Conway E-P Mix Finally Turns Positive

The biggest story coming out of August in terms of natural gas liquids (NGL) was that Conway E-P mix finally saw positive frac spread margins for the first time since the beginning of the year.

Although these margins were not outstanding, they represented a huge turnaround from the previous month. The primary driver for this price increase was the fact that producers found other markets for their E-P mix outside of Conway, Kansas, with Sarnia, Canada, and Mont Belvieu, Texas, being the prime export markets.

This outlet was necessary as Conway ethane was trading at a 95% discount to Mont Belvieu prices in early July, according to Tudor, Pickering, Holt & Co. By the end of August, this difference was cut to a 40% discount.

The firm anticipates that the differential will close further as approximately 600,000 barrels (bbl.) per day of NGL transportation capacity from PADD II (Midwest) to PADD III (Gulf Coast) is scheduled to come online in 2013.

"Conway will tighten with Mont Belvieu, but it will bring Mont Belvieu prices down," Bradley Olson, vice president, equity research at Tudor, Pickering, Holt Co. said in a recent NGL report.

CURRENT FRAC SPREAD (CENTS/GAL)
Price, Shrink of 42-gal NGL barrel based on following: Ethane, 36.5%; Propane, 31.8%; Normal Butane, 11.2%; Isobutane, 6.2%; Pentane+, 14.3%, Fuel, frac, transport costs not included. Conway gas based on NGPL Midcontinent zone, Mont Belvieu based on Houston Ship Channel. Shrink is defined as Btus that are removed from natural gas through the gathering and processing operation.Source: Hart Energy

In short, this narrowing of the price spread between the hubs represents both an improvement in the Conway price as well as a weakening of the Mont Belvieu price, as that hub is handling greater volumes of ethane than in the past.

The 174% improvement in margin for Conway E-P mix was by far the largest increase of any NGL margin in a month that saw price and margin improvements largely across the board. In fact, the lone NGL to experience a dip in margin in the month was Mont Belvieu ethane as that market suffered a bit from the increased volumes of ethane and propane in the Gulf Coast as a result of increased shipments from Conway.

Similarly, Conway propane margins rose 57% from July while Mont Belvieu margins improved just 3% from the previous month. The lower improvement in margin at Mont Belvieu was a result of not just the increase in propane volumes coming in from Conway, but also a decrease in propane exports.

Butane margins rose at both hubs as refiners began to switch from making summer-grade gasoline to making winter-grade gasoline as the month drew to a close.

While NGL prices saw improvements largely across the board at both hubs, natural gas prices dipped at both hubs as the month came to a close. These decreases were a result of the market reacting to a weak hurricane season thus far as well as fears that the market is oversupplied. Despite strong cooling demand, it is likely that the forward curve will continue to move downward heading into the fall.

Although there was a production curtailment of approximately 40 billion cubic feet due to Hurricane Isaac; however, this was short-lived and likely won't have any long-term effect on prices. Indeed, Barclays Capital is forecasting that gas prices will move lower as the weather turns cooler and production recovers.