DALLAS: 15455 Dallas Parkway · Suite 200 · Addison, Texas 75001 · Phone (214) 954-4455 · Fax (214) 954-1521HOUSTON: Three Allen Center · 333 Clay Street · Suite 4130 · Houston, Texas 77002 · Phone (713) 890-1182 · Fax (713) 751-8888
NATURAL GAS LIQUIDS,IN-STATE GAS PROCESSING,
ANDPETROCHEMICAL FACILITIES
NNATURALATURAL GGASAS LLIQUIDS,IQUIDS,IINN--SSTATETATE GGAS AS PPROCESSING,ROCESSING,
ANDANDPPETROCHEMICAL ETROCHEMICAL FFACILITIESACILITIES
September 2004
Prepared for
SSTATE OF TATE OF AALASKALASKA
DDEPARTMENT OF EPARTMENT OF RREVENUEEVENUE
2
U.S. NU.S. NATURAL ATURAL GGAS AS LLIQUID IQUID PPRODUCTION RODUCTION –– 20032003
PADD Gasoline DieselI 3.0 1.3II 2.5 1.1III 1.3 0.6IV 0.3 0.2V 1.5 0.4
Total U.S. 8.6 3.6
II
IIII
IVV
PADD I1% PADD II
17%
PADD III66%
PADD IV12%
PADD V4%
Ethane 625Propane 505Normal Butane 130Isobutane 182Natural Gasoline 275
Total 1,717
(Mb/d)
Overall U.S. demand averaging about 2 million barrels per day (MMb/d)2003 U.S. net imports of natural gas liquids averaged approximately 166,000 barrels per day (Mb/d)
3
NGL TNGL TRADING RADING HHUBSUBSMont Belvieu market is the “price setter” or "NGL price reference point" for North American NGL markets
– Canadian NGL exports represent about 10 percent of U.S. demand
SOURCE: NEB
In the Lower 48, regional market centers are associated with significant NGL fractionation assets
– Sarnia, Ontario– Conway, Kansas– Edmonton, Alberta
Sales to local markets– Via truck and/or
barge transport– “Bottled Gas”
distribution
4
PPRODUCT RODUCT PPRICE RICE TTRENDSRENDSIn general, ethane tracks natural gas price; propane and butane track crude oil price
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Jan-
90
Jul-9
0
Jan-
91
Jul-9
1
Jan-
92
Jul-9
2
Jan-
93
Jul-9
3
Jan-
94
Jul-9
4
Jan-
95
Jul-9
5
Jan-
96
Jul-9
6
Jan-
97
Jul-9
7
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Nat
ural
Gas
, $/M
MB
tu
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
Cru
de, $
/Bar
rel
Etha
ne, ¢
/Gal
lon
Natural Gas Crude Oil Ethane
SOURCES: Natural Gas Week Henry Hub; Platt's WTI; OPIS Mont Belvieu Purity Ethane
Ethane
Natural Gas
Crude Oil
5
CCOMPARISON OMPARISON OOF F NNATURAL ATURAL GGAS AS AAND ND EETHANE THANE VVALUESALUES
Although prices for both natural gas and ethane have increased, the difference between the prices for these products has narrowed significantly since late 2000
SOURCE: Natural Gas Week Henry Hub Gas Price, OPIS Mt. Belvieu Purity Ethane
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Jan-
90
Jul-9
0
Jan-
91
Jul-9
1
Jan-
92
Jul-9
2
Jan-
93
Jul-9
3
Jan-
94
Jul-9
4
Jan-
95
Jul-9
5
Jan-
96
Jul-9
6
Jan-
97
Jul-9
7
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
(Dol
lars
Per
MM
Btu
)
Natural Gas Ethane
6
Energy Information Administration (EIA) is forecasting that NGL prices will remain essentially flat on a real basis in the long term
Specific netback pricing for Alaska Gas Pipeline (AGP) delivered supplies will be a function of the total cost to extract the NGL and to transport the products to end-user markets
End-use markets may not develop uniformly for all NGL components and will be dependent on local demand in the geographic location or locations selected for NGL extraction
– NGL extracted from AGP will be primarily ethane, with significantly lesser amounts of propane and heavier products
– NGL composition from AGP is expected to be much different than typical Lower 48 NGL mixtures
NGLNGL PPRICINGRICING
7
HHISTORICAL ISTORICAL NNET ET NGL ENGL EXTRACTION XTRACTION MMARGINARGIN
Net Operating Margin = Processing Upgrade Less Plant Operating Expenses (Excludes Overhead, Capital Expenditures, and Return on Capital)
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1Ja
n-90
Jul-9
0
Jan-
91
Jul-9
1
Jan-
92
Jul-9
2
Jan-
93
Jul-9
3
Jan-
94
Jul-9
4
Jan-
95
Jul-9
5
Jan-
96
Jul-9
6
Jan-
97
Jul-9
7
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
U.S
. Dol
lars
Per
Inle
t MSc
f
U.S. Midcontinent U.S. Gulf Coast
$4.56$2.75$1.76Gas, $/MMBtu
(0.03).04.08U.S. Gulf Coast
.04.21.23Mid-Continent
2001 YTD 20041996-20001990-1995
8
40%
60%
80%
100%
120%
140%
160%
Jan-
90
Jul-9
0
Jan-
91
Jul-9
1
Jan-
92
Jul-9
2
Jan-
93
Jul-9
3
Jan-
94
Jul-9
4
Jan-
95
Jul-9
5
Jan-
96
Jul-9
6
Jan-
97
Jul-9
7
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Perc
ent P
aym
ent t
o Pr
oduc
er
U.S. Midcontinent U.S. Gulf Coast
NOTE: Assumes producer stands fuel, shrink, and transportation and fractionation,and no return on capital
PPRODUCERRODUCER’’SS BBREAKEVEN REAKEVEN PPERCENT OF ERCENT OF EEXTRACTED XTRACTED NGLNGLSS
$4.56$2.75$1.76Gas, $/MMBtu
99%84%69%U.S. Gulf Coast
93%79%69%Mid-Continent
2001 YTD 20041996-20001990-1995
9
AALTERNATIVE LTERNATIVE DDISPOSITIONS ISPOSITIONS FFOR OR AGPAGP TTHROUGHPUTHROUGHPUT
– U.S. Gulf Coast is the largest petrochemical center with 80 percent of existing U.S./Canadian ethylene production capacity
– Other petrochemical centers include:• Alberta (primarily near Edmonton) – 12 percent• Sarnia, Ontario – 3 percent• Various locations within the U.S. Midwest –
3 percent• U.S. East Coast – 1 percent
– The nearest existing infrastructure of plausible size is located in Alberta
• Canada is currently supplying internal demand for NGL and exports excess supply to the U.S. Midwest
• New gas processing and petrochemical manufacturing capacity or NGL pipeline export capacity may have to be added in Alberta to absorb Alaskan NGL's, depending on the timing of AGP start-up relative to the decline of existing Canadian gas production and development of new sources of Canadian gas, such as the Mackenzie Delta project
Extraction in Alaska– Would not likely support economic development of second pipeline to Canada/Lower 48 for NGL
only– Would therefore require development of complete NGL extraction, petrochemical manufacturing,
and support system infrastructure– May also require transportation infrastructure expansions that have not yet been defined
Extraction and Petrochemical Manufacturing Outside of Alaska
10
IINN--SSTATE TATE EEXTRACTION XTRACTION OOFF AALASKAN LASKAN NGL'NGL'SS– Fairbanks Extraction Facility to handle up to 1.4 Bcfd of AGP
throughput– Extraction of approximately 40,000 b/d of ethane to feed
petrochemical complex and 1,000 b/d of propane for local consumption
– Availability of commercial-quality natural gas for local distribution– Residue gas (over 1 Bcfd) and excess NGL re-injected into AGP– Would be required in addition to NGL extraction facilities or
access to NGL extraction capacity at AGP terminus
11
AALASKAN LASKAN PPETROCHEMICAL ETROCHEMICAL CCOMPLEXOMPLEX
All of the ethane extracted is utilized in the production of ethylene that is subsequently converted to polyethylene (PE) resinCracker to produce 1.5 billion pounds per year of ethyleneIncludes on-site power generation to support facility operations and optionally could generate excess power for local distributionAssumes that the PE resin will move on existing rail infrastructure and be exported to the U.S. West Coast by marine vessel out of Whittier
EthyleneCracker
Ethane
EthylenePolyethylene
PlantPE Resin
Byproducts
OptionalPower
GenerationUtility
Systems
Catalyst
Storageand Warehousing
EthyleneCracker
Ethane
EthylenePolyethylene
PlantPE Resin
Byproducts
OptionalPower
GenerationUtility
Systems
Catalyst
Storageand Warehousing
EthyleneCracker
Ethane
EthylenePolyethylene
PlantPE Resin
Byproducts
OptionalPower
GenerationUtility
Systems
Catalyst
Storageand Warehousing
12
SSUMMARY OF UMMARY OF FFINDINGSINDINGSAdvantages of Fairbanks Petrochemical Development
– Availability of attractively priced feedstock extracted from AGP– Waterborne access to California market– Synergy with other potential energy developments
• Provides pipeline quality natural gas to Fairbanks– Could develop gas pipeline to Anchorage (supplement Cook Inlet gas)
• Possible cogeneration plant tied into regional power grid– Off-set Cook Inlet gas decline and power generation
Disadvantages of Fairbanks Petrochemical Development– Variability in gas composition over time
• Non-optimal sizing and operation of Fairbanks extraction and fractionation plant– Inherent inefficiency of processing a large portion of the gas twice; first at Fairbanks, then
again at pipeline terminus– Non-optimal sizing of AGP downstream of Fairbanks– Considerably higher capital cost than other locations– Higher fixed operating cost than other locations– Lack of supporting infrastructure– Lack of market for byproducts
13
SSUMMARY OF UMMARY OF FFINDINGS (CONTINUED)INDINGS (CONTINUED)Preliminary Economics
– High level analysis indicates that the production of ethylene in Fairbanks is economically less attractive than in either Alberta or the U.S. Gulf Coast
– Advantages of: • Lower feedstock price (ethane)• Lower variable operating cost advantage, driven mainly by lower gas price
– More than offset by:• Higher fixed operating cost due to higher labor and maintenance costs• Lower product value due to downgrading byproducts to fuel
– Significantly higher capital costs also a disincentive to invest– Using recent U.S. Gulf Coast historical benchmarks, and assuming a Fairbanks location could
achieve the same operating cash margin, due to the higher investment cost, a Fairbanks ethylene plant would generate a much less attractive rate of return
• Returns shown below are expressed as capital recovery factor (CRF)
AnnualRevenue
$MMU.S. Gulf
Coast Fairbanks2004 YTD 158.5 11.3% 7.1%2003 avg. 125.0 8.9% 5.6%2002 avg. 127.0 9.1% 5.7%2001 avg. 153.6 11.0% 6.8%
CRF
Return on Capital