Texas Storm Fallout Festers in Petrochemical, NGL Sectors
Source: NGI, April 6, 2021
The impacts of a Winter Storm Uri, which wreaked havoc on the Texas energy system in mid-February, are lingering nearly two months later as downstream facilities await freeze-related repairs.
“From a natural disaster perspective, the impact on the petrochemical space from Uri is much greater than any previous event that we’ve had in recent memory,” said IHS Markit’s Bill Hyde, executive director of olefins and elastomers. “I’ve been associated with the petrochemical space now for 30 years directly, and nothing in my experience is anywhere close to this.”
The impacts are wide ranging, including a reported global plastics shortage. The U.S. Energy Information Administration (EIA) recently reported the storm also caused ethanol production to fall to the lowest levels since last spring. Production has since rebounded to average levels, but inventories are below their typical seasonal averages heading into the summer driving season, according to EIA.
The storm caused widespread power outages in mid-February, impacting homes, businesses, and every ethane cracker in Texas. A number of crackers in nearby Louisiana also went offline because of the storm.
According to Hyde, the plants did not have enough advance warning to shut down their units effectively, making them more susceptible to damage from the freezing weather.
“You cannot shut down an ethylene production unit, as an example, efficiently in 24 hours,” Hyde told NGI. “It just can’t be done. And so the damage from the quick shutdown was much more severe than a normal event would have been.”
As a result, ethylene production has been hit particularly hard, with about 70% of U.S. output down at one point, according to IHS Markit. For comparison, only 20% of ethylene production went down after a pair of hurricanes that rocked the Gulf of Mexico last fall.
East Daley Capital analysts in early April said about half of U.S. ethylene capacity remained offline and it could take several weeks more to recover to full rates. Hyde said about 10% of production capacity was up and running. However, “there’s a big difference between running and running at full rates,” he said. Hyde said he expected a “protracted” ramp-up period before output effectively recovers to pre-storm levels.
On Monday, Raymond James & Associates Inc. pegged the amount of U.S. effective cracking capacity still down 15% from normal as of late March.
The effects are being felt in the plastics market, which was already seeing higher-than-expected levels of demand because of the Covid-19 pandemic, said IHS’s Joel Morales, executive director, Polyfins Americas. As a result, prices have spiked in recent weeks.
Buyers have few alternatives for finding other materials.
“You can’t make masks out of other things besides polypropylene plastic,” Morales said. “You can’t make car bumpers out of other things besides polypropylene plastic. So it’s a challenge for converters to be able to take those price increases and pass them on. And eventually, it will lead to some demand destruction.”
In some cases, global buyers have stopped making certain products because the raw materials are costly, he told NGI. Others have resorted to reselling their plastic materials rather than converting them to products they won’t be able to make money on. He said plastics prices could correct this summer. “We do see more imports getting here; they just can’t get here fast enough. So the second half of the year will look very different.”
While the damage to ethane plants on the Gulf Coast has resulted in higher prices for downstream products, it has had the opposite effect on upstream natural gas liquids, especially ethane.
Natural gas production collapsed during the February freeze, with nearly 25% of U.S. output going offline at one point. In Texas and Louisiana, it was even more stark, with about half of the states’ natural gas production going down, says IHS Markit senior director Charles Nevle.
[NGI’s natural gas price indexes have included trade data from both price reporters and the Intercontinental Exchange (ICE) since 2008. Find out more about our price index data here.]
However, output ramped up more quickly than expected once the storm passed, and was back at pre-freeze levels within a few weeks.
“My concern was that there were going to be a lot of equipment issues,” Nevle said. “And that everybody would be trying to get equipment and manpower at the same time. That didn’t happen, they came back. And so, the only explanation would be that they did not have those kinds of problems and equipment failures, and that they were able to restart fairly quickly.”
NGL production has also rebounded as crude and natural gas output came back online. However, with so much ethane capacity down, there are few options for the barrels produced.
“If the crackers are down, the feedstock demand for NGLs is down,” IHS Markit’s Veeral Mehta, executive director of Midstream and NGL, told NGI. “And that still seems to be down, it hasn’t recovered all the way back yet.”
Still, with production approaching pre-storm levels, ethane is being diverted into storage. IHS Markit anticipates U.S. ethane inventories to reach around 75-76 million bbl, compared to around 78 million after Hurricanes Laura and Delta affected downstream facilities last fall.
The inventory build has had an impact on pricing, with ethane prices dropping from about 30 cents/gal to about 21 or 22 cents/gal on March 30. The prices were little changed as of Tuesday (April 6), with Mont Belvieu April futures trading at 22 cents/gal, according to CME Group.
Despite the lower pricing, producers are unlikely to pull back on NGL output, since NGLs are a byproduct of oil and gas production, Mehta told NGI.
“It impacts them, but that’s not what’s driving their economics,” Mehta said. “Their economics are driven by crude and gas prices.”
East Daley analysts said the lower prices don’t tell the whole story, however. Analyst Ajay Bakshani noted that ethane prices at the start of April, while lower than before the storm, were still above the 16 cent/gal low hit during last year’s hurricane season. The firm credited higher exports with the extra support for prices.
“Bloomberg data show March ethane export levels have been 83% higher than February and 22% higher than June 2020, when plastics demand skyrocketed due to Covid-19,” analyst Ajay Bakshani wrote.
East Daley projects ethane production in the Permian Basin declined more than 200,000 b/d in 1Q2021 because of the loss of petrochemical demand, supply disruptions and higher natural gas prices. However, the firm said ethane recovery had returned to its pre-freeze levels.
In fact, Raymond James analysts noted murmurs in the market that first quarter ethane recovery could exceed expectations because it is going into storage.
Regarding fractionation, “recovery/rejection dynamics have been reasonable,” the Raymond James analysts said. “In fact, midstream players may be utilizing Mont Belvieu storage capacity to keep recovering ethane even when the spread is narrow. Increased U.S. ethane capacity and higher export utilization have also helped during the messy stretch.”