Despite current depressed natural gas liquids prices that could persist through June, supplies are unlikely to outpace long-term petrochemical demand as plant expansions and new builds begin to enter operation in the second half of the year, investment banker Raymond James said in a report Tuesday.
"The concern is that an NGL supply glut, similar to what has unfolded in the natural gas markets could lead to a prolonged period of depressed future NGL prices," the report said.
But that fear may be overblown, the analysts said, adding that by the second half of the year ethane demand could exceed supply as ongoing petrochemical plant turnarounds are being used to boost efficiencies and enhance ethane cracking capabilities.
Ethane demand, the report states, could exceed 1 million b/d in the late summer, up from about 935,000 b/d last year based on various analyst estimates.
The analysts project a 200,000 b/d annual increase in NGL production through 2015, up 40% from 2011 levels that came in around 3 million b/d. Pipeline capacity should keep pace with that uptick, increasing some 55% to 3.4 million b/d by mid-2014 from the current takeaway of 2.2 million b/d.
On the demand side, the analysts said an additional 125,000 b/d to 150,000 b/d is expected between 2014 and 2015 because of expected moves by several companies to convert heavy feedstock plants to ethane.
The biggest source of future demand should come from the new builds expected between 2016 and 2018, which could up demand by some 250,000 b/d, the Raymond James report said.
Along the Gulf Coast, Chevron Phillips Chemical has said it plans to build a cracker in Baytown, Texas, and Dow Chemical also has announced plans to build a world-scale cracker in the vicinity. Shell Chemical has also proposed a new cracker in Appalachia.
There could be periods, however, when ethane would face an oversupplied situation, but the wide crude-oil-to-gas ratio would decrease the competitiveness of oil-based naphtha and gas oil, which are alternative feedstocks for the petchems industry.
"Therefore, within the context of our recently revised commodity price deck (i.e., gas-to-crude ratio on a Btu basis to remain well below 50% and ethane prices to remain very low vs. crude in the 25%-35% range), ethane remains positioned to provide ethylene producers with the highest margin over the long term."
The NYMEX crude-to-gas ratio came in at 40-to-1 Tuesday. It hit a record high of 43-to-1 January 19.
Raymond James acknowledged the recent price weakness, specifically for ethane, but attributed that to reduced demand due to plant downtime and turnarounds, potential for some ethylene producers to short ethane ahead of such turnarounds, falling natural gas prices that set the floor for ethane prices, a warm winter that reduced propane demand and rising value of co-products, such as propylene and butadiene that upped the demand for other NGLs, such as normal butane.
Platts assessed Mont Belvieu ethane at 49.5 cents/gal on Friday, up from the 43.75 cents/gal it hit February 14, which also marked a 30-year price low for the benchmark hub, Platts data show.
But these lower ethane prices could encourage some producers, particularly in marginal production markets like the Midcontinent to leave ethane in the gas stream. As the Conway, Kansas, and Mont Belvieu discount widens as well, Midcontinent fractionation spreads could be marginally negative "to the extent Midcontinent processors don't receive a blended Conway/Belvieu price for their ethane (i.e.: will help reduce supply, which is a good thing)."
Platts prices show Conway purity ethane held a 19.75 cents/gal discount to Mont Belvieu February 17. In contrast, the average year-to-date discount stands at 30 cents/gal, Platts prices show.
More importantly, the analysts said, ethane's net margin per pound of ethylene producers stands around 45 cents, about three-and-a-half times the margin of crude-based naphtha.
