The US Gulf Coast Non-LST Purity Ethane Assessment Has Fallen to Its Lowest Level

The US Gulf Coast non-LST purity ethane assessment has fallen to its lowest level since August 2002, according to Platts data, a move attributed to increasing supplies form shale gas plays across the US.

Ethane has fallen 68% on the year, based on the Platts assessment Thursday. It was heard trading slightly stronger Friday morning at 26.375 cents/gal and E/P mix was heard trading at 22.5 cents/gal.

"Ethane is at an all-time high inventory and there are no petrochemical plants to take in the surplus ethane," a Gulf Coast NGL trader said.

According to the American Petroleum Institute's inventory report for September total ethane inventory was at 34.11 million barrels, up 59% from last September.

Ethane prices are a function of the two uses of the product: to leave ethane in the gas stream where it is burned for fuel, or to use ethane as a petrochemical feedstock where it is "cracked" to produce ethylene. These two end uses create a price dynamic that allows for a natural price ceiling and a floor.

Based on Platts estimates, current ethane cracking margins for petrochemical plants are about 33.76 cents/lb. However, cracker margins for ethane/propane mix and propane are stronger than ethane cracking margins.

The current heating value and the cracker margin levels of ethane imply that ethane prices have the possibility of falling fall even lower, traders said.

First, ethane has not reached its current price floor of 24.08 cents/gal. Secondly, ethane is not the economically preferred feedstock, meaning ethane prices need to fall further to attract demand.

The floor for ethane prices is the BTU value or heating value, a price in which ethane is "rejected" by the gas processing plant and burned as fuel. The fuel value of ethane can be estimated by multiplying the price of natural gas in $/MMBTU by 6.6.

Given Thursday's December NYMEX natural gas settlement of $3.648/MMTBU, the fuel value of ethane is 24.08 cents/gal. Since the fuel value is currently lower than the spot price, natural gas processors have more incentive to continue selling ethane to petrochemical producers rather than rejecting it.

According to US Energy Information Administration data, ethane and ethylene gas plant production has increased significantly over the past 10 years in the Northeast, Gulf Coast and Rocky Mountain regions.

In the Rocky Mountain region,the Niobara, Uinta and Williston basins have become the largest shale plays. In the Gulf Coast region, Eagle Ford, Permian Basin and Granite Wash are the largest fields. In the Northeast region the Marcellus and Utica regions are the largest shale fields.

In the Midwest region ethane and ethylene production has increased from 3.16 million barrels/month to 4.95 million b/m, a 56% increase in production since August 2002. Over the same time period, Gulf Coast production has grown from 15.82 million b/m to 19.30 million b/m, a 21% increase in production. The Rocky Mountain region has seen the largest growth in production, increasing 81% to to 5.25 million b/m.