Frac Spread: Propane Facing Rough 2015

As 2014 drew to a close, NGL prices experienced positives for the first time in more than a month as ethane prices surged the week of Dec. 17 and only saw a small decrease in value the final week of the year.

The NGL market also benefited from a downturn in gas prices as ethane frac spread margins rose significantly to the point where they are almost theoretically positive. It is unlikely that margins will turn to a positive state in the first half of 2015 as the market is still working to restore balance after cracking capacity was limited throughout 2014 with both scheduled and unscheduled turnarounds. Though capacity has largely returned, it will take some time to work of the storage overhang that built up in the past 12 months.

Conway ethane rose 15% from 15 cents per gallon (/gal) in the first full week of December to 18 cents/gal the last full week of the month. The Mont Belvieu price experienced a 14% improvement during the same time period, as the price improved from 16 cents/gal to 18 cents/gal.

One potential headwind facing ethane margins is the possibility that increased propane cracking could undermine a return to balance of the ethane market. “Ethane prices are showing signs that they are detaching from natural gas prices, but there is a very long road ahead before ethane frac spreads turn positive out in the field. Increases in ethane cracking and greater ethane rejection are starting to put support under spot ethane prices despite the rapid fall in gas prices,” En*Vantage said in its Weekly Energy Report for Dec. 25.

The biggest headwind facing ethane is the potential for it to lose its status as the preferred feedstock. Propane, butane and naphtha are all making gains among ethylene manufacturers due to lower prices. According to En*Vantage, propane cracking could increase by more than 400,000 barrels per day (bbl/d) in the spring as the fundamentals for propane remain very weak. Even with increased heating demand, propane will need improved LPG export demand to work off the huge storage figures and restore balance to the market. Despite lower Mont Belvieu propane prices, LPG prices in Europe and Asia are not supportive of increased export levels at this time.

Propane ended 2014 with a 7% decrease in price to 52 cents/gal at Mont Belvieu and an 11% decrease to 46 cents/gal at Conway. Both prices are the lowest in more than a decade. While it is likely that improvements will occur with improved heating demand, it will take some time for prices to fully recover.

Heavy NGL prices fell at a faster rate than crude prices, and are pushing frac spread margins well down in value. Though margins for butane, isobutane and C₅₊ are firmly positive, they are at their lowest levels in years. This occurred despite the accelerated drop in gas prices, which fell 7% to $3.01 per million Btu (/MMBtu) at Conway and 5% to $3.02/MMBtu at Mont Belvieu.

The most profitable NGL to make at both hubs was C₅₊ at 73 cents/gal at Conway and 72 cents/gal at Mont Belvieu. This was followed, in order, by isobutane at 52 cents/gal at Conway and 40 cents/gal at Mont Belvieu; butane at 48 cents/gal at Conway and 37 cents/gal at Mont Belvieu; propane at 19 cents/gal at Conway and 24 cents/gal at Mont Belvieu; and ethane at negative 2 cents/gal at both hubs.

Natural gas storage levels decreased by 26 billion cubic feet to 3.22 trillion cubic feet (Tcf) the week of Dec. 26 from 3.246 Tcf the previous week, according to the U.S. Energy Information Administration. This was 8% higher than the 2.988 Tcf posted last year at the same time and 3% below the five-year average of 3.301 Tcf.