We have seen oil production begin to decline in the wake of the oil price crash in 2015. With WTI closing at sub $50/bbl for the 125th consecutive day, producers’ pain has become apparent. This pain has had the obvious effect of reducing oil production, but has also had the more subtle effect of slowing the production of natural gas liquids. Natural gas liquids’ prices, particularly for ethane and propane, in North America have come under significant pressure on an absolute basis and on a relative basis to crude over the last several years as rampant increases in supply driven by crude oil investment overwhelmed demand. With the weakness in crude prices, producers have reduced activity and have began reallocating capital from liquids rich gas plays to dry gas plays in the Northeast (Utica and Marcellus) and Southeast (Haynesville) to avoid paying higher natural gas processing fees associated with the recovery of natural gas liquids (NGL). This reduction in activity comes at a time when the demand build out for ethane is well in progress as new steam crackers and export facilities are developed along the Gulf and East Coasts.
Potential ethane supply has exceeded ethane demand since 2012 as new cryogenic processing capacity, NGL pipeline infrastructure, and fractionation capacity was developed and connected rich gas producers with the Mont Belvieu market. The above figure shows US ethane production from natural gas plants has grown from 869 Mb/d in 2010 to 1,075 Mb/d in 2015, but the amount of ethane rejected has grown from 105 Mb/d in 2010 driven by field processing constraints to as much as 746 Mb/d in 2015 or 45% of available ethane production capacity rejected into the US natural gas stream due to pricing and infrastructure constraints (Bakken). The amount of ethane supplied into the natural gas market in 2015 represents almost 2.0 Bcf/d of production on an energy equivalency basis further compounding the oversupply issues faced by natural gas producers.
Now, we are in a period where $40/bbl oil is taking the place of $100/bbl oil. This is causing ethane production capacity growth to slow and potentially even start declining as producers face capital constraints and the lack of positive netbacks from producing natural gas liquids given current natural gas ($2.11/MMbtu), ethane ($0.18/gal), and propane prices ($0.42/gal).
However, the outlook for ethane prices into 2016 is improving on the back of slower investment in the E&P space and new demand side projects coming into the market in 2016-2019 requiring processors and producers to begin to recover currently rejected ethane to supply these projects. From 2016-2019, there are over 500 Mb/d of new steam cracker projects under development by XOM, DOW, CP Chem, Sasol, Shell, Formosa, Lyondell, and others. In addition to the new petrochemical plants, Enterprise and Sunoco are developing export facilities for ethane with over 200 Mb/d of combined capacity to serve international markets.
In the end, ethane pricing can be viewed as having an inverse correlation with crude prices, with a bit of a lag. As crude prices stay weak, liquids rich plays will recieve less attention, which will lead to lower ethane supply, in turn bringing back a bit of strength to weak ethane prices, especially given the fact that there is new ethane demand coming online. However, if the crude supply imbalance takes a major turn over the course of the next few years, the expectation should be a flood of NGLs coming to the market, continuing the trend of ethane rejection and driving ethane prices to parity with natural gas prices. For more on BTU Analytics’ outlook on natural gas liquids production, see BTU Analytics’ Upstream Outlook and for an outlook on natural gas pricing check out our newest report, the Northeast Natural Gas Quarterly.