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How to Profit From Marcellus Ethane

Want to know the driving force behind the United States’ abundant supply of natural gas?

Look no further than the Marcellus shale formation in Pennsylvania.

This rich supply of various natural gas liquids (NGLs) is the gift that keeps on giving, with NGL production there likely to increase eightfold to more than 650 million barrels a day over the next three years.

One of the key, abundant NGLs in the Marcellus is ethane – a colorless, odorless gas used for ethylene production…

But there’s a problem…

Ethane Feeling “Rejected”

Namely, a lack of infrastructure – i.e., pipelines – to move ethane to the markets where it’s needed.

The problem is especially acute because pure ethane burns hotter than methane and therefore is not allowed in the same pipelines as natural gas or propane.

This is similar to the problem I discussed in an article about the Northeast and natural gas pipelines.

It means that drillers without access to ethane pipelines have to dilute the ethane they produce with more natural gas, so it can be put into natural gas pipelines.

This process is called “rejection” – and it’s a costly one that can affect profitability.

And it’s becoming more frequent.

In the United States, rejection ran at a 200,000-barrel-per-day rate in 2013. And current forecasts have that rate climbing to 450,000 barrels per day this year, with a good chunk of that coming from the Marcellus.

But the incentive is there to improve this situation, because if companies can get the ethane out of the Marcellus to ports, there’s a ready market for ethane from international chemicals producers.

Let the Infrastructure Buildout Begin

The good news is that the infrastructure buildout has begun – which should be a real boon to the pipeline companies, as high demand for space in their pipelines means a quick return on their investments.

For example, MarkWest Energy Partners (MWE) and Sunoco Logistics Partners (SXL) have teamed up on the Mariner West and Mariner East ethane pipelines.

The pipelines will transport up to 65,000 barrels a day to Ontario and 70,000 barrels a day to the Philadelphia area.

And demand for space in these pipelines is robust…

  • Major Marcellus producer, Range Resources (RRC), is a shipper in both Mariner projects. Range is also a shipper on another new ethane pipeline, the ATEX pipeline. This pipeline, built by Enterprise Product Partners (EPD), will move up to 265,000 barrels of ethane a day from the Marcellus to the U.S. Gulf Coast.
  • In February, another big Marcellus player, Consol Energy (CNX), announced a deal with European chemical firm, Ineos, to sell the company ethane shipped through the Mariner East and the Port of Philadelphia beginning in 2015.

In fact, demand is so great for the eastern pipeline that Sunoco has a second pipeline on the drawing board already.

Aside from the Mariner West and Mariner East ethane pipelines, Kinder Morgan Energy Partners (KMP) and MarkWest are building the Kinder Morgan/MarkWest Ohio pipeline.

Plus, Williams Companies (WMB) and Boardwalk Pipeline Partners (BWP) are constructing the Bluegrass pipeline.

These pipelines will help alleviate the problem of what to do with all the difficult-to-transport Marcellus ethane.

And it literally lays the foundation for a new revenue stream for Marcellus infrastructure providers like Sunoco and Markwest.

Tim Maverick

Tim Maverick

, Senior Correspondent

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