Viewpoint: US midcon propane arbitrage to stay wide

The US north/south propane arbitrage is likely to remain wide this year and into the next thanks to a lack of pipeline and rail capacity, surging production and strong US Gulf coast prices.

Propane at the Conway, Kansas, hub was valued at a 3¢/USG discount relative to prices on the Gulf coast at Mont Belvieu, Texas, in the beginning of the year. The north/south arbitrage widened significantly in March as strong export demand on the Gulf coast pushed up propane prices in Mont Belvieu, while the influx of incremental railed propane volumes from the Marcellus region in the northeastern US following the closure of Mariner East 1 pipeline pressured propane prices at the Conway hub. By early July the discount reached 24¢/USG.

That 24¢/USG gap — the widest it has been since July 2012 — prompted an increase of southbound shipments as Oneok's 570,000 b/d Sterling I, II and III natural gas liquids (NGL) pipelines and DCP Midstream's 175,000 b/d Southern Hills pipeline operated at full capacity.

Market participants expect the arbitrage between Conway and Mont Belvieu to remain around 15¢/USG or wider until more pipelines are commissioned in the upcoming years.

A planned expansion of the Sterling III pipeline will add around 60,000 b/d of additional southbound capacity by the end of this year but it is unlikely to provide necessary relief to congested infrastructure. DCP Midstream and partners plan to add up to 120,000 b/d of capacity to its Southern Hills pipeline by the end of next year.

The largest midcontinent midstream operator, Oneok, expects Conway NGL prices to catch up with the Gulf coast values after it commissions its 400,000 b/d Arbuckle II pipeline in 2020 connecting Oneok's midcontinent storage and fractionation facilities in Mont Belvieu. After completion of Arbuckle II, Oneok might further expand the pipeline to 1mn b/d by adding additional pump facilities, the company said in its July investor presentation.

Targa Resources also launched an open season in June to gauge shipper interest in building an NGL pipeline from Oklahoma to Mont Belvieu. The open season closed on 6 July but the results were still undisclosed.

The gap between Conway and the Gulf could also be narrowed this year after Energy Transfer's Sunoco Pipeline brings online its 275,000 b/d Mariner East 2 pipeline in the third quarter, following a one-year delay. Mariner East 2 will carry ethane, propane and butane from western Pennsylvania to Marcus Hook, Pennsylvania, leaving less propane flowing into the midcontinent market.

DCP Midstream also plans to add 90,000 b/d to its 280,000 b/d Texas Express pipeline which connects with Enterprise's Mid-America Pipeline System, but the timeline for this project has yet to be determined.