Ethane rejection into the natural gas stream has persisted since early 2012 after the ethane price crashed due to rapidly increasing rich gas production coupled with stagnant US ethane demand. The tide is starting to turn in the market as significant incremental ethane demand is coming in the form of new, large-scale petrochemical complexes, predominately located in the Gulf Coast. The amount of recoverable ethane available to supply these new crackers, including where this ethane is located, will greatly impact the ethane price over the next five years. If ethane must be sourced from supply basins located geographically farther from the Gulf Coast, the price must rise meaningfully from current levels to cover greater transportation cost to incentivize increased ethane recovery from the gas stream. Conversely, due to the recent dramatic increase in drilling activity in the Permian, there may be tremendous supply available relatively close to the Gulf Coast, placing a cap on prices.

Given limited publicly available data on the ethane market, quantifying regional ethane production is challenging. Only ethane recovered as a liquid is reported by the EIA and state agencies, meaning there is not a clear benchmark for the amount rejected to the gas stream. Further, as illustrated in the figure below, there have been key changes in the market since 2012, when widespread ethane rejection began, that may be masking the true potential supply of ethane:

1. price dynamics in the oil and gas market have shifted rig movements over this timeframe, altering the wellhead supply of ethane available;
2. highly efficient cryogenic processing plants that can recover over 90% of the ethane in the gas stream have been constructed in key supply areas, altering the relative amount of ethane that can be recovered from the gas stream versus history.

Given these shifts in the market, quantifying the amount of ethane available based on historical recovery would underestimate the true production potential from key supply regions going forward. To address these changing dynamics, BTU Analytics has developed a detailed new NGL supply model based on wellhead NGL gallons per Mcf (GPM), composition, and processing plant recovery efficiencies, which sheds light on NGL production and potential ethane recovery. Our findings are summarized in a new paper published this week, Hidden in Plain Sight: How the Industry’s Models Broke and Obscured True Ethane Supply. Find out how much recoverable ethane is available, where it’s located, and corresponding price implications.