The US NGL business wrestles what to do with its gusher of supply

There’s a Seinfeld episode where Jerry’s parents cancel dinner at the Costanzas, for a very simple reason: they can’t stand them. Mrs. Costanza is then seen to be fretting, “What am I going to do with all this paella?” It’s the Spanish dish she made for the big event.

As people observe the US NGL industry, they may be exclaiming something similar: “What are we going to do with all these liquids?”

Simply put, there is an issue regarding whether the US can take in all this added supply, forecast to come to market in the next two to three years as a result of the shale gale bringing more quantities of crude, NGLs and natural gas on to the market.

So far, the answer for at least one stream–ethane–is yes, as the lightest gas liquid remains the most economically favorable feedstock for the petrochemical industry.

“Don’t underestimate the US petrochemical industry’s ability to consume ethane,” Enterprise’s VP of NGL Lynn Bourdon said last week at the Platts NGL Forum, a phrase he reiterated six months ago at the Purvin & Gertz LPG Seminar.

While the liquids rush has not yet hit the market with full steam, ethane-consuming chemical crackers continue to operate near 1 million b/day through the first three quarters of 2011, a healthy rate.

Market observers concede the rush to liquids will soon gave the US market a bounty of supply, with some forecasts calling for 2.80 million b/d of total NGL supply by the end of this decade. (Current supply is approximately 2.2 million b/d.)

The liquids-rich shale plays, most notably the Marcellus Shale, will also provide the market with a higher percentage of ethane from the NGL barrel, up to slightly more than 40% from around an average of 36% historical composition.

But even as it lightens, what about the supply growth of propane and heavier liquids? “Exports will be needed to balance supply growth,” John Auers of consultant Turner Mason said at the forum.

As expected, companies are building out export capacity, and halfway through 2011, US companies were ripe with LPG export/import terminal expansion announcements. Vitol, Targa, ConocoPhillips and Enterprise all formed some sort of plan to expand LPG export capacity from the US Gulf Coast.

Could it be feasible that the US market could become too dependent on exports? Chemical companies producing in the US currently have an economical feedstock and product margin advantage over just about every other region, except possibly the Middle East. Primary reason: dirt-cheap natural gas.

With natural gas so cheap, one analyst tried to put a benchmark on what is needed to continue production, and allow ethane’s growth to continue at the expense of other feedstocks, such as naphtha.

Peter Fasullo of Envantage said the ratio of natural gas to crude on a per barrel basis must be less than 40% of the price of crude, on a Btu basis, and ethane must be valued around 30% of crude oil.  Based on a price of WTI (not a perfect correlation, because of WTI’s well-known oversupply issues at Cushing), that spread now stands at about 27% for natural gas, and 45% for ethane to WTI.  But if you lay current ethane prices against an LLS price of near $100, the ratio is about 35%.

Fasullo said that if those targets are met, it would take a global recession to derail the outlook for ethane and ethylene.

But suppose the global market just can’t handle all this propane and butane? In the short-term, softening European propane prices are weighing in on the arbitrage from the Gulf Coast. Market sources noted in late September that three cargo vessels, loaded from the Gulf Coast and headed to Europe, were canceled due to lack of demand and closing of the arbitrage window.

Petral Worldwide’s Dan Lippe said international buyers will continue to load cargoes out the US Gulf Coast, as propane supply will eventually increase and domestic demand will be essentially flat. Lippe, in agreement with Auers, said exports will keep the market in balance, but cautioned that inventories may remain tight. US propane stocks currently are the lower end of the 5-year average.

Perhaps the answer is Asia. When the Panama Canal expands, some folks believe that the shortening of the timeframe for shipments between the US Gulf Coast headed out to Asian markets opens up ample arbitrage opportunities. And many believe long-term petroleum demand in Japan is expected to heighten with the fallout from Fukushima.

Could Asia be where the US can send all this paella?