Appalachian NGL Storage Hub – A Reality or a Pipe Dream?

February 19, 2018 | By Amol Wayangankar

There is a tremendous amount of buzz regarding development of a massive Appalachian NGL Storage Hub to cater to future needs of market participants in the Appalachian basin. “The Hub” – which carries a price tag of $10 Billion eventually aims to rival Mont Belvieu – an existing and well established NGL Hub in Texas. This vision received a major boost on November 9^th 2017 when the China Energy Investment Corp. announced in presence of President Trump and Chinese President Xi the signing of an MOU to invest $84 Billion into the concept of Appalachian NGL Hub over the next 20 year – that commitment is $10 Billion greater than West Virginia’s 2016 GDP! Further, it appears that the vision has intrigued the political establishment and received bi-partisan support in West Virginia. The marketing of this vision is being led by Appalachian Development Group (ADG) – a Joint Venture between MATRIC and WV University Innovations Corporation that claim job creation and invigoration of regional economy as the main benefits of the Hub while the detractors believe the Hub will buoy the oil & gas activity further damaging the environment.

The central premise on which the vision stands is the mismatch between abundant NGLs supply and inadequate infrastructure that results in “locked-in” NGLs in the basin thus negatively impacting NGL prices. The root cause for the impetus and the appeal for the Hub will be diminished if and when incremental NGL pipeline capacity is added to de-bottleneck the region and drain the basin. Few questions therefore arise – (1) Is there fundamental support for the Hub and how much storage is needed to keep market in balance? (2) What factors would ensure reasonable storage development that can be supported by investments that are less risky and more profitable? And (3) who eventually pays for this storage – Producers, Buyers, Traders, or Cracker Operators?

Although quantifying the need for storage can be difficult proposition, long-term adequacy of NGL storage in Appalachia would depend on how much operational/price risk potential customers consider “acceptable”, their tolerance for volume and price risk and alternatives available to them to mitigate that risk. Purely from a fundamentals perspective, it is hard to conceive need for a significant amount of incremental storage in the Appalachian basin/North East region by 2025 – at least not at the grandiose levels that ADG’s vision for the Appalachian NGL Hub implies.

To quantify incremental storage capacity requirements, we need to discuss fundamentals for each of the NGL components in insolation starting with ethane which typically makes up 55-65% of the Appalachian NGL barrel and therefore potentially the most important contributor to NGL storage requirements in the basin. While ethane potential in Appalachia has increased from 80 MBPD in 4Q2017 to 480 MBPD by 3Q2017, actual ethane extracted (and sold as ethane) has been a smaller percentage of the potential – 10 MBPD in 4Q2012 to 203 MBPD by 3Q 2017; with the difference left in the natural gas stream or otherwise “rejected” from the recovered NGL barrel. Ethane rejection has therefore proven highly effective for Appalachian producers to mitigate both volume and price risk thus acting as de-facto ethane storage. Increases in Appalachian dry gas production in Appalachia has bolstered rejection effectiveness as only 75 MBPD of ethane actually extracted in 3Q2017 (or 15% of the potential) is estimated to be “must recover” to meet residue pipeline quality specifications.

Under our Base Case projections, ethane potential is expected to increase to ~750 MBPD while actual ethane extracted would increase to 525 MBPD by 2025 which assumes generic expansions on ATEX ethane pipeline, Mariner East 2X, Utopia and 2021 in-service for the PA shell cracker project. As a consequence, ethane rejection will drop drastically from current levels to less than 100 MBPD by 2021 before rising to 200 MBPD by 2025. What this implies is t as more ethane is extracted and transported to established markets out of Appalachia and limited markets within Appalachia (such as the Shell cracker), coupled with increased gas take-away capacity and growth in dry production, the ability to blend ethane in the gas stream will only increase providing higher levels of low-cost de-facto storage for producers and end-users. Our analysis indicate relying on ethane rejection (as de-facto storage) could be a low-risk strategy as the expected residue gas pipeline quality specifications would remain well below permissible limits through 2025.

So, while higher ethane extraction under our Base Case keeps rejection low through the forecast period, it provides more room for producers and end users to reject ethane. We estimate that in addition to the ethane rejection in our Base Case, there exists 225 to 400 MBPD of incremental latent rejection capability in the basin if the producers chose to reject ethane before exceeding residue gas quality specifications.

Finally, as the basin gets increasingly connected to markets in U.S. Gulf Coast and Sarnia, ethane barrels targeting these markets would rely on ample storage available in downstream markets such as Mont Belvieu. So there exists a compelling argument to suggest that the producers are not ideal candidates for leasing ethane capacity at the Appalachian NGL Hub, which brings me to the proposed local crackers projects like Shell, PTT and others. For the petrochemical end-users, in-basin storage may be attractive on the surface but they have a number of tools in their tool kit before they start putting real value on Appalachian Hub storage. As a start, volume risk arising from cracker upset/downtime period will most certainly be borne by gas producers – most likely considered a valid Force Majeure event for the ethane buyer. So during planned and unplanned cracker outages, and to the extent capacity is available, ethane can be sold on ATEX, Mariner East and Mariner West to downstream markets. Secondly, the producers may simply reject that ethane (if downstream ethane pipeline capacity is constrained) or sell to alternative local buyers. Some dual-fired gas power plants in Appalachian basin connected to ethane pipelines may be able to consume ethane at the right price. If the outage is of short-duration, line packing could be a better alternative than contracting for significant storage capacity. We just don’t see crackers leasing significant portion of capacity in either the Appalachian Hub or any other storage project – perhaps 2 to 4 days of supply at the most which is less than 400 MB in case of Shell’s PA cracker.

In summary, there are plenty of synthetic ethane storage options for producers and end-users that can provide effective volume and price mitigation without relying on expensive physical storage in the basin. Physical ethane storage at the Appalachian Hub may be part of a wider portfolio but would need to compete with other low-cost synthetic storage options. While Appalachian NGL Storage Hub seems fundamentally challenged for ethane….politics is a different tale. In the next installment of Weekly Ensight, we will dig deep into fundamentals of propane and heavier NGL components to ascertain whether C3+ fundamentals support formation of the Appalachian NGL Hub.