Ethane’s Tumble Seen Boosting Profits at Dow to Westlake: Energy

If you want to make a chemical company boss smile these days, here’s the word to use: ethane.

Ethane isn’t a term ordinary people come across every day but after processing the natural gas liquid into ethylene it does end up in a lot of ordinary things: plastic bags and bottles and even bumpers on cars. It’s used to make chemicals found in everything from antifreeze to diapers.

Just five years ago, ethane had gotten so expensive that U.S. chemical companies had begun to move much of their ethylene manufacturing elsewhere to take advantage of cheaper raw materials.

Not now. Owing to the shale-gas revolution, a glut of ethane has flooded the market, so much so that this natural gas liquid is poised to become cheaper than even natural gas itself. It’s already fallen 69 percent in two years. If that trend continues it could materially boost profits for Dow Chemical Co., LyondellBasell Industries NV and Westlake Chemical Corp., for whom ethane is a critically important raw material.

“We’re quite happy with current prices, and if it goes a little lower, our smile will get bigger,” said LyondellBasell Chairman and Chief Executive Officer Jim Gallogly, whose company buys ethane to make polyethylene, a plastic used in shopping bags and packaging.

The U.S. now rivals the Middle East as home to the world’s lowest-cost plastics producers, helping LyondellBasell and Westlake. Shares of both companies have more than doubled in the past two years as they posted record earnings.

‘Significant Upside’

In contrast, net income at Germany’s BASF SE, the world’s biggest chemicals company, fell 22 percent last year on lower earnings from chemicals and plastics. At China Petroleum & Chemical Corp., known as Sinopec, net income dropped in 2012 as operating income from its chemicals unit plunged 96 percent.

Chemical producers in the U.S. “may have significantly more upside to margins than previously contemplated even without rising chemical prices,” Charles Neivert, an analyst at Cowen & Co. in New York, said in a Sept. 30 note. “There may very well be another leg down in ethane cost over the next few years.”

Ethane, which doesn’t trade on an exchange, currently fetches 25 cents a gallon, according to data compiled by Bloomberg. Its premium over gas is 1.6 cents a gallon, compared with a 2011 peak of 71.4 cents.

Too Hot

Typically ethane fetches a higher price because if it doesn’t get sold to chemical makers, it can be added back to gas pipelines for power and heating. That’s changing as so much ethane is now being added into the gas supply in some regions that no more can be added without the gas burning so hot that it damages stoves, water heaters and turbines.

“The gas grid can only take so much ethane,” said Anne Keller, manager of natural gas liquids research at Wood MacKenzie in Houston.

About 200,000 barrels of ethane a day are “rejected” and go back into the gas supply, and that could approach 500,000 barrels a day in a few years amid rising NGL production, Keller said. New pipelines to export ethane from saturated markets, such as West Virginia, Ohio and Pennsylvania near the Marcellus shale formation, will help absorb the excess, she said.

NGL producers have begun to view ethane as something to be disposed of while they focus on more profitable liquids such as propane and butane, according to Neivert.

ATEX Pipeline

The slide in ethane prices may begin to accelerate as soon as the first quarter of 2014, when Enterprise Product Partners LP opens its Appalachia-to-Texas ethane pipeline, known as ATEX, Keller said in an Oct. 3 phone interview. The 1,230-mile (1,980-kilometer) pipeline has the capacity to bring 190,000 barrels a day of ethane to Gulf Coast petrochemical makers, exceeding current demand by about 20 percent.

Ethane could dip as much 4 cents below gas prices until suppliers from the Rocky Mountains and other regions respond by cutting ethane shipments to the Gulf, according to Keller.

The duration and depth of the discount depends on how much ethane is piped to the Gulf and the timing of expansions by LyondellBasell, Westlake and others at ethane-consuming ethylene plants, said Kelly Van Hull, manager of energy analytics at RBN Energy LLC. Dow and Enterprise declined to comment on the outlook for ethane and Westlake didn’t respond to requests for comment.

Ethane at Mont Belvieu in Texas, the main U.S. NGL storage hub, has traded at a steep discount to gas just twice in the past decade -- the fourth quarters of 2005 and 2008. Supply disruptions due to hurricanes played a role in both instances, Keller said. More recently, ethane fell to a discount of less than 2 cents for 10 days in June, the data show.

Propane, Butane

NGL producers are already supplying ethane at a loss, after taking into account the expense of separating it from the gas stream and transporting it via pipelines, according to Van Hull. They persist because of contractual obligations to supply chemical makers and because ethane is usually found mixed in with propane and butane, two much more valuable NGLs.

Propane has rallied 35 percent since June 20 at Mont Belvieu and butane has climbed 37 percent, while ethane has gained just 4.2 percent, according to data compiled by Bloomberg.

“Propane is what supports continuing production, because you are already eating it on ethane,” Van Hull said by phone on Oct. 3.

The U.S. has tripled capacity to ship propane and butane since 2011, according to an April report by Bentek Energy LLC and RBN Energy. Exports of NGLs, primarily propane, rose 55 percent to a record 555,000 barrels a day in July, from 357,000 barrels in June, the Energy Information Administration reported Sept. 27.

NGL Expansion

There’s no sign of an end to the expansion in NGL production. By 2018, Gulf Coast capacity to export propane and butane will quadruple to 800,000 barrels a day, Van Hull said.

Still, not everyone sees ethane trading for less than gas for a sustained period. While it will occasionally fetch a discount, more often it will closely track the gas price, until the opening of new ethylene plants boosts demand later in the decade, said Keller and Van Hull. That’s also the view of Rotterdam-based LynondellBasell’s Gallogly, who spoke in a Sept. 30 interview at the opening of his company’s research center in Channelview, Texas.

Enterprise Products is trying to find export markets for ethane that may reduce the oversupply. One way would be to convert European producers of ethylene to ethane from naphtha, a more expensive oil derivative, the Houston-based company said in a Sept. 23 presentation. Ethane producers could boost U.S. demand by supplying individual power plants and industrial customers, who would need to change their equipment to burn the fuel.

‘Further Underwater’

“Deals might be struck to put dedicated gas lines to power plants,” Wood MacKenzie’s Keller said. “It’s been looked at in the past.”

Pipeline operators such as Enterprise also may find ways to sell ethane into municipal gas grids in Louisiana and other markets that haven’t reached their limit on using high-energy ethane, Peter Fasullo, a principal at En*Vantage, a Houston energy consultant, said in an Oct. 3 phone interview.

They may need to hurry up as ethane prices slide. It has been trading at just 10 percent of the energy value of West Texas Intermediate crude for months and can’t get much cheaper, because producers are willing to lose only so much, Fasullo said.

“I don’t think it can go any further underwater,” he said. “Everybody is already drowning.”