Ethane production has been a “problem” for producers and midstream operators for the last several years as supply overwhelms demand as more shale production is brought online. Thus far, diversion has been the strategy of choice in how to handle the new production; increasingly, this strategy has moved the bulk of the U.S. ethane production to the Gulf Coast.

Mont Belvieu has been able to handle the production, either by finding a current home for it or by finding storage space for it. However, like a pair of pants the day after Thanksgiving, it’s getting stretched to its limits. Increased fractionation capacity is being added, but this new capacity is still several years away and new markets are still necessary.

Similar oversupply situations have been felt for other natural gas liquids (NGL), primarily propane and butanes. Producers have managed to work off the supply overhang and regain strong economics by exporting these volumes as liquefied natural gas (LPG). Natural gas is soon to have an increased export market as well through liquefied natural gas (LNG). This has led to a call for ethane exports, but that is easier said than done.

Currently ethane is exported to Canada via the Vantage Pipeline and Sunoco Logistics’ Mariner West Pipeline. So far, there are no ethane export terminals out of the U.S. Sunoco Logistics’ Mariner East project will begin to ship up to 70,000 barrels (bbl.) per day of propane and ethane from Marcus Hook, Pennsylvania to foreign markets. The company secured long-term contracts to transport 20,000 bbl. per day of ethane from Range Resources to Ineos’ Rafnes cracker in Norway. In addition, the company agreed to ship an undisclosed amount of ethane via a long-term contract with CONSOL Energy to Ineos’ Grangemouth cracker in Scotland.

Sunoco Logistics is also gauging interest in further capacity for exports through an open season for a second Mariner East project. “Exported ethane is primarily being consumed by petrochemical plants for use as a feedstock to create ethylene. Most of the ethylene produced in Europe relies on higher priced naphtha as a feedstock. The shift to ethane as a feedstock should generate significantly better economics for European petrochemical producers,” according to Wells Fargo Securities’ February NGL Snapshot.

The two Ineos crackers are expected to take two years to complete with the currently unprofitable Grangemouth facility undergoing a $500 million investment program primarily focused on adding storage. This is expected to make it profitable and avoid a shutdown. The cracker will have the capacity to produce approximately 1 million tons per year of ethylene. “It is unclear whether the entire plant already had the capability to accept ethane and LPGs or a portion of the naphtha-based capacity is being converted,” the report said.

Although naphtha capacity is being converted to handle ethane, Wells Fargo Securities anticipates that ethane will compete more with LPG. “LPG exports are on the rise and are significantly easier to transport, handle, and price than ethane. Ineos indicated that the relative price of ethane and LPG will determine which feedstock the company uses in its retooled ethylene plants,” according to the report. Ineos is committing $160 million to build a new storage tank at the Rafnes plant as well as expand its ethylene capacity to 750,000 tons per year from 620,000 tons per year. Currently it has the capacity to process ethane and some crude-based feedstock.

Although they’re relatively simple to build in that they’re similar to LNG terminals, ethane export terminals are similarly expensive and operators would require contracts from sponsors for overseas exports since there is no spot market for the product. These contracts require negotiations among producers, midstream operators, shipping companies, and foreign petrochemical companies.

Undoubtedly producers would love to see these facilities in place now or in the near term to help improve ethane prices, but there are real questions of whether these facilities are necessary in the long term given the amount of new ethane crackers being built along the Gulf Coast.

“While ethane rejection will keep supply/demand in balance (at the expense of ethane pricing), management teams are currently evaluating waterborne export solutions for ethane to maximize value,” the report said.

The investment firm’s analysis found that the U.S. ethane market could be rebalanced by 2017 given the six new world-scale crackers scheduled to come online in that timeframe, which lessens the potential for ethane export terminals especially compared to LPG terminals.

The report stated that there is a possibility that its analysis of ethane production in the future is conservative, which would open the door for exports. “Increasingly, consultants and midstream companies are shifting their long-term view and projecting that the ethane market could remain oversupplied in 2017 [on] even after new crackers are placed into service,” Wells Fargo said. The company added that its forecasts are based on anticipated fractionation capacity, which will increase as new expansion projects are announced.

The export market could also develop quickly if a foreign petrochemical producer were willing to sign a long-term contract with a U.S. midstream operator. This would place all of the risk on the petrochemical producer rather than the midstream operator. In addition, Well Fargo stated if there were delays in one or more world-scale crackers, then the export market would vastly increase in demand. Should the export market develop, it would theoretically have a positive impact on U.S. ethane prices, but the report noted that such an uptick would only occur if the market were balanced.

The construction of ethane export terminals shouldn’t be considered the be-all, end-all of ethane exports, according to the report. If the market proved too limited to necessitate these facilities, ethane could still be exported out of the U.S. via injection into LNG.

“According to RBN Energy, global LNG is typically sold with an average British thermal unit (BTU) content above U.S. natural gas pipeline quality. Hence, ethane (and/or other NGLs) could theoretically be injected and (indirectly) exported along with LNG,” the report said.

However, given the likelihood that ethane will trade higher than methane on a BTU basis once the new crackers are in place, it is unlikely that ethane would be injected into LNG since a higher netback would be received by selling pure methane instead.

Aside from Mariner East, no ethane export terminal has been announced, but Enterprise Products Partners, Sunoco Logistics and Targa Resources Partners officials announced they are considering the possibility of building such terminals along the Gulf Coast. The Sunoco Logistics would export volumes from its Mariner South project. “We believe it is highly likely that Enterprise will announce a new ethane export terminal [along] the Gulf Coast this year,” the report said.

Wells Fargo Securities anticipates that if sufficient ethane export capacity were constructed to eliminate the near-term supply glut, it would increase prices to nearly 50 cents per gallon.

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