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Ethane Market: Recent Developments May Benefit Energy MLPs

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Excess supply

Ethane production in the US grew rapidly over the last few years as midstream companies developed more infrastructure supporting ethane recovery and transport. As the price of natural gas continues to be relatively low, producers have shifted focus on “wet” gas plays, which increased natural gas plant liquids production.

Ethane prices dropped below natural gas spot prices in 2013 due to the excess supply. Thus ethane recovery became unprofitable. Costs of storing and transporting ethane are relatively higher than other HGL (hydrocarbon gas liquids) products. This resulted in “ethane rejection,” which means producers leave ethane in the natural gas stream as the low margins make it uneconomical to extract ethane. The above graph compares select HGL, petroleum, and natural gas spot prices over 15 years.

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Developments to watch for

Some recent developments in the ethane market are expected to positively impact companies such as Sunoco Logistics (SXL), MarkWest Energy (MWE), Energy Transfer Partners (ETP), and Enterprise Product Partners (EPD). EPD forms ~10% of the Alerian MLP ETF (AMLP). These developments include:

  • Lower prices have resulted for petrochemical companies increasingly using ethane as feedstock in place of naphtha. The EIA expects this trend to continue in the future. Ethane is primarily used in the production of ethylene, which is used in plastics production.
  • Ethane infrastructure has been developed in the US, including plants to convert ethane to ethylene. This supports the increased demand of petrochemical companies.
  • Companies have invested in export terminals for ethane. There is an attractive export market for ethane, including Canada, Asia, and Europe.

In the next part of the series, we’ll compare yields of a few MLPs and the factors that possibly drive these yields.

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