It’s no secret to anyone in the energy industry that the Marcellus unconventional shale-gas play in the Appalachian Basin is a big, big deal. The vast shale holds some 350 trillion cubic feet of economically recoverable reserves from 1,500 trillion cubic feet spread across 95,000 square miles. Drilling permits for the Marcellus in Pennsylvania alone will triple this year over 2009 levels.

But the play is not without its challenges, and one of those appears to be a lack of local markets for its ethane production. Is it a serious issue? That’s debatable.

“I have heard of that issue several times,” says Jeff Rawls, managing director for Houston-based NGP Midstream & Resources LP. “But I am not sure how big a problem it is.”

About 85% of the Marcellus gas will be dry, but the wet gas will eventually present a bottleneck in fractionation and liquids take-away capacity, according to a recent report by Tudor Pickering Holt & Co. The investment bank predicts a “blending threshold” will be reached in three years, and notes that only one new fractionation facility has been announced (by MarkWest Energy Partners LP) and no expansions for liquids take-away projects are on the drawing board.

Says Jack Bentley, manager of Elkhorn Energy LLC, “Sooner or later, the play will produce too much ethane to be absorbed by the local market. Then, where will it go? They will have to build a pipeline or make some other arrangements, when the existing pipeline waivers expire.”

During a recent Oil and Gas Investor web­inar, Murry Gerber, chairman and chief executive of EQT Corp., said, “Ethane is a huge issue…but we can put ethane in power plants, no problem, just change the burner a little bit. So, we need to think of ethane as a benefit, not a problem.”

For now, gas producers are relying on the pipelines to blend high- and low-Btu gas, but other solutions should be evaluated, says Alan Armstrong, president of Williams’ midstream business.

And he should know. Williams’ olefins production plant in Geismar, Louisiana, uses ethane feedstock to produce up to 1.3 billion pounds of ethylene per year. Its Rocky Mountain and Gulf Coast operations make an annual average margin on ethane of about 35 cents per gallon.

In the rich-gas area of the Marcellus, where the ethane yield is up to 4 gallons per thousand cubic feet (Mcf) of gas, producers could make another $1.50 per Mcf of gas if they had the infrastructure available in other production areas, according to Armstrong.

“It’s a chicken-or-the-egg concept,” he says. “There is not enough ethane extracted to justify more pipeline or fractionation yet, and producers are becoming leery about long-term commitments to producing without a market for it.”

Armstrong believes there are four possible solutions. One is to build new fractionation facilities in the Marcellus region, and pipe the resulting ethane volumes south to the Gulf Coast, where the petrochemical industry has plenty of plants to use the ethane as a feedstock. This would require about 1,100 miles of new pipeline.

Another possibility is to move ethane to Sarnia, Ontario, and existing Midwest markets. Those areas, altogether, consume about 50,000 barrels of natural gas liquids per day, and there are existing pipelines to support the option. In fact, Buckeye Partners LP and Nova Chemicals Corp. recently announced plans for a Union Pipeline project to take natural gas liquids from the Marcellus into Sarnia. Also supporting this option: ethane supply from Canada to the U.S. has been dwindling due to falling gas production.

This second solution also takes advantage of excess ethylene-derivative manufacturing capacity. Derivative capacity converts ethylene into downstream products, such as ethylene glycol, ethylene oxide and polyethylene, which are more stable and safer to ship globally than ethylene.

“A third solution, which would be one of the most difficult to coordinate but would be the most economic solution in the short term, would be to blend the wet gas with dry gas in large gathering systems and trunklines without seeking any upgrade in value,” Armstrong suggests.

“That is a very feasible alternative, but requires the cooperation of all parties.”

A final solution, suitable for the long term, is to build a nearby ethylene cracking facility in an industrialized area such as New Jersey or elsewhere in the Northeast, giving Marcellus gas producers an upgrade option for years to come.