Fractionation Rates Crash Ahead?

COVID 19 has reduced production from shale basins across the U.S., limiting wet gas production and the extraction of associated NGLs. In this article, we will discuss the impact of lower NGL production on U.S. gulf coast fractionation balances and spot fractionation rates. Since 2012, robust oil-directed drilling has resulted in a ~18 Bcf/d increase in wet gas production in the U.S., with Permian leading the pack. NGL Y-grade production from the Permian, Eagle Ford, Mid-continent, Bakken, Rockies, Haynesville, and the Barnett flow to U.S. gulf coast fractionator complex, which in aggregate fractionated approximately 4.1 Million bpd of NGLs in 1Q 2020.

By 1Q 2020, five major regions – all west of the Mississippi (Permian, Eagle Ford, Mid-con, Niobrara, and Bakken) in aggregate processed ~43 Bcf/d of wet gas, resulting in 3.7 Million Bpd of NGL production. As wet gas production grew, an aggregate of ~33 Bcf/d of processing capacity was installed in the five regions since 2012 to facilitate NGL extraction, with Permian adding the majority of new plants. For now, there is an ample near-term processing capacity.

In lock step, NGL pipeline capacity expanded to accommodate greater NGL volumes for transportation to the gulf coast for fractionation complex at Mont Belvieu and Sweeny. NGL pipeline capacity is projected to be adequate to transport future growth in NGL production through 2024.

Will fractionation facilities at Mont Belvieu/Sweeny able to handle all these NGLs? We believe s. In fact, we see significant downside risk to fractionation rates. The current fractionation capacity at Mont Belvieu and Sweeny are at 3.2 Million BPD (excluding 0.55 Million BPD of fractionation capacity in Louisiana). During 2018, Y-grade flows to USGC for fractionation exceeded the Mont Belvieu/Sweeny fractionation capacity, proving price signals to support significant fractionation expansion in the Gulf Coast region. The graph below shows a historical snapshot of Y-grade NGLs bound for Mont Belvieu/Sweeny vs the Mont Belvieu/Sweeny fractionation capacity, illustrating past fractionation constraints.

To meet the projected increase in fractionation demand, Enterprise, Targa, Energy Transfer, ONEOK, and Phillips66 planned to add ~1 Million Bpd of new fractionation capacity by 2Q 2021. A large portion of that capacity is already online or imminent but a few expansions have been put on hold or deferred. Combining the effect of reduction in NGL production and the increase in gulf coast fractionation capacity, are we about to see a crash in fractionation rates? Only time will tell us how this will unfold, but we may be entering a period of fractionation overcapacity, pressuring near-term fractionation spot rates. At the time of writing, we heard that Mont Belvieu fractionation all-in rates were rumored at 3-3.5 CPG.