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Ethane disposition poses a risk for Marcellus Shale production

 

Anadarko Petroleum is one of many operating in ethane-rich Marcellus producing region of the Appalachian basin. Photo courtesy of Anadarko Petroleum Corp.

E. Russell "Rusty" Braziel, Bentek Energy, Evergreen, Colo.

Producers in the Marcellus shale may be forced to curtail natural gas production unless they can come up with a viable way to dispose of ethane, an associated gas, according to a new study from BENTEK Energy. The report assesses the magnitude of the ethane problem, examines several projects designed to address this issue, and proposes a framework for assessing the viability of each of the options.

In most natural gas producing regions, ethane is a highly-valued byproduct of natural gas production, sold as an important feedstock for the petrochemical industry. But in the rapidly growing Marcellus producing region of the Appalachian basin, ethane is viewed by some natural gas producers as a contaminant that could threaten development plans in the area.

Natural gas production in the Marcellus shale is increasing rapidly. In Pennsylvania alone, receipts into pipeline systems have increased four-fold from 0.3 bcf/d (billion-cubic-feet per day) in early 2009 to 1.2 bcf/d in August 2010. Over the next five years Marcellus production is expected to reach at least 5 bcf/d, with some projections exceeding 10 bcf/d.

As Marcellus volumes continue to ramp up, a serious problem is emerging for producers of high-BTU (British Thermal Unit), or "rich" gas. Before this gas can be delivered to pipelines for transportation to market, natural gas liquids (NGLs) must be extracted from the gas. Of the hydrocarbons that make up NGLs in this region, ethane is by far the largest by volume.

In most gas-producing regions, high-BTU gas and abundant NGLs are good news. NGLs are generally priced significantly higher than natural gas on a BTU equivalent basis, and improve the producer's profitability at the wellhead. But in the Marcellus, NGLs are a problem for two reasons. First, today there is not enough gas-processing infrastructure to extract all the NGLs from gas in the high-BTU gas regions of the Marcellus. This problem is being addressed by the construction of a number of new gas plants. But these plants are creating the second problem – increasing volumes of ethane in the Marcellus region. There are essentially no markets for ethane in the Northeast US.

Other components of the NGL stream can be marketed locally, with the propane sold into the home heating market, and the "heavies" (butanes and natural gasoline) moving into Northeast refinery markets. But in other parts of the country, almost all ethane moves by pipeline into petrochemical markets, predominantly along the Gulf Coast. There are no ethane pipelines or petrochemical plants that use ethane in the Northeast region.

An Enerplus Resources operation sits atop a scenic tract of the Appalachian basin. Photo courtesy of Enerplus Resources.

The Bentek study, A Home for Marcellus Ethane, examines several projects that have been announced to address this problem, including three proposals from Buckeye, Kinder Morgan, and Enbridge to build pipelines from the Marcellus to Canada and Chicago:

  • a proposal from MarkWest and Sunoco to move ethane by ship to the Gulf Coast;
  • the conversion of a portion of the Tennessee natural gas pipeline by El Paso to move ethane to Baton Rouge, La; and
  • a Williams proposal to blend the ethane with low-BTU gas in the Northeast and market the product as pipeline specification natural gas.

Our analysis segments the ethane problem into "discretionary" and "must-recover" components. Most of the new plants being built can leave a portion of the ethane in the natural gas without a problem. We call this volume discretionary. The real problem is the must-recover ethane – this must come out or the gas will not meet pipeline specifications, potentially resulting in curtailments of natural gas production – a very bad thing for Marcellus producers.

The study assesses key risks faced by each of the ethane disposition projects. One of the most important of these risks is the "frac spread." Projects that involve shipping Marcellus ethane long distances to petrochemical markets are vulnerable to downward pressure on the frac spread – the difference between natural gas and ethane prices.

If ethane prices are low relative to natural gas prices, shippers will not realize enough incremental revenue to offset the cost of transporting the ethane to market. Another important risk to examine is that of overbuilding ethane transportation. If the capacity of a project significantly exceeds the volume of ethane than needs to be moved, project economics will suffer.

Bentek's A Home for Marcellus Ethane analyzes these and other project risks, evaluates the individual projects which have been proposed, and provides a framework for evaluating the commercial viability of these options.

About the author

E. Russell "Rusty" Braziel is managing director of Bentek Energy LLC in Evergreen, Colo. His background in energy marketing, trading, and data services includes 20 years with Texaco (now Chevron), serving as vice president of natural gas marketing and trading and manager of NGL supply. Subsequently, he was vice president of business development for The Williams Companies. Braziel founded and served as president and CEO of Altra Energy Technologies, a developer of energy transaction management software and electronic trading systems. He also was vice president, NGL marketing and operations for Link Energy LLC (formerly EOTT Energy). He is on the board of directors of the North American Energy Standards Board and is the author of numerous articles in industry publications.

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