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Ethane frac spread flat to year-ago levels, still below breakeven
HOUSTON, April 18, 2017 (PCW) -- The Gulf Coast ethane fractionation spread (the differential between the ethane and natural gas price) has gone nearly unchanged year-on-year (see graph below), coming in at below breakeven levels, which could impact production rates going forward.
The ethane frac spread has averaged about 2.7 cents/gallon so far this year, compared to 2.8 cpg for the same time in 2016. While this might be positive territory, transportation and fractionation costs from Gulf Coast supply basins to the Mont Belvieu complex come in around 11 cpg, making it uneconomic on paper for producers. The reason for this is that while ethane prices rallied about 7.3 cpg during these time periods, natural gas gained $1.10/mmBtu, or an equivalent of 7.3 cpg.
Ethane’s recovery is largely on the back of increasing demand from petrochemical cracking and exports. Natural gas, however, has been supported not by demand, but supply. Production has been steadily decreasing over the last two years as producers have largely found it uneconomic to drill at $2/mmBtu price levels. Ethane production, however, has been increasing.
EIA data put it at 38.118 million barrels in Jan (1.23 million b/d), compared to 35.939 million barrels (1.16 million b/d) in Jan 2016. This points to continued drilling in so-called ‘wet’ plays, where the primary product is not natural gas, but NGLs or light crude. A more holistic look at the entire NGL barrel shows that margins remain in-the-money, thanks to the more lucrative prices fetched by the heavier purity products.
Forward curves for ethane and natural gas, meanwhile, indicates the ethane frac spread could improve drastically some time in 2Q 2018 when the spread begins to exceed the 11 cpg level. This time frame coincides with the full in-service of the first wave of petrochemical crackers, which could boost ethane demand by an additional 300,000 b/d (or 25%) from current consumption rates.
On the natural gas side, the improving price could see result in a drilling uptick, which should also be fueled by increasing power demand and liquefied natural gas (LNG) exports. -- Samantha Hartke