A little-known transport problem has created a severe bottleneck for Marcellus gas producers, which in turn has unleashed a flurry of new pipeline projects…
Nobody likes being rejected.
In the gas business — particularly in the Marcellus shale — rejection is a common problem…but in a much different sense of the word.
Here’s what I mean…
Most people are familiar with the Marcellus. It’s a massive gas rich shale formation in northeastern US that spans across much of Pennsylvania and West Virginia, and parts of New York, Virginia, and Ohio.
Development of the Marcellus has been fast and furious, with natural gas liquid (NGL) production in the shale expected to expand 8-fold to more than 650 Mboed over the next three years.
A variety of gases are produced from this shale, but perhaps the most interesting type is ethane.
Ethane is a colorless, odorless gas used in the production of ethylene.
The biggest use for ethylene is in polyethylene form, which is the plastic that’s found in all sorts of packaging material.
Other uses include additives to detergents, garbage bags, automotive antifreeze, PVC piping, and rubber products.
Normally, ethane is a very valuable product that gets separated and transported from production wells in its very own pipelines.
Also for safety reasons, pure ethane burns hotter than methane and other natural gases. As such, it isn’t normally transported in the same pipes as the others when it’s in its pure form.
But as producers have shifted focus to liquids from dry gas, ethane prices have fallen substantially. Ethane prices are now so low that separating the ethane from the natural gas stream is no longer profitable, so producers are keeping the ethane in the natural gas stream while separating the other wet gas products (propanes, butanes and condensates).
And unfortunately, there are only a handful of ethane-dedicated pipes currently in existence.
Therefore, because it’s no longer profitable to separate, and because a large number of ethane producers don’t have convenient access to ethane pipelines, producers have resorted to shipping the natural gas – with ethane included – into pipelines.
This process is called rejection. It allows producers to grow production substantially.
It’s estimated that some 200,000 barrels worth of rejection NGLs were being transported daily across the US in 2013. This year, rejection is expected to more than double to 450,000 bpd.
But there are limits to this process.
Because ethane gas is “richer” than natural gas, the blend has a higher heat content, which can cause quality issues with end users and fail to meet pipeline specifications.
Fortunately, new ethane pipelines are about to come into service, thanks to these 2 companies.
Top Pipeline Stocks To Buy Today:
Two highly anticipated ethane pipelines are nearing completion in the Marcellus. They are being built by MarkWest Energy Partners (NYSE:MWE) and Sunoco Logistics Partners (NYSE:SXL).
With an initial starting point at MWE’s processing and fractionation complex in Houston, PA, both pipelines will connect with existing pipeline infrastructure belonging to SXL that will be modified to handle ethane.
Upon completion, Mariner West will have a transport capacity of up to 65,000 bpd to send products to as far north as Sarnia, Ontario, while Mariner East will bring up to 70,000 bpd through the Philadelphia region and eventually to SXL’s processing plan at Marcus Hook, NJ.
Up in Sarnia, Nova Chemicals will utilize the pure ethane as feedstock for its steam cracker facility that can break down the cheaper fuel source into more valuable hydrocarbon products.
At the Marcus Hook refinery and export terminal, ethane products could then be shipped to US Gulf Coast and international markets.
Mariner West is officially in operation and will be ramping up shipments this year, while Mariner East will be ready to transport propane in the second half of 2014 and will handle ethane products in mid-2015.
MarkWest is a master limited partnership (MLP) with 19 facilities currently under construction in the northeast region.
Seven of the projects commenced on January 30th of this year, including five new cryogenic processing plants.
They’re on an aggressive growth path as they’re aiming to have a processing capacity of 2.3 bcf of natural gas and fractionation capacity of 300,000 bpd by next year.
It has $80 million in cash and around $11 million in debt, with a $1.2 billion credit facility that they’ve barely tapped.
Their distributable cash flow has increased from $417 million in 2012 to $483 million in 2013.
Sunoco is also an MLP that was formed in 2002. They recently completed their 35th successive quarter where they increased distributions to shareholders, which now stand at $0.6625 per share. It’s also their seventh consecutive 5% quarterly increase.
They have 11 projects currently in the works, comprising of both crude oil and natural gas processing.
Their distributable cash flow has increased from $604 million in 2012 to $655 million in 2013.
The bottom line is there are a growing number of capital projects underway in the Marcellus that will help producers with rejection.
Gas producers now see greater incentive to expand their output as ethane take-away capacity increases.
MarkWest and Sunoco are the perfect mainstream picks to capture this growth.