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US Ethane Outlook: Ethane: It’s Available and For Sale. Presented to the 15 th Annual PFAA Conference November 13, 2008. Peter Fasullo En*Vantage, Inc pfasullo@envantageinc.com. Introduction. Our recent studies on ethane have indicated: Supply Side

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us ethane outlook ethane it s available and for sale

US Ethane Outlook:Ethane: It’s Available and For Sale

Presented to the 15th Annual PFAA Conference

November 13, 2008

Peter Fasullo

En*Vantage, Inc

pfasullo@envantageinc.com

introduction
Introduction

Our recent studies on ethane have indicated:

Supply Side

  • US ethane extraction starting to increase – rising gas production and new plants.
  • Plant expansions will create an overhang of ethane extraction capability.
  • More logistical infrastructure (fractionation and distribution) is needed.
  • Processors incurring more economic risks on ethane, unless demand increases.

Demand Side

  • Total US ethylene capacity not expected to increase. Contraction is highly possible.
  • Ethylene industry maximizing ethane cracking, but level is not enough.
  • It will take time and capital to increase the capability to crack more ethane.
  • Less co-product production could be an issue.
slide3

Our Basic Message About Ethane

Gas Processors

Ethylene Producers

Face challenges in managing excess ethane extraction capability and dealing with the consequences.

Have the opportunity to increase feedstock optionality by accessing greater ethane supplies.

basic facts about ethane
Basic Facts About Ethane
  • Ethane constitutes ~ 40% of the US NGL stream from gas processing.
  • Ethane is the most economically sensitive NGL and its extraction is discretionary.
  • Ethane has only one major end use -- feedstock to produce ethylene.
  • About 50% of US ethylene is produced from ethane -- 5-yr avg.
  • The amount of ethane cracked is a function of ethylene production.
  • But, ethane feedstock usage can be volatile when ethylene industry’s operating rates are below 90%.
  • The incentive to extract ethane is only as good as the economic viability of the US petrochemical industry and its ability to crack ethane.
slide6

Overview of Ethane Supply & Demand

Ethane supply & demand fundamentals appear simple, but they are complex and volatile. Market range for ethane*: Low-- 475 MBPD; High-- 850 MBPD

  • Market drivers for ethane extraction 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/Exports

Source: DOE, En*Vantage, Hodson; * Includes Ethane from Refining

slide7

Key Drivers for Ethane Supply and Demand

Both being inversely related to gas to crude price ratio

slide8

Key Pricing Drivers for Ethane Supply & Demand

Source: DOE, En*Vantage, OPIS, ICE

slide9

The Planets Aligned Perfectly for Gas Processors to Maximize Ethane Profitability in ‘07 and 1st Half of ‘08.

  • Low Gas-to-Crude Ratios
  • High Crude Prices
  • Decent Ethane-to-Crude Ratios

Great for:

Keep Whole

  • High Ethane Frac Spreads
  • High Ethane Prices

% of Proceeds

  • Two Factors to Consider:
  • Record high ethane prices and frac spreads would not have been possible if the US ethylene industry was doing poorly.
  • Additional ethane from newly constructed processing plants had not fully impacted the market yet.
concentration of processing plants and regional distribution of ethane extracted
Concentration of Processing Plants and Regional Distribution of Ethane Extracted

US 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 average

Source: DOE, En*Vantage, LPG Almanac

slide17

Recently Completed & Announced Plant Additions ~6.8 BCFD. Rockies-- 54%; TX Inland-- 29%; MidCont-- 11%; G.C.-- 6%

Source: En*Vantage and Company Announcements

slide18

In Addition to Incremental NGLs from Processing, One USGC LNG Terminal will have NGL Extraction Capability

  • Trunkline is building a 1.050 BCFD NGL extraction plant at its Lake Charles LNG Terminal, completion in late 2008/early 2009.
  • Depending on the quality of LNG being imported, anywhere between 18 MBPD to 48 MBPD could be extracted.
  • Most likely, the Trunkline LNG terminal will process Nigerian LNG with an average BTU content of 1150 +/- 25.
  • That would imply an NGL recovery rate of at least 39 MBPD, with ethane extraction about 24 MBPD.
slide20

Financial Crisis Could Delay Unannounced Plants

Another 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.

slide22

Fairly Good Business Environment for the US Ethylene Industry in ’07 & 1st Half of ’08

  • Low gas-to-crude ratios in the US made US ethylene producers more competitive globally.
  • The US ethylene industry’s ability to shift to ethane and E/P gave it a competitive edge over heavy feedstock crackers in Europe and Asia.
  • Although the US economy was slowing, the low US dollar created an export market for US petrochemicals.
  • In 2007 and 1st Half of 2008, US ethylene operating rates were 88.5% and 87.3%, respectively.
  • However, those US ethylene producers leveraged to heavy-feedstocks suffered in the high crude price environment during Q1 and Q2 ‘08.
slide23

Growth in US Ethylene Production and Capacity has Basically Stagnated Over the Past 5 yrs.

Source: En*Vantage, Hodson, CMAI

over the past few years us ethylene capacity has shifted more to flexi and heavy feed crackers
Over the Past Few Years, US Ethylene Capacity 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.

slide25

Cracking of Gas Processors’ Ethane

8 Year Average is 670 MBPD.Peaked at 800 MBPD in ’01.High in ’08 was 745 MBPD.

slide26

The Amount of Ethane Cracking Positively Correlates with the Amount of Ethylene Produced.

Source: Hodson and En*Vantage.

slide28

High Likelihood That an Ethane Extraction Overhang Will Continue Through 2012.

US economy grows at 3%/yr.

Max C2 Cracking

US economy stagnates and an ethylene surplus develops worldwide

Source: DOE, En*Vantage, Hodson

lower ethane values relative to crude wti
Lower Ethane Values Relative to Crude (WTI)

Source: DOE, En*Vantage, OPIS, ICE

greater ethane volumes and poor economy pressuring ethane frac spreads
Greater Ethane Volumes and Poor Economy Pressuring Ethane Frac Spreads

Source: DOE, En*Vantage, OPIS, ICE

slide33

Opportunities and Bottlenecks Occurring Across NGL Value Chain

Wellhead Production

Gas Gathering & Processing

NGL Transport

NGL

Fractionation

NGL

Storage

Product

Distribution

Greater Gas Production Volumes

More Opportunities for Gathering & Processing.

Greater Need for Long Haul NGL Takeaway Capacity.

Greater Need for Full Fractionation Capacity.

Storage Plays a Greater Role in Balancing Supply & Demand

Greater Need for More Ethane Distribution to Petro- Chemicals

Keeps Gas-to-Crude Ratios Low

Expansions are being completed:- MAPL - Overland Pass - Sterling - West Texas P/L - Arbuckle

Belvieu Fracs at capacity.

More Barrels being diverted to Louisiana

More Capacity may be needed

us ethylene industry faces challenges and opportunities to increase ethane consumption
US Ethylene Industry Faces Challenges and Opportunitiesto IncreaseEthane Consumption

Ethane cracking capability could increase by another 50 to 75 MBPD at existing plants, but….

  • Some heavy-feed crackers are isolated from large ethane distribution systems. Additional ethane distribution is needed to access these plants.
  • Midstream companies are reluctant to bear the full risk in building more logistics to handle ethane. (The Chicken and Pig Fable)
  • Maximizing ethane cracking at some heavy-feed ethylene plants may require investments to retool process equipment.
  • Ethylene producers need to be convinced that ethane supplies will last.
  • Co-product production could suffer and petrochemical companies will need to find ways to meet downstream co-product requirements.
  • Economic slowdown plus more ethylene plants worldwide could dampen enthusiasm to make investments to access and handle more ethane.
slide35

Is There A Happy Ending?

  • Cooperation and sharing of risks between midstream and petrochemical companies is required to increase ethane distribution and demand.
  • Current economic recession may delay aggressive actions by both parties.
  • In the meantime, gas processors will need to prepare for a greater frequency of marginal ethane extraction economics.
  • Careful study and planning is required by individual processors looking to build that next cryogenic processing plant.
  • Although additional US ethylene capacity is unlikely, petrochemical companies have the opportunity to increase feedstock optionality by taking advantage of ethane’s growing availability and lower valuation relative to competing feedstocks.