Is Chesapeake’s Ethane Pipeline Deal a Negotiating Tactic?

Last week, MDN reported that officials in West Virginia were angry with Chesapeake Energy over their decision to sign a contract to ship ethane out of the Marcellus region for processing in the Gulf Coast (see this MDN story). Specifically, state Commerce Secretary Keith Burdette said the deal may jeopardize the state’s chances of attracting a cracker plant—a facility that processes ethane into ethylene, the raw material used to make plastics. The chief complaint was that Chesapeake has been part of negotiations to bring such a plant to the region but at the same time were silent about their impending deal with Enterprise Products Partners to lease a pipeline to move ethane out of the area.

Chesapeake has responded to the criticism and says its deal with Enterprise has been “misunderstood.” A recent statement from Chesapeake seems to indicate the deal to ship ethane via pipeline is a negotiating tactic to get the best price for their ethane. Other industry sources are sticking up for Chesapeake and say the deal is certainly not a “cracker killer.”

"The announcement with Enterprise is not a sales agreement; it is a transportation agreement," said Scott Rotruck, Chesapeake’s vice president for corporate development, in a statement.

"If we can get a better price locally, we have the ability to choose not to ship barrels to the Gulf of Mexico."

Jim Crews is the vice president of northeast development for MarkWest, a company that removes ethane from natural gas for other gas companies, including Chesapeake.

He speculated Chesapeake might be using its deal with Enterprise as a bargaining chip. For instance, if a cracker-building petrochemical company offered Chesapeake less money for its ethane than Chesapeake feels it deserves, Chesapeake might have decided to ship its gas away to drive up the price.

"What it might have done is force the chemical companies to give a better price to the exploration and production companies like Chesapeake here in the Appalachian basin," Crews said. "And, in the end, that might be better for all of us.

"When you go into a negotiation with one option, it usually doesn’t turn out very good for you," Crews said.

It’s not clear how much ethane can be drawn from the Marcellus shale gas, but state Commerce Secretary Keith Burdette said officials estimate the Marcellus shale alone can produce about 270,000 barrels a day by 2015.

Burdette’s numbers don’t include ethane that will be produced in the Utica shale, a nearby field that may be as large – if not larger – than the Marcellus.*

Right now, between Chesapeake’s deal to ship 75,000 barrels of ethane per day via the Enterprise pipeline, added to another deal that Range Resources has to ship ethane via the Mariner West pipeline to Canada for processing, means between 125,000 and 175,000 barrels would be removed from the region via pipeline. That leaves 95,000 to 145,000 barrels in the region, enough to support a cracker plant according to some. Those numbers do not reflect ethane from the wet gas-rich Utica Shale, which may double the volume of ethane available once Utica wells become plentiful.

MDN comment: It’s clear that Chesapeake is acting in their own economic self interest, and in our great country where capitalism has generated the highest standard of living on earth, one can’t argue that acting according to economic self interest is a bad thing. It produces the best result for everyone overall. But by acting that way in this case, it may chase away interest from petrochemical companies in building cracker plants in the region. Or it may not! Time will tell.

*Charleston Daily Mail (Nov 10, 2011) – Chesapeake Energy’s ethane deal not ‘cracker killer’