Falling natural gas liquids production in the US Midwest and Rockies has resulted in a return of the regional frac spread to positive territory and a drop-off in ethane rejection since mid-January, a Platts analysis shows.
Platts historical prices show the frac spread -- the difference between the price of ethane-propane mix at the benchmark Conway, Kansas, hub and Rockies spot gas price, without taking into account transportation and fees -- turned overwhelmingly negative in April 2012.
This coincided with record-high production of NGL in PADD II, the US Midcontinent, of around 511,111 b/d of raw NGL mix. At the end of March, raw mix in PADD IV, the Rocky Mountain region, hit a high of about 425,000 b/d, according to data from Platts unit Bentek Energy.
Since mid-January, however, the price of E/P mix has rebounded from its historic low of 2.35 cents/gallon (roughly 35 cents/MMBtu), to about 24.25 cents/gallon Tuesday ($3.65/MMBtu), according to Platts data. Meanwhile, Colorado Interstate Gas averaged $3.54/MMBtu Tuesday, putting the frac spread around 10.7 cents/MMBtu.
The frac spread hit a low of minus $2.30/MMBtu on July 5, when E/P mix was assessed at 2.35 cents/gallon (about 35 cents/MMBtu) and CIG averaged at $2.595/MMBtu.
One of the reasons cited for the frac spread recovery is falling NGL production in both regions.
PADDs II and IV raw mix began dropping noticeably beginning last August as a result of the negative frac spread and depressed Conway prices. PADD II raw mix stood at at 441,000 b/d, while PADD IV was at 311,111 b/d as of Tuesday, according to Bentek data, a decrease of 13.7% and 26.8%, respectively.
As a result of the price recovery and the flip of the frac spread, ethane rejection in both regions eased considerably. Rejection involves leaving ethane in the natural gas stream instead of removing and fractionating it. Ethane rejection in PADD II went from 1,000 b/d on January 1, 2012, to 93,000 b/d in early December, Bentek data showed. That figure is now down to 69,000 b/d as of Tuesday. Similarly, ethane rejection in PADD IV went from 5,000 b/d January 1, 2012, to 66,000 b/d in mid-December. That number stood at 55,000 b/d Tuesday.
"Producers started exercising some discipline, followed the price signals and reined in production," a banker's analyst said.
NGL traders had other opinions. One noted there was increased ethane and E/P mix consumption from eastern Canada as Nova Chemicals had recently lightened its feedstock slate at its massive Sarnia, Ontario, complex to consume these products.
That demand uptick in Conway NGL, however, is not expected to last. Markwest Energy Partners' Mariner West project, a 65,000 b/d ethane pipeline, is expected to go into service in the third quarter of this year, bringing Marcellus Shale ethane to Sarnia. Nova is one of the shippers on Mariner West.
Another trader said the E/P mix price recovery was merely a move on the part of one major player to bid up the market. "There generally has been one bidder who has paid about 2 to 3 cents/gallon above the rest of barrels that have moved, which has moved the daily average up," the trader said. "They are playing some sort of spread."
