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Companies look overseas to find customers for ethane

Stephanie Ritenbaugh | Pittsburgh Post-Gazette

As drillers have tapped the liquids-rich areas of the Marcellus, Utica and other shale plays, they’ve faced a quandary: There’s a lot of ethane coming out of the ground and not a lot of places to use it.

That is expected to change.

As the volume of natural gas liquids (NGLs) — including ethane, propane, butane and isobutane — associated with the shale boom grows, the industry is looking overseas to broaden its customer base.

But, while ethane is abundant and low-priced, exporting the gas has some challenges to overcome, analysts said.

For one thing, it’s an expensive commitment, according to Steve Lewandowski, a global business director for Colorado-headquartered consultancy IHS.

There’s the financial investment it takes to convert petrochemical plants to use ethane as a feedstock, as well as the cost to build customized carriers to ship ethane.

“It’s difficult to ship because it needs a lot of refrigeration and pressure to keep it in its liquid form,” Mr. Lewandowski said.

Ethane is used to make ethylene, an ingredient in numerous items, including plastics and polyester fibers.

Still, the price of ethane, which follows natural gas prices, is at historic lows, making it more attractive than its typical competitor, naphtha, a petroleum byproduct.

Since August, European naphtha prices have been running in the high $90 range per barrel. U.S. ethane, conversely, has been trading at a fraction of that — about $10 per barrel, according to Bentek Energy, a Denver energy analytics firm.

That makes for attractive math.

“What happens in the world when there’s that big of an advantage? Creative people find a way to take advantage of that, make the money and eliminate the arbitrage and differential,” Mr. Lewandowski said.

One company that recently announced it would invest in U.S. ethane is India’s Reliance Industries. In August, Reliance plans to ship 1.5 million tons per year of ethane from its U.S. shale play joint ventures — two of which are in the Marcellus — to India to feed ethane plants, commonly referred to as crackers.

Though India’s largest private company did not identify from which terminal it would ship the ethane, there are only two options at this time: Sunoco Logistics’ facility in Marcus Hook, Pa., and Enterprise Product Partners’ facility on the Houston Ship Channel in Texas.

Ethane exports are so new that Reliance has to special order the ships that will take them overseas. The company said it also plans to build a world-scale receiving and storage facility in India for liquefied ethane, and a pipeline to deliver ethane to the cracker facilities it also plans to upgrade.

Reliance is hardly alone. Switzerland’s Ineos Group; Austria’s Borealis AG; and Saudi Basic Industries Corp. also have an appetite for U.S. ethane.

Domestically, there are generally two options to handle ethane. One is to blend a limited amount of ethane into the natural gas pipeline stream as a way to handle excess ethane. That’s what the industry refers as “rejecting” ethane.

Another choice is to ship it via NGL pipelines to petrochemical markets in the U.S. and Canada.

Demand for ethane exports will compete with those users in the U.S. and Canada. The shale boom has prompted a resurgence in the domestic petrochemical industry. Several companies have ethane crackers projects either underway or proposed along the U.S. Gulf Coast, Canada and in the Northeast, including Royal Dutch Shell, Appalachian Resins and Odebrecht.


Appalachian ethane on the move

In the Appalachian Basin, the geological formation that contains the Marcellus and Utica shale plays, ethane generally is going east to Sunoco’s Marcus Hook facility on the Delaware River, south to the Gulf Coast, or north to Sarnia, Canada.

Marcus Hook can cater to both domestic and international markets, according to Jeffrey Shields, spokesman for Philadelphia-based petroleum and petrochemical manufacturer Sunoco.

During an Aug. 7 conference call, Sunoco CEO Michael Hennigan said the company believes ethane supply will continue to exceed demand.

“We certainly recognize the [petrochemical] growth that’s going to occur in the next couple of years, but we are a believer that ethane exports are going to be needed well beyond where the consultants think,” Mr. Hennigan said.

Meanwhile Houston-based Enterprise said in July that its project — expected to be the world’s largest ethane export terminal — has long-term commitments for 85 percent of its capacity and it is looking at an expansion. The project is currently designed to ship 240 thousand barrels per day by the third quarter of 2016.


Related: Indian firm plans exports of ethane from U.S. shale fields


Challenges on the water

There are risks, especially as a new export market forms around ethane. One is that the price won’t stay low forever.

“If you’re able to bring the ethane market back into balance with international exports, we’d expect the price of ethane is going to rise,” said Jennifer Van Dinter, manager, NGL analysis and consulting services for Bentek Energy. “The trick is, as you start to increase the price of ethane, it becomes less profitable to import it via ship. There’s a trade-off going on there, and at some point, there’s a risk that it isn’t profitable to move it overseas.

“The thing that people are overlooking is that we have this oversupply of ethane, but we also have naphtha,” Ms. Van Dinter continued. “A lot of those global crackers are running on naphtha. If they can stay the course, they can see an improving price environment and won’t have to invest in the infrastructure to convert over to ethane as a feedstock.”

What’s the source of that naphtha? Once again, it’s shale. This time, it’s the growing supply of condensate production found in plays that include the Utica and the Bakken shale.

“It’s a question of whether you want to switch now and get in on cheap ethane prices or wait to try to capture price benefits later,” Ms. Van Dinter said.

Today, most ethane is consumed in the same country it’s produced in because it’s difficult to ship, said Stephen Zinger, head of chemicals, Americas, at Wood Mackenzie.

It’s also a market that needs to have a definite customer in mind, Mr. Zinger noted.

“It’s not a spot market where I’ll go out there, and a buyer will come,” he said. “You need Reliance, Borealis and Ineos to help justify the value chain. Could the market develop into a liquid market like gasoline or crude oil? Someday, but it’s very early. That’s probably a decade or two off.”

Wood Mackenzie puts current ethane consumption at about 1.3 million barrels per day (MMB/d). Most of that, about 1 MMb/d, is being consumed. The rest is being rejected. And, since ethane is being rejected anyway, exports would allow companies to extract more value from the gas, Mr. Zinger noted.

ICF International, a consulting firm in Fairfax, Va., doesn’t expect exports to have a substantial impact on the U.S. market. Overall, finding markets for ethane “adds a great deal of value to the production of the Marcellus and Utica,” said Mike Sloan, principal with ICF International

“When those facilities come online, they will reduce the amount of ethane rejection in the market right now, and most of the supply will come from that,” Mr. Sloan said. At the proposed export levels, “we’re not talking about a fundamental shift in ethane markets in US.”

“I think the market will balance fairly well,” Mr. Sloan said. “I’m not going to say there are no impacts, but not a significant dislocation in the market.”


Stephanie Ritenbaugh: sritenbaugh@post-gazette.com or 412-263-4910


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