RPT-NGL supply crunch looms for US heating, petchem sector Friday December 15, 8:28 AM EST By Soo Youn

NEW YORK, Dec 14 (Reuters) - U.S. natural gas liquid (NGL) producers are cutting output in December to take advantage of record high gas prices, sparking fears of a crunch in the heating fuel and petrochemical feedstock supplies.

With natural gas prices having nearly doubled since the start of November and now quadruple those at the beginning of the year, it makes more sense for some companies to completely shut down the so-called fractionators, that liquefy the usually more expensive NGLs from the gas stream.

They are also "rejecting ethane" by warming up the plants so that the heavier liquids, such as ethane and propane, cannot be extracted, resulting in more natural gas.

"We produce about 650,000, maybe even 675,000 barrels per day (bpd) of ethane from gas processing a day, and we're probably rejecting 100-125,000 barrels of ethane a day in the U.S.," consultant Dan Lippe, president of the Petral Companies, told Reuters.

"And when you're not producing that much ethane, you're probably not producing 25,000 bpd of propane, just by ethane rejection," Lippe added.

Almost all of the gas processing plants in Louisiana, where about 40 percent of the country's NGL plants are located, are shut down or bypassing NGL production, industry sources say.

"This is going to be a problem everywhere. Louisiana is usually the first line of defense when these things start to crumble - these economics are not good for everybody," said Susan Bertsch, Senior Energy Analyst at Honeywell Hi-Spec Solutions.

Louisiana also houses the more updated plants, which can reject ethane the easiest.

However, such measures were occurring throughout the U.S. which has about 750 gas plants, from the beginning of the month, natural gas manufacturing companies say.

"A lot of the straddle plants - which straddle the main (gas) line and extract the liquids - are shut down," Dynegy Inc.'s (DYN) senior vice president of liquids Vincent McConnell said. "Of the others remaining, it makes all the (economic) sense in the world to reject the ethane."

Dynegy owns 25 plants in the U.S. Gulf Coast with production capacities upwards of 550,000 to 580,000 bpd.

Williams Cos. Inc. (WMB) has shut two of its 13 gas processing plants Dec. 1, as well as halving the capacity at another, spokesman Kelly Swan said.

Williams's 600 million cubic feet per day (MMcf/d) Mobile Bay LPG plant in Coden, Ala., and its 500 MMcf/d Cameron Meadows plant in Cameron, La. have shut in, Swan said. In addition, the company's Opal, Wis. plant has reduced its 750 MMcf/d capacity by half, by rejecting ethane.

Koch Industries Inc (KOCH),which runs four NGL fractionators in the Gulf and the Midwest, has been experiencing a reduced throughput of roughly a third, said spokeswoman Mary Beth Jarvis.

Under normal market conditions, Jarvis estimates Koch's Medford, Okla.'s fractionator capacity at 200,000 bpd, Hutchinson, Kan. at 100,000 to 150,000 bpd, Mont Belvieu, Texas at 150,000 bpd and its K/D/S Promix fractionator in Napoleonville, La. at 140,000 bpd.

"Folks are doing as little initial splitting as they can, and sending as much of their product gas to the gas side as they can. So consequently, that has meant less NGLs coming our way, and coming to other fractionators," Jarvis said.

Following suit, Mitchell Energy and Development Corp. (MND) said it is bypassing gas production at Exxon Mobil's (XOM) Katy plant near Houston, an older plant where it has a processing contract. As a result, its NGL production was expected to be reduced by 14,000 bpd starting December 8.

FAR REACHING IMPACT

As a result of the curb in production, LPG prices have firmed by as much as 30 percent, and in turn could threaten petrochemical production.

Ethane, a key feedstock in the production of ethylene or plastics, has gained roughly 20 cents since November 1. It has traded over 50.00 cents a gallon since Dec. 1, and has even approached 60.00 cents, well within the realm analysts consider record highs.

But, "the gas problem is not going to stop here," Honeywell Hi-Spec's Bertsch says.

Both propane and ethane can also be produced from the oil refining process and are known as liquefied petroleum gases (LPGs).

But because of the high gas prices, oil refiners throughout the country are now burning propane, largely used as a heating fuel, as an alternative fuel to run their plants, instead of putting it on the market.

"Instead of buying natural gas, they're splitting out their own propane and just consuming it, which means they're then not producing and selling propane and other LPGs," Koch's Jarvis said.

The Department of Energy's first weekly inventory report, released Wednesday afternoon, showed a smaller than expected draw of 3.2 million barrels of propane.

But analysts say the effects of decreased production should be evident in next Wednesday's data.

"Basically, we're in a situation which we've never, ever been in before," Petral Companies' Lippe said. "It is difficult to say how much production we're actually losing, but it's a substantial amount."

"At this point shrinkage in the supply side of ethane and propane, etc. are going to be the controlling factor (in NGL prices). The supply side effects are much larger than the demand effects at this point," he said.

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-- Martin Thompson (mthom1927@aol.com), December 16, 2000