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Us ethane outlook

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  • Thanks Joel: I appreciate the opportunity to be here and speak to the GPA about the outlook for ethane and its implications for gas processors and ethylene producers.
  • It was just 2 years ago, that I was here speaking to the GPA about the challenges facing the NGL midstream sector. One of those major challenges concerned ethane. If you recall, the gas processing industry was suffering from: The lingering effects of an economic recession High gas prices relative to crude oil Poor processing margins which resulted in considerable ethane rejection. A depressed petrochemical environment And a real fear that the US ethylene industry would pack up and leave as we witnessed Dow permanently shut down 2 ethylene plants that cracked primarily ethane and E/P mix.
  • It was just 2 years ago, that I was here speaking to the GPA about the challenges facing the NGL midstream sector. One of those major challenges concerned ethane. If you recall, the gas processing industry was suffering from: The lingering effects of an economic recession High gas prices relative to crude oil Poor processing margins which resulted in considerable ethane rejection. A depressed petrochemical environment And a real fear that the US ethylene industry would pack up and leave as we witnessed Dow permanently shut down 2 ethylene plants that cracked primarily ethane and E/P mix.
  • On the surface, ethane supply/demand fundamentals appear simple, but they are complex which causes the wide volume swings that are associated with ethane. Taking a look at a 5 year average balance for ethane we see that:: On the supply side the major source of ethane is gas processing which contributes 89% of all ethane supplies or about 680 MBPD. Refiners also contribute the equivalent of 11% or 84 MBPD of ethane supplies in the form of an ethane/ethylene mix that is recovered and sent to an adjacent ethylene plants. The demand side as we mentioned is dominated by the ethylene industry consuming 98% of ethane supplies and whatever is left over usually goes to utilities for peak shaving. The fundamentals are complex when you consider that the demand for ethane can be influenced by ethylene business cycles, cracker capacities and feedstock capabilities. Also competing feedstock economics and co-product prices, and even ethylene derivative imports and exports can influence the amount of ethane used in the production of ethylene. Factors that influence ethane extraction are not that simple either. Frac spreads, processing contracts, plant type and location, the quantity and quality of gas can all influence how much ethane reaches the market.
  • It was just 2 years ago, that I was here speaking to the GPA about the challenges facing the NGL midstream sector. One of those major challenges concerned ethane. If you recall, the gas processing industry was suffering from: The lingering effects of an economic recession High gas prices relative to crude oil Poor processing margins which resulted in considerable ethane rejection. A depressed petrochemical environment And a real fear that the US ethylene industry would pack up and leave as we witnessed Dow permanently shut down 2 ethylene plants that cracked primarily ethane and E/P mix.
  • It was just 2 years ago, that I was here speaking to the GPA about the challenges facing the NGL midstream sector. One of those major challenges concerned ethane. If you recall, the gas processing industry was suffering from: The lingering effects of an economic recession High gas prices relative to crude oil Poor processing margins which resulted in considerable ethane rejection. A depressed petrochemical environment And a real fear that the US ethylene industry would pack up and leave as we witnessed Dow permanently shut down 2 ethylene plants that cracked primarily ethane and E/P mix.
  • To answer this question we have to go back to a study we did early last year before the rebound occurred for ethane. We were commissioned to study ethane market conditions and determine when they would improve and why? So today, I would like to review the analysis performed in that study that was completed in February of 2004 which did forecast better times for ethane. Specifically, we will examine the fundamentals driving ethane supply/demand and frac spreads. Present simple benchmarks that we developed that can be used to indicate whether ethane’s economic conditions will improve or worsen; And along the way we will share updated findings regarding the outlook for ethane and its implications.
  • What that analysis showed is that processing industry has the capability to extract 800 MBPD of ethane by 2010. The incremental ethane production will come from the Louisiana Gulf Coast and the Rockies. Although we did not factor LNG as a source of ethane, it is probable that after 2010 LNG could be a source for as much as 50 to 100 MBPD of ethane if the LNG comes in “hot”.
  • What that analysis showed is that processing industry has the capability to extract 800 MBPD of ethane by 2010. The incremental ethane production will come from the Louisiana Gulf Coast and the Rockies. Although we did not factor LNG as a source of ethane, it is probable that after 2010 LNG could be a source for as much as 50 to 100 MBPD of ethane if the LNG comes in “hot”.
  • To answer this question we have to go back to a study we did early last year before the rebound occurred for ethane. We were commissioned to study ethane market conditions and determine when they would improve and why? So today, I would like to review the analysis performed in that study that was completed in February of 2004 which did forecast better times for ethane. Specifically, we will examine the fundamentals driving ethane supply/demand and frac spreads. Present simple benchmarks that we developed that can be used to indicate whether ethane’s economic conditions will improve or worsen; And along the way we will share updated findings regarding the outlook for ethane and its implications.
  • The composition of the US ethylene plants is the fundamental reason why the trends just discussed for ethane cracking exist. There are basically 4 types of ethylene plants. The plants that have the greatest amount of feedstock switching capability are the flexi crackers that can crack a wide range of feedstocks from ethane through naphthas and gas oils. The heavy crackers have little, if any, feedstock flexibility to crack ethane. The purity and E/P cracker are basically stuck with cracking purity ethane and E/P mix and that is why there is a minimum amount of ethane that must be cracked by the industry. As you can see the effective capacity of the ethylene industry has increased by 2 billion lbs/yr from about 60 billion pounds in 2000 to about 62 billion pounds as of the end 2004. The capacity increase has shifted the mix of plants more to the flexi and heavy cracker categories as new plants in this category have come on line and as older purity and E/P crackers have been mothballed or permanently shutdown. Based on this shift, we adjusted the ethane cracking range that is implied in the previous scatter chart downward by 15 to 20 MBPD. But this revision may be temporary as there is talk that ChevronPhillips is seriously looking at restarting their 650 million lb/yr E/P cracker in Sweeny and there has been some noise out of Lyondell that they are studying whether to bring their 850 million lb/yr E/P cracker in Lake Charles out mothball status.
  • Transcript

    • 1. US Ethane Outlook:US Ethane Outlook:Ethane: It’s Available and For SaleEthane: It’s Available and For SalePeter FasulloEn*Vantage, Incpfasullo@envantageinc.comPresented to the 15thAnnual PFAA ConferenceNovember 13, 2008
    • 2. 2Our recent studies on ethane have indicated:Our recent studies on ethane have indicated:Supply SideSupply Side US ethane extraction starting to increase – rising gas production and new plants.US ethane extraction starting to increase – rising gas production and new plants. Plant expansions will create an overhang of ethane extraction capability.Plant expansions will create an overhang of ethane extraction capability. More logistical infrastructure (fractionation and distribution) is needed.More logistical infrastructure (fractionation and distribution) is needed. Processors incurring more economic risks on ethane, unless demand increases.Processors incurring more economic risks on ethane, unless demand increases.Demand SideDemand Side Total US ethylene capacity not expected to increase. Contraction is highlyTotal US ethylene capacity not expected to increase. Contraction is highlypossible.possible. Ethylene industry maximizing ethane cracking, but level is not enough.Ethylene industry maximizing ethane cracking, but level is not enough. It will take time and capital to increase the capability to crack more ethane.It will take time and capital to increase the capability to crack more ethane. Less co-product production could be an issue.Less co-product production could be an issue.IntroductionIntroduction
    • 3. 3Our Basic Message About EthaneGas Processors Ethylene ProducersFace challenges in managing excessethane extraction capability anddealing with the consequences.Have the opportunity to increasefeedstock optionality by accessinggreater ethane supplies.
    • 4. Quick OverviewQuick Overview
    • 5. 5Basic Facts About EthaneBasic Facts About Ethane1.1. Ethane constitutes ~ 40% of the US NGL stream from gas processing.Ethane constitutes ~ 40% of the US NGL stream from gas processing.2.2. Ethane is the most economically sensitive NGL and its extraction isEthane is the most economically sensitive NGL and its extraction isdiscretionary.discretionary.3.3. Ethane has only one major end use -- feedstock to produce ethylene.Ethane has only one major end use -- feedstock to produce ethylene.4.4. About 50% of US ethylene is produced from ethane -- 5-yr avg.About 50% of US ethylene is produced from ethane -- 5-yr avg.5.5. The amount of ethane cracked is a function of ethylene production.The amount of ethane cracked is a function of ethylene production.6.6. But, ethane feedstock usage can be volatile when ethylene industry’sBut, ethane feedstock usage can be volatile when ethylene industry’soperating rates are below 90%.operating rates are below 90%.7.7. The incentive to extract ethane is only as good as the economic viabilityThe incentive to extract ethane is only as good as the economic viabilityof the US petrochemical industry and its ability to crack ethane.of the US petrochemical industry and its ability to crack ethane.
    • 6. 6Ethane supply & demand fundamentals appear simple, but they are complexEthane supply & demand fundamentals appear simple, but they are complexand volatile. Market range for ethane*: Low-- 475 MBPD; High-- 850 MBPDand volatile. Market range for ethane*: Low-- 475 MBPD; High-- 850 MBPDMarket drivers for ethaneextraction and cracking: Ethane Extraction Frac spreads Processing contracts Plant type Plant location Gas quantity & quality Ethane Cracking Ethylene business cycles Cracker capacities &feedstock capabilities Competing feedstocks Ethylene co-products Derivative Imports/ExportsSource: DOE, En*Vantage, Hodson; * Includes Ethane from RefiningUS Ethane Supply & DemandUS Ethane Supply & Demand5-Year Average5-Year Average(2003-2007)(2003-2007)SupplySupply DemandDemandSourceSource MBPDMBPD %% End UseEnd Use MBPDMBPD %%ProcessingProcessing 667667 8989 EthyleneEthylene 737737 9898RefiningRefining 8383 1111 BlendingBlendingintointoPropanePropane1313 22TotalTotal 750750 100100 TotalTotal 750750 100100Overview of Ethane Supply & Demand
    • 7. 7Key Drivers for Ethane Supply and DemandKey Drivers for Ethane Supply and DemandPrimary Drivers InfluencesNatural Gas to Crude Price Ratio(Henry Hub Gas/WTI on a BTU basis)ProcessingMarginsEthane FeedstockEconomicsAbsolute Value of WTI Absolute spreads and priceEthane to Crude Price Ratio Absolute Ethane Price.Ethane Frac Spreads.Natural Gas Production & Quality Volume of ethane that can be extracted given thecapacities and types of gas processing plants.US Ethylene Production & IndustryConfigurationEthane consumption versus competingfeedstocks.Both being inverselyrelated to gas to crudeprice ratio
    • 8. 8Key Pricing Drivers for Ethane Supply & DemandKey Pricing Drivers for Ethane Supply & DemandGas-to-Crude RatioWTIPriceGas BTUDiscount to WTIEthane toCrude RatioEthanePriceEthane FracSpread(BTU Basis) $/Bbl $/BTU (Volume Basis) (MB $/gal) (MB $/gal)1998 87.6% $14.4 $0.32 54.3% $0.19 $0.0431999 71.8% $19.2 $1.00 61.3% $0.28 $0.1252000 81.3% $30.3 $0.96 55.9% $0.40 $0.1202001 87.3% $25.9 $0.47 53.3% $0.33 $0.0702002 74.2% $26.1 $1.14 42.0% $0.26 $0.0392003 102.0% $31.1 -$0.11 53.8% $0.40 $0.0352004 83.6% $41.3 $1.26 51.0% $0.50 $0.1132005 89.6% $56.4 $0.89 46.2% $0.62 $0.0382006 59.2% $66.1 $4.71 41.4% $0.65 $0.2102007 57.6% $72.5 $5.53 45.6% $0.79 $0.3312008* 50.3% $114.4 $9.80 40.0% $1.08 $0.42310-Yr AVG 79.4% $38.34 $1.62 50.5% $0.44 $0.112* Jan - Aug 08Key Pricing Metrics For EthaneSource: DOE, En*Vantage, OPIS, ICE
    • 9. 9 Low Gas-to-Crude RatiosLow Gas-to-Crude Ratios High Crude PricesHigh Crude Prices Decent Ethane-to-Crude RatiosDecent Ethane-to-Crude RatiosTheThe Planets Aligned PerfectlyPlanets Aligned Perfectly for Gas Processors tofor Gas Processors toMaximize Ethane Profitability in ‘07 and 1Maximize Ethane Profitability in ‘07 and 1ststHalf of ‘08.Half of ‘08. High Ethane Frac SpreadsHigh Ethane Frac Spreads High Ethane PricesHigh Ethane PricesTwo Factors to Consider:1. Record high ethane prices and frac spreads would not have been possibleif the US ethylene industry was doing poorly.2. Additional ethane from newly constructed processing plants had not fullyimpacted the market yet.Great for:KeepWhole% of Proceeds
    • 10. 10Concentration of Processing Plants andRegional Distribution of Ethane ExtractedUS Gas Processing Industry # of Plants: ~500 Inlet Gas Capacity: 65.5 BCFD Gas Throughput: 43.2 BCFD Industry Operating Rate: 66% Gas Production Processed: 80%Regional Ethane Extraction* LA Gulf Coast……….13% TX Gulf Coast….........6% TX Inland…………….34% Midcontinent…………12% New Mexico………….14% Rockies………………13% Upper Midwest……….6% Other…………………..2%* 5-year averageSource: DOE, En*Vantage, LPG Almanac
    • 11. 11NGL Extraction Will Continue to Shift Further InlandNGL Extraction Will Continue to Shift Further InlandRegional Change in Total NGL and Ethane Extraction Volumesmax 2001 vs max 2008(160)(140)(120)(100)(80)(60)(40)(20)020406080100VolumeChangeMBPDChange in Total NGL Extraction Change in Ethane ExtractionTX InlandTX Gulf Coast LA GulfCoastN. LA/ArkNew MexicoRockiesMid-ContinentUpperMidwest Other+10%+15%-30%-34%+57% +257%-26%-26%+35%-17%-20%+42%-4%+2%+21%-21%-93%-4%Source: DOE and En*Vantage
    • 12. Outlook For Ethane ExtractionOutlook For Ethane Extraction
    • 13. 13Source: EIA and En*VantageEthane Extraction From Processing Can Be VolatileEthane Extraction From Processing Can Be VolatileTotal Ethane Extraction From US Gas Processing(Data for Jan 00 thru Aug 08)250300350400450500550600650700750800850Jan-00Jul-00Jan-01Jul-01Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08NGLExtractionMBPD.High Gas-to-Crude Ratios
    • 14. 14Source: EIA and En*VantagePrior to ‘07 Ethane Extraction Capability was DecliningPrior to ‘07 Ethane Extraction Capability was DecliningRange of US Ethane ExtractionMBPD3004005006007008002000 2001 2002 2003 2004 2005 2006Min C2 Extraction AVG C2 Extraction Max C2 Extraction
    • 15. 15Source: EIA and En*VantageMajor Changes in Regional Proved Natural Gas Reserves - 2000 to 2007(Wet after Lease Seperation)(-49%) (-12,883)(-36%) (-2,313)(-12%)(-1,455)(-25%) (-1434)(-4%) -501389 (+10%)1991 (+45%)2,499 (+56%)3,063 (+32%)3,093 (+93%)5,350 (+84%)5,641 (+39%)11,643 (+107%)13,685 (+80%)22,244 (+533%)(20,000) (16,000) (12,000) (8,000) (4,000) 0 4,000 8,000 12,000 16,000 20,000 24,000Billion Cubic FeetFederal G.O.M………Texas (Barnett Shale)……………………………………………………Wyoming……………………………………………………………………Colorado……………………………………………………………………Oklahoma………………………………………………………………….North Louisiana…………………………………………………………..East Texas…………………………………………………………………Utah…………………………………………………………………………New Mexico (San Juan)…………………………………Texas Panhandle…………………………………………………………New Mexico (Permian)……………………………………………………West Texas (Permian)…………………………………………………..South Texas…………………………………………South Louisiana………………………………Kansas (Hugoton)…………………………………Gas Reserve Additions in Key Processing Regions
    • 16. 16Source: EIA and En*VantageGas Production is UP 11% or +5.8 BCFD since 2006.US Natural Gas Production versus Rig Count(Average Monthly Rig Count versus Marketed Gas Production)46474849505152535455565758596061Jan-00May-00Sep-00Jan-01May-01Sep-01Jan-02May-02Sep-02Jan-03May-03Sep-03Jan-04May-04Sep-04Jan-05May-05Sep-05Jan-06May-06Sep-06Jan-07May-07Sep-07Jan-08May-08Sep-08MarketedGasProduction(BCFD)1002003004005006007008009001000110012001300140015001600RotaryGasRigCountMarketed Natural Gas Production Gas Rig CountHurricanes
    • 17. 17Recently Completed & Announced Plant Additions ~6.8 BCFD.Rockies-- 54%; TX Inland-- 29%; MidCont-- 11%; G.C.-- 6%Region YearProcessingCapacity(MM CFD)NGL ProductionCapabilty(MBPD)Ethane ExtractionCapability (MBPD)Rockies 2007 1100 52 26Texas Inland 2007 825 51 20Mid-Continent 2007 0 0 0Gulf Coast 2007 0 0 0Total 2007 1925 103 46Rockies 2008 1520 71 35Texas Inland 2008 510 34 13Mid-Continent 2008 360 28 11Gulf Coast 2008 295 17 7Total 2008 2685 106 67Rockies 2009 700 33 16Texas Inland 2009 655 48 19Mid-Continent 2009 380 31 16Gulf Coast 2009 100 7 3Total 2009 1835 58 54Rockies 2010 350 30 15Texas Inland 2010 0 0 0Mid-Continent 2010 0 0 0Gulf Coast 2010 0 0 0Total 2010 350 30 15Rockies Total 07-10 3670 185 93Texas Inland Total 07-10 1990 132 53Mid-Continent Total 07-10 740 59 27Gulf Coast Total 07-10 395 24 10Grand Total 6795 401 182*Assumes 100% utilization ratesAdditions to US Gas Processing Capacity and NGL Production Capability*Source: En*Vantage and Company Announcements
    • 18. 18 Trunkline is building a 1.050 BCFD NGL extraction plant at its LakeTrunkline is building a 1.050 BCFD NGL extraction plant at its LakeCharles LNG Terminal, completion in late 2008/early 2009.Charles LNG Terminal, completion in late 2008/early 2009. Depending on the quality of LNG being imported, anywhere between 18Depending on the quality of LNG being imported, anywhere between 18MBPD to 48 MBPD could be extracted.MBPD to 48 MBPD could be extracted. Most likely, the Trunkline LNG terminal will process Nigerian LNG withMost likely, the Trunkline LNG terminal will process Nigerian LNG withan average BTU content of 1150 +/- 25.an average BTU content of 1150 +/- 25. That would imply an NGL recovery rate of at least 39 MBPD, withThat would imply an NGL recovery rate of at least 39 MBPD, withethane extraction about 24 MBPD.ethane extraction about 24 MBPD.In Addition to Incremental NGLs from Processing, OneIn Addition to Incremental NGLs from Processing, OneUSGC LNG Terminal will have NGL Extraction CapabilityUSGC LNG Terminal will have NGL Extraction Capability
    • 19. 19Source: EIA and En*VantageAnnounced Plants Boosting Ethane Extraction CapabilityAnnounced Plants Boosting Ethane Extraction CapabilityForecast of US Ethane Extraction Capability5005506006507007508008509002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011MBPD500550600650700750800850900Ethane Extraction from Existing Plants as of 2006 Ethane Extraction From Announced PlantsLevel of C2 Extraction CapabilityPredicted for 2007 was 756778Level of C2 Extraction CapabilityPredicted for 2008 was 817803Did not include C2 extracted fromLNG at Trunklines LC terminlal
    • 20. 20Another 0.5 - 1 BCFD of cryo-plant capacity could be built in next few years.Represents 30 to 60 MBPD of NGLs of which 12 to 24 MBPD is ethane.Potential Production Change in Growing Gas Processing Basins2006 to 20150.02.04.06.08.010.012.0BarnettShalePiceanceGreenRiverArklatexArkhoma/AnadarkoPermianTotalBillionCFD6.8 BCFD of cryogenic capacity just completed or under construction.Potentially another ~3.4 BCFD ofincremental gas is rich of enough to beprocessed over the next 10 years.Source: EIA, Enterprise, Energy Transfer, Williams, Broadwalk+4.9 BCFD+1.7 BCFD+1.0 BCFD +1.0 BCFD +1.0 BCFD+0.6 BCFDFinancial Crisis Could Delay Unannounced Plants
    • 21. Outlook For US Ethane DemandOutlook For US Ethane Demand
    • 22. 22 Low gas-to-crude ratios in the US made US ethylene producers moreLow gas-to-crude ratios in the US made US ethylene producers morecompetitive globally.competitive globally. The US ethylene industry’s ability to shift to ethane and E/P gave it aThe US ethylene industry’s ability to shift to ethane and E/P gave it acompetitive edge over heavy feedstock crackers in Europe and Asia.competitive edge over heavy feedstock crackers in Europe and Asia. Although the US economy was slowing, the low US dollar created anAlthough the US economy was slowing, the low US dollar created anexport market for US petrochemicals.export market for US petrochemicals. In 2007 and 1In 2007 and 1ststHalf of 2008, US ethylene operating rates were 88.5%Half of 2008, US ethylene operating rates were 88.5%and 87.3%, respectively.and 87.3%, respectively. However, those US ethylene producers leveraged to heavy-feedstocksHowever, those US ethylene producers leveraged to heavy-feedstockssuffered in the high crude price environment during Q1 and Q2 ‘08.suffered in the high crude price environment during Q1 and Q2 ‘08.Fairly Good Business Environment for the USFairly Good Business Environment for the USEthylene Industry in ’07 & 1Ethylene Industry in ’07 & 1ststHalf of ’08Half of ’08
    • 23. 23Growth in US Ethylene Production and Capacity hasGrowth in US Ethylene Production and Capacity hasBasically Stagnated Over the Past 5 yrs.Basically Stagnated Over the Past 5 yrs.US Ethylene Capacity versus Production(Billion Pounds per Year)010203040506070801990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 H108BillionLbs/Year01020304050607080Ethylene Capacity Ethylene ProductionDuring the 1990s U.S. ethylene production andcapacity were growing at a rate 1.5 times GDP.During the 2000s U.S. ethylene productionand capacity have basically flatlined.Source: En*Vantage, Hodson, CMAI
    • 24. 24¹ Capacity excludes plants that are mothballed; Source Hodson and En*Vantage100.0%60.1100.0%62.2Total Effective Capacity5.3%3.214.4%8.9Heavy Feed Crackers45.1%27.150.5%31.4Flexi Feed Crackers38.6%23.228.0%17.4E/P Crackers11.0%6.67.2%4.5Purity Ethane Crackers%Billion Lb/Yr%Billion Lb/Yrof Ethylene Plants20002007Basic TypesEffective Capacity¹Shift in US Ethylene Capacity¹ Capacity excludes plants that are mothballed; Source Hodson and En*Vantage100.0%60.1100.0%62.2Total Effective Capacity5.3%3.214.4%8.9Heavy Feed Crackers45.1%27.150.5%31.4Flexi Feed Crackers38.6%23.228.0%17.4E/P Crackers11.0%6.67.2%4.5Purity Ethane Crackers%Billion Lb/Yr%Billion Lb/Yrof Ethylene Plants20002007Basic TypesEffective Capacity¹Shift in US Ethylene CapacityOver the Past Few Years, US Ethylene CapacityOver the Past Few Years, US Ethylene Capacityhas Shifted More to Flexi and Heavy Feed Crackers.has Shifted More to Flexi and Heavy Feed Crackers.Plus, 21% of US ethylene plant capacity is aging (35 years and older)and this capacity represents 33% of total ethane consumption.
    • 25. 25Cracking of Gas Processors’ EthaneU.S. Ethylene Feedstock Consumption - MBPD(Jan-00 to Aug-08)0100200300400500600700800900Jan-00May-00Sep-00Jan-01May-01Sep-01Jan-02May-02Sep-02Jan-03May-03Sep-03Jan-04May-04Sep-04Jan-05May-05Sep-05Jan-06May-06Sep-06Jan-07May-07Sep-07Jan-08May-08IndividualFeedVolumesMBPD…..0100200300400500600700800900Ethane (from gas processors)PropaneHeavy FeedsN-ButaneSource: Hodson Reportsand En*VantageHurricanesHigh Gas-to-CrudeRatio EnvironmentLow Gas-to-CrudeRatio Environment8 Year Average is 670 MBPD. Peaked at 800 MBPD in ’01. High in ’08 was 745 MBPD.
    • 26. 26The Amount of Ethane Cracking Positively Correlateswith the Amount of Ethylene Produced.EthyleneProduction RateEthyleneOperating RateMin EthaneCrackingAvg EthaneCrackingMax EthaneCrackingBillion Lb/Yr % MBPD MBPD MBPD50 80% 480 598 68052 84% 530 629 71054 87% 580 660 74056 90% 620 691 77058 93% 670 722 80060 96% 710 753 83062 100% 750 784 860Call on Ethane from Gas ProcessingEthane Cracking as a Function of Ethylene ProductionSource: Hodson and En*Vantage.
    • 27. 27US Ethylene Production Forecast ScenariosUS Ethylene Production Forecast ScenariosUS Ethylene Capacity versus Ethylene Production(Billion Pounds per Year)3035404550556065702000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012BillionLbs/YearUS net exports of ethylene productsdeclines as foreign production increasesHistorical Ethylene CapacityEthylene Capacity ForecastHigh Case: 3.5% AGRHistorical Ethylene ProductionHistorical Data: CMAI,HodsonForecast: En*VantageLow Case: 1.5% AGR
    • 28. 28High Likelihood That an Ethane Extraction OverhangHigh Likelihood That an Ethane Extraction OverhangWill Continue Through 2012.Will Continue Through 2012.US economygrows at 3%/yr.Max C2 CrackingUS economystagnates and anethylene surplusdevelopsworldwideEthane Extraction Capability versus Ethane Demand5005506006507007508008509002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012MBPD500550600650700750800850900Max Ethane from Existing Plants Prior to 07 Max Ethane from Announced Plants Ethane from LNGForecasted range of demandfor ethane from gas processingEthane Extraction CapabilityHISTORIC MAXIMUMETHANE CRACKING ABILITYHistorical Demand forEthane from ProcessingAdditions camein Q4 07Source: DOE, En*Vantage, Hodson
    • 29. ImplicationsImplications
    • 30. 30Lower Ethane Values Relative to Crude (WTI)Lower Ethane Values Relative to Crude (WTI)Ethane Price Relationship to WTI(On a $/Bbl Basis)20%30%40%50%60%70%80%90%Jan-91Jan-92Jan-93Jan-94Jan-95Jan-96Jan-97Jan-98Jan-99Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-0820%30%40%50%60%70%80%90%Long-Term Avg 49%Source: DOE, En*Vantage, OPIS, ICE
    • 31. 31Greater Ethane Volumes and Poor EconomyGreater Ethane Volumes and Poor EconomyPressuring Ethane Frac SpreadsPressuring Ethane Frac SpreadsEthane Frac SpreadsMt. Belvieu Ethane minus Henry Hub Gas(Cents per Gallon)(20)(10)010203040506070Jan-91Jan-92Jan-93Jan-94Jan-95Jan-96Jan-97Jan-98Jan-99Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08EthaneFracSpread(Cents/Gallon)-20-10010203040506070Winter ‘95/’96Winter‘00/’0105 HurricanesAsian Crises/Crude PriceCollapseEconmomic Recession/Crude Collapse Winter/Spring 03Record High Crude Prices &Low Gas-to-Crude RatiosAverage 10.6¢/galOver the past 206 months (~17 yrs),ethane frac spreads have traded 66%of the time below 10¢/gal and havetraded 30% of the time below 5¢/gal.Source: DOE, En*Vantage, OPIS, ICE
    • 32. 32Ethane Overhang Will Affect Gas Processors DifferentlyEthane Overhang Will Affect Gas Processors DifferentlyHigh Exposure to Economic RiskHigh Exposure to Economic Risk Lower Exposure to Economic RiskLower Exposure to Economic RiskProcessors with the following:Processors with the following: ““Keep Whole” ContractsKeep Whole” Contracts No ability to re-inject ethaneNo ability to re-inject ethane Little or no integration along the NGLLittle or no integration along the NGLvalue chain.value chain. High T&F feesHigh T&F fees High Fuel Usage & CostsHigh Fuel Usage & Costs Little or no gas basis offsetLittle or no gas basis offset Low value market for ethaneLow value market for ethane Little integration with gas producerLittle integration with gas producerProcessors with the following:Processors with the following: POP ContractsPOP Contracts Ability to re-inject ethaneAbility to re-inject ethane High degree of integration alongHigh degree of integration alongthe NGL value chain.the NGL value chain. Low T&F feesLow T&F fees Low Fuel Usage & CostsLow Fuel Usage & Costs Wide gas basis offsetWide gas basis offset High value market for ethaneHigh value market for ethane Integration with gas producerIntegration with gas producer
    • 33. 33WellheadProductionGas Gathering& ProcessingNGLTransportNGLFractionationNGLStorageProductDistributionOpportunities and Bottlenecks Occurring AcrossNGL Value ChainGreater GasProductionVolumesGreater Needfor Long HaulNGL TakeawayCapacity.MoreOpportunitiesfor Gathering& Processing.GreaterNeed for FullFractionationCapacity.Storage Playsa GreaterRole inBalancingSupply &DemandGreaterNeed forMoreEthaneDistributionto Petro-ChemicalsKeeps Gas-to-Crude Ratios LowExpansions arebeing completed:- MAPL- Overland Pass- Sterling- West Texas P/L- ArbuckleBelvieu Fracsat capacity.More Barrelsbeing divertedto LouisianaMoreCapacitymay beneeded
    • 34. 34US Ethylene Industry Faces Challenges andUS Ethylene Industry Faces Challenges andOpportunitiesOpportunities to Increaseto Increase Ethane ConsumptionEthane Consumption Some heavy-feed crackers are isolated from large ethane distribution systems.Some heavy-feed crackers are isolated from large ethane distribution systems.Additional ethane distribution is needed to access these plants.Additional ethane distribution is needed to access these plants. Midstream companies are reluctant to bear the full risk in building more logisticsMidstream companies are reluctant to bear the full risk in building more logisticsto handle ethane. (to handle ethane. (The Chicken and Pig FableThe Chicken and Pig Fable)) Maximizing ethane cracking at some heavy-feed ethylene plants may requireMaximizing ethane cracking at some heavy-feed ethylene plants may requireinvestments to retool process equipment.investments to retool process equipment. Ethylene producers need to be convinced that ethane supplies will last.Ethylene producers need to be convinced that ethane supplies will last. Co-product production could suffer and petrochemical companies will need toCo-product production could suffer and petrochemical companies will need tofind ways to meet downstream co-product requirements.find ways to meet downstream co-product requirements. Economic slowdown plus more ethylene plants worldwide could dampenEconomic slowdown plus more ethylene plants worldwide could dampenenthusiasm to make investments to access and handle more ethane.enthusiasm to make investments to access and handle more ethane.Ethane cracking capability could increase by another 50 to 75 MBPD atexisting plants, but….
    • 35. 35Is There A Happy Ending?Is There A Happy Ending? Cooperation and sharing of risks between midstream and petrochemicalCooperation and sharing of risks between midstream and petrochemicalcompanies is required to increase ethane distribution and demand.companies is required to increase ethane distribution and demand. Current economic recession may delay aggressive actions by both parties.Current economic recession may delay aggressive actions by both parties. In the meantime, gas processors will need to prepare for a greaterIn the meantime, gas processors will need to prepare for a greaterfrequency of marginal ethane extraction economics.frequency of marginal ethane extraction economics. Careful study and planning is required by individual processors looking toCareful study and planning is required by individual processors looking tobuild that next cryogenic processing plant.build that next cryogenic processing plant. Although additional US ethylene capacity is unlikely, petrochemicalAlthough additional US ethylene capacity is unlikely, petrochemicalcompanies have the opportunity to increase feedstock optionality by takingcompanies have the opportunity to increase feedstock optionality by takingadvantage of ethane’s growing availability and lower valuation relative toadvantage of ethane’s growing availability and lower valuation relative tocompeting feedstocks.competing feedstocks.

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