Yesterday the price of ethane in E/P mix in Conway dropped again, now down to 14.5 cnts/gal, or $6.09/Bbl. A lot of the ethane barrels that move down the ONEOK Overland Pass NGL pipeline from Opal, WY to Conway, KS get priced out based on Conway ethane numbers. We talked about this situation last Wednesday in Not Gonna Lie.
Purity non-TET ethane in Mt. Belvieu, TX held up at 46.1 cnts/gal, or $19.36/Bbl. Still this is about half of the Mt. Belvieu price in January 2012. So ethane prices are down. What does this mean for producers and gas processors? Moreover, ethane supply is projected to increase by more than 50% over the next five years. That’s a lot of ethane. Which will probably crush the price. Will that kill the wet gas goose that is laying all the golden eggs? We better look at the numbers carefully.
This is Part VI of a multi-part series on the Golden Age of Natural Gas Processors. The first five parts covered the Crude-to-Gas Ratio, Increasing NGL production, Uplift Calculation Math, Gas Plant Profitability, and the relationship between GPM and processing returns. Today we look at the sensitivity of total processing uplift and plant profitability to ethane prices.
There is only one market for ethane, and that is the petrochemical market. Over the next few months several petchems will upgrade their facilities to run more ethane. But there is a good chance that ethane production will exceed the capacity of those upgrades in 2015, based on the Bentek projection in The Great NGL Surge. Until several new petchem plants are completed in the 2016 timeframe, it looks like ethane could be in a surplus supply situation.
The good news – bad news is that surplus ethane will not result in processing cutbacks. Processing plants can produce the other NGLs (propane, butanes and natural gasoline) and reject the ethane. Rejection means that ethane is either left in the gas stream or blended into the plant tailgate gas stream and sold at natural gas prices (on a BTU Basis). Ok, the good news is that we don’t have to shut down the plant -- or the production upstream of the plant. But the bad news is that we don’t get ethane prices for ethane, we get lousy natural gas prices. How bad is that? For that answer we can look back at our sample plant revenue and value-add calculations that have been used in previous posts in this series.
Tables 1 & 2 below are the same format we’ve used all along in this series, updated for yesterday’s OPIS Non-TET NGL prices. Our sample plant generates $446M/day or $13.4 MM/month based on current prices, while the shrinkage costs about $73/M/day. Thus the total uplift is $11.2 MM/month. But note one other important fact. Although ethane makes up 42% of the volume extracted from our plant, it generates only 14% of the revenue and only 9% of the value-add uplift. That is because ethane prices are so cheap relative to the other NGL products.
How cheap are they? Recall from Part III that ethane has about 66,500 BTU/gallon. If we multiply by 42 to get BTU/Bbl, that yields the BTU factor in the above table. (2,790,000 BTU/Barrel or 2.79). If we divide the price of ethane on a per barrel basis by the BTU factor, we’ll get the price of ethane on an MMBTU basis. (0.46 * 42) / 2.79 = $6.92/MMbtu. Obviously that’s a lot higher than the price of natural gas at $2.00 /MMbtu. But that number pales against natural gasoline. Here’s the same calculation with the natural gasoline price of 235 cnts/gallon, or $2.35/gallon, and using the natural gasoline BTU factor. (2.35 * 42) / 5.00 = $19.74/MMbtu. So natural gasoline is almost three times the price of ethane on a BTU basis and almost ten times the price of natural gas.
We worked all of this math to establish the simple fact that the heavy NGLs (butanes and natural gasoline) are worth a lot more than ethane. And a whole lot more than gas.
So now let’s reverse our calculation. What would the price of ethane be if it were to fall to fuel value. Except for brief aberrations, ethane should not fall below its value in the natural gas stream since ethane can be rejected at the plant and sold as natural gas. Using a $2.00 natural gas price, that would be (2.00 * 2.79)/42 = $0.13 or 13 cnts/gal. (BTW, pretty close to the price of ethane in Conway yesterday.)
So let’s plug this ethane price into our calculation table below. Product value dropped from $13.4 MM/Month to $11.6 MM/Month. Value-add dropped from $11.2 MM/Month to $9.5 MM/Month. That’s $1.7 MM/Month, certainly nothing to sneeze at. But in the big scheme of life it is only a 15% hit off an extremely profitable value-add calculation.
Here’s the moral to this story. Ethane don’t matter to me. Ok, perhaps that is a bit of an overstatement. It matters, but the uplift on the other four NGLs is so astronomical at today’s price levels that both producer and processor will continue to be very profitable. And the wetter the gas (e.g, the higher the BTU content), the less ethane matters, because the uplift is just that much more money, regardless of the ethane value.
Note: Because we dropped the price of ethane to fuel value in the table above, it actually resulted in a loss in the value-add column for ethane. This is due to the 10 cnt/gal transportation and fractionation (T&F) charge that is borne by all the barrels out of the plant. This means that the plant would actually start rejecting when the price drops to fuel value at the plant tailgate, not at Mt. Belvieu. That will be an important factor for traders watching for the onset of significant ethane rejection.
To recap, continued increases in wet gas production will probably result in a surplus of ethane in the 2015-16 timeframe. When and if that happens, there will probably be significant ethane rejection going on. But the impact on the uplift from wet gas processing will be muted. And that means that producers will continue to produce wet gas for the NGL uplift, regardless of the price of natural gas, and as we’ve seen here, regardless of the price of ethane.
To paraphrase the Bread lyrics from 1970 – Ethane, It’ Don’t Matter to Me.
Want to play around with some of these numbers yourself? Here’s your chance. Just download the spreadsheet below. It contains all the numbers and calculations shown above.
 For the NGL purist and/or processing engineer and/or pipeline supply person -- There is a limit on how much ethane that can be rejected. If rejection results in a processing plant tailgate gas stream that exceeds the downstream pipeline specs, the pipeline will shut down receipts from the plant. That is exactly the situation facing wet gas processors today in the Marcellus where ethane takeaway capacity is still many months away. This constraint, and limitations of the technology in many older plants means that the effective level of rejection that can be achieved is only about half of total ethane currently processed. Rejection is also sometimes limited by processing agreements and other commercial arrangements.
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