Mineral Owners, Rejoice! But North Dakota Flaring Is Getting Worse -- September 17, 2018

From RBN Energy today:

There is more evidence that mayhem is afoot when we look at NGL price relationships. In fact, ethane tells a big part of the story.

Since mid-May 2018, the price of Mont Belvieu ethane has more than doubled, from 25 c/gal to 55 c/gal on Friday (September 14).  All measures of ethane value that we monitor here at RBN are back to levels not seen since 2012.

Ethane is now three times the price of natural gas on a per-Btu basis. The last time we saw that was May 2, 2012. The ethane price is up to 34% of West Texas Intermediate (WTI) crude oil. Last year at this time, it was 20%. The frac spread, where ethane is a big component, is up to $8/MMBtu, the highest level since crude prices crashed in 2014.

Two things are driving this dizzying ascent of ethane prices.

First is increasing ethane demand from all the new U.S. ethane-only crackers coming online plus growing ethane exports. The second factor is the focus of this blog: the fractionation capacity constraint. Maxed-out fractionation capacity caps ethane production.

Ethane can’t be delivered to petchem plants or export docks until it has been fractionated. But not only does fractionation capacity cap ethane production, there is a more nefarious process at work. Even though ethane prices are now three times natural gas prices, ethane rejection (the sale of ethane as natural gas) is on the rise.

That is because processors are rejecting ethane to make room for the fractionation of propane and the heavier NGLs.

There are all sorts of quirks that happen when rejection is driven by fractionation capacity constraints instead of natural gas-versus-ethane value economics, not the least of which is that lowering the ethane content of incoming y-grade actually reduces the effective capacity of the fractionator (more on that math in an upcoming blog). But regardless of the math, the net result is lower ethane supply just when ethane demand is cranking up. No surprise that ethane prices are skyrocketing.

Talk about a conundrum. The price of ethane is going up. But North Dakota doesn't have the infrastructure to process all of the ethane it is producing. And even if North Dakota had the necessary infrastructure it sounds like the US doesn't have the necessary capacity to handle all of it.

On top of all this, look at the NG fill rate.

If you are having trouble following the pricing / measuring of LNG, you are not the only one. See this post.

Last week, it's all about LNG.

More from the RBN Energy link:

So what happens if production continues to outpace fractionation capacity? Presumably, at some point, there is no more storage capacity for y-grade. How about exporting the surplus? That’s what happens with purity products like ethane and propane. While theoretically possible, exports of y-grade are extremely problematic — there are no appropriately configured docks or ships. Consequently, if storage is full, production must be curtailed. But here’s the catch: Y-grade gets produced as a byproduct along with associated and “wet” gas production. The only way to dial down y-grade production is to dial down the production of associated gas (which means pulling back on crude oil production), or to reduce wet gas production — or both. That would be an unprecedented market development.

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