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Appalachian ethane demand/supply balance to evolve rapidly by end of decade

HOUSTON, September 9, 2016 (PCW) -- Over the last two issues, NGLs Week has looked at Appalachian ethane demand and supply. We have established the region holds vast amounts of resources, the bulk of which remain untapped due to insufficient takeaway capacity and localized demand. But demand is expected to increase within the next few years, largely in the form of pipeline exports to Canada and the Gulf Coast and waterborne exports to Europe.

Now putting both of these together (see graph below), it appears the region is in for some tightness through 2018 largely due to an uptick in waterborne exports (Ineos and Borealis).

These are contracted volumes for the companies’ crackers in Norway, Scotland, Sweden and Finland and therefore, from a fundamental perspective, is unlikely to provide a leg up for spot prices. However, the bullish sentiment could give a short-term jolt to the market. A look at ethane’s forward curve, however, shows this sentiment is somewhat baked in as ethane is in contango through January 2018.

It is in 2018 that the regional supply-demand situation could become looser. Various forecasts show increasing production, given futures curves for natural gas and crude oil that show improving prices during that time frame. Although there is always downside risk to these increases, it is worth noting that the overall NGL frac spread in the Marcellus Shale has been positive for more than two years now and the basin has always demonstrated the greatest uplift compared to other shale plays in the US.

This is mainly because Appalachian natural gas prices have been for many years among the lowest in North America for one of the reasons Appalachian ethane remains so constrained: insufficient pipeline takeaway capacity. Market sources said, post-2018, two scenarios emerge: (a) ethane rejection increases, or; (b) more Appalachian spot ethane is seen in the market, opening up the possibility of a regional pricing hub.

Most agree, however, that Appalachia will remain a major swing supplier of ethane for the Gulf Coast and a predominant basin for Canadian petrochemicals in the years going forward. -- Samantha Hartke

**NB: Estimates on demand and supply derived from various company and analyst presentations.

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