In April 2024, Energy Transfer unveiled the inaugural phase of an optimization initiative at the Marcus Hook NGL export terminal, designed to incorporate additional ethane refrigeration and storage capacity. This enhancement aims to facilitate heightened exports of ethane from the Appalachian basin. While specific details regarding the incremental capacity remain undisclosed, the announcement holds strategic significance for gas producers. It is poised to incite competition among current ethane pipeline operators for firm commitments and amongst buyers for future sales opportunities. Furthermore, the expansion is expected to grant access to incremental global ethane markets, intensifying competition among ethane buyers seeking competitively priced ethane within the Appalachian basin.

Energy Transfer’s export expansion is poised to reconfigure the landscape of Appalachian ethane disposition, furnishing wet-gas producers with a broader array of avenues to monetize ethane. Consequently, this expansion holds the potential to diversify index, pricing, and market exposure for gas producers and other stakeholders.

To contextualize the relevance of Energy Transfer’s ethane expansion, it is pertinent to assess the current state of affairs. With the exception of sporadic periods such as 2015 and 2019-2020, the economics surrounding the production of NGLs-rich gas in the Appalachian basin have consistently favored it over dry gas economics. This economic incentive has prompted gas producers to concentrate drilling activities in NGL-rich acreage, resulting in a notable increase in Appalachian rich gas production, which has surged by approximately 9 Bcf/d since 2012. By the fourth quarter of 2023, production levels surpassed 10 Bcf/d, representing approximately 28% of total gas production within the basin. Given that ethane constitutes 55-65% of the Appalachian NGL barrel, the proliferation of wet gas has precipitated a surge in ethane supplies within the basin.

To extract or not- that is the question!

With the rise in wet gas production, the ethane potential in Appalachia continues to expand. Ethane potential denotes the theoretical volume of ethane that can be extracted from the inlet gas stream, considering the technical limitations of each gas processing plant. As illustrated below, the ethane potential in Appalachia reached approximately 720 thousand barrels per day (MBPD) by the fourth quarter of 2023. However, only 42% of this ethane was actually extracted, either to meet residue gas quality specifications and contractual obligations regarding minimum de-ethanization recoveries (referred to as “Must recover extraction”), or at the discretion of operators to fulfill downstream sales commitments (referred to as “Discretionary extraction”).

The remaining ethane, constituting approximately 58% of the ethane potential, was left in the natural gas stream or otherwise excluded from the recovered Appalachian NGL barrel.

Since 2012, ethane rejection, defined as selling ethane based on its BTU value, has served as a significant avenue for producers in Appalachia to monetize ethane production. This was particularly prevalent during a period when the region lacked adequate ethane takeaway pipeline capacity or access to regional markets. However, need to comply with the residue gas pipeline quality specifications imposes stringent limitations on the extent to which ethane can be rejected within the gas stream. In the absence of favorable ethane price signals, we anticipate that Appalachian producers will persist in maximizing ethane rejection. Data analysis suggests that there exists incremental headroom for ethane rejection, indicating that additional ethane labeled as “must-recover” or deemed “distressed” will likely remain inaccessible to ethane buyers.

Markets for Appalachian Ethane

As of 2024, ethane disposition in the Appalachian basin is primarily piped to four key markets, complemented by the flexibility of ethane rejection for gas producers. Ethane extracted in this region finds its way to regional petrochemical hubs or is exported to various destinations including Europe, South America, and Asia.

1. Steam crackers in Sarnia, ON, accessed through Energy Transfer’s Mariner West pipeline or Kinder Morgan’s Utopia pipeline.
2. Steam cracker in Calvert City, KY, and subsequent crackers along the U.S. Gulf Coast, facilitated by Enterprise Product’s ATEX pipeline.
3. Waterborne export market, utilizing the Mariner East 2X pipeline to transport ethane to the Marcus Hook export docks.
4. Shell cracker in Monaca, PA, serviced by the Falcon pipeline, representing the sole in-basin ethane market available to gas producers.

The inaugural ethane shipment from the Marcus Hook Facility in Pennsylvania occurred in March 2016 aboard the JS INEOS Intrepid. Since then, the growth of ethane exports has been restrained, initially due to capacity limitations of the Mariner East Pipeline, and presently due to constrained chilling and refrigerated storage capacity at the Marcus Hook terminal. Despite Energy Transfer’s introduction of a larger 20-inch pipeline with an initial capacity of 135 MBPD in 2021, actual ethane exports have remained capped at approximately 70 MBPD. Consequently, Energy Transfer’s expansion efforts at Marcus Hook aim to address these limitations. Successful commercialization of this expansion would afford producers improved access to international markets.

The Competition

Ethane rejection has emerged as a cornerstone strategy for Appalachian producers, constituting the primary market for ethane within the basin. Consequently, any prospective new domestic or export markets seeking incremental ethane must offer economic terms surpassing those of ethane rejection in the basin, and possibly more, to entice producers into ethane extraction.

However, competition for the ethane currently being extracted is fierce. As depicted in the graph below, extracted ethane transported via multiple takeaway pipelines to markets outside Appalachia (excluding ethane consumed by the Shell cracker) is reported at an average aggregate utilization factor of 79% as of the fourth quarter of 2023. This suggests sizable spare pipeline capacity available to accommodate further growth in ethane extraction. Although aggregate utilization factors on takeaway capacity remain below 80%, individual pipeline utilization varies widely, ranging from approximately 25% to pipelines operating near their design capacity.

A critical consideration here is the operational challenges faced by the Shell ethane cracker in Pennsylvania, which has struggled to achieve full capacity utilization in 2023. Assuming the Shell cracker reaches full operational capacity, it is conceivable that a portion of the extracted ethane currently flowing outbound on marginal takeaway pipelines, such as the ATEX pipeline, may be rerouted to the Falcon pipeline, further reducing utilization on outbound ethane pipelines from the basin. Additionally, it is anticipated that ethane previously rejected may also be redirected to fulfill the Shell cracker’s full requirements. The future addition of Energy Transfer’s Marcus Hook expansion is poised to exert a major influence on ethane flow patterns, reshaping the dynamics of ethane transportation within and beyond the Appalachian basin.

Commercial Implication

A pivotal commercial consideration for gas producers revolves around the timing of Energy Transfer’s export project, which entails the construction of fully cryogenic tanks and chillers. Assuming a construction timeline of three years, the expansion is anticipated to come online by late 2027 to 2028, aligning closely with the original contract expiration schedule of the ATEX ethane pipeline. Historically, weakness in Mont Belvieu ethane prices has translated into netbacks on the ATEX pipeline that consistently been lower than gas prices in the Appalachian basin (rejection economics), resulting in negative ethane frac spreads for Appalachian producers. Consequently, disregarding “sunk cost economics” for firm shippers, ATEX has functioned as the conduit to the market of “last resort.”

It appears unlikely that the netback situation for producers on ATEX will experience significant improvement in the foreseeable future. As producers contemplate their ethane takeaway options beyond 2027/2028, they will closely monitor developments concerning Energy Transfer’s ethane export expansion project and weigh the cost implications of eastward transportation against upcoming contract renewals on marginal pipelines. Should the Energy Transfer project offer a more lucrative alternative, enhancing ethane netbacks for producers, the re-contracting landscape for marginal pipelines like ATEX may become notably interesting.

Food for thought…

1. Will Enterprise be forced to consider discounts on the current tariff?
2. If so, at what discount level will bring ATEX to parity with netbacks from export markets?
3. Can Energy Transfer’s project be at a scale that can provide 1:1 replacement?
4. What role will increase in wet gas production and ethane rejection play?

• Amol Wayangankar

If you are interested in our Regional NGL Benchmarking Outlook and obtaining a detailed analysis on Appalachian basin NGLs, please contact us at info@enkonenergy.com. We encourage you to subscribe to our articles to get weekly articles via email.

Enkon Energy Advisors is a boutique consulting firm specializing in oil & gas, and energy transition since 2012. We bring deep expertise in a range of markets including natural gas, NGLs, Oil, LNG, and Energy Transition where we provide commercial and market advisory to investors, energy companies, and project developers with consulting services, subscription reports, and analytics, with the goal of delivering commercially actionable outcomes to our client.