- NGL production in the US: US natural gas liquids (NGL) and ethane production continue to grow despite significantly lower rig counts. The countrywide ethane rejection is at 640kbpd or 23% of total.
- Gulf Coast consumption: While there is sufficient ethane for six new crackers in the US, consumption in the Gulf Coast Area (to August) has grown faster than NGL production. Ethane rejection in the region has fallen to 161kbpd or 11% of total.
- New consuming capacity: A new cracker by Total/Borealis (Port Arthur, TX) is set to start this year. Start-up would have been delayed by COVID cases as well as a shutdown due to Hurricane Laura. A new export terminal (Energy Transfer) is also set to come online this year. The combined new capacity could consume 240kbpd of ethane, leaving the Gulf Coast in an ethane deficit. Data to the end of August suggest these facilities have not yet started and ethane inventories remain high.
- Enough ethane elsewhere. Significant volumes of ethane are still being rejected at the Marcellus and Bakken shale plays and pipeline capacity is in place to transport the ethane. Current pipeline tariffs suggest that transportation costs could increase ethane prices by around 11cpg. Increased demand could also increase pipeline tariffs.
- Switching feedstock: Many older crackers in the US could switch feedstock if ethane prices increased above the economic thresholds. The current propane ceiling is at 40cpg and ethane would remain the most economical feedstock even if prices increased by 10cpg.
- Price outlook: Based on our expectation of higher oil prices we would expect an increase in drilling activity in the Permian in particular. This should alleviate the pressure on supply in the Gulf. Lower natural gas prices have also lowered the floor price of ethane.
- Impact on Sasol: Sasol guides that a 10cpg increase in ethane prices would lower EBITDA by around $74mn (we estimate lower earnings of R1.46/share in FY22). The Sasol share price has increased significantly this week as oil prices rebounded. The share is approaching our target price of R120 but for now we maintain our Overweight rating.
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