This Stranded Commodity is About to be Rescued
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I recently attended a conference that focused on how shale gas has the potential to lead to a renaissance in manufacturing here in the United States. One of the speakers made a comment that really stuck out, saying that, “Ethane is a stranded commodity in” the Marcellus and Utica shale areas. He pointed to transportation costs being one problem that needs to be addressed. While the commodity may currently be stranded, multiple rescuers are on the way.
Ethane, without getting too technical, is the second largest component of natural gas after methane. When you hear that term “wet” gas or natural gas liquids (NGLs), think of it as natural gas with a higher ethane component. Ethane is valuable as a petrochemical feedstock for ethylene production, which is widely used in the chemical industry for a variety of products. The problem is that while ethane is currently being found in abundance in the Marcellus and Utica formations, the primary customers are not in abundance, meaning this feedstock must be shipped to them. The transportation costs are high and eat into margins. But as those costs go down profits will rise as the commodity becomes more valuable.
There are currently two main options to get the ethane from the production basin to the customers. You can ship that gas via a pipeline like the Mariner West, which is being developed by Sunoco Logistics (NYSE: SXL) and MarkWest (NYSE: MWE). This pipeline ships ethane from production centers in Southwestern PA to Sarnia, Ontario, Canada where there is a market for Marcellus ethane. Transportation costs range from $0.12 to $0.15 per gallon, which should eventually come down as this project and others are completed.
A second option currently under development is the ATEX Express (Appalachia-to-Texas), which will take ethane from the Marcellus to the Texas Gulf Coast petrochemical market. This project, being developed by Enterprise Product Partners (NYSE: EPD), is a 1,230-mile pipeline of which 70% of the proposed route is using existing pipeline. This pipeline system is important because it currently costs from $0.15 to $0.25 per gallon to ship ethane to the Gulf Coast. Not only should transportation costs begin to come down but the Gulf Coast petrochemical market is adding a new $4 billion Dow Chemical (NYSE: DOW) ethylene production plant in Texas. Cheaper transportation costs combined with more potential customers has the potential to improve margins for producers.
In both currently available options, the ethane is leaving the production basin and being transported to areas where it can be marketed. A third and potentially game-changing solution could be coming from Royal Dutch Shell (NYSE: RDS-A), which has announced that a $4 billion ethylene cracker plant is under consideration for the region. The location of the proposed plant is in very close proximity to Mariner Pipeline of MarkWest and Sunoco. What makes this plant so important to the region is that the local pipeline transportation costs are about $0.02 per gallon. This inexpensive local feedstock not only gives the company a sustainable completive advantage but producers in the area will now have access to multiple markets, which should improve pricing and margins.
What’s been dubbed as a stranded commodity is about to see rescue coming from all sides. Investors should take notice that the value proposition offered throughout domestic energy industry is enticing. Click here to find out the one energy company I’m buying right now.
latimerburned owns shares of Enterprise Products Partners L.P. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Enterprise Products Partners L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.