Aug-2014

Economic alternative for remote and stranded natural gas and ethane in the US

The recent abundance of natural gas in widespread locations of the US has resulted in many resources being remote or stranded, creating the need for economical options for moving those resources to market.

Joel Cantrell, Jerry A. Bullin & Gavin McIntyre, Bryan Research & Engineering Inc
Clark Butts & Bryon Cheatham, BCCK Engineering Inc

Article Summary

In many cases the gas is ethane-rich resulting in a need for new ways to monetize an otherwise low value ethane product. The current market price for ethane, in particular, is well below historical values and projections for the future indicate that this market condition will persist. Synfuels International, Inc. has developed a process for converting natural gas and light hydrocarbons to a high value, easily transportable gasoline product and, thereby, substantially increasing the value of the product. The process has great returns with payouts of about two years for ethane and about three years for natural gas streams of 15 – 20 MMSCFD and larger. The process concept and economics will be discussed. 

Introduction
The recent abundance of natural gas in widespread locations of the US has resulted in many resources being remote or stranded, creating the need for economical options for moving those resources to market. In many cases the gas is ethane-rich resulting in a need for new ways to monetise an otherwise low value ethane product. The current market price for ethane, in particular, is well below historical values and projections for the future indicate that this market condition will persist.

Natural gas production in the US has increased substantially in the last 10 years. The growth for natural gas production for the United States, along with some individual states is shown in Figure 1. The greatest contribution to these increases has been through the exploitation of shale formations. These increases have been seen not only in traditional gas production areas such as Texas and Louisiana, but also non-traditional places such as Pennsylvania and Arkansas.

In many areas, large quantities of natural gas is being flared due to the lack of pipeline availability. For example, as of June 2012, in N. Dakota over 200 MMSCFD was being flared. This represents about one third of the total gas production in the state [Curtis 2]. Some of these wells will be connected to a pipeline within about a year while others will continue to be flared on a longer term basis.

Along with the large increase in natural gas production in the U.S. indicated in Figure 1, there has been an even larger increase in natural gas liquids, of which ethane is the greatest volume. This increase in ethane is shown in Figure 2 [EIA 3].

From 1984 to 2008, ethane production gradually rose by approximately 40% from 500,000 BPD to 700,000 BPD. From 2008 to 2012, ethane production grew almost another 40% from 700,000 BPD to nearly 1,000,000 BPD. These production numbers do not include the more than 50,000 BPD that was either flared or rejected into the residue gas stream. In total, the US has increased available ethane by more in the last 4 years, than the previous 24 years.

By far, the dominant use of ethane is as a feedstock to Gulf Coast steam crackers to make ethylene, [Fasullo 4]. However, ethylene is not a finished product, nor one that is easily transported outside of the limited ethylene pipeline networks along the Gulf Coast. The only other significant use for ethane is in natural gas sales for its fuel value, which sets the ‘floor’ price [Fasullo 4].

Due to ethane’s limited value in the overall hydrocarbon production, shale plays are frequently developed without significant effort towards disposition of the ethane as a standalone product, [Curtis 2]. For example, in a typical Bakken gas with 12.2 GPM, the ethane content can represent about 44% of the total natural gas liquids by volume, but only 14% of the value. If the gas is produced in association with oil from a well with a Gas-Oil Ratio of 1.1 MSCF/bbl, the ethane represents a meagre 1% of the value of the hydrocarbons, despite being 10% of the total hydrocarbon liquids produced.

The prices for Henry Hub natural gas, Mont Belvieu purity ethane, and West Texas Intermediate crude (WTI), all in terms of $/MMBTU are shown in Figure 3, [EIA 5, EIA 6, Midstream Monitor 7]. Historically, ethane has tracked near WTI, based on their respective heating values. This was true until about 2008, when ethane began to drop relative to crude. The primary reason for this drop was that newly available ethane began flowing, much of it from Texas shale. As can also be seen from Figure 3, the market separation in terms of $/MMBTU between gas and ethane prices and crude prices is currently the highest over the last seven years at least. Furthermore, this trend is expected to continue for many years.

The ethane production for the U.S. and the Texas Inland refinery district which includes the Eagle Ford, Barnett, and Permian Basins is shown in Figure 4 [EIA 8]. Figure 4 also shows estimated ethane production for the Appalachia 1 and MN, WI, ND, SD (Midwest) refinery districts which include the Marcellus/Utica and Bakken, respectively. While the Marcellus/Utica and Bakken districts had no significant ethane production reported, the chart shows the estimated ethane amounts produced from the fields and sold with the residue gas, based on other NGLs produced.
From 2008 to 2011, ethane maintained a significant cost premium over natural gas, despite the rising supply shown in Figure 3. With the increasing price separation between oil and ethane, ethylene crackers that used heavier, oil price-dependent feeds such as naphtha, butane, and propane began shifting their feedstock to cheaper ethane, [Fasullo 4, Ordemann 9].
    
Limits on Ethane Price/Demand Growth
Several new ethylene plants are being contemplated along with some expansions to consume some of the expected production, [Fasullo 4]. To integrate these plants with existing infrastructure for feedstock delivery and product off-take, they are almost exclusively built on the US Gulf Coast, [Fasullo 4]. This relative proximity to other ethylene producers requires world-class economies of scale to compete. As such, these plants represent very large ethane commitments, typically on the order of 95,000 BPD (149 MMSCFD) of ethane for the life of the plant. They also involve very large capital commitments, in the range of $1.7 to 3 billion [Kaskey 10, Marais 11] depending on the sophistication and product slate. Because recent shale resources are located far from the Gulf Coast, extensive pipelines are required to bring the ethane to the cracker. The overall risks of constructing new ethylene capacity, including feedstock, transportation, competition, and capital are sizeable, on top of the normal risk of price and demand for the final product.

As mentioned above, transporting ethane from new production areas such as the Bakken and Marcellus fields is not a trivial matter. Even if a pipeline exists and capacity is available, transportation cost impacts ethane value to the producer significantly. The estimated transportation fees associated with moving ethane from some of the major shale basins to Mont Belvieu are shown in Table 1. In most instances, a purity ethane pipeline was not available, so pricing for a Y-grade product is used in the table. Data is from FERC non-incentive tariffs, [FERC 12].

The Opportunity
The problem of residue gas and ethane oversupply and, particularly, localised oversupply in remote and stranded locations is in need of a solution that can convert moderate quantities (15 to 50MMSCFD and up) of residue gas and ethane to a higher value and more easily transported product. These small volumes put it far outside of the reasonable scale of a ‘local’ ethylene plant. In many cases, pipelines may be at capacity or not available at all. Furthermore, even if pipeline capacity is available, high transportation fees may result in very low prices for natural gas and ethane in the field. In addition, the current trend of very large differences in gas and ethane prices relative to crude prices is expected to continue for many years.