Blog September 17, 2018

A major surge in ethane prices is making big news in the natural gas liquids (NGL) world the past few weeks. Ethane prices have awakened from a five-year nap at gas equivalent levels in the Gulf Coast to nearly double in the past three months, going from $.28/gallon in early June to $.5575/gallon on September 14, 2018. Since NGL production continues to ramp up along with oil and gas, the hunt is on for the bottleneck in the supply chain. What is keeping the ethane that’s been deliberately left in the gas stream away from the growing ethylene market?   

Genscape analysts know the source of the bottleneck - fractionation. Other than a handful of locations with small capacity units designed to split out barrels for local markets, most U.S. NGLs are piped as a mix of molecules to central storage and distribution locations for further handling. This mix of so-called “liquefiable hydrocarbons” that are frozen and/or squeezed out of the vapor that we call natural gas is called “Y grade”, a term that comes from the product descriptions in an NGL pipeline tariff. “Y-grade” implies a blend of molecules that includes ethane, propane, iso butane, normal butane, and pentanes. Their molecular weight is too light to be put into a crude oil line, but too ‘heavy’ to be left in a natural gas line.  

Once the Y-grade gas gets to a hub facility, it must be split, or ‘fractionated’, into the groups of molecules that are sold as so-called “purity” products to end users. NGL fractionator towers work the same way as the distillation towers in a crude oil refinery. The towers heat up the mixed stream, and separate the components based on the differences in their boiling points. The big challenge for NGL fractionators is that the amount of ethane in an incoming stream of Y-grade can currently vary by 30 percent or more depending on the value of  the ethane; the parts of the fractionator that are designed to separate the ethane (the “de-ethanizer”) are designed for a stream that ranges from 35-38 percent ethane (in older units), to 50 percent in newer facilities. 

The result is a price that inspires producers and holders of processing rights all over the country to pull ethane out of their gas after five years, but pure ethane supply is not ramping in response. In fact, according the U.S. EIA, ethane supply fell by an average of 33 k b/d in June. This drop was counter intuitive given that Exxon was in the process of bringing up a world-scale ethylene cracker at Mont Belvieu.

Genscape alerted clients to the pending squeeze in fractionation capacity in our July production update:

NGL Production vs. Fractionation Capacity

Additionally, our forecasted supply/demand balances point toward a tight market through year end:

US Ethane S&D Balances for August, 2018

As with most things involving ethane, the challenges of getting the gas producer’s least-loved molecule to its growing market are more complicated than simply putting up more fractionation towers. Furthermore, higher ethane prices are not what the new ethylene plants were hoping for as the first big wave of petrochemical capacity ramps up. Genscape’s proprietary monitors help users see how the supply chain is responding to these challenges and inform our outlook for the impacts on supply. Genscape's NGL supply chain monitoring services include NGL fractionators, pipelines, and ethylene crackers.