The U.S. Gulf Coast remains dominant in the race for fractionation capacity, even with natural gas liquid (NGL) production increasing in the Northeast. As NGL production intensifies, a host of new fractionation capacity is expected to come online to handle the anticipated surge making the swampy marshlands to the south a virtual mecca for U.S. produced NGLs.
There are a total of 27 announced U.S. fractionation projects, which are expected to add 1.3 million barrels (bbl.) per day of fractionation capacity, bringing the national capacity up to 4.3 million bbl. per day in the next few years. This will create cash and incentives for companies operating in this sector, RBN Energy analyst Callie Mitchell said.
“These facilities are gigantic, high-dollar investments and they take at least a year-and-a-half to complete,” Mitchell wrote on RBNEnergy.com. “This new capacity will generate lots of low risk fee-based revenue. But just as important, this fractionation capacity will provide the capability to turn additional Y-grade (raw NGL mix) into more valuable purity products.”
Salty dog
According to Mitchell, of the 27 fractionation projects, 14 will be located on the Gulf Coast and many will be situated around the Mont Belvieu, Texas, NGL hub—a place Mitchell calls “the big kahuna.” Lone Star NGL, ONEOK Partners, Enterprise Products and Targa Resources all have fractionation projects under construction in Mont Belvieu. By the end of 2014, there will be a total of 1.7 million bbl. per day of fractionation capacity operating in the Mont Belvieu area alone, which Mitchell says is more than 50% of what is nationally available today.
Mitchell, who has 30 years of energy industry experience and recently retired from The Williams Cos. after years as vice president of Enterprise Services, sees the “geological phenomenon” that is Mont Belvieu as one of the reasons the Gulf Coast is the reigning king of the NGL market, due in large part to the fact that it sits on top of one of the largest underground salt-dome formations in the world.
“Mont Belvieu is the center of the universe for NGLs because of the large salt caverns located in the area,” she tells Midstream Business. “They [salt caverns] are the least expensive and most cost-efficient way to store NGLs. The whole hub was built around that.”
The salt domes sit about 2,000 feet below sea level and are surrounded by a large and expansive network of pipelines that transport NGLs to fractionators and petrochemical facilities in the area, Mitchell says. She adds that the vast amount of storage is attractive to many customers because “not all NGLs are consumed when they are produced.”
Out to market
Mont Belvieu’s location is also key, according to Mitchell. “The whole hub of the NGLs was also built around the fact that they are located by water for imports and exports,” she says. “Everything, including most of the petrochemical industry, is located within striking distance of Gulf Coast fractionation.”
According to the U.S. Energy Information Administration, about half of the total 17.7 million bbl. per day of U.S. refining capacity can be found on the Gulf Coast. The close proximity to the extensive petrochemical refining network on the Gulf Coast makes fractionation buildout in this area an even more attractive option, Mitchell says. With ethane and propane being the biggest feedstocks used for crackers, the area’s allure extends that much further because the Gulf Coast is home to largest concentration of crackers in the nation, Mitchell adds.
“Petrochemicals have a huge impact on what happens in the fractionation market,” Mitchell says. “As long as the petrochemical facilities get ethane and propane— especially ethane—and continue making the kind of money they are making today, you are going to see the market expand.”
With all the expansion, is there a concern about a glut of production flowing into the market? Mitchell says she has faith industry executives will strike the best balance between investments and the end market.
“Eventually everything balances out and the market will adjust,” she tells Midstream Business. “The companies that are handling fractionation are very smart when it comes to supply and demand. I can guarantee that a lot of them studied this long and hard, and I don’t think any one of them would have invested a dime unless they really believed that the marketplace was going to be able to absorb it without completely taking out pricing and supply and demand situation down there.”
New construction
Lone Star NGL, a joint venture between Energy Transfer Partners (ETP) and Regency Energy Partners, is one of the companies throwing its hat into the Mont Belvieu ring. The company announced the construction of two new 100,000 bbl.-per-day fractionators in the area. Fractionator I came online in December 2012 and is operating at full capacity. Fractionator II, according to Steve Spaulding, executive vice president of Lone Star NGL, is expected to begin operations in November and is contracted 100%. Both of these projects cost a total of $740 million and much of the capacity is coming from ETP’s Justice and West Texas Gateway Pipelines.
And with all of the recent fractionation additions in the area, Spaulding tells Midstream Business that many within the industry are already beginning to feel the market effects.
“We already see ethane trading just a hair above its fuel value, and we have seen propane trading at historically low levels compared to the normal crude oil relationship,” he says. “We have also seen an uptick in the price of propane due to recent LPG [liquefied petroleum gas] export projects.
“As we see more of these LPG export facilities coming online in the next two to three years, we should start to see propane trading back at normal historical levels.”
Longer lead time, patience required
With the uptick in fractionation buildout, there has been a stall between the production of NGLs and fractionation, an issue, Spaulding says, that can be directly attributed to a longer and more drawn out permitting process. Under these circumstances, he says, patience is a virtue.
“On the Gulf Coast it takes a long time to build fractionators due to the time frames around getting the air permits,” he tells Midstream Business. “Lone Star’s lead time is roughly about two-and-a-half years; it doesn’t take that long to build fractionators, but it takes a significant amount of time to get the permits in place to allow fractionators to be built.
“It is a difficult task to balance that timing. It is one of the things we have to wrestle with; you just have to be prepared to take some risk on potentially not being fully contracted when you launch a project.”
The beast to the east
Continual change is on the way for the area and for the NGL production market. As the Marcellus and Utica ramp up more NGL production, many new fractionation projects are taking shape to take advantage, especially in the area expanding from Moundsville, West Virginia, to Houston, Pennsylvania. According to RBN Energy, Northeast fractionation capacity, especially in the area they have dubbed “Houville,” is expected to increase from 100,000 bbl. per day in 2012 to more than 500,000 bbl. per day in 2015; an increase of 400,000 bbl. per day in just three years.
But what does that mean to the reigning king of the NGL market? RBN Energy’s Mitchell says there is no need to worry.
“The Gulf Coast region with Mont Belvieu at its heart remains the center of choice for new fractionation capacity. And that is not about to change because the growing importance of export markets for NGLs and their petrochemical derivatives will continue to make the Gulf Coast the center of the NGL universe.”
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