Ethane rejection estimates have been revised sharply upward as ethylene cracking margins have reversed to make heavier feedstocks more profitable.
Ethane rejection in the US is being pegged at 450,000 b/d, according to Peter Fasullo, a principal with consulting firm EnVantage, while other market observers have pegged it even higher, at about 480,000 b/d. Ethane rejection occurs when a gas processor leaves ethane in the natural gas stream rather than extracting it because it is uneconomical to do so.
Current estimates come in higher than rejection expectations at the beginning of December, when Fasullo said about 360,000 b/d of ethane was being rejected back into the gas stream.
When ethane rejection was thought to be running at about 360,000 b/d, forecasts had rejection peaking at about 400,000-450,000 b/d by 2015-2016.
The sudden increase in ethane rejection comes following the shift in ethylene margins, which flipped to make heavier feedstocks, such as propane, butane and light naphtha preferable to ethane.
Cheaper ethane prices, coupled with poor cracking margins, led to a deterioration in the economics of recovering ethane. More gas producers were heard increasing their rejection levels in return.
During the month of December, ethane's value relative to natural gas averaged a 5.69¢/USG discount, reaching a low of 9.74¢/USG. On the final days of the year, ethane shifted to a premium to natural gas, reaching a 0.199¢/USG premium on on 31 December.
In January ethane jumped back and forth from a discount to a premium and settled on a 4.91¢/USG premium on 9 January, a differential unseen since 14 March 2014.
The last time ethane stood at that steep of a premium, outright prices for EPC ethane averaged 29.625¢/USG, and almost reached a high of 48¢/USG in February 2014. The fundamentals that caused NGL prices to tumble this past year are almost the exact opposite of what caused prices to spike in February of last year. Ethane's margins stood well above propane, butane and light naphtha, and ethane rejection was seen at a much lower 300,000 b/d.
Although ethane's current value relative to its fuel value stands at a premium, typically indicating more favorable recovery economics, rejection is still being pegged at steeper volumes, leaving greater volumes of ethane on the market.
On an oversupplied market, some gas producers at the Texas Gulf coast were heard re-injecting ethane coming off of long haul ethane lines from the Marcellus and Utica regions into the their gas pipelines. This re-injection is being done because it is easier to reject ethane downstream in pipelines along the US Gulf coast than in the Marcellus and Utica shale regions. The re-injection is helping take some volume off the market, but inventories are still abundant.
An oversupplied market typically would lend itself to weaker prices; however, emerging demand from Williams Partners' 1.9bn lb/yr cracker in Geismar, Louisiana, and Dow's light hydrocarbons unit No. 8 at Freeport, Texas, has helped firm prices.
Ethane has averaged 18.95¢/USG since the beginning of the year, falling between a high and low of 17.75-20.5¢/USG.
Increased ethane rejection, coupled with petrochemical startups, could help whittle away at the supply overhang.
"It is probable that ethane inventories could drop 8mn bl (22pc) by the end of April, provided there are no major unscheduled ethylene plant outages," Fasullo said.
It is unlikely that ethane prices will find too much support from petrochemical demand, as springtime propane cracking will increase, which could even cause ethane prices to fall further, according to Fasullo.
If ethane continues to stand at a premium to natural gas and if that differential widens, ethane rejection could likely taper back.
at/tdf
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