How afraid should you be of ethane rejection?

If you have any dabblings in the natural gas or natural gas liquids business: be very, very afraid.

Because it is growing and it is *everywhere*.

Ethane rejection–-where ethane is left within the natural gas stream without breaching gas pipeline specification limits– is becoming increasingly widespread as supply outstrips demand, economics become unfavorable and infrastructure lags behind.

Here’s the numbers: Platts unit Bentek Energy estimated some 157,000 b/d of ethane was being rejected as of mid-February. About 65,000 b/d was being rejected in PADD2, 39,000 b/d in PADD3 and the remainder in PADD 4.

Bentek has no solid numbers for PADD 1–read Marcellus and Utica shales–but we do know producers are rejecting the NGL wholesale because there just is not enough takeaway capacity.

Here’s the rub for gas producers and transporters.

Analysts have pegged incremental gas volumes as a result of ethane rejection between 300,000 Mcf/d and 1 Bcf/d nationwide. Even as its most aggressive estimate, however, that only makes up some 1.4% of overall US gas production.

Which means, if you’re in the dry gas bidness, more supplies are hitting those pipes. This at a time when production is near record high levels and prices remain trapped in the $3/MMBtu range. Good for your power bill and the petchemmers; bad for project financers, producers and marketers.

While this may be a seemingly small amount, ethane rejection looks set to continue, begging the question of how much more incremental gas volumes lie in wait as the trend persists.

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A slew of analysts from Raymond James to Tudor Pickering Holt & Co. have contended the ethane market will be oversupplied starting as soon as– you guessed it–right now.

If you’re in the NGL business, this means you’re staring at ethane prices trading sideways in the 20-cent gallon range for quite a while, echoing lows last seen in early 2002.

So where did it start? For that we can thank the Rockies and Midcontinent, where all hydrocarbons come to a head (in this case, literally).

This happened when the frac spread-–the price differential between ethane and regional natural gas prices–turned overwhelmingly negative. In so doing, market players found it uneconomic to strip out the ethane, thereby incurring transportation and fractionation costs, given the razor-thin or negative margins.

Ethane rejection in the Rockies went from 4,000 b/d in January 2012 to close out the year at 59,000 b/d, according to Bentek data. In the Midwest, that number went from 1,000 b/d to 75,000 b/d during the same time frame.

Then it moved over to the Marcellus Shale, a seeming NGL production black box when it comes to estimating ethane rejection. Platts has been told, however, that producers in that play were were rejecting anywhere between 50% and 80% of their ethane.

And now it’s hit the Gulf Coast, where a combo of vacillating economics and a backlog of infrastructure that has led to increased ethane rejection. In late December, the regional frac spread went negative, according to Platts assessments, but has since flip-flopped in and out of negative territory.

Ethane rejection began noticeably occurring in the Gulf Coast in late October 2012, where some 1,000 b/d were being rejected, swiftly rising to close out the year at 47,000 b/d, according to Bentek data.

This has partly been due to the wealth of liquids-rich production now pouring out of the Eagle Ford shale and the deployment of new drilling technologies to perk up Permian Basin production, among others.

Nearly 3.2 Bcf/d of new processing capacity is expected to come online by year’s end in order to deal with the slew of new rich gas supplies. Nearly 1.23 million b/d of new raw mix NGL pipeline capacity headed for Mont Belvieu is set to go into service by the end of 2013 as well, while 118,000 b/d of Eagle Ford fractionation capacity is slated for in-service in the first quarter of this year alone.

But will it be enough? Our sources say no, that adding infrastructure will forever be playing catch-up with supply in these prolific plays, once again opening the door to the specter of ethane rejection.

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