethane has caused the domestic petchem sector to become more profitable. The U.S. petrochemical industry has largely benefited from the ethane supply surge and domestic shale boom.
What could cause ethane prices to recover
Ethane supply is not likely to decrease dramatically in the near future. Many companies are continuing to drill wet gas formations as current economics are still profitable, despite depressed ethane prices. What needs to happen for ethane prices to recover is an increase in demand, which would come mostly from petrochemical facility expansions. Many companies have proposed projects that would make use of the ethane supply, however, the completion timeline of the majority of these projects is several years into the future. This means that, in the near term, ethane prices are likely to remain depressed and close to natural gas prices.
|Proposed Ethylene Cracking Capacity Projects|
|Owner/Operator||Location||Capacity (millions of metric tons per year)||In-Service|
|Westlake||Lake Charles, LA||0.11||2012|
|Dow Chemical||Haynville, LA||0.40||2012|
|Ineos||Chocolate Bayou, TX||0.15||2013|
|Dow Chemical||Plaquemine, LA/Freeport, TX||0.50||2014|
|LyondellBasell||Channelview, TX/La Porte, TX||0.60||2014|
|BASF-Total||Port Arthur, TX||0.12||2014|
|Westlake||Calvert City, KY||TBD||TBD|
|Westlake||Lake Charles, LA||0.11||2015|
|Formosa USA||Point Comfort, TX||0.80||2016|
|Shell Chemical||Appalachia, PA||1.50||2018|
|CP Chemical||Baytown, TX||1.50||2018|
|Dow Chemical||Freeport, TX||1.50||2018|
|Sasol||Lake Charles, LA||1.40||2018|
Ethane prices traditionally traded directionally with crude oil. However, due mainly to a recent supply surge in the commodity, ethane prices have collapsed and now maintains a closer relationship to natural gas. The supply of ethane is not likely to abate soon, and for ethane prices to recover (and for the commodity to revert back to tracking crude), it will take an increase in demand. The construction of new petrochemical facilities is being planned which can help to absorb this excess ethane supply, however, most of the capacity is not likely to come for several years, and until then the price of ethane is likely to remain depressed.
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