Growth in hydrocarbon production continues to impress the markets despite producer capital discipline and access to capital. While U.S. producers in general have shown stupendous capital control, growth continues at a striking rate – For example, Permian natural gas continues its ascent – adding ~3 Bcf/d since Jan 2022 (~99% of which is NGL-rich gas) while crude oil has grown by ~0.7 Million barrels per day in the same time period. We expect this trend to continue, aided by additional gas and NGL pipeline capacity, increasing GORs for existing wells, and increased flow of capital to this sector post-Russian-Ukraine conflict. What does this mean for NGLs and more specifically the ability of the Mont Belvieu fractionation complex to cater to this growth in NGL volumes? Our analysis suggests that spot fractionation rates are likely to come under significant pressure to increase towards the end of 2023 or early 2024, especially if there are major construction delays in bringing on fractionation trains.

Between 2019-2021, U.S. Gulf Coast operators brought online significant regional Y-grade pipeline takeaway capacity and Mont Belvieu NGL fractionation capacity. The unabated increase in natural gas production has been chipping away at surplus pipeline capacity out of key NGL-producing regions and fractionation capacity at Mont Belvieu and Sweeny. A case in point is the Permian, where Y-grade volumes have grown into the spare NGL pipeline capacity. As shown below, Y-grade volumes have grown ~1.0 Million barrels a day since the beginning of 2021 and chipped away at the available pipeline capacity existing Permian.

While in aggregate Permian NGL pipeline, takeaway capacity is sufficient with a utilization rate of 90% in 4Q 2022, space is filling up fast and capacity expansions on existing pipelines (such as Shin Oak and Grand Prix/Daytona) are over a year away. Utilization on individual pipelines has ranged from 65% to 100% with most pipelines running close to or at capacity by the end of 2022. If production growth continues at current rates or ethane demand picks up (both with high possibility), we expect NGL pipeline capacity to be inadequate by end of 2023/1Q 2024 which indicates significant risk on spot rates on NGL pipelines until the point in time when current expansion projects commercialize. Longer term, our analysis indicates capacity constraints developing beyond 2027, if no new pipeline projects are announced by 2025.

On the fractionation side in Mont Belvieu/Sweeny region, capacity is getting tight with the 4Q 2022 utilization rate reported at 88%. Like NGL pipelines, fractionation volumes have been steadily growing into fractionation capacity since the 1^st wave of capacity addition post-2019. Y-grade flows to USGC for fractionation during late 2018 exceeded the Mont Belvieu/Sweeny fractionation capacity, providing price signals for significant fractionation expansion in the Gulf Coast region. Consequently, significant capacity came online in 2019 and 2020. 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 and capacity tightness observed towards the end of 2022.

While P66’s frac 4 at Sweeny helped alleviate immediate capacity constraints, there is a possibility of constraints developing during the end of the year or 1Q 2024, if there are any delays in the commercialization of subsequent frac trains. Despite this tightness, the GCF fractionator located in Mont Belvieu (co-owned by EnLink, P66, and Targa) remains mothballed and not likely to commence operations for at least 8-12 months.

Can persistent $70+/Bbl oil prices, increased call on ethane extraction (from increased cracker utilization/higher exports), and delays in some fractionation expansions create a capacity squeeze? How will this impact the “T&F” rates for producers and walk-up shippers? For a deeper dive into the Permian pipeline NGL takeaway and Mont Belvieu NGL fractionation outlook, drop us a line at info@enkonenergy.com.