Ethane, the gas around which Royal Dutch Shell has vowed to build a multibillion-dollar petrochemical mecca in Beaver County, has never been the star of the show.

Since the beginning of Marcellus Shale development a decade ago, ethane has swung between perk and burden. The hydrocarbon is recovered along with methane — the main ingredient of commercial natural gas — and either can be left in the gas stream to boost its energy content or be separated and sold to so-called cracker plants.

Those crackers, like the one destined for the banks of the Ohio River in the next decade, further process, or “crack” ethane molecules into ethylene, a building block of the chemical industry. It’s in your antifreeze, in your child’s diaper, it is your grocery bag.

At oil and gas industry conferences, discussions of ethane are either jubilant or ominous.

Either it’s a great advantage to producers such as Range Resources and Antero Resources — those with wells in so-called wet gas areas where natural gas liquids, such as ethane, are plentiful. In high times, these companies boast they can sell their ethane on the Gulf Coast or ship it to Canada and Europe where it competes with cracker plants that use oil-based feedstocks.

Or, ethane is a drag. There’s too much of it to “reject” or blend into pipeline gas — pipelines have a ceiling on the energy intensity of the gas they transport and ethane bumps up against it. When oil prices are low, ethane can’t compete with naphtha, which can also be cracked to produce ethylene and propylene and is derived from crude oil. When oil prices are competitive, the cost of pulling ethane from the gas stream, which involves cryogenically freezing it to turn it into a liquid, outweighs the benefit.

That’s when, as it happened last year, oil and gas producers who have the option shift their activity to dry gas areas — drilling targets that don’t contain as much ethane — as they wait for the price of oil to rebound or for ethane demand to pick up.

Waiting for the crackers

Any guide to ethane markets should come with a large disclaimer: market dynamics are subject to drastic change.

“Four years ago, our hair was all on fire,” said Randy Nickerson at a MarkWest investor conference last year. “What are we going to do about ethane? What are we going to do about ethane?”

Like natural gas and oil prices, ethane spiked in 2008. A barrel was going for about $140 in June of that year. And like the others, the shale game changer created a glut that forced prices to collapse.

For natural gas, it happened around 2011. For ethane, in 2012. Oil plunged last year.

The ethane slide landed somewhere around $12 a barrel in December before reversing into the $20s this month. Still, it’s one third to one quarter of what it was before shale gas from places like Pennsylvania and West Virginia came into the picture.

Much has changed in the past five years.

MarkWest Energy Partners, a Colorado-based oil and gas processor, built nine fractionators in Appalachia. Those are huge processing plants that separate natural gas liquids from the gas stream and split them into purity products like ethane, butane, propane.

The company now produces 80 percent of the ethane in this region that’s not blended into natural gas pipelines. It also operates two pipelines strictly to carry the hydrocarbon to a chemical hub in Canada and another in Marcus Hook, Pa. Earlier this year, the ethane coming into Marcus Hook started boarding specially-constructed boats heading for Europe.

Another pipeline, ATEX (Appalachia to Texas), carries ethane down to the U.S. Gulf Coast, home to all of the country’s existing petrochemical crackers in the and where another half a dozen or so are planned.

“We solved it,” Mr. Nickerson, who now works for Marathon Petroleum Corp., which acquired MarkWest, told analysts and investors last June. “The rest of the industry stepped in and we solved it.”

Then he added, “We would be utterly delighted if Braskem or Shell or one of the other cracker projects happen. If that happens, the [Appalachian] basin then will really be in fantastic shape.”

A home-grown market

Well, it happened with Shell’s announcement on June 7 to build a plant in Beaver County.

And that means a home-grown market for ethane. At least, five years from now. In the interim, it’s safe to expect another boatload of industry changes.

“Can you pull it out of the gas? Certainly, physically, yes,” said Greg Haas, director of integrated gas at Stratas Advisors, a consulting firm in Houston. “But can you do it for a price higher than blending into natural gas? That’s always questionable and that’s why people still reject today.” 

Mr. Haas estimates that producers in North America are currently leaving in the gas stream 750,000 barrels of ethane daily, while the ethane that’s being extracted and sold separately amounts to no more than 1.3 million barrels.

So, if the market is right, there could be a lot of new ethane ready to fill demand in no time.

But the question is, “Do we all need 70 percent more plastic this year?” he asked.

It’s a hard equation that balances oil and gas prices, economic and political forces around the world, population growth, and long-term projections of consumer patterns.

“Shell is a big company. They know the globe, but it took them five years to get comfortable to do it,” he said.

Kendall Puig, a senior analyst with Platts Analytics, expects ethane to swing into a shortage by the end of the decade, when several Gulf Coast-based crackers come online and eat up the oversupply available today. Prices will rise, she predicts.

The U.S. Energy Information Administration projects a similar trend and expects that ethane production will grow by 27 percent between 2015 and 2017, while natural gas production will rise only 3 percent during that time.

That means rigs are likely to return to the wet gas areas like southwestern Pennsylvania.

It’s still not the headliner — no one is drilling for ethane as their primary target — but over the next several years, it might be that ethane will have more of a supporting role in the region’s energy profile.

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Good analysis. Unless I have missed something (quite possible), MarkWest does not operate the Mariner West and Mariner East pipelines which transport ethane to Sarnia, Ontario and Marcus Hook, PA respectively. Sunoco Logistics was the owner/operator last time I checked. However, I can see where this would be a good bolt-on acquisition for MW/Marathon Petroleum.
BluFlame

Yea, and since they don't have to pay landowners royalties on the ethane they are sucking out from under them, it's even more attractive! At least for now they've figured out a way not to have to give the owners of the ethane their fair share, but maybe someday that will change. When the next lease renewing goes around, maybe landowners can make sure that if they supply the stuff;they get paid for it! Or maybe leave it,and the oil&gas in the ground? The 1st go-around, landowners seen $ signs and signed just about anything, not knowing they were gonna get stolen from.

bo,

Rex Energy in Butler Co, Pa paid 0.16 per for Ethane to me on the May statement. Got $383.87 for my share of the Ethane. Money for nothing.....chicks for free!

Yeah right.

Rex Energy: those people are the salt of the earth.

Did you get a bale of hay, chocolate ice cream cone or pearl necklace with the 16 cents per mcf?

The people who transported/treated the stuff probably got around 1.75 mcf.

I wonder what the Rex kick back was and how it will be paid?

Paul,

Just relaying the facts, if you have any questions on the Royalty statement, please ask, or are you just a whiner?

How much for transportation, treatment, compression, etc.?

Paul,

They show nothing on the statement for what you ask, I have a no deductions lease.

You're the first one I've seen honored, assuming you are reading the statement correctly.

Indeed.

The first damn time by a Shaler.

I've seen much free royalty language, I've just never seen it honored.

Too bad it's not selling for $140/bbl like it was before the rubes tanked the market.

Was that 16 cents a gallon, i.e. $6.72 a barrel?

16 cents per mcf?

   A few years ago when ethane was much higher in price, several Utica/Marcellus E&P's signed take or pay ethane transportation contracts with the pipeline companies at ~$.25/gallon. That was the quid pro quo to build the pipelines to Canada and Marcus Hook, PA in the first place. The last few years, those transportation contracts have been big losers for the E&P's as ethane has consistently priced at <.20/gal. With the recent increase in NG prices and the Shell announcement, ethane prices are now hovering ~breakeven. 

   Therefore, the E&P's are transporting the minimum amount of ethane, rejecting as much as possible into the NG stream, and transporting the rest at a loss. BTW…the underwater situation I've outlined doesn't factor in processing costs at de-ethanators or fractionators. 

   I am a leaseholder/royalty recipient in the wet gas zone, and therefore not an apologizer for the E&P's. But it is necessary to know the current economic reality.

BluFlame

Since the ALOV, SURE, and other leases in Ohio require payment of a royalty at the end user sale, plus the Fair Market Value requirement, I'm sure we will find a huge amount of money owed to Ohio Landowners for the NGLs, including the Pentane being mixed in our gasoline and the Ethane being sold to Cracker plants. We don't pay for any processes, enhancements for sale or shipping per our leases.

If the Ohio Supreme Court rewrites our leases with a Net Back method approval to Chesapeake in Ohio, Ohio can kiss all royalties goodbye and those who have sold us out will remain free to spend the money they are making for overlooking Criminal Activity and redefining it as a Civil Matter. 

The Net Back joke is just another angle used to cheat Ohio Landowners, similar to Market Enhancement in PA, and Production Costs being charged in other states. Chesapeake always has an angle to short change landowners and walk away with a state's riches.

If those who governed those same states were deprived of a Cash Award for looking the other way, then they would jump through hoops writing laws to shut Chesapeake down, or in the case of Ohio apply the existing laws that are being violated, Theft By Deception and A Pattern Of Corruption, thus violation of the RICO Act.

I can hear the next State of The State Address: We Need these thieves to build our State's Oil & Gas Empire even if my subjects must suffer an obvious theft to accomplish our states goals. It's always been this way with oil and gas, the rich get richer, the poor remain poor, if you don't like it move. 

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