EP Mix is part of the natural gas liquid (NGL) family, with varied uses and a unique trading structure. Get to know this useful NGL!
EP Mix, as the name suggests, is a blend of ethane and propane that meets the individual product specifications for each component. It’s a mixture of roughly 80% ethane and 20% propane.
In the latest OPIS North America LPG Report, you see EP Mix priced at 14cts/gal, purity ethane at 18cts/gal, and purity propane at 45cts/gal.
What you quickly learn is that the individual price for propane and ethane can be misleading when it comes to understanding EP Mix – in that the price of EP Mix should reflect the price of ethane contained in the mixture, while the propane in the mix clearly enjoys no such discount.
You also learn that buying 100,000 bbl of EP Mix does not mean you get 80,000 bbl of ethane and 20,000 bbl of propane. In fact, a 100,000-bbl EP Mix purchase actually transfers 125,000 bbl of liquid product to a buyer.
For individuals in such situations, or even for traders eager to expand their knowledge, understanding the fundamentals of EP Mix can be very beneficial in clearing up confusing math. Here’s a road map for pricing EP Mix.
What Is EP Mix?
When natural gas from shale basins is processed at the wellhead, a stream of hydrocarbons in liquid form is removed from the underlying gas stream. This material usually is called Y-grade, or mixed NGLs.
This Y-grade is then processed through a plant known as a fractionator to get specification products, namely ethane (C2), propane (C3), normal butane (NC4), isobutane (IC4) and natural gasoline and pentanes (C5+). Collectively, this family of specification products is called NGLs.
These products are obtained as the Y-grade moves through towers that de-ethanize, de-propanize, de-butanize and de-isobutanize. Purity ethane emerges from the first “cut” and usually is 40%-50% of the Y-grade volume.
The exact breakdown of all products in the NGL barrel can vary slightly because of factors such as the liquid content of gas produced in each field being different and other variables, such as the level of ethane rejection at any given time.
However, the NGL basket as outlined in OPIS methodology pegs the make-up of the barrel as follows: 42% ethane, 28% propane, 11% normal butane, 6% isobutane and 13% natural gasoline.
In the first cut, at least 95% of the liquid must contain the ethane molecule for it to be on-spec purity ethane. Conventionally, EP Mix is 78%-82% ethane, with the other 18%-22% allowing for propane and impurities including methane and ethylene.
Therefore, purity ethane is actually also EP Mix, but with a molecular composition of at least 95% ethane.
How Is EP Mix Used?
There are two main ways in which EP Mix is used: as feedstock to produce ethylene through a process known as steam cracking or for processing in a “splitter” that separates purity ethane from purity propane.
The first of these two uses – petrochemical processing – is the only “end-user” application for EP Mix. Volumes fed into splitters represent a midstream processing step, during which the two purity grades are separated for subsequent petrochemical or other industrial use.
EP Mix and the Midstream NGL Sector
The NGL hub in the Midcontinent named after the Kansas township of Conway has three fractionation locations linked by pipelines.
The Conway hub mainly produces EP Mix, though a small volume of purity ethane also can be produced and pumped via pipeline directly to the larger NGL hub in Mont Belvieu, Texas.
One reason for the preponderance of EP Mix in Midcontinent NGL production is that storage wells in Conway do not have the pressure rating required to store purity ethane. Therefore, any excess ethane either must be piped south or be diluted into EP Mix by adding propane before it can be stored.
Fractionator operators in the Midcontinent include ONEOK and Williams. A large portion of EP Mix produced in the Midcontinent (i.e., barrels not consumed by local petrochemical plants) also ends up flowing via pipeline to Mont Belvieu.
EP Mix has a spot market in Conway.
EP Mix also trades in Mont Belvieu, where a huge “catchment area” of PADD3 (Gulf Coast) petrochemical demand is at the doorstep. There also is a separate market and daily OPIS price assessment for Mont Belvieu purity ethane. (Caverns in Mont Belvieu have the ability to store both purity ethane and EP Mix.)
The price relationships between Conway EP Mix and Mont Belvieu EP Mix, and between Mont Belvieu EP Mix and Mont Belvieu ethane, change daily. These price variations are often based on demand dynamics from end-users and, in turn, also drive or suppress end-user demand.
Mont Belvieu is the bellwether fractionation hub in America, with current capacity to process Y-grade estimated at some 2.25 million b/d and expansions totaling more than half this volume expected to be onstream by 2021. Over the years, fractionators in Mont Belvieu have evolved to produce purity ethane almost exclusively.
However, there are a few exceptions. Targa Resources Corp.’s Fractionator I produces only EP Mix.
ONEOK in Mont Belvieu has a stand-alone splitter (distinct from its fractionator) that enables it to produce purity ethane and propane from the EP Mix it pipes in from Conway. In addition, most other Mont Belvieu fractionators have the ability to co-feed EP Mix along with Y-grade, which results in the final output comprising only purity NGLs.
Separately, EP Mix produced by fractionators in Hobbs, N.M., is also shipped via pipeline to Mont Belvieu. In this fashion, the Mont Belvieu hub is the final clearinghouse for all of the non-purity C2 that flows in from PADD2 and PADD3.
EP Mix and End-Users
There is a cottage industry of steam crackers in the Midcontinent, including the small LyondellBasell units in Morris, Ill., and Clinton, Iowa, and a Westlake plant in Calvert City, Ky. All of these plants crack EP Mix.
However, the Gulf Coast is where most of America’s steam cracking capacity is concentrated.
Of the existing Gulf Coast steam crackers, some plants (for example, some operated in Texas and Louisiana by Dow Chemicals and Westlake) are also equipped with EP Mix splitters, which gives them more flexibility on choice of feedstock.
Nonetheless, all new steam crackers in America are designed to optimally process only purity NGLs. In mid-2019, a so-called “second wave” of these crackers along the Gulf Coast was on the cusp of starting up, representing combined incremental purity ethane demand in excess of 300,000 b/d.
This points to a possibility that industrial use of EP Mix in PADD3 may, over time, shrivel away. With no recently constructed fractionators being designed to produce EP Mix, and end-users also focusing on ethane-only crackers, soon there may be no incentive left to crack, and therefore buy or sell, EP Mix in PADD3.
Nonetheless, a few Gulf Coast petrochemical firms such as Dow, Ineos, Chevron Phillips Chemical and Westlake still have steam crackers that can process EP Mix. Whether this apparently dying PADD3 breed chooses to crack EP Mix comes down to elementary economics.
EP Mix and End-User Economics
As a baseline, it is useful to understand that each stream of feedstock (ethane, EP Mix, propane, normal butane, natural gasoline and naphtha), when processed through a steam cracker, yields finished olefinic co-products including ethylene and propylene in differing proportions.
Separately, each of these feedstocks and each of these finished products has its own price, which varies every day.
Moreover, each steam cracker is unique. Most of these crackers are designed with a specific feedstock in mind and with varying feedstock flexibility. Meanwhile, the severity at which each furnace in the steam cracker is operated influences the composition of the output, even from the same feedstock.
Therefore, there is no cookie cutter formula that can accurately project the composition of the olefin output for each feedstock option.
Feedstock storage at the steam cracker operator is another important variable. For instance, some modern petrochemical firms may have set their feedstock storage apparatus to optimally store only purity ethane. These firms may not be keen on switching to EP Mix even during cyclical price downturns in EP Mix, because the opportunity cost involved in converting the storage configuration may outweigh any short-term price benefit.
After providing for all these realities, the steam cracker operator must determine what permutation of feedstocks and end products would be most lucrative. All petrochemical majors employ sophisticated linear programming models to do these calculations. A separate model is used for each individual steam cracker, considering the plant’s precise specifications. These models, which are proprietary, look at each individual feedstock price and the logistical cost of moving it via pipeline from Point A to Point B.
In the case of EP Mix as a feedstock, the marginal cost of splitting it into its purity components is also tacked on.
This computation is then stacked against the expected sale price of the finished products yielded by each permutation of feedstock for each individual steam cracker. A companywide picture is thus obtained. In most cases, it is seen that the lowest-cost feedstock mix does not yield the maximum profit.
How Is EP Mix Traded?
Let’s imagine you have joined the feedstock supply management division at a petrochemical producer.
Your employer has determined that cracking EP Mix right now makes economic sense and you are tasked with buying 100,000 bbl of EP Mix.
The material you purchase would actually comprise 125,000 bbl of a liquid stream containing roughly 80% ethane and roughly 20% propane (i.e., some 100,000 bbl ethane and some 25,000 bbl propane).
This purchase can be consummated in two ways: physical delivery of barrels or allocation by the seller of material in common storage that the seller owns, the title to which now transfers to your company’s name.
The second mode of purchase is described as a book trade, and you have come into possession of exactly 125,000 bbl stored in the common storage location.
On the other hand, when the purchase involves physical deliveries, the exact volume delivered is usually slightly different than 125,000 bbl. In the case of EP Mix, an additional complication is introduced by the fact that the exact percentage of ethane contained in the mix also needs to be ascertained before the trade is settled.
Back-office personnel “true up” this percentage, which is one basis for the settlement of the trade.
But your headaches are still not over. Because while you will be “paying” the seller based on the posted price for EP Mix (i.e., for the 100,000 bbl or so ethane you sourced), you are now required also to “repay” the seller for the 25,000 bbl of propane that came as part of the package. And this propane is typically valued at its purity price, which forms the basis for this “refund.”
This part of the transaction can be achieved in three ways: a straight cash payment using the OPIS posted price for propane; another in-well allocation (i.e., reassigning ownership of propane barrels in common storage that are controlled by you); or a separate physical delivery of propane to the EP Mix seller.
All the “barrel balancing” described above can be cumbersome. Needless to say, if the basic math is not done right, the EP Mix deal could end up costing you and your company more than just time and effort.
Want to learn more? Whether you’re new to the industry or a seasoned professional looking for a refresher, expand your LPG/NGL knowledge with OPIS NGL Supply & Market Basics, a self-paced eLearning course that you can take online anytime, anywhere.