A recent post (pay wall) in an oil-and-gas industry blog caught my attention. The author, David Braziel, bemoans the state of the market for “natural gas liquids” (NGLs), particularly ethane. The profitability of ethane has declined dramatically over the last few years.
Why is this relevant to those of us interested in the Dragonpipe (Mariner East 2 pipeline)? The Dragonpipe is designed to carry NGLs. NGLs are byproduct gases derived from the process of fracking for natural gas. They are “liquids” because they are held under pressure to keep them in liquid form for transportation. The main byproduct gas is ethane, so the profitability of the ethane trade is a key in determining the profitability of the Dragonpipe. And right now, ethane isn’t profitable.
To understand the problem with the ethane market, you have to consider what it is used for. More than 99% of ethane is used in refineries that convert it into ethylene. This conversion utilizes a high-temperature process called “cracking”. Ethylene, in turn, is the primary ingredient in many plastics. And ethylene is the real source of the problem. At the moment, Braziel reports, there is a huge ethylene glut. There’s more ethylene available than the plastic manufacturers have the capacity to absorb. As a result, the price of bulk ethylene has dropped from 74 cents/pound in 2014 to 14 cents/pound now.
Because ethylene is overabundant and cheap, no one wants to produce more of it. So the refineries that make ethylene from ethane are cutting back on their ethane purchases. Companies like Ineos (the European refinery operator that has bought the ethane that has been carried by the Mariner East 1) are shifting their focus to more profitable products to the extent they can.
Although Braziel’s analysis is focused on refineries, it also has implications for those who drill and frack natural gas. In some geographical areas, the natural gas emerges from the well with very few of the byproduct NGL gases. That’s called “dry gas”. In other regions, the gas comes out “wet”, meaning it has lots of NGLs. The gas from western Pennsylvania’s Marcellus region is very “wet”. That’s good for drillers when there is a good NGL market, but it’s a problem right now. If the problem continues, the drillers will start to focus their efforts in other parts of the country, where they get almost all natural gas and none of the NGLs.
What happens to the NGLs as byproducts of fracking if the NGLs are not transported and sold for plastic production?
Good question. Limited amounts of NGLs can be transported by train and truck. Propane for heating and cooking is routinely delivered by truck in areas without natural gas pipelines. Trucks are also used for butane.
Ethane is a tougher problem for the drillers and traders if there is no pipeline capacity. The volumes are much larger than propane or butane, so trucks and trains are more problematic. Some of the ethane can simply be left in the natural gas (this is called “ethane rejection”). Large amounts of it would cause the natural gas to burn too intensely or even become explosive, so there are BTU limits on ethane rejection. Marcellus gas is so “wet” that ethane rejection can only handle a fraction of the ethane from the wells there.
There are two other NGL pipelines (or perhaps three—I’d have to check on that) taking NGLs from the Marcellus. ETP owns one of them (Mariner West) that goes to Ontario, Canada. There is another pipeline (Atex) that takes Marcellus NGLs to Texas. So those are still options, to the extent that they have the necessary capacity.
For drillers with more NGLs than the trains, trucks, and pipelines can take, the only real option is to shut in the well until such time as a way can be found to get rid of the NGLs. That is a last resort, since it means losing the revenue from the natural gas too. If that becomes frequent, drillers will just pack up and take their rigs elsewhere.
Note that Marcellus wells, like most fracked wells, produce 90% of their lifetime output in the first two years of operation. That means that thousands of new wells must be drilled each year just to keep production steady. Drillers know that if they stop drilling in an area for a couple of years, any surpluses there will gradually disappear on their own as the output of operating wells drops off, and capped wells can then be opened up again.
Thanks, George. Ours is a supply and demand economy. It all boils down to dollars and cents (as opposed to sense). This post offers a glimmer of good news for those of us dreading Mariner East.
I’m sorry we didn’t have more time to talk on Monday. If you or you and your wife are in the Exton area, Jerry and I would welcome a visit. As always, thanks for your excellent coverage of Dragonpipe news.