Rejection, re-injection and ethane angst

US propane production has outpaced ethane output, according to federal data, something that hasn’t happened since 1993. And it’s all because ethane’s been feeling a little rejected.

Starting around late 2012 the surge in natural gas liquids (NGLs) output — thanks to the shale boom — sent ethane prices plummeting to the 20¢/USG range. That led to midstream fees associated with purity ethane production becoming more costly than the value of the feedstock itself. Companies began blending ethane, the lightest of the NGLs, with natural gas as a way to recoup some of the costs – and dispose of the monstrous ethane overhang. 

But there’s a limit to how much ethane – which is used to as a feedstock to create plastics — can be injected into the natural gas stream. Industry estimates between 500,000-550,000 b/d of ethane is now being left out of the raw mix stream that gets shipped to fractionators, the equipment that turns mixed NGLs into purity products, like ethane or propane.

Since then, the cash price for a gallon of ethane has become flat and a lot less meaningful. But the relationship between ethane cash prices and the Henry Hub gas futures contract is more volatile, and more open to arbitrage opportunities, especially to midstreamers who own the system that makes arbitrage plays possible.

Cue the ethane re-injection trend that surfaced earlier this year. A regional Btu arbitrage opens when natural gas prices in northern Louisiana stand higher than ethane prices per mmBtu, and the Btu spread is stronger than shipping costs. This makes it profitable to move ethane south from the Marcellus shale on the Enterprise Appalachia-to-Texas pipeline to re-inject it into the natural gas stream in northern Louisiana.

And as the tollroad operator and king pin of that infrastructure, Enterprise Products Partners can reject or re-inject ethane wherever it pleases, without paying the additional fees that it charges to its contract-bound customers.

“We can and do make these kinds of changes daily, if that’s what the market gives us,” chief operating officer and soon to be chief executive Jim Teague said.

Enterprise revealed a key trading scheme for 2015 that aims to capture what marginal contango is resting in the Mont Belvieu, Texas, ethane forward curve. Futures prices reflect a healthy carry as waterborne export demand and new petrochemical projects will chip away at the American ethane overhang and pull prices out of the gutter.

Argus North American NGL forward curves show calendar year 2016 priced at 21¢/USG and 2017 at 24.625¢/USG, up from the 2015 balance year price of 18.375¢/USG.

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