Over the last several months, Bakken gas quality constraints have become an increasing topic of discussion for producers and midstream companies active in the basin. Today’s energy market commentary will focus on the issues at play in the Bakken and potential impacts of tighter gas quality specifications on Northern Border Pipeline to ethane markets.
In the Bakken, ethane has predominantly been rejected into the gas stream rather than recovered as a liquid. This is due to depressed ethane prices and high costs to transport ethane from the region to demand centers located on the Gulf Coast. As a result, residue gas from the Bakken has had a higher heating value due to ethane rejection. The chart below shows Bakken gas quality measured at the outlets of several natural gas processing plants located on WBI Pipeline. Most of the outlets show deliveries into WBI with a heat content over 1100 BTU/cf.
However, this rampant ethane rejection may start to change as Northern Border pipeline, the primary natural gas pipeline out of the region, may start to impose heating value limits. ONEOK indicated in its 3Q19 earnings call that “Northern Border is currently in discussion with customers and point operators about a potential BTU change in their tariff” in 2020. This would potentially force producers in the region to recover enough ethane from the gas stream to meet this new gas pipeline spec, regardless of whether it is economic to do so.
Northern Border pipeline is the primary outlet for Bakken natural gas and has operated at high utilization over the last decade bringing Canadian and Bakken supply to market. However, Bakken production growth has been displacing Canadian flows over that time frame. Receipts in North Dakota, primarily from the Bakken, now comprise over 70% of total flows, or about 1.8 Bcf/d, as seen below. While Bakken gas has a relatively high heating value, it has been blended down by lower BTU Canadian gas. However, as the proportion of Bakken gas has increased, this has pushed the heating value of gas on Northern Border downstream of the Bakken in excess of 1100 BTU/cf, as seen below. Though pipeline specs vary, a typical heating value limit is 1100 BTU/cf, and Northern Border interconnects with other pipes that designate this limit, including Vector and NGPL.
The recent completion of ONEOK’s Elk Creek NGL pipeline, which transports y-grade from the Bakken to Midwest NGL facilities (essentially Conway), could facilitate incremental ethane recovery. NGL takeaway from the Bakken has been particularly tight for ethane. Due to its high vapor pressure, ethane must be piped while heavier NGLs can be moved by truck and rail. At 240 Mb/d capacity, Elk Creek provides a material increase in NGL takeaway capacity, as seen in the figure below. The dashed line quantifies total NGL production if all the ethane is recovered given processing plant recovery efficiencies.
However, not all the ethane would have to be recovered to meet a heating value of 1100 Btu/cf. At a GPM of 10, just under 50% of the ethane would need to be recovered from the gas stream, as illustrated below. BTU Analytics estimates that just over 20% of the ethane is currently being recovered. At current gas production levels, this means an incremental 90 Mb/d of ethane would need to be recovered from the region. To put that in perspective, demand from most large-scale ethane crackers is about 90 Mb/d.
Material increased ethane supply from a region where recovery is uneconomic would be sure to weigh on downstream ethane prices. While there are some moving pieces here, including if or when Northern Border adjusts the tariff, and how much gas production increases in the Bakken and displaces Canadian production, the outcome will have ripple effects on the ethane market. To keep up with ethane production trends, check out the Upstream Outlook.