The Daley Note: August 1, 2023
Ethane prices hit $0.39/gal on July 17 as persistent heat waves in Texas may be impacting production while demand reached record highs.
Until recently, ethane production has also been hitting record highs. Since September 2022 when Permian gas egress constraints first occurred, total ethane plant production increased 14% (+335 Mb/d) through April according to the latest EIA data and has outpaced total NGL growth over the period (+5%, +277 Mb/d). We estimate that the TX Inland sub-PADD, which includes most of the Permian, accounts for 42% of the growth in ethane production.
One would think that spike in ethane production would lead to price declines, but the higher demand has been able to absorb this growth. Total US ethane demand has been 4% higher YTD vs. 2022, driven by higher exports (+10%) as well as domestic demand (+3%).
We expect ethane production to continue to grow due to the Permian, as gas egress capacity remains tight and new processing plants are placed in-service: since 4Q22, 1.1 Bcf/d processing capacity has been added in the basin and we expect an additional 1.1 Bcf/d will be added by the end of the year.
However, production may have hit a snag as consistently above average temperatures in Texas impact processing plant efficiency and ability to recover ethane. Higher temperatures have led to higher local gas demand, which has resulted in a 21% M-o-M increase in Waha gas prices. However, Mont Belvieu ethane prices rose 56% as the heat limits supply and demand remain high. Adding to the potential supply disruption, FERC-indexed tariffs on liquids pipelines increased 13.3% starting July 1, increasing the frac spread needed to incentivize recovery. The Permian frac spread had declined from ~$0.20/gal average in January to $0.09/gal in June, before the recent run-up in ethane prices sent it to ~$0.19 for July.
Heat impacts might have mixed effects for midstream. Higher prices will lift G&P POP earnings, but any impact to plant NGL production might limit a company’s ability to take advantage. We expect newer plants to fare better, which may help companies like EnLink (ENLC) that brought its Phantom plant online in 4Q22. Energy Transfer (ET), Targa (TRGP), Kinetik (KNTK), and MPLX (MPLX) have also built new plants recently. However, the dip in ethane may lower 3Q23 volumes for NGL pipelines out of the basin, impacting Enterprise (EPD), ET, OKE and TRGP.
Temperatures have cooled down in Texas and ethane prices are back to $0.30/gal, still higher than average prices in June. Though the frac spread has also come down to $0.15, it is still high enough to incentivize recovery. - Christina Adjiman Tickers: ENLC, EPD, ET, KNTK, MPLX, OKE, TRGP
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