Ethane frac spread faces downward pressure, study says

Tuesday, September 14, 2010

The ethane frac spread, or the spread between natural gas and ethane, faces downward pressure going forward as shale plays across North America stand to increase total ethane production, says a market report.

Weak frac spreads are bad news for planners of pipeline and marine transportation projects that involve shipping Marcellus Shale ethane long distances to petrochemical markets, located mostly at the U.S. Gulf Coast. The frac spread is a primary driver that underlies the economics of these projects.

From 2006 to the present, the spread has averaged a robust 20.9cts/gal, and on occasion has leapt to 60cts/gal, says the Sept. 9 report from Bentek Energy. But over the next five years, the difference between the Marcellus Shale gas price and the Mt. Belvieu ethane price could average just 1-20cts/gal, the report says.

Strong NGL prices have seen producers shift toward shale plays with high NGL content, increasing their production, especially of ethane. Almost 100% of ethane is used in the petrochemical market where NGLs have long been the preferred feedstocks versus more expensive naphtha and gas oils from refinery output streams. Over the past year, about 80% of all U.S. ethylene cracker feedstocks were NGLs.

However, Bentek says that it is highly likely that ethane production from shale plays will increase faster than the petrochemical industry's ability to absorb it. Thus, ethane prices will decline relative to other NGLs, compressing the ethane frac spread.

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