What’s next for U.S. ethane exports?

U.S. ethane markets have evolved from being “ethane short” pre-2012 to “ethane long,” owing to the success of the U.S. shale revolution. Successful shale drilling started in gas-rich basins such as the Barnett and the Haynesville, quickly spread to NGL-rich gas drilling in the Appalachian basin, and by 2012, U.S. E&P companies had replicated shale drilling techniques in tight oil patches in Bakken, Eagle Ford, Mid-Con, and the Permian. NGL production quickly grew along with “associated gas” production: development of NGL-rich shale plays caused aggregate ethane extraction potential in the U.S. to increase substantially from ~1.5 Million BPD in 2012 to ~3.2 Million bpd by the 2^nd quarter of 2020, or a whopping post-2012 11% CAGR.

Let’s define an important term for non-specialist readers before diving in. Ethane potential refers to the theoretical volume of ethane that can be extracted from the inlet gas stream subject to the technical maximum limits of each gas processing plant in the U.S. Realistically, the maximum ethane that can be extracted may be further constrained by availability of downstream pipeline or fractionation capacity. Ethane potential increased with significant contributions from Appalachian, Permian, and Eagle Ford.

The U.S. market was unable to use all this ethane, however, as demand from domestic U.S. steam crackers consumption and ethane exports failed to match the growth in ethane supply potential. While U.S. ethane consumption has grown by ~1.0 Million bpd since 2021, this consumption still does not utilize all of U.S. ethane potential. Consequently, by 2020, ~1.3 Million of ethane was rejected in the U.S.

Shale regions with high T&F fees (i.e. those regions farthest from the Mont Belvieu complex, such as Appalachian, Bakken and Rockies) accounted for ~60% of total 2020 ethane rejection. As seen from the figure below, there is plenty of U.S. ethane available (even at current reducing drilling levels). At the right price, the U.S. can meet incremental demand from U.S. crackers and ethane export terminals.

Recent Developments in Ethane Exports

Since the US industry started in 2016, ethane terminals Marcus Hook and Morgan’s Point have incrementally increased the US’s waterborne exports to about 175 Mb/d in 2020. The new year brought Energy Transfer’s new Orbit Ethane Export Terminal, which could export up to 150 Mb/d of Ethane to a new Chinese customer. Finally, Energy Transfer announced a 135 Mb/d expansion at its Marcus Hook facility; the expansion project is expected to be in service by 3Q 2023.

U.S. ethane potential is expected to stay one step ahead of demand despite the third wave of U.S. steam cracker projects and the ramp-up in export terminal capacity; new U.S. crackers and new ethane export terminals will likely enjoy ample future supply. While ethane exports and new U.S. ethane crackers will relatively tighten U.S. ethane balances (and provide tailwinds to Mont Belvieu ethane price), our analysis suggest that additional volumes of ethane can be exported. The key difficulty for any new ethane export projects will be cultivating ethane export markets.

Good International Demand is so Hard to Find

Most of the “low hanging fruits” in export markets have been snatched already. Less complex crackers with maritime access (such as INEOS, Borealis, Shell, Exxon, Reliance, Braskem etc) have already been converted to ethane. The remaining opportunities have much less favorable economics. Additional cracker conversions are less technically plausible and/or more expensive. Asian greenfield cracker development, on the other hand, has its own unique infrastructure challenges: the procurement of Very Large Ethane Carriers, receiving tanks, pipeline connectivity in destination markets, and an exceedingly small set of credit worthy ethane buyers that can commit to long-term contracts (say, 10-15 years) with U.S. export projects.

“Creating” new demand for export projects will be difficult due to a dearth of potential credit-worthy customers. Global ethane trade is currently characterized by long-term contracts: spot markets are virtually non-existent and serve only a handful of creditworthy buyers. Ethane export markets are comparable to LNG export markets 40 years ago – a point-to-point pipeline over water! In other words, the spot market is non-existent. Currently, there are only a handful of customers who fit the title of credit-worthy, and they are all taken. In sum, we believe that ethane availability in the U.S. will not be the challenge for new ethane export projects. Finding credit worthy partners will be the greatest obstacle.