US Chemical Industry Raw Material Cost Advantage Will Gradually Narrow

Permian Basin Natural Gas Shifts to Export

Recently, market participants have stated that a new natural gas pipeline being built by the US Energy Transfer company will support the prices of natural gas and ethane produced in the Permian Basin, a major shale oil and gas production area in the US. With the rise in ethane prices, the cost advantage of US chemical producers compared to those outside the US regarding ethane raw materials will also shrink.

The newly built Hugh Brinson natural gas pipeline by Energy Transfer will transport natural gas from the Waha Hub in western Texas to Maple south of Dallas and connect with export pipelines. The first phase of this pipeline project will transport 1.5 billion cubic feet of natural gas per day, expected to be operational by the end of 2026. According to demand, the company may begin construction of the second phase of the project, which will increase the transportation capacity to 2.2 billion cubic feet per day.

This new natural gas pipeline is the second major domestic natural gas transportation pipeline announced in the past six months in the US. Earlier, a new joint venture in the US announced the construction of the Blackcomb natural gas pipeline, which can transport up to 2.5 billion cubic feet of natural gas per day from the Permian Basin to the Agua Dulce area in southern Texas for export. The Blackcomb natural gas pipeline will be developed by a joint venture between Targa and WPC.

Market participants believe that these two new natural gas pipelines will provide sufficient export capacity for the western Texas region and prevent local natural gas prices from falling below zero. The Waha Hub is the main pricing point for natural gas produced by oil wells in the Permian Basin. For most of 2024, natural gas prices at this hub were below zero due to insufficient pipeline capacity to transport excess local supply, forcing producers to pay extra to store the gas. With the increasing gas-to-oil ratio throughout the basin, natural gas supply has been rising, and storage costs have also increased, further driving natural gas prices down.

However, when the natural gas price at the Waha Hub falls below zero, local gas processing plants recover as much ethane as possible from the gas. Unlike natural gas sold at negative prices, ethane prices remain positive. By maximizing ethane recovery, gas processing plants can also free up existing pipeline capacity, raising natural gas prices. The significant increase in the amount of ethane recovered from natural gas has increased the available ethane supply in the market, which has suppressed ethane prices. In 2024, US ethane prices briefly dropped below 12 cents per gallon, a low not seen since the COVID-19 pandemic. Subsequently, the opening of the Matterhorn Express pipeline increased natural gas export capacity from the Permian Basin, leading to a rise in Waha natural gas prices above zero. Additionally, colder winter temperatures have supported natural gas prices. In early December, ethane prices were above 20 cents per gallon.

Market participants noted that Waha Hub's natural gas pricing is one of many factors influencing US chemical producers' ethane costs. Other factors include the potential for a major natural gas pipeline from the Permian Basin to undergo maintenance, which could cause Waha Hub's natural gas prices to fall sharply, potentially lowering ethane prices. The growing number of LNG export terminals along the Gulf Coast is also having an increasing impact on US natural gas and ethane prices, though these terminals are vulnerable to damage caused by hurricanes and tropical storms in the Gulf of Mexico. These storms can disrupt LNG operations and temporarily shut down natural gas demand sources in the US. If the disruptions last long enough, they could lead to a significant increase in domestic natural gas supply, lowering both US domestic natural gas prices and ethane recovery costs. This is detrimental to the oil and gas industry but beneficial to the chemical industry.

To hedge against risks, some midstream oil and gas companies in the US are increasing their ethane export capacity. This is expected to support domestic ethane prices. Enterprise is increasing ethane export capacity through its Neches River ethane terminal project, with the first phase increasing export capacity by 120,000 barrels per day, scheduled to be operational by mid-2025. The second phase, which will add another 180,000 barrels per day of export capacity, is set to be operational in the first half of 2026. Energy Transfer has also added 250,000 barrels per day of flexible export capacity, capable of exporting both LNG and ethane, which is expected to be operational in the second half of next year.

Meanwhile, new ethylene cracker projects in the US will also increase demand for ethane, further supporting ethane prices. Currently, the only confirmed new ethylene cracker project in the US is a joint venture cracker plant by Chevron Phillips Chemical and QatarEnergy, set to start production in Texas by the end of 2026. Additionally, US firm Sinopec may build a cracker plant in Louisiana, though the company has not yet announced a final investment decision.

In summary, US ethane prices are on an upward trend. As ethane prices rise, the cost advantage of US chemical companies using ethane as a raw material, relative to companies in other regions, is gradually narrowing.