Widespread US ethane rejection expected in 2013, limited by BTU specs: paper

Houston (Platts)--4 Jan 2013 254 pm EST/1954 GMT

Ethane rejection, or the choice to keep ethane in the natural gas stream rather than removing it to sell it as an NGL, will become more widespread in the US in 2013 as the price of ethane remains below the price of methane, an analysis released Friday by US Capital Advisors said.

For the first time, however, "we may hit a threshold on ethane rejection" because of pipeline BTU specification limits, leading to some "super-rich" Northeast natural gas being shut-in, the consultant group said.

"We see the potential for gas shut-ins in the Northeast as pipelines pull their BTU waivers, and sub-spec gas just doesn't have a home," the report said. For example, Texas Eastern Transmission BTU content has been running as high as 1,070 lately versus the 1,100 limit, the group said.

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US Capital Advisers is estimating potential ethane production will close out 2013 at 1.1 million b/d, up from 1.041 million b/d at the end of December 2012. Ethane rejection by the end of the year is estimated at 62,000 b/d, up from 28,000 b/d at the end of 2012. Cracking demand should increase to 1.05 million b/d by the end of this year, up from 978,000 b/d at the end of 2012.

During 2012, ethane inventories grew by 54% or 12.3 million barrels and propane inventories built by 14.7 million barrels. The result was a 63% drop in ethane prices and a 33% drop in propane prices, according to the report.

"Just as producers destroyed gas prices by over-drilling, they have now pummeled ethane and propane prices by over-drilling," the consultancy said.

In 2012, the US saw some regional ethane rejection as prices in areas like the Rockies and Midcontinent fell below the methane-equivalent price.

US Capital Advisors estimates that, on average, the industry was rejecting about 30,000 b/d of ethane during 2012.

Historically, the NGL business has been self-correcting. When ethane prices fell too much, the industry went into ethane rejection mode, thereby decreasing ethane supply and increasing gas supply -- and prices adjusted accordingly. If there was a propane glut because of a warm winter, propane prices would fall, the NGL would become the preferred feedstock in crackers, and propane prices would rebound.

Although these mechanisms are still in place, ethane rejection will likely hit a limit because of the BTU specification limitations, the group said.

The paper also stated that for the first time since the shale boom began, infrastructure will be largely ahead of production.

In 2013, 1.6 million b/d of new crude lines will begin to flow to the Gulf Coast, about 1 million b/d of new NGL lines will come online headed in the same direction, more than 4.3 Bcf/d of major gas plants will be added mainly in the Eagle Ford and Marcellus/Utica regions, some 716,000 b/d of new fractionation capacity will go into service and 175,000 b/d of propane export facilities will be completed.

This should result in narrowing crude and NGL basis differentials and more fee-based income for some companies that should help offset lower NGL prices, it said.

--Eunice Bridges,
--Edited by Lisa Miller,

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