How co-product credits will preservenaphtha’s viability as an olefin feedstockJim FosterSenior Editor, Analytics
Agenda  •   Ethane’s growing popularity  •   Propylene feeling the pinch  •   Naphtha’s positive co-product scenario  •   ...
Feedstock advantage key to profits, but…per ton Ethylene     Ethane      Propane      EP Mix       Normal Butane Light Nap...
Ethane remains the most popular feedstock • Currently has the best margins • Produces the most ethylene – which is the ind...
Ethane – big return for small investment                         Ethane      Propane     EP Mix      Normal Butane Light N...
Why shale gas changed US petrochemicaldynamics             Marcellus shale gas composition                                ...
Excess ethane has widened US cracker margins                                               7
Wide margins motivate new crackers andexpansions 10 million metric tons of additional ethylene capacity planned in the US ...
Agenda •   Ethane’s growing popularity •   Propylene feeling the pinch •   Naphtha’s positive co-product scenario •   Etha...
Propylene feeling the pinch             Before Shale Gas                                    Heavier liquids,              ...
On-purpose propylene projects in the USYear             Company          Location            Const. Type      Feedstock   ...
On-purpose propylene production                                  12
Cumulative output growth from crackers andPDH10,000,000.00 7,500,000.00 5,000,000.00 2,500,000.00          -              ...
Agenda •   Ethane’s growing popularity •   Propylene feeling the pinch •   Naphtha’s positive co-product scenario •   Etha...
Could the US lose its ethane advantage?                               Ethane Surplus/(deficit) in MT/year 6,000,000.00 4,0...
Historic ethane and ethylene prices                                      16
Scenario: Ethane at 2011 average, ethylene 2x ethane                         Ethane     Propane      EP Mix     Normal But...
Cracker yield percentages                            The large amount of pygas (aromatics)                             and...
Naphtha prices expected to trend lower                                         19
Scenario: Naphtha price falls 25%                         Ethane     Propane      EP Mix     Normal Butane Light Naphtha G...
Butadiene also could provide a boost to lightnaphtha                                                21
Scenario: $3,500 butadiene                         Ethane     Propane     EP Mix     Normal Butane Light Naphtha Gas Oil 2...
How likely is the US to overbuild?The petrochemical industry follows an approximate 8-year cycle of profitability.Overbuil...
Are we entering a period of overbuilding?      “If the petrochemical industry knows          anything, it’s how to overbui...
The trend could go global                            25
Who has shale gas?  • US – 482 Trillion Cubic Feet  • China – 1,275 Trillion Cubic Feet  • Mexico – 681 Trillion Cubic Fee...
Agenda  •   Ethane’s growing popularity  •   Propylene feeling the pinch  •   Naphtha’s positive co-product scenario  •   ...
Is ethane rejection possible?                               Ethane Surplus/(deficit) in MT/year6,000,000.004,000,000.00   ...
Ethane oversupply leads to ethane rejection    At the point of ethane rejection, propylene, pygas and Crude C4 need    to ...
75% of Marcellus shale is methane                                                               1%                        ...
16% of Marcellus shale is ethane
0                      200                            400                                  600                            ...
Crude vs. natural gas
How co-product credits will preserve naphtha’s viability as an olefin feedstock (EPCA 2012 presentation)
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Read the How co-product credits will preserve naphtha’s viability as an olefin feedstock presentation given at EPCA 2012 by Platts editor Jim Foster. This presentation talks about ethane’s growing popularity; propylene feeling the pinch; naphtha’s positive co-product scenario and ethane rejection and the impact on naphtha.

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How co-product credits will preserve naphtha’s viability as an olefin feedstock (EPCA 2012 presentation)

  1. 1. How co-product credits will preservenaphtha’s viability as an olefin feedstockJim FosterSenior Editor, Analytics
  2. 2. Agenda • Ethane’s growing popularity • Propylene feeling the pinch • Naphtha’s positive co-product scenario • Ethane rejection and the impact on naphtha 2
  3. 3. Feedstock advantage key to profits, but…per ton Ethylene Ethane Propane EP Mix Normal Butane Light Naphtha Gas Oil 2 Full Range NaphthaFeedstock $ 231.88 $ 487.14 $ 282.93 $ 642.13 $ 860.67 $ 920.83 $ 994.22Ethylene $ 987.71 $ 537.65 $ 846.06 $ 508.45 $ 392.10 $ 272.45 $ 353.65Propylene $ 26.32 $ 159.20 $ 68.14 $ 162.60 $ 152.68 $ 138.15 $ 143.99Crude C4s $ 37.25 $ 58.02 $ 43.79 $ 135.84 $ 107.22 $ 114.18 $ 125.98Pygas $ 17.87 $ 69.84 $ 34.22 $ 74.83 $ 178.27 $ 177.41 $ 184.34Gas Oil (6 oil) $ - $ - $ - $ 10.53 $ 65.90 $ 151.41 $ 89.58 Hydrogen/Fuel $ 24.85 $ 49.05 $ 32.47 $ 39.04 $ 28.23 $ 22.57 $ 25.10 Co-product credit $ 1,094.00 $ 873.77 $ 1,024.69 $ 931.28 $ 924.41 $ 876.17 $ 922.65Margin $/mt $ 862.13 $ 386.63 $ 741.76 $ 289.16 $ 63.74 $ (44.66) $ (71.57)RATIO 372% 79% 262% 45% 7% -5% -7% Betting on the current shale gas craze requires going all-in on ethylene – and foregoing any profits from aromatics, propylene or butadiene.
  4. 4. Ethane remains the most popular feedstock • Currently has the best margins • Produces the most ethylene – which is the industry’s largest-volume feedstock • Ethane is the reason natural gas is driving new cracker construction • Ethane crackers also are less expensive, with naphtha crackers costing about 40% more for a similar scale plant • Ethane makes basically only ethylene • 80% of ethylene is used for polymers, produced by back-integrated companies
  5. 5. Ethane – big return for small investment Ethane Propane EP Mix Normal Butane Light Naphtha Gas Oil 2 Full Range NaphthaFeedstock Cost $ 231.88 $ 487.14 $ 282.93 $ 642.13 $ 860.67 $ 920.83 $ 994.22Margin $ 862.13 $ 386.63 $ 741.76 $ 289.16 $ 63.74 $ (44.66) $ (71.57)Return on Feedstock Cost 372% 79% 262% 45% 7% -5% -7% Ethane and ethane/propane mix not only have the largest margins, but also the lowest feedstock costs – providing the best return on investment. 5
  6. 6. Why shale gas changed US petrochemicaldynamics Marcellus shale gas composition 1% 1% 1% 1% 5% 16% 75% Methane Ethane Propane Butane Pentanes Hexanes Inerts/Other 6
  7. 7. Excess ethane has widened US cracker margins 7
  8. 8. Wide margins motivate new crackers andexpansions 10 million metric tons of additional ethylene capacity planned in the US – if all is built. Less than half a million tons of additional propylene and crude C4 will be produced from these new and expanded cracker projects. 8
  9. 9. Agenda • Ethane’s growing popularity • Propylene feeling the pinch • Naphtha’s positive co-product scenario • Ethane rejection and the impact on naphtha 9
  10. 10. Propylene feeling the pinch Before Shale Gas Heavier liquids, 30% Propylene production suffers • Changing feeds has NGL, 70% reduced propylene production in crackers After Shale Gas by more than 50%. Heavier Liquids, 13% • Refineries, which make 50% of propylene, remain at or below 2008 levels. NGL, 87% 10
  11. 11. On-purpose propylene projects in the USYear Company Location Const. Type Feedstock FS Quantity Propylene 2015 Enterprise USG New PDH Propane 1,650,680,195.68 1,642,427,000.00 2015 Dow Freeport, TX New PDH Propane 1,661,758,586.25 1,653,450,000.00 2015 Formosa Point Comfort, TX New PDH Propane 1,329,406,869.00 1,322,760,000.00 2015 LyondellBasell Channelview, TX New Metathesis Propane 502,958,932.11 500,444,200.00 Unknown Williams Alberta, Ontario New PDH Propane 1,005,917,864.21 1,000,888,400.00 12-17 Total Million lbs 6,150,722,447.24 6,119,969,600.00 12-17 Total MT 2,789,949.40 2,776,000.00 11
  12. 12. On-purpose propylene production 12
  13. 13. Cumulative output growth from crackers andPDH10,000,000.00 7,500,000.00 5,000,000.00 2,500,000.00 - 2012 2013 2014 2015 2016 2017 Ethylene Propylene Pygas Crude C4
  14. 14. Agenda • Ethane’s growing popularity • Propylene feeling the pinch • Naphtha’s positive co-product scenario • Ethane rejection and the impact on naphtha 14
  15. 15. Could the US lose its ethane advantage? Ethane Surplus/(deficit) in MT/year 6,000,000.00 4,000,000.00 2,000,000.00 -(2,000,000.00) Ethylene margins shrink as ethane price climbs(4,000,000.00) 2012 2013 2014 2015 2016 2017 15
  16. 16. Historic ethane and ethylene prices 16
  17. 17. Scenario: Ethane at 2011 average, ethylene 2x ethane Ethane Propane EP Mix Normal Butane Light Naphtha Gas Oil 2 Full Range NaphthaFeedstock Cost $ 567.18 $ 487.14 $ 551.17 $ 642.13 $ 860.67 $ 920.83 $ 994.22Margin $ 419.15 $ 328.02 $ 381.28 $ 233.73 $ 20.99 $ (74.36) $ (110.12)Return on Feedstock Cost 74% 67% 69% 36% 2% -8% -11% Assumptions: Ethane at 2011 average of $567.18 per metric ton. Ethylene valued at a 2-to-1 ratio against ethane (down from the current 5-to-1 ratio). All other prices as of COB October 3, 2012. In this scenario, the ethane-based return falls from 372% to 74%. Light naphtha remains profitable, but the return on feedstock cost falls from 7% to 2%. 17
  18. 18. Cracker yield percentages The large amount of pygas (aromatics) and crude C4 (butadiene) from light naphtha allows for potentially large co-product credits if aromatics and butadiene prices climb. 18
  19. 19. Naphtha prices expected to trend lower 19
  20. 20. Scenario: Naphtha price falls 25% Ethane Propane EP Mix Normal Butane Light Naphtha Gas Oil 2 Full Range NaphthaFeedstock Cost $ 567.18 $ 487.14 $ 551.17 $ 642.13 $ 645.50 $ 729.47 $ 710.05Margin $ 413.93 $ 315.83 $ 373.87 $ 213.77 $ 208.88 $ 89.15 $ 144.42Return on Feedstock Cost 73% 65% 68% 33% 32% 12% 20% Assumptions: Ethane at 2011 average of $567.18 per metric ton. Ethylene valued at a 2-to-1 ratio against ethane (down from the current 5-to-1 ratio). Naphtha price down 25% from current level to $645.50/mt. Benzene price at a 1.5-to-1 ratio with naphtha. RBOB gasoline priced at 3-to-1 ratio with naphtha. Full-range naphtha maintains a 10% premium over light naphtha. All other prices as of COB October 3, 2012. Extending the scenario to include a drop in naphtha – and a subsequent drop in benzene – ethane’s return on feedstock is down slightly at 73% and light naphtha climbs to 32%, up from 2%. Full range naphtha also is profitable at 20%. 20
  21. 21. Butadiene also could provide a boost to lightnaphtha 21
  22. 22. Scenario: $3,500 butadiene Ethane Propane EP Mix Normal Butane Light Naphtha Gas Oil 2 Full Range NaphthaFeedstock Cost $ 567.18 $ 487.14 $ 551.17 $ 642.13 $ 645.50 $ 729.47 $ 710.05Margin $ 433.57 $ 346.42 $ 396.96 $ 285.39 $ 265.41 $ 149.35 $ 210.84Return on Feedstock Cost 76% 71% 72% 44% 41% 20% 30% Assumptions: Ethane at 2011 average of $567.18 per metric ton. Ethylene valued at a 2-to-1 ratio against ethane (down from the current 5-to-1 ratio). Naphtha price down 25% from current level to $605.64/mt. Benzene price at a 1.5-to-1 ratio with naphtha. RBOB gasoline priced at 3-to-1 ratio with naphtha. Butadiene at $3,500/mt. All other prices as of COB October 3, 2012. Extending the scenario to include a jump in butadiene provides a boost across the board, pushing light naphtha to 41% from 32% and ethane to 76% from 73%. If butadiene approached record-high levels, the profitability of light naphtha would climb to 50% 22
  23. 23. How likely is the US to overbuild?The petrochemical industry follows an approximate 8-year cycle of profitability.Overbuilding during peak times causes supplies to lengthen. The additionalcapacity also tends to coincide with an economic downturn, resulting in reduceddemand. 23
  24. 24. Are we entering a period of overbuilding? “If the petrochemical industry knows anything, it’s how to overbuild.” -- Senior Vice President of major engineering firm Peak behavior Valley behavior• Expansion in current business areas • Market share drives sales• Too much new capacity by too many • Some companies exit because ofcompanies heavy loses (resulting in cheap acquisitions)• Capacity tends to start up at thesame time • Little new investment• Does any of this apply to the current • Demand starts to catch up withpetrochemical environment? supply as older units are closed 24
  25. 25. The trend could go global 25
  26. 26. Who has shale gas? • US – 482 Trillion Cubic Feet • China – 1,275 Trillion Cubic Feet • Mexico – 681 Trillion Cubic Feet • Argentina – 774 Trillion Cubic Feet • Australia – 396 Trillion Cubic Feet • All of Europe – 639 Trillion Cubic Feet • South Africa – 485 Trillion Cubic Feet • All of Africa – 1,042 Trillion Cubic Feet • Saudi Arabia was not included in the EIA study, but the country expects to be producing from shale gas by 2020. They call their reserves “very significant.” 26
  27. 27. Agenda • Ethane’s growing popularity • Propylene feeling the pinch • Naphtha’s positive co-product scenario • Ethane rejection and the impact on naphtha 27
  28. 28. Is ethane rejection possible? Ethane Surplus/(deficit) in MT/year6,000,000.004,000,000.00 Potential ethane rejection2,000,000.00 -(2,000,000.00)(4,000,000.00) 2012 2013 2014 2015 2016 2017 28
  29. 29. Ethane oversupply leads to ethane rejection At the point of ethane rejection, propylene, pygas and Crude C4 need to support continued drilling – or the wells shift from NGLs to oil. 29
  30. 30. 75% of Marcellus shale is methane 1% 1% 1% 1% 5% 16% 75% Methane Ethane Propane Butane Pentanes Hexanes Inerts/Other
  31. 31. 16% of Marcellus shale is ethane
  32. 32. 0 200 400 600 800 1,000 1,200 1,400 1,600 7/17/1987 7/17/1988 7/17/1989 7/17/1990 7/17/1991 7/17/1992 7/17/1993 7/17/1994 7/17/1995 7/17/1996 US oil and gas rig count 7/17/1997 7/17/1998 7/17/1999Oil 7/17/2000Gas 7/17/2001 7/17/2002 7/17/2003 7/17/2004 7/17/2005 7/17/2006 7/17/2007 7/17/2008 7/17/2009 7/17/2010 7/17/2011 7/17/2012
  33. 33. Crude vs. natural gas

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