NGL’s Markets Beyond Mont Belvieu

NGEAO - Tulsa May 2012

Anne B. Keller

© Midstream Energy Group, Inc. 2012 All rights reserved

Aerial View of Mont Belvieu, TX

Midstream Consultancy Business & Asset strategy advisory services Feasibility studies – commercial & technical Market analysis & forecasts Transaction due diligence & transition services support Training Services Provider Author & instructor – “NGL Fundamentals”

Have trained over 500 professionals since 2004

Specialty Interests Petrochemical feedstocks, fuels blending, producer

services

Midstream Energy Group Who We Are

Midstream Energy Group The “Fine Print”

The combination of groupthink and too much money wrecks a lot of forecasts, even the ones that were right to start with…..

NGL’s - Spring 2012 Wandering in the Wilderness

Looks like we have a way to go to reach the Promised Land of Orderly Markets again!

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Frac Spread @Opal Frac Spread @Conway

Ethane Frac Spread $/Mmbtu

NGL’s - Spring 2012 Wandering in the Wilderness

Pressure on midcontinent NGL’s as inventory builds

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MB Basis Conway Basis Linear (MB Basis) Linear (Conway Basis)

NGL Barrel as % of WTI FOB Cushing

NGL’s - Spring 2012 Long Term Survival Guide

The NGL Commandments: Surplus NGL should

seek Mont Belvieu Export markets will

handle supply that cannot find a home here

Pipeline Expansions Underway All Heading to Mont Belvieu

Source: Oil & Gas Journal, May 7, 2012 *In development/construction

Newly announced

What Will They Find There?

Mont Belvieu: Storage

Over 170 million barrels capacity; space for 2+ months’ of daily NGL production

Fractionation Capacity Capacity for 43% of US

NGL production Markets?

Mont Belvieu Markets The “Promised Land” for Ethane

Ethane for Ethylene Production:

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C2 C3 NC4 C5+ Gasoil

2004-2007 Avg 2009-2012 Avg

% of Feedstock Market

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Total Feedstock Market

Total demand still 191M BPD less than 2004 Ethane produces more ethylene with fewer pounds of feedstock

Mont Belvieu Ethane for Ethylene - Outlook

Expansions under way will add 60-80M BPD demand to the area by 2013 New units planned for 2017 could add 200M BPD more Most are reachable via Mont Belvieu, but West Texas barrels can access most of these without coming there

Ethylene demand increase: 950M BPD 2010 1.2 million BPD by 2015

Mont Belvieu Propane – Already Long

Seeing price pressure:

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Propane Price as % of WTI

Beyond Mont Belvieu Propane – Heading Offshore Already

Rising Inventories and Exports: Propane Exports Mont Belvieu

000 BPD

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Source: EIA

Terminal Capacity Booked through 2013 Prices will settle at levels that encourage buying for winter

Mont Belvieu Propane Outlook for the Next Barrel

Near term petrochemical demand probably flat Low ethane prices make propane a hard sell for

ethylene feedstock Projected surpluses are encouraging development of

on purpose propylene production Demand in other sectors flat to falling: High price relative to gas, warm weather have levelled

demand in other domestic sectors Unless motor fuel demand grows, limited growth seen

here

Mont Belvieu Butane

Also switching from imports to exports:

Source: Waterborne LPG Report, April 26, 2012

Mont Belvieu Gateway to Global Markets

Current options for propane & butane heading to Mont Belvieu are storage or export Unlike in the US, international markets use propane and butane mixes (LPG) as a gas substitute What are these markets like?

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International Markets Overview

24%

48%

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9% 6%

Global LPG Chemical ResidentialIndustrial Vehicle FuelRefinery/Agricultural

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International Markets Overview N. America ex USA - Canada & Mexico

9%

28%

63%

Canada Petchem & Other

Residential/Commercial

Exports

10%

13%

13% 64%

Mexico Farming & IndustryVehicle FuelCommercialResidential

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Propane (LPG) Demand USA – Different from the Rest of the World

31%

9% 10%

45%

5%

USA Residential CommercialIndustrial/Vehicle Fuel/Retail ChemicalAgricultural

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International Markets Factors That Drive Prices

Domestic Market Prices

International Market Prices

Import/Export Volumes to Balance Domestic Markets

Domestic Demand

Domestic Price

Subsidy Levels

Domestic Supply

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International Markets Global Market Factors

This is the marginal barrel in the LPG market The price for the last barrel sold is set here “Premium” (less price-sensitive) demand grows with GDP – supply grows with drilling “Price sensitive” demand (aka chemicals) picks up the surplus Prices fall until: Premium demand growth absorbs supply Chemical capacity expands enough to increase baseload

demand and raise feedstock prices Producers reduce optional output or energy production falls

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International NGL/LPG Markets Primary Trade Routes for Waterborne Shipments

Surplus in Atlantic Basin and Middle East

Clears to Highest Price Market at the Time Based on Arbitrage

About 1.6 to 1.8 Million BPD (4.4 million metric tons/month) of LPG moves in the international cargo markets – nearly 20% of global LPG supply

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International LPG Trade Patterns

Traditional moves are from the MidEast to Asia and West Africa/North Sea to Europe. Moves to/from U.S. only when “arb window” is open.

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East of Suez West of Suez

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International LPG Who’s Buying? April 2012 Destinations

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International LPG – Trade Patterns Pricing Points

Middle East Saudi “CP” (contract price) North Sea BP “CP” Atlantic Basin (includes West Africa, Algeria, Central and South America): Price reference = Mont Belvieu

International LPG Importance of Mont Belvieu to Global Markets

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Global clearing market Highest overall storage capacity 2 terminals Most transparent pricing Usually considered market of last resort for global sellers Is currently a supply source since we are long LPG – prices are low enough to attract chemical buyers replacing naphtha with LPG But, these barrels reduce costs for other ethylene producers who compete with US

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International Markets Correlation Between Major Markets - Propane

Correlation Coefficient 2007 to Apr 2011 = .87 Saudi CP vs. Mont Belvieu

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MB Propane Saudi Propane

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Section 4 – International Markets – Propane Big Change in Correlations in the Past Year

Correlation Coefficients (R2) = Saudi CP to MB .62 Algerian CP to MB .46

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Mont Belvieu switching from price setter to price taker?

International Markets “Waterborne” LPG - Shipping

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Oceangoing Vessels Can hold up over 600,000 Bbl.

(75,000 tonnes) Big terminals have fully

refrigerated storage

International Markets Waterborne LPG – How Trades Work

Pricing depends on destination and contract terms Atlantic Basin – usually OPIS Mont Belvieu based +/- a

differential Asia – usually based on Saudi CP +/- a differential Buyer can hedge by selling in the destination market during the lifting “window” Pricing usually determined when the cargo is lifted; average of the day before, day after, and day of lifting; some cargoes have 5 day pricing windows Hedge sales can move the markets due to the volume involved

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International Markets Waterborne LPG – Trends

Export terminals are being expanded to handle more cargoes (2nd half 2012, 2013) Expansion of the Panama Canal in 2014 will shorten the distance to Asia from the US Gulf Coast – Japan is a premium market But, Asian market prices may be lower if more NGL is produced by LNG facilities in Australia

Race to the bottom for prices if domestic demand does not grow

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Mont Belvieu What About C5+?

In Upper Plains and Rockies a new market “commandment” is emerging Strong demand for diluent in Canadian syncrude blending is pulling these barrels north for producers with access to rail Can blend some butane into these barrels

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Diluent Sale WTI @ Cushing

C5+ Demand as Diluent Moving South to North

Southern Lights line can bring 180 M BPD into the market via pipeline; rail supply coming from other places goes directly to Canada; US Gulf Coast barrels can come via Capline pipeline from St. James, LA terminal to Chicago for staging on Southern Lights

From Gulf Coast

C5+ Demand for Diluent Longer Term Views

Outlook for crude prices >$70 Bbl. FOB Canada supports continued development in the oilsands High costs of “coking” projects make diluent blending attractive as long as supply can be found Diluent is about 33% of a “dilbit” (diluted bitumen) barrel – can afford to pay WTI+ prices Tariffs on Southern Lights should fall as throughput volumes rise Kinder Morgan export line to Western Canada provides an outlet for diluent other than recycle from US refiners using Canadian crude

“Beyond Mont Belvieu” Challenges Ahead

Costs to access this hub from other regions are $6-$12/barrel – much higher than in the past Will markets connected here grow enough to accommodate the volume heading here at a price that continues to be attractive? It’s the best outlet to global markets for propane and

butane surpluses outside of the Marcellus But, ethane demand is growing in other areas (Texas Gulf

Coast, Louisiana) with direct access to shale production Demand pull for C5+ and some butane is north, not south –

the direct sales route may be better than circulating in and out of the hub

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