The rush to develop liquid-rich oil and gas basins by the exploration and production industry is leading to significant increases in production of other hydrocarbons, including ethane and natural gas liquids. The industry is dealing with this issue by constructing infrastructure to process and transport these liquids to end markets and users. (To help you invest in this industry, read A Guide To Investing In Oil Markets.)
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Ethane is a chemical compound that exists in a gaseous state at standard temperatures and pressures. It is present in the production stream generated from many domestic natural gas wells.
Natural gas that contains ethane is sometimes referred to as "wet" gas and is sought after by the industry, since ethane and natural gas liquids can be extracted from the natural gas stream and sold separately. This increases the revenues generated compared to a dry gas well.
Ethane is used by the chemical industry as a feedstock to produce ethylene, which is then used to manufacture a number of polymers used to produce products in the consumer and industrial marketplace.
Range Resources (NYSE:RRC) is active in the Marcellus Shale and anticipates rising ethane production from its development here. The company estimates that its position in southwest Pennsylvania contains total resource potential of 500 million barrels of ethane.
Range Resources estimates that a typical wet gas well in the Marcellus Shale will generate revenue of $6.34 per thousand cubic feet, with NYMEX natural gas prices of $4.
Range Resources recently signed an agreement to supply ethane to NOVA Chemicals, which is revamping a facility in Ontario, Canada. The ethane will be transported as part of the Mariner West Project, a system designed to process and transport ethane to the Canadian market. The project will be able to scale up to 65,000 barrels per day of capacity and will be in service by 2013.
The Mariner West Project is being jointly developed by Sunoco Logistics Partners (NYSE:SXL) and MarkWest Energy Partners (NYSE:MWE).
NOVA Chemicals is diversifying its supply, and in July it signed a memorandum of understanding with Statoil (NYSE:STO) to purchase ethane from the company's Marcellus Shale properties.
Integrated Oil Companies
Integrated oil companies are taking a different approach to ethane. Royal Dutch Shell (NYSE:RDS.A, RDS.B) entered the Marcellus Shale in a big way in June 2010 through a $4.7 billion acquisition of a private oil and gas company that held 650,000 net acres. Royal Dutch Shell is considering building an ethylene cracker plant in the Appalachian Basin to handle ethane production from its own leasehold as well as from other operators in the region.
The Bottom Line
The rapid development of onshore domestic oil and gas basins is having a number of collateral effects that are forcing the industry to invest billions in infrastructure. These investments will help the unemployment situation in the United States as well. (If you are interested in investing in natural gas, see Natural Gas Industry: An Investment Guide.)
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