“Mont Belvieu fractionation capacity is not overbuilt – it is ahead of its time by few quarters.” At least, that is what one executive from a midstream company with a frac and storage position at Mont Belvieu told me in a recent conversation. While he was directionally correct, he was perhaps a little generous on the timing. While fractionation capacity and Y-grade volumes are moving towards alignment, we think this process will play out across several quarters – probably well over a year.

2020 has changed the growth trajectory and dynamics of hydrocarbon production in the U.S., including in prolific regions like Permian and Appalachia. Forecasts of crude and NGL volume growth 2019 are completely out of date due to the pandemic: they have been replaced with tamer long-term growth trajectories, and even short-term production declines in economically challenged regions like Bakken, the Rockies and MidCon. As other regions’ production declined, however, U.S. Gulf Coast operators brought online significant regional Y-grade pipeline take-away capacity and NGL fractionation capacity. The pandemic crushed both fuel demand and oil production; neither has recovered fully, and many large oil pipelines had capacity factors of 60% or lower at the end of 2020. Development of a de facto secondary capacity release market is inevitable, where operators can use their marketing arm to buy space on the pipeline per FERC tariff rates and sell it to ad-hoc buyers at discounted rates.

NGL pipelines face a similar dynamic. Reported and anecdotal data both suggest all is not well: it may take a few years to balance production growth and installed capacity among both incoming Y-grade pipeline capacity into Mont Belvieu and Mont Belvieu fractionation balances. By 4Q 2020, five major regions (all west of the Mississippi Permian, Eagle Ford, Mid-con, Niobrara, and Bakken) in aggregate processed ~41 Bcf/d of wet gas, resulting in 3.9 Million Bpd of NGL production (not including ethane rejected in the gas stream). As production rose, NGL pipeline capacity expanded to accommodate greater NGL volumes for transportation to gulf coast fractionation facilities. In fact, aggregate NGL pipe capacity has been adequate for flows to the USGC/Mont Belvieu/Sweeny region for some time now. Even assuming the most aggressive production growth scenarios, we do not find that NGL regional take-away capacity will be a constraining factor for a few years.