There’s been a lot of hullabaloo over Chesapeake Energy Corp.’s announcement that it plans to ship at least 75,000 barrels of ethane from its Appalachian operations to Texas, where the ethane can be used in the Gulf Coast petrochemical industry. The problem: West Virginia officials desperately want a billion-dollar petrochemical facility known as a cracker to be constructed in the state.
A local cracker would take advantage of the region’s massive natural gas reserves and create hundreds if not thousands of jobs. Crackers use byproducts removed from natural gas before the gas is burned in homes. One of those chemicals is ethane, a key ingredient in plastics. Here’s a good explanation of ethane, the chemical and the business.
The worry is that Chesapeake’s deal has robbed the Appalachian region of ethane.
To understand this debate there are a couple of things to keep in mind. We report on some of these points in an article titled Chesapeake Energy’s ethane deal not ‘cracker killer’, but let’s go over them in a bit more detail:
1) Ethane has to go somewhere. Gas being produced in the Marcellus shale play is a “wet gas,” meaning it contains a lot of stuff besides methane — methane is the main gas in “normal” (or “dry”) “natural gas.” That stuff isn’t easily transported in natural gas pipelines and can’t really be burned in people’s homes in large quantities.
Plus, ethane is worth more on its own than normal natural gas, so companies want to sell it separately.
Here’s the rub: Right now there isn’t really a facility like a cracker in the Appalachian region that can use massive quantities of ethane, according to industry people I’ve spoken with.
So, the industry says, it has to get the ethane out of the natural gas. But then, the industry says, they have to find somewhere to put the ethane or else they are going to have trouble dealing with all the gas they are getting from the Marcellus field. And, without an ethane-using cracker in the region, that somewhere isn’t here yet.
Chesapeake vice president for corporate development Scott Rotruck put it this way, “Without a market for the ethane, the industry could be choked in its formative stages. Now that we have made arrangements for pipeline outlet, we can produce more ethane and turn our attention to the development of a local cracker.”
2) Chesapeake’s deal is, in fact, a significant amount of ethane. There’s not really a solid number for how much ethane will come from the Marcellus field. But estimates from state officials and industry suggested there will somewhere in the range of 250,000 – 270,000 barrels per day of ethane by 2015 from the Marcellus play. This does not include ethane that will available from the Utica shale, another “wet gas” field which is also in this region. Indeed, the Chesapeake deal seems to assume the company will be getting ethane from the Utica play, which Chesapeake continues to buy land in.
But let’s just assume for a second there is no Utica. Let’s do some math based solely on the ~270,000 barrels per day of ethane we can expect from the Marcellus: How does Chesapeake’s deal affect the regional supply of ethane?
Here’s an email I received from state Commerce Secretary Keith Burdette, who Gov.-elect Earl Ray Tomblin has made the quarterback of the state’s quest for a cracker:
The Task Force quantified projected ethane volumes during its July 20, 2011 public meeting in Wheeling, West Virginia. I chaired that particular meeting. Task Force members quantified that approximately 265,000 Bbl/day of ethane would be produced from the Marcellus Shale by the end of 2015. The breakdown of that analysis was presented at the Task Force meeting as follows:
- Ethane separated in Northern WV and Western PA by MarkWest at its fractionators – up to 120,000 Bbl/day;
- Ethane separated in Siloam, KY by MarkWest at its fractionator – up to 20,000 Bbl/day;
- Ethane separated in Northern WV by Dominion at its fractionators – up to 47,000 Bbl/day; and
- Ethane separated in Northern WV by Caiman Energy at its fractionator – up to 75,000 Bbl/day.
Thus, from the perspective of projected ethane volumes in the Marcellus Shale, the Governor’s Office and the Department of Commerce have been working with total estimated volume of 270,000 Bbl/day, which includes some minor adjustments to the above calculation resulting from additional analysis undertaken following the July 20, 2011 Marcellus to Manufacturing Task Force Meeting. To date, MarkWest’s Mariner West pipeline project, which is slated to connect Pennsylvania to Sarnia, Ontario, Canada, has reported committed capacity of 50,000 Bbl/day. Furthermore, with Chesapeake’s recent announcement that it will commit to up to 75,000Bbl/day of takeaway capacity on Enterprise’s new pipeline project to the Gulf Coast, which is expected to have a maximum initial capacity of 125,000 Bbl/day, substantial pipeline commitments appear to have been made. Furthermore, Enterprise appears to be seeking an additional 50,000 Bbl/day for its Gulf Coast pipeline project in order to maximize capacity. To date, no further public announcements have been made regarding additional Enterprise commitments. If no further commitments are made to the Enterprise project, it appears that 125,000 Bbl/day have been committed. If Enterprise is able to secure the entire 125,000 Bbl/day that it seeks, it appears that 175,000 Bbl/day will have been committed. Subtract those numbers from 270,000 Bbl/day estimated production volume and you can calculate projected remaining volumes in both cases. It is also noteworthy that significant ethane production from the Utica Shale is not factored into this analysis as the projected ethane volumes discussed above relate to regional Marcellus Shale. Some industry leaders are suggesting that ethane volumes from Utica and Marcellus Shale will greatly exceed these numbers, but todate there is nothing quantifiable.
As a reminder, a world-class ethane cracker will utilize anywhere from 65,000 to 85,000 Bbl/day. I hope this is helpful……Keith
That is pretty much the most definitive statement I’ve seen on this whole issue using purely raw data.
Do the numbers one way and Chesapeake’s deal leaves the region barley enough ethane for a would-be cracker. Do the math another way and there’s a lot of wiggle room — as long as there isn’t another pipeline deal.
Keep in mind: there could be another pipeline deal.
Keep in mind: Burdette’s numbers don’t include ethane from the Utica.
Here’s an excerpt from an interview The American Oil & Gas Reporter just conducted with Vikram Rao, a former Halliburton guy and the current executive director of Research Triangle Energy Consortium.
Q: The wet gas portion of the Marcellus obviously has been the most economic to drill over the past couple years, given oil prices in relation to gas prices. How will the industry’s focus on oil and NGLs impact Utica development strategies, particularly in regard to joint development of the Marcellus? How does a combination gas and liquids production stream impact overall economics?
Rao: Unlike the Marcellus, the Utica has a significant oil portion, and the oil tends to be light, and therefore, have high value. This certainly will draw some investment.
As to wet gas, with propane and higher hydrocarbons pegged to oil prices, the profitability is dramatically higher for liquids-rich gas than for dry gas. I see wet gas as the focus until demand-driven natural gas prices rise. Noncompliant coal-fired electric power plants will be large volume gas users. At low gas prices, gas-to-liquids will get a positive jolt.
The main issue with wet gas is monetizing ethane, especially in Ohio and points eastward. Sufficient aggregation could allow ethylene plants to be built in proximity to the producing fields. In the past, ethylene has been an oil refining byproduct. If the Utica promise continues to unfold, especially in the high-rate potential, that and the wetter character is likely to shift investment away from the Marcellus.
3) Finally, let’s keep in mind the structure of the Chesapeake deal itself. This not something I have the details of, but the company insists that it is not a sale, it is a transportation agreement. That means Chesapeake will have to pay a penalty if they don’t ship the gas, but it also means they don’t have to ship the gas if they get a better deal locally.
Our commitment to the Enterprise ethane pipeline covers only a portion of the ethane we expect to produce over the development of this resource. This is simply a question of economics. If Chesapeake has local customers who will pay us equivalent pricing, minus the cost of transportation, we would be willing to commit significant barrels of ethane toward such a project. The announcement with Enterprise is not a sales agreement; it is a transportation agreement. If we can get a better price locally, we have the ability to choose not to ship barrels to the Gulf of Mexico.
In addition, listen to what ethane-processor MarkWest’s vice president for northeast development Jim Crews says. Crews suggests that Chesapeake may be using the recent pipeline deal to get a better price locally with a petrochem company looking to build an Appalachian cracker.
“What it [the Chesapeake deal] might have done is force the chemical companies to give a better price to the exploration and production companies like Chesapeake here in the Appalachian basin,” Crews said. “And, in the end, that might be better for all of us.
“When you go into a negotiation with one option, it usually doesn’t turn out very good for you,” Crews said.