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US Ethane Outlook: Part III Will the Good Times Last for Ethane Extraction?. Presented to the 87 th Annual GPA Convention March 4, 2008. Peter Fasullo En*Vantage, Inc This is Our 3 rd Ethane Speech in 4 years for the GPA.

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Us ethane outlook part iii will the good times last for ethane extraction l.jpg

US Ethane Outlook: Part IIIWill the Good Times Last for Ethane Extraction?

Presented to the 87th Annual GPA Convention

March 4, 2008

Peter Fasullo

En*Vantage, Inc

This is our 3 rd ethane speech in 4 years for the gpa l.jpg
This is Our 3rd Ethane Speech in 4 years for the GPA

In our previous two speeches we emphasized 4 basic facts:

  • Ethane constitutes ~ 40% of the US NGL stream from gas processing.

  • Ethane has only one end-use as a feedstock to produce ethylene.

  • Ethane feedstock usage can, at times, be quite volatile.

  • The incentive to extract ethane is only as good as the economic viability of the US petrochemical industry.

    This year’s speech will not deviate from these 4 basic facts

    and will provide an update of our latest views on ethane.

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In 2005:

We Forecasted Better Times for Ethane Extraction.

Key Points:

  • Lingering effects of an 2002/2003 economic downturn were over.

  • Gas prices would remain low relative to crude oil.

  • US ethylene production would be strong enough to support higher levels of ethane cracking.

    Main Conclusion: Favorable conditions for ethane cracking

    would support ethane extraction across all processing regions

    from existing processing plants.

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Last Year:We Focused on Ethane Again. Why?

  • In 2006, midstream players announced $2 billion in projects to support growing gas producing basins.

    • 3 bcfd of cryogenic plant capacity, capable of extracting 150 MBPD of NGLs

    • 450 bpd of new NGL pipeline capacity

    • 215 bpd of additional fractionation capacity

  • These projects are heavily leveraged to ethane, as ethane constitutes at least 40% of the total incremental NGL stream.

  • Major concerns:

    • What is the long-term viability of the US Ethylene Industry and will new ethane volumes from gas processing flood the market?

    • Which segments of the midstream value chain are taking the most risk in betting on ethane and where?

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Let’s Review Last Year’s Observations for ’07 to ’11.

Demand Side:

  • US ethylene capacity not expected to increase. Contraction possible.

  • US ethylene producers striving for greater feedstock flexibility.

  • Demand range for ethane from processing: 600 to 725 MBPD.

    Supply Side

  • US NGL (ethane) extraction declining, but new announced plants will more than offset this decline and create a surplus.

  • Plus, ethane recovered from LNG could add to this overhang.

  • POP and fixed-fee processing contracts can prolong the surplus.

  • Regional shifts in NGL extraction spurring new “logistics” heavily dependent on ethane.

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Last Year’s Conclusions ’11.

  • The US Midstream Sector can no longer take for granted that the US Petrochemical Industry will always be there for ethane.

  • Any processor considering to add more cryo capacity must:

    • Carefully follow and evaluate the state of the US petrochemical industry.

    • Examine your degree of integration across the NGL value chain.

    • Have the ability to re-inject ethane, because ethane market conditions will be more volatile.

    • Structure processing deals to minimize economic damage when a downturn occurs.

  • Logistic players will need to recognize and manage the risks of having projects that handle high ethane content NGL streams .

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So, What’s Changed in One Year? ’11.

  • 2007 was a great year for ethane extraction and demand.

  • More cryogenic plant capacity was announced in 2007.

  • Starting to see signs that ethane extraction is rapidly increasing.

  • Ethane prices relative to crude and natural gas are beginning to show the strains of supplies exceeding demand.

  • Were the great conditions seen in 2007 the “Calm before the Storm?”

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Ethane Frac Spreads Hit Record Highs in 2007 ’11.

Source: Platts & En*Vantage

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Very Low Gas to Crude Ratios along with Record Crude Prices were a Major Driver for Record Frac Spreads.

Source: Platts, DOE and En*Vantage

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Plus, Decent Ethane to Crude Ratios Contributed to Record Frac Spreads and Record High Ethane Prices.

Source: Platts, DOE and En*Vantage

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Basically the Frac Spreads and Record High Ethane Prices.Planets Aligned Perfectly for Gas Processors to Maximize Ethane Profitability in 2007.

  • 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.

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2007 was a Fairly Good Year for US Ethylene Producers. ethane from gas processing

  • 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, US ethylene production was up 1.3% for the year to ~55.5 billion lbs/yr (89% operating rate).

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Despite 2007, Growth in US Ethylene Production and Capacity has Basically Stagnated Over the Past 5 yrs.

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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.

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US Ethylene Production Forecast Scenarios More to Flexi and Heavy Feed Crackers.

Best case call on ethane from processing will be 720 to 780 mbpd most likely case 680 to 700 mbpd l.jpg
Best Case, Call on Ethane from Processing will be 720 to 780 MBPD. Most Likely Case: 680 to 700 MBPD.

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Are Our Assumptions About Ethane Extraction Holding UP? MBPD. Most Likely Case: 680 to 700 MBPD.

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Prior to 2007,US NGL Extraction Declined ~2.5%/yr since Peak in 2001. In Late 2007, the Trend Reversed.

  • 2001-2006:

  • Declining gas production.

  • Slightly leaner gas.

  • Spikes in the gas-to-crude ratio.

  • Hurricanes.

  • Late 2007:

  • Gas production increases in

  • Rockies and Barnett Shale.

  • New processing plants.

  • Very favorable processing

  • economics.

Source: EIA and En*Vantage

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In Late 2007, the Rebound in Ethane Extraction Capability was Greater than We Predicted Last Year .

Source: EIA and En*Vantage

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Gulf Coast Processors Showing the Greatest Declines, TX Inland and Rockies Showing the Greatest Growth.

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Recently Completed & Announced Cryo-Plant Additions Exceeds the 3 BCFD Additions Cited Last Year.

  • The 5.8 BCFD of processing additions represent an incremental:

  • 267 MBPD of NGLs

  • 107 MBPD of Ethane

Because of timing of start-ups, volumes will take time to ramp up.

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In Addition to Incremental NGLs from Processing, One USGC LNG terminal will be Recovering NGLs by 2009.

  • 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.

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Very Good Likelihood an Ethane Extraction Overhang Will Develop in 2008 and Continue Through 2011.

Ethane s forward frac spread and value relative to crude have fallen since late october 07 l.jpg
Ethane’s Forward Frac Spread and Value Relative to Crude have fallen since Late October ’07.

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What Are the Chances that Additional Cryo-Plants Will Be Built in US?

  • Another 1 BCFD of cryo-plant capacity could be announced in next 2 years.

  • Gas processors seldom driven by NGL markets, always driven to serve the gas producer – Just consider this year’s convention theme.

  • What’s required to absorb more ethane supply:

  • More US ethylene capacity with ethane cracking capability -- Not likely.

  • Retooling existing ethylene plants to crack more ethane -- Will take time.

  • US gas-to-crude ratios staying low -- More upside than downside risk here.

  • No new foreign ethylene plants and the delay of those being constructed –

    Delays are possible but additional plants will eventually be built.

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Should the Industry Build More Cryo-Plants? – More Difficult Question to Answer.

An ethane supply overhang:

  • Increases the frequency of marginal ethane frac spreads.

  • Lowers the relative value of ethane to crude.

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In Conclusion Difficult Question to Answer.

  • Last year’s conclusions still stand.

  • Good times may last a little longer for ethane, but a storm is brewing.

  • 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.

  • The gas processing industry must be more market oriented and it needs to closely follow the actions of the petrochemical industry.