The oversupply of ethane in the US, mostly from the country's shale gas boom, continues to put bearish pressure on prices, now mostly based on its heating value or a floor set by natural gas prices.
Platts assessed Gulf Coast ethane at 22.50 cents/gal on Friday, up 50 cents from 22.00 cents/gal seen Wednesday, its lowest level since January 14, 2013, a 19-month low. The assessment Wednesday was 22.25 cents lower than the yearly high set on February 10.
Ethane at the Mont Belvieu, Texas, hub has been keeping an average value of under 23.00 cents/gal since July 17. It was assessed at an average of 26.00 cents/gal in 2013 and 39.75 cents/gal in 2012.
Due to the low price of ethane there is growing interest from domestic and international buyers to use it as a petrochemical feedstock. But despite the growth, industry participants say oversupply will continue to put downward pressure on the domestic price.
The US Energy Information Administration has reported ethane from natural gas plant field production averaged 1.0464 million b/d through May, 12.8% higher than the comparable period of 2013.
Production in May was 53,000 b/d lower from April, at 1.051 million b/d, but 139,000 b/d higher than in May 2013.
Ethane and ethylene stocks in May ended 2 million barrels higher at 36.6 million barrels, which was a 5-year high, EIA reported.
Platts unit Bentek Energy estimates US supply of ethane from gas plants will climb to 1.449 million b/d by year-end and 2.41 million b/d by 2024.
Bentek's petrochemical model estimated ethane demand from steam crackers will reach up to 1.8 million b/d by 2024, doubling from the 2013 demand of 960,000 b/d. The forecast is based on announcement of eight crackers to be built in US -- five on the Texas Gulf Coast, three in Louisiana and one in the Northeast.
NEW CRACKERS
The Environmental Protection Agency has issued final greenhouse permits to five greenfield crackers to be built in Texas. Three companies have officially disclosed they have started construction in June: Chevron Phillips Chemical at Cedar Bayou plant, ExxonMobil at Baytown and Dow Chemical at Freeport. Occidental Chemical has received its greenhouse gas permit for its Ingleside plant, but the construction start date for the plant has not been disclosed. All of these plants have planned start dates in 2017.
Bentek estimates total ethane exports using pipelines and waterborne markets using the planned export terminals will be at 195,000 b/d by year-end,reaching 300,000 b/d by 2018 and remain at that level until 2024.
As more international buyers become interested in cheap US ethane, the capacities of these terminals are expected to be increased while others are built.
But it may take some time before the US would reach current ethane export capacities due to the lack of available carriers capable of transporting ethane, limited on terminal use where there is high demand for petrochemical feedstock and the lack of investment from petrochemical producers in Asia to build ethane crackers.
Analysts have said 25 large ethane carriers would be needed just to service the Enterprise Products Partners proposed 240,000-b/d ethane export terminal at Morgan's Point on the Houston Ship Channel and according to them the current fleet, or on order, is not enough.
There also might be a new demand source for ethane as US export of liquefied natural gas ramps up.
"Many Asian LNG buyers want higher heating-value-gas than US standard, and have typically added propane to get there, but adding ethane to LNG before exporting is a cheaper way to accomplish and buyers would pay more for the LNG with the higher heating value as a result," an ethane trader said.
The Department of Energy has received long-term applications to export domestically produced LNG totaling 40.4 Bcf/d. The first, Cheniere Energy's terminal in Sabine Pass, Louisiana, is expected to come online in stages beginning in late 2015.
"There will be massive oversupply for another couple of years, then tightening gradually as exports begin and especially as the new crackers begin to start up in 2017," said a source at a petrochemicals producer.
NATURAL GAS PRICE TIE
The decline in ethane prices has been also attributed to a comparatively weaker front-month NYMEX gas futures contract. Platts Friday assessed the September futures contract at $3.776/MMBtu. By comparison, the value was 6% lower than the average NYMEX front-month gas contracts assessed in July.
The gas price sets the price floor for ethane because producers can leave ethane in the gas stream and receive the same heating value rather than separating it out for fractionation.
As the growth in supply continue to outpace downstream demand in the foreseeable future, substantial amount of ethane will continue to be rejected instead of extracted, with the current rate at 300,000 b/d, according to Bentek. As a result ethane may continue to trade near its heat-equivalent price floor set by the gas price until these new demands hit the US market.
"The big question marks are production growth rates and rejection levels," the petchems producer said. "There seems to me to be a wide range of outcomes that would lead to a wide range of potential pricing outcomes. Fortunately for US ethylene producers, we will be insulated by at least the substantial costs of exporting ethane for the foreseeable future.
"I don't expect ethane price to change substantially relative to natural gas until nearly all ethane come out of rejection to the market," he said.
