Capstone Energy Services


The Effect of Ethane Rejection on Natural Gas Supplies

March 4th, 2013

OMAHA (Capstone Energy Services) – Over the last three years, the boom in oil and gas production has undergone a strategic transformation. As natural gas prices have declined, so has the economics of drilling into formations that produce primarily dry natural gas. It is now estimated that the exploration and production costs from some of these dry gas formations exceeds the existing price of natural gas. As a result, the drilling strategy has shifted away from dry natural gas producing formations to those with high volumes of crude oil and “wet” natural gas containing liquids (NGLs). The Baker Hughes rig count chart below clearly illustrates the shift in the drilling targets. The effect of this strategy shift has been a large increase in the amount of NGLs in U.S. markets and a corresponding decrease in prices. The highest volume liquid produced and the lowest cost is ethane. Since mid-2012 the price of ethane has plummeted to the lowest level since 2002, a price so low that after adjusting for transportation and fractionation, the value is less than that for natural gas. (See pricing graphs below) As a result, many processing plants are leaving much of the ethane in the gas stream while removing the more valuable liquids – a process termed “ethane rejection”.

The effect of ethane rejection on natural gas supplies is two-fold: 1) it increases the volume of natural gas in Mcf being delivered into the natural gas pipeline system and 2) it increases the Btu content of system gas since ethane has a higher Btu/Mcf than dry natural gas. So how big is this issue? Some analysts believe total ethane rejection could be as high as 1,000,000 Mcf, or 1.4% of the total estimated gas supply. According to Bentek, a unit of Platts, approximately 157,000 barrels per day (or approximately 500,000 MMbtu per day) was rejected by processors in February. However, Oneok, a major gas processor, challenged the Bentek estimate this week as far too small, citing their own ethane rejection rate of 90,000 barrels per day, a rate they expect to continue all year. While the actual volume of ethane rejection is not known, it is certainly adding to the existing oversupply situation.

As the volume of ethane available to the liquids markets is reduced, the price should begin to rise until it reaches the point that it makes sense again to remove it. That point will depend on the price differential between the two commodities adjusted for transportation and fractionation. There are no signs, at this time that the shift will occur this year, essentially creating as much as 1 Bcf per day of increased supply from existing producing wells.

In addition to the gas supply effect of increased ethane rejection, BNP Paribas estimated this week that a 2.6 Bcf per day reduction in 2013 natural gas demand will occur due to electric generation facilities returning to coal as a fuel source in 2013 after having used low cost natural gas in 2012. The current price of natural gas does not justify its continued use. The combination of these two factors, ethane rejection reduced generation use, could increase total available supply in 2013 by over 5%. Assuming normal weather and no unusual events, the natural gas surplus should once again begin to grow this spring, putting downward pressure on prices.


By Ed Freeman

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