HOUSTON—Ethane prices continue to hover around their price floor, but relief is in sight in the form of seven steam crackers currently under construction, Kendall Puig, senior energy analyst with Bentek Energy, said at Platts’ Benposium. Once the new crackers come online, current ethane rejection rates will need to decrease, Puig said, to meet a new incremental demand of about 590,000 barrels per day.

However, investors in infrastructure to get ethane from the wellhead to Gulf Coast processing plants, as well as the new crackers themselves, will need to recoup construction costs by charging fees that current ethane prices simply will not support.

“You have to flow ethane on a pipeline and these pipelines have costs associated with them, they have tariffs,” Puig said. “Ethane prices will need to cover both fractionation fees and the cost of flowing on these pipelines.”

That cost varies significantly depending on where the ethane originates. The transportation cost from the Rocky Mountains to the Gulf Coast region is about 14 cents per gallon, Puig said. Moving ethane from the Marcellus and Utica shales in the Northeast on Enterprise Products Partners LP’s Appalachia–to–Texas Express Pipeline is pricier, at about 22 cents per gallon. Transporting ethane from the Williston Basin is the most expensive option at about 26 cents per gallon.

“When ethane rejection starts to decrease and more ethane is necessary to fill domestic demand, ethane prices will need to rise to cover these transportation and fractionation costs,” she said. According to Puig, PADD 3 and PADD 2, or the Gulf Coast and Midwest, respectively, will likely see the first decreases in ethane rejection due to the relatively lower transportation costs from the regions. The next areas to follow will likely be the East Coast and Rocky Mountain regions, or PADD 1 and PADD 4, respectively. The Williston Basin’s high transportation costs make it the last likely candidate for decreased ethane rejection.

“Looking into 2018 to 2020, almost all of the rejection that’s still occurring is up in the Williston Basin,” Puig said. If ethane demand is higher than currently expected so that more ethane from the Williston Basin is required to meet the demand, “this will cause a material uplift in ethane prices.”

Rejection Hurts

Ethane rejection has been widespread since around mid-2012 and early 2013 due to simple rule of economics: supply outpaced demand.

“Petrochemical demand, while it has increased from more crackers optimizing, more crackers taking ethane—the amount of ethane coming from gas plants has really outpaced it,” Puig said.

The supply and demand imbalance was reflected in prices. Starting in early 2013, the Henry Hub natural gas price and Mont Belvieu ethane price on a heat equivalent value “began to trade in tandem because when ethane can be rejected, the heat equivalent natural gas price serves as a price floor,” she said. “Ethane has essentially been trading near the price floor since the beginning of 2013 because we are very oversupplied. This has just incentivized rejection.”

Ethane rejection causes its own problems, though. When ethane is rejected rather than separated as a liquid, it simply remains in the natural gas stream and is burned as natural gas. However, ethane differs from natural gas in some important ways. The most notable way is its higher heat content, which sometimes conflicts with gas quality specifications.

“On the natural gas pipeline grid, there is a higher heating value specification on the tariffs, and this generally tends to be about 950 to 1,100 Btu per cubic foot,” she said. “This is the heat range that natural gas has to be in to flow on these pipelines because of end-user burner requirements.”

At 1,770 Btu per cubic foot, ethane has higher heat content than natural gas. As more ethane remains in the gas stream, the heating value specification climbs higher and nears the upper end of the allowed range. This was such a problem in the Northeast in 2013 that dry gas from the Rocky Mountains was moved into the region for blending with the gas stream to lower the heat content, she said.

However, until it becomes economically sound to separate ethane from the gas stream, ethane rejection at current levels will likely continue.

“The decision to reject ethane is based on economics and really low ethane prices due to an oversupply have incentivized widespread rejection across the U.S. for the past few years,” Puig concluded.

Contact the author, Caryn Livingston, at clivingston@hartenergy.com