Robust domestic liquids supply faces takeaway constraints

Belcher

The U.S. supply equation continues to be dominated by the shale boom. The recent recovery of oil prices makes this even more the case as producers double down on their existing positions and look at returning to the more marginal basins.

For the domestic natural gas market, this means more associated gas production and supply in the producing basins. But that supply is being constrained by the lack of pipeline takeaway to market.

The ramp-up in oil production and associated gas is also resulting in greater production of natural gas liquids (NGLs) in the Permian Basin, Eagle Ford, Bakken and other shale basins. This supply is also constrained by the lack of NGL pipeline capacity to carry product out of those basins and fractionation capacity needed to produce marketable products.

Virtually all of the propane that moves from the Rockies and Bakken shale, as well as that which moves from the Texas shale plays to the Gulf Coast, moves as a component of Y-grade. The biggest challenge domestically is getting the Y-grade stream to the Gulf Coast to crack into ethane, propane, butane, isobutane and natural gas.

Historically, the price spread between the Conway (Kansas) and the Mont Belvieu (Texas) hubs has been very small, usually below a nickel. That has changed in the past few months. Starting in April 2018, the spread increased to around 18 cents a gallon and has, on occasion, moved above 25 cents a gallon.

The reason for this is, in part, the lack of capacity for purity products, including propane, to move out of fractionation facilities located near Conway. There are only three pipelines capable of moving purity products to Mont Belvieu. There is much more pipeline capacity to move Y-grade to Mont Belvieu’s fractionators. So, as the supply of NGLs has increased from more activity in the shale plays, the spread between Mont Belvieu and Conway has increased.

Exacerbating this situation was the shutdown in late winter and early spring of the Mariner East 1 pipeline and problems associated with construction on Mariner East 2. That resulted in propane barrels from the Marcellus and Utica shale plays, which would have been piped to Marcus Hook, Pennsylvania, being diverted on railcars to Conway.

So, the ramp-up in production has forced a bottleneck in terms of Y-grade takeaway and fractionation capacity. Mont Belvieu has about 2.1 million barrels per day (bpd) of fractionation capacity. That situation is expected to improve slowly as 465,000 bpd in new fractionation capacity comes online in the next couple of years.

Despite the constraints in pipeline and fractionation capacity, there remains a robust domestic supply of propane, and this is forcing domestic propane to be priced based on international commodity prices, a trend that has been in place for several years. In general, this is good news for U.S. marketers and consumers.

Jack Belcher is executive vice president at HBW Resources, a consulting and advocacy firm based in Houston with offices nationwide.

Photo: HBW Resources