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Hurry Up and Wait: How the Northeast Ethane Market Rebound is Continuously Just Around the Corner

October 4, 2017 | By Robert Applegate

Since the rapid development of the Marcellus and Utica shales, gas production has shattered records and grew, seemingly exponentially, in the Northeast. This rush of supply has pushed gas prices lower in a historically premium market and changed market dynamics on the natural gas side that have been addressed in previous Get the Point articles by PointLogic Energy.

New impacts continue to emerge. Since the start of September, the local ethane fractionation (frac) spread in the Northeast has moved from the second-worst in the county to the middle of the pack, signaling to producers and processors that it is more financially beneficial to drill for wetter gas, recover the ethane and sell it as ethane than it has been in previous months (see Figure 1). This has brought the local, Northeast ethane market into the spotlight once again. In this installment of Get the Point, we will delve into the ethane market in the Northeast and discuss what the future may bring for that area.

Local Ethane Frac Spreads

The Problem

The increase in gas production over the past few years has resulted in an oversupply in the ethane market, depressing prices and necessitating massive ethane rejection (see Figure 2 below).

Specifically in the Northeast, where historic demand for ethane has been zero, this has led to problems hitting tariff limits on BTU content in the gas stream of local and interstate pipelines. ATEX was the first liquids pipeline to attempt a solution to the problem, moving ethane from the Marcellus and Utica down to the Gulf where it could be used in steam crackers and, more recently, exported out of Morgan’s Point. Exports out of Marcus Hook, Pa. were the second attempt to balance the Northeast ethane market by moving ethane out to European steam crackers.

But it’s not so simple. There are no Jones Act ethane ships, meaning that even with ethane ports now operating, there’s no way to ship ethane from the Northeast to the Gulf Coast by boat (because the Jones Act mandates that shipments from one U.S. port to another U.S. port must be done by U.S.-registered ships). Steam cracker debottlenecks and new ethane-only crackers increased demand for ethane in the Gulf, which led to an expansion of ATEX. But, basically, the ethane market in the Northeast is much the same as it has been for the past couple years, due to unceasing, increased ethane production outpacing takeaway capacity increases.

Ethane Rejection

On a U.S. level, the start of 2017 saw gas production down from the records in 2015, but this didn't last. Overall, this year has seen some of the fastest production gains ever as producers have taken advantage of increased drilling efficiencies while prices are up from record lows. Specifically in the Northeast, gas production barely leveled off before increasing again, which meant that ethane production gains in the region never really stopped (see Figure 3). This is an issue that producers, processors, and midstream companies in the Northeast are continually dealing with.

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Solutions Adding More Problems

The first solution to reel in ethane rejection in the Northeast was to move it out of the area to other demand sources. As noted already, ATEX relieved some of the pressure, but not enough to stop ethane rejection. ATEX can currently move 140 Mb/d and is running full, while ethane rejection remains over 100 Mb/d between Illinois, the Utica and Marcellus.

Midstream companies are currently trying to tackle the ethane problem with many of the same solutions: getting it out of the region. Sunoco Logistics’ Mariner East 2 is expected to come online by the end of this year, adding 275 Mb/d of ethane, propane and butane takeaway capacity from the Northeast by sending the NGLs to Marcus Hook for exports. Of the increased capacity provided by Mariner 2 East, most will be taken up by LPG (propane and butane), which are easier to export. Therefore, the expansion will not result in significant decreases in ethane rejection.

PointLogic is expecting a similar result when the Mariner 2 X expansion is completed in 2018. Combined, by the end of next year, these two Sunoco Logistics projects could add enough takeaway capacity from the region to put a dent in current ethane rejection levels -- but by the end of 2018 gas production will be higher, too. In short, while the ethane takeaway capacity may be available, the demand abroad and fundamental lack of ethane ships may not.

Utopia East is expected to be complete in 2018 as well, adding 50 Mb/d of EP mix takeaway capacity. Potentially, this will help to alleviate the problem, but this will depend on the balance between propane and ethane in the Canadian feed slate as well as demand overall for olefins from Canada.

And as noted above, this increased takeaway capacity is expected to quickly be taken up not so much significantly reduced ethane rejection, but rather by increased gas production.

MPLX, an MLP formed by Marathon Petroleum, is arguably the largest processor and fractionator in the region and has already begun positioning itself for the large gas and ethane production increases forecasted. MPLX estimates a further increase of gas production of roughly 20 Bcf/d in the U.S. in the next 10 years, of which, 8.6 Bcf/d will come out of the Northeast. According to an investor presentation that the company made in September, this year alone MPLX brought four new processing plants into service. Next year, MPLX is expected to bring 6 more processing plants online, adding 1.2 Bcf/d of gas processing in the Marcellus, and further increasing ethane production. In total, MPLX has 11 plants currently under construction.

On the ethane side, MPLX brought its Bluestone 20 Mb/d ethane fractionator online recently and is expected to complete the Majorsville II 40 Mb/d fractionator by the end of the year. The company plans to add another 40 Mb/d of ethane fractionation capacity in the region next year as well, not quite offsetting the increased capacity to be processed. All of these factors combine to paint a picture of Northeast ethane rejection remaining stagnant or even increasing next year.

The Long-Term Solution

The real solution to the ethane oversupply in the Northeast does not come from moving the ethane out of the area. Moving it to the Gulf will eventually run straight into increasing volumes of ethane coming out of the Permian, which is much closer to the demand sources and, thus, cheaper to ship. 

The solution, much like on the gas side, comes from creating local demand. Shell was the first company to announce a steam cracker project in the Northeast, and after some delays it’s expected to come online in 2021. Shell representatives have stated that "more than 70 percent of North American polyethylene customers are within a 700-mile radius of Pittsburgh,” meaning that local olefins demand could be well served by local steam crackers.

While this seems significant, Shell’s steam cracker would only add approximately 90 Mb/d of ethane demand, and that’s four years from now. With current ethane production over 250 Mb/d in Pennsylvania and West Virginia, and another 150 Mb/d coming from Ohio and Illinois, this plant won’t even make a dent in 2021 ethane rejection levels, when production will undoubtedly be even higher than it is today.

PTT Global Chemical took the signal from Shell, and announced plans to build a steam cracker in Ohio, but this plant will not come online until 2022 at the earliest, as it is still pending a final investment decision. Again, this is many years off and in an environment in which gas production is expected to grow. IHS Markit estimates that the Marcellus and Utica could support three more crackers than the two currently under consideration, but no other projects have been announced yet.

Until some real, large-scale investment comes to the ethane demand side of the market in the Northeast, rejection will remain. Companies eyeing the region to build a steam cracker must weigh the billions of dollars and upwards of five years of planning and construction with what the ethane feedstock margins may look like in the future.

Thus, while new ethane takeaway projects show the promise to alleviate some local ethane oversupply and rejection, production is expected to continue to grow significantly in the region. Companies are already gearing up for that production. With a larger, local demand source many years away -- and it may not even put a dent in the local supply -- it looks like the oversupply situation will persist well into the next decade.

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