In Part 1 of the Appalachian NGL Storage Hub series, we evaluated whether ethane fundamentals, which makes up a significant portion of the Appalachian NGL barrel, support development of the proposed Appalachian NGL Storage Hub. Our data-driven analysis suggests that ethane rejection has been highly effective in the region providing de-facto storage for producers. Further, as new residue gas pipelines get commissioned to take residue gas out of Appalachia and as new ethane markets develop (such as Shell cracker, PTT cracker, Utopia, ME2X/ATEX expansion), the ability to blend ethane in the gas stream will only increase – estimated between 225 to 400 MBPD of incremental rejection post 2020. This creates significant barriers of entry for incremental ethane storage in the region. We concluded, 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. In this concluding Part 2, we ascertain whether fundamentals of propane and heavier NGLs support the need for the proposed Appalachian NGL Storage Hub and attempt to quantify the need for incremental C3+ NGL storage in Appalachia.
Right off the bat we can all agree that the investment thesis of the Appalachian NGL Storage Hub cannot be supported by the heavier components of the NGL barrel (Pentanes+ or C5+) for the simple reason that it is far more cost effective to construct above-ground tanks to store less volatile hydrocarbons such as pentanes for relatively smaller production volumes. Appalachian C5+ production increased from less than 10 MBPD by end of 2012 to 50 MBPD by 3Q 2017 with expectations to grow to 80 MBPD by 2025 (or only 8% of total NGL production in Appalachia). Consumption patterns for C5+ for use in crude blending or diluent market exhibit no pronounced seasonality to warrant need for storage. Propane supply increased from 25 MBPD by end of 2012 to 170 MBPD by 3Q 2017 and currently makes up 55% of the Appalachian C3+ NGL barrel.
In contrast propane exhibits significant seasonality in consumption patterns – high heating demand in the winter and low demand in the summer/non-winter months. Prior to this production boom, winter propane demand in the Northeast would be met by limited local refinery production, regional storage withdrawals and a large winter influx of propane from storage and production sources in Canada, PADD 2 and PADD 3. Growth in Appalachian propane supply has reduced Northeast’s dependency on imports from Canada and supply from other U.S. regions, creating significant summer supply-demand imbalances that require either export outlets and/or storage capacity to rebalance the market. Propane is therefore railed out of the region during the non-winter months and then railed back to meet winter demand. Since 2014, the imbalance is also corrected by exporting propane out of ETP’s Marcus Hook NGL export terminal. The export outlet provided by Marcus Hook therefore alleviates the supply-demand imbalance and directly competes with incremental NGL storage capacity additions for rebalancing Northeast propane and butane markets.
Under Enkon’s base-case scenario, propane supply from gas plants in Appalachia is expected to reach ~300 MBPD by 2025 growing at a CAGR of 7%. Growth in propane demand will not keep pace with the supply thereby amplifying supply-demand imbalances. Such a scenario would be ideal for developing incremental propane storage to balance the market. However, commissioning of Mariner East 2 pipeline in 2Q 2018 and the resultant propane exports in the non-winter months from Marcus Hook will erode this imbalance deferring incremental storage requirements in the future. While we expect the market imbalances to grow significantly from 110 MBPD in 2018 Summer to 170 MBPD by 2025, the actual storage requirements after accounting for exports via Mariner East flows are significantly lower and more importantly deferred to post 2023. Mariner East 2 pipeline will therefore have a structural impact on the disposition of surplus non-winter propane supply in the Appalachian basin; barrels will be priced to drain the basin out of Marcus Hook.
Like propane, growth in Appalachian butane supply has led to self-sufficiency for the Northeast butane market. Butane also exhibits seasonal demand patterns with high demand in winter months for use in gasoline blending. Market relies heavily on temporary storage (such as rail cars) to store butane for summer. Butane supply is expected to grow at a much faster pace than ability of the Northeast gasoline blending/refinery market to consume C4. While we expect robust butane exports out of Marcus Hook, which will minimize the supply-demand imbalance, there is still need for ~2 Million barrels of incremental butane storage by 2021.
To summarize, Northeast does need more NGL storage, but the incremental requirements are not as large as implied by the vision laid out for the Appalachian NGL Storage Hub. Our analysis suggests that the incremental short-term need for butane storage is more compelling than any other NGL product in the Appalachian. If not for significant incremental ability to reject ethane and expectations of high load factors at Marcus Hook during non-winter months, the Northeast NGL storage requirements would be significantly greater than what our crystal balls says…
@Enkon Energy Advisors .2015 All rights reserved
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