The natural gas liquids (NGL) market has been slowly improving of late, but ethane prices are expected to struggle for the next several years as rejection will still be widespread in the Rockies, according to ONEOK Partners LP.

“We have not changed our outlook for ethane rejection for 2014 and 2015. We still believe that ethane rejection by natural gas processing plants connected to our NGL system will continue at current levels of approximately 90,000 barrels (bbl.) per day throughout much of 2014, and through 2015 but primarily in the Rockies,” Terry Spencer, the company’s president, said during a November 6 conference call to discuss third-quarter 2013 earnings.

He noted that ethane from Conway and Mont Belvieu have benefited from getting rejected at both hubs, which is helping to work off excess storage. “From a demand perspective with major plant outages behind, the [petrochemical companies] are consuming the excess ethane inventory, and we expect a significant drawdown throughout the remainder of this year and into 2014.”

Spencer expects petchem companies to continue operating at a high rate with ethane as their primary feedstock, which should remain the same due to the strong economics it has versus other feedstock alternatives. In fact, ethane continues to grow as a petrochemical feedstock while propane prices have been improving because liquefied petroleum gas (LPG) exports have been increasing.

According to Spencer, some petchem companies have been switching from propane back to ethane at approximately 50,000 to 75,000 bbl. per day. “From a pricing perspective, this should lead to some upside momentum to ethane prices. But we expect it will be slow and moderated by the ability of processors to recover ethane fairly quickly and rebalance the market,” he said.

Despite the challenges facing ethane prices, ONEOK remains well-positioned through its integrated network of assets and NGL-rich basins, Spencer continued. This integrated system allowed the company to capture higher margins from wider NGL price differentials. “Ethane rejection did result in NGL pipeline capacity typically utilized for exchange-services business becoming available for optimization activity allowing us to benefit from NGL price differentials that are still relatively narrow compared to the five-year average between the Midcontinent and Gulf Coast NGL market centers,” Spencer said.

The ONEOK system will continue to grow as the company is bringing several major projects online in the coming months. The MB-2 fractionator will have an initial capacity of 75,000 bbl. per day when it comes online this month at Mont Belvieu where it will supplement the company’s 160,000 bbl. per-day MB-1 fractionator.

The 570-mile Sterling III Pipeline is expected to completed by the end of 2013 and will provide the company with the flexibility to transport either unfractionated NGL or NGL purity products from the Midcontinent to the Gulf Coast.
ONEOK was able to expand its operations through the recent acquisition of the 50 million cubic feet per- day Sage Creek gas processing plant and related assets in the Powder River basin in western Converse and Campbell counties, Wyoming, for $305 million.

The company is planning to invest in upgrading and building related gathering and processing infrastructure and well connections that will connect to both the Sage Creek plant and third-party plants, including a lateral to its Bakken shale NGL pipeline.

“This acquisition provides significant long-term growth potential in the basin and the opportunity to provide area producers and processors with a full menu of midstream natural gas and NGL-related services,” Spencer said.
“The opportunity in buying these assets was for future development; we didn’t look at it as an opportunity to buy earnings as much as it was to buy future earnings,” John Gibson, the company’s chairman and chief executive, said on the call.

Spencer also noted that growth opportunities are present along the Gulf Coast with new pipelines being built to transport volumes from various plays down to the Mont Belvieu hub without any companion fractionation capacity. “The opportunity exists for us to potentially provide more fractionation services, to provide storage services and infrastructure services for those parties that do not construct or build those pipelines or ship through those pipelines. I think there is going to be an opportunity for us without necessarily having to own and operate a pipeline all the way back to the basin.”

The company remains on track to complete the spin-off of ONE Gas, it’s 100% regulated pure-play natural gas distribution utility, in first-quarter 2014. “We believe the separation will enhance the strategic and financial strength as well as the flexibility and growth potential of both ONEOK and ONE Gas,” Gibson said during the recent Barclays CEO Energy Conference in New York City. Following this spin-off, ONEOK will focus on cash flow generation that is expected to help increase the company’s dividend.

ONE Gas will consist of Oklahoma Natural Gas Co., Kansas Gas Service and Texas Gas Service, and will be headquartered in Tulsa, Oklahoma. Under the plan, ONEOK shareholders would retain their current stock shares and receive a pro-rata dividend of shares in the new company in a tax-free transaction. Upon completion of the transaction, ONEOK will continue to hold its interests in ONEOK Partners LP, which include the sole general partner interest and limited partner interests, representing a combined 43.3%. ONEOK Partners will not be affected by the proposed transaction.