What caused the increase in ethane production?
The shale revolution has caused increased drilling of hydrocarbon resources in the U.S. Led by new applications of hydraulic fracturing technology and horizontal drilling, the development of new sources of shale gas has offset declines in production from conventional gas reservoirs, and has led to major increases in the U.S. natural gas reserves. According to EIA, gross withdrawals of natural gas increased to 2.64 trillion cubic feet in January 2014, from 2.25 trillion cubic feet In January 2009, an increase of 17.3%.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 increasingly favored “wet gas” formations, that is, areas with a larger proportion of natural gas liquids, as NGLs received better pricing than dry gas. Natural gas processors remove natural gas liquids, and the NGL components are sold separately from the dry gas (methane) stream. Such companies targeting wet gas include Range Resources Corporation (RRC), Chesapeake Energy Corporation (CHK), EQT Corporation (EQT), and Antero Resources Corporation (AR). Many of these companies are components of SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
One of the natural gas liquids, ethane, had historically received significantly more advantageous pricing than dry natural gas. Ethane is the largest component of the natural gas liquids stream, and the increased wet gas production caused a large increase in ethane production. Most of the U.S. ethane production is used in the petrochemical sector, where it is used to make ethylene, a basic component used for manufacturing many chemicals and plastics. At first the excess ethane had been absorbed by the existing U.S. petchem demand. However, eventually this demand was saturated and the increased production began to cause ethane prices to fall substantially, in some cases to levels at or below that of natural gas.