Raymond James
U.S. Research
Please read domestic and foreign disclosure/risk information beginning on page 6 and Analyst Certification on page 6
.
© 2010 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.
International Headquarters:
The Raymond James Financial Center
|
880 Carillon Parkway
|St. Petersburg, Florida
33716
|
800-248-8863
What are NGLs Used For?
Industrial end-users are the main drivers of demand for NGL products in the U.S. Specifically, the petrochemical industry is the largest user at ~50%of total consumption, primarily using the individual components of the NGL stream to produce olefins such as ethylene. Petrochemical producersengage in a process known as steam cracking to break down large hydrocarbons (NGLs, Naphtha, Gas-oil) into olefins (ethylene, propylene, andbutadiene). These chemicals are used in the production of plastics, fibers, and elastics. For reference, ethylene is a critical feedstock for theindustry, as it is their largest input by volume and has the greatest number of derivatives. Ethylene is essentially used as a raw material for a widevariety of inputs for making plastics, fibers, and elastics.The adjacent table details how each NGL component is used within thepetrochemical, industrial fuel, and refining industries. Thepetrochemical industry makes use of all NGLs, most often ethane.Additionally, the domestic and industrial consumers use propane asheating, engine, and commercial fuel. The refining industry typicallyuses butane, isobutane, and natural gasoline as a blending componentto produce motor oil. To clarify, while production in liquids-rich playscan have a significant component of condensates (oil liquids), in thecontext of this discussion, we are referring to natural gas rich in NGLs.
The NGL advantage: Light-end (NGLs) vs. Heavy-end (Crude-based) Feedstocks.
NGLs compete with crude-based feedstocks for use by petrochemical producers in the stream-cracking process. Given that gas prices haveremained depressed over the past two years while crude prices have more than doubled from their lows of ~$31/bbl at the start of 2009, crude oilfeedstocks have remained more costly on a relative Btu basis when compared to NGLs. As a result, NGLs have acquired a large share of thepetrochemical feedstock market due to the competitive pricing advantage and margins yielded to petrochemical producers. In our view, a long-term shift in the crude-to-gas ratio (Btu basis) will support continued preference for light-end feedstocks (i.e. ethane) in petrochemical production.Given the current RJ commodity deck calling for a paradigm shift in the crude-to-gas spread (average of ~17.5:1 and ~19:1 for FY10 and FY11,respectively), this pricing divergence stands to keep NGLs cost basis relatively low vs. crude-based alternatives. As previously mentioned, NGLs holda dominant share of the steam-cracker feedstock market, represented almost 85% of total feedstocks consumed by U.S. crackers in July.
Ethane to Remain in the Driver’s Seat as the Primary Feedstock for Ethylene Production Over the Long Term.
Ethane, the largest component of the NGL stream, has emerged as the primary U.S. steam cracker feedslate, averaging ~55% of the total feedslatein 1H10. For context, this marks a solid ~310 basis point improvement vs. the 1H09 average of 51.7%, and an even more impressive ~ 1,000 basispoint improvement vs. the 18-year historical average (~44.6%). According to industry data, on an absolute basis, estimates suggest U.S. streamcracker demand for ethane averaged ~830 MBPD during 2Q10, surging even higher in July to an estimated ~919 MBPD. Should this estimate holdtrue, July 2010 would not only surpass the previous high by ~3% (895 MBPD during 2/2010), but would also come within 80 basis points of a newall-time high for ethane’s market share of the feedslate (~57% vs. 57.8% set in 1/2010). Additionally, the charts below detail domestic steamcrackers tracking at near full effective utilization (~91% in July). While subject to revision, should this figure and the July ethane demand estimatehold true, this would represent some of the highest thresholds the industry has experienced during the past two decades. Clearly, ethane demandis tracking at record highs. However, with no new ethylene capacity scheduled to come online, attention shifts to the amount of remaining flexi-cracking capacity that can switch to cracking the light-ends, as well as the time lag to add new capacity. All of this lends to even more uncertaintyaround the sourcing of additional demand to absorb growing NGL supplies.
Eventually, a limit will be reached as to how much ethane can becracked, and we believe the industry is rapidly approaching that limit.
0%10%20%30%40%50%60%70%80%90%100%02004006008001,0001,2001,4001,6001,8002,000EthanePropaneButaneNaphthaGas OilSteam Cracker Utilization Rate
M B P D
Monthly US Steam Cracker Feedstocks and UtilizationRates 1/08 -7/10
% U t i l i z a t i o n
Source:Hodson9/08 DataImpacted for Comparability Purposes by Hurricane Ike
0%10%20%30%40%50%60%70%80%90%100%-2004006008001,0001,2001,4001,6001,8002,000EthanePropaneButaneNaphthaGas OilSteam Cracker Utilization Rate
M B P D
Annual US Steam Cracker Feedstocks and UtilizationRates 1992-2010
% U t i l i z a t i o n
Source:Hodson
What Sets NGL Prices?
Historically, NGLs have traded at ~60-70% of the price of a barrel of crude. However, more recently, NGLs have traded at ~50-60% of the price of crude, averaging ~53% in July and reflecting ~54% as of 8/13. Ethane has traded at 40-55% of crude over on-average over the past 15 years but
ProductPetrochemicalFeed StockDomestic andIndustrial FuelRefineryFeed StockOther
Ethane 97.0% 1.5% 0.0% 1.5%Propane 42.0% 52.0% 0.0% 6.0%Butane 21.0% 0.0% 66.0% 13.0%Isobutane 43.0% 0.0% 57.0% 0.0%Natural Gasoline 28.0% 0.0% 44.0% 28.0%
Source: J Richard Moore
Natural Gas Liquids Products and MarketsMarkets (% of Consumption)
Leave a Comment