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Outlook for US Ethane:Always Climbing a Wall of Worry

Presented to the 2ndPlatts NGL Conference

Sept 24, 2012Hilton Houston Post Oak

Peter Fasullo

En*Vantage, Incpfasullo@envantageinc.com

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2

Throughout its history ethane has posed concerns upand down the NGL value chain

Introduction

Industry Player Historical Concern

Gas Producers &Processors

Sufficient ethane extractioneconomics to justify investmentsin cryogenic plants.

Midstream Cos. Volume risks associated withhandling NGLs with high ethane

contents.

Petrochemical Cos. The long-term availability ofcompetitively priced ethane.

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3

Basic Facts About Ethane

Ethane - most economically sensitive NGL, extraction canbe discretionary, and its price floor is set by natural gas.

Ethane has only one major end use ethylene feedstock.

The incentive to extract ethane is only as good as the

economic viability of the US petrochemical industry.In the past 40 years, ethane frac spreads and crackingeconomics have been materially impacted by: Gas shortages - Late 1970s/Early 1980s; Early to Mid 2000s

Recessions - Mid 1990s; Late 2008/Early 2009. Crude price collapses Late 1990s; Q4 2008 to Q1 2009.

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4

The Biggest Worry Today

A chronic surplus of ethane will develop due to the drilling ofrich hydrocarbon shale plays. Many believe ethane supplies will surge overtaking the

petrochemical industrys ability to crack ethane.

Predicting that ethane rejection could be widespread.

So are these concerns justified or are they overblown?

Lets examine the following areas: Recent history

The factors that will drive ethane supply, demand and pricing.

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5

Over the 2007 to 2011 Period

Over 9 BCFD of newcryogenic processingcapacity was built.

NGL extraction climbed

570 MBPD - 310 MBPDwas ethane.

A global recession,followed by sluggisheconomic growth.

A major build out ofethylene capacity in theME, China and SE Asia.

Incremental NGLs, mainly ethaneefficiently absorbed, except duringthe recession in late 08/early 09.

Petchems enhanced ethane

cracking capability to 1.05 MMBPD, exceeding processors abilityto extract ethane.

US became net exporter of NGLs.

Record NGL (ethane) frac spreadsoccurred in 2010/2011.

One negative - NGL takeawaybottlenecks in Mid-Continentdepressing Conway NGL prices.

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6

US ethane prices declined andfrac spreads narrowed: Ethane extraction up 100 MBPD year

over year to near 1 MM BPD.

Additional volumes would have been

efficiently consumed, but Ethylene plant turnarounds

dropped ethane demand by 10%.

Lack of winter weather createda propane surplus.

Conway ethane prices remaindepressed.

Global economic slowdown droppedUS polyethylene exports by ~14%.

What Happened in 1stHalf of 2012?

Ethane Inventoriesclimbed to Record

Levels.

Ethane Rejection

mainly in Mid- Cont.

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Majority of ethylene plant turnarounds completed.Ethane cracking capability enhanced.

Ethane balances still very sensitive to plant outages.

More balanced Ethane Market for theRemainder of 2012 and into 2013

US Ethane Inventories(1000 Bbls)

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Average

Actual Forecast

Ethane Days of Supply of Inventories

0

10

20

30

40

50

60

70

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Day

s-of-Supply

Average

Actual Forecast

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The Relative Value of Natural Gas to Crude

Low gas-to-crude ratios combined with high crude prices isproviding a significant BTU price spread between gas andcrude, driving both the supply and demand for US NGLs.

Gas-to-WTI Price Ratio (On a Thermal Basis) vs

the BTU Spread between WTI and Gas

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

YTD

Gas-to

-CrudeRatio

...

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

$perMMB

TU

Gas-to-WTI Ratio

BTU Spread Between WTIand Gas

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NGL Price Relationships and Frac Spreads

Ethanes floor value, set by gas,has declined, allowing its marketvalue to crude to drop to remainthe preferred feedstock.

Heavy NGLs have maintained

their value relative to crude.

Low gas-to-crude ratios and high oil

prices caused record high NGL fracspreads in 2011.

Ethane frac spreads lower this year.

Heavy NGL frac spreads remain high.

Mt Belvieu NGL Price Relationships to WTI Prices

0%

20%

40%

60%

80%

100%

120%

2006 2007 2008 2009 2010 2011 2012 YTD

Ethane Propane N-Butane I-Butane C5+

NGL Frac Spreads at Mt. Belvieu($ Per MM Btu)

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

2006 2007 2008 2009 2010 2011 2012 YTD

Ethane

Propane

N-Butane

I-Butane

C5+

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NGL Uplift Calculation for Typical Shale Play

* Mt. Belvieu NGL pr ices net of T&F fees of 12/gal.

Ethane51%

27%

Shale Gas

with 5 gpm

of NGLs

PropaneButane +

Cryogenic

Processing

Plant

Residue Gas

22%

NGL Barrel Extracted Sep-2012 NGL uplift $1.75/MM Btu versus $3.25 in Jan-12

Assumes 90% ethane recovery

NGL Uplif t for Average Shale Play(Using Sept 2012 prices for Natural Gas and Mt Belvieu NGLs)

-$0.50

$0.50

$1.50

$2.50

$3.50

$4.50

$5.50

Natural Gas Gas + NGLs

Natural

Gas

C5+

Propane

N-Butane

I-Butane

Ethane

$/MM Btu

$2.73/MM Btu

$1.82

$0.79

$0.58

$0.14$0.78

$0.37

Uplift w/ ethane extraction $4.48/MM Btu

$1.75

Assumes 32%shrinkage plus

1% plant fuel

Uplift w/o

ethane fracspread

$4.11/MM Btu

$1.38

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Rich Hydrocarbon Natural Gas Plays

Rich Plays

NGL

(GPM)Content*

Avalon/Bone Springs** 4.0 to 7.0

Bakken** 4.0 to 9.0

Barnett 2.5 to 3.5

Cana-Woodford 4.0 to 6.0

Eagle Ford*** 4.0 to 9.0

Granite Wash 4.0 to 6.0

Green River** 3.0 to 5.0

Niobrara** 4.0 to 9.0

Piceance-Uinta 2.5 to 3.5

Green River 2.5 to 3.5

Marcellus/Utica (Rich) 4.0 to 9.0

* gpm gallons of NGLs per 1000 cu. ft.

** Oil Shale Plays

*** Both an Oil and Gas Shale Play

Rich Shale Play Corridors

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Outlook for Lower 48 State Gas Production

Expect Lower48 natural gasproductionrising 17% from2011 to 2020.

Shale gasproductiongrowth,offsetting the

decline in theconventionalgas plays.

Source: EIA and En*Vantage

US Lower 48 Gas Produc tion vs Demand

(Trillion Cubic Feet)

0

5

10

15

20

25

30

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

0

5

10

15

20

25

30

Non-associated onshore

Non-associated offshore

Associated w/ oil

Tight Gas

Coal Bed Methane

Shale GasNet Imports

Domestic Gas Demand

17%

8%7%

7%

24%

29%

42%

22%

7%

7%

9%

12%

Source EIA AEO 2012

8%

1%

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Primary Growth NGL is EthaneFollowed by Propane

Ethane/NGL %: 33%.........37%...................39%....................43%

Source: EIA and En*Vantage

US NGLs Extracted From Gas Processing(Thousand BPD)

0

100

200

300

400

500

600700

800

900

1,000

1,100

Jan-90

Jan-92

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Jan-06

Jan-08

Jan-10

Jan-12

0

100

200

300

400

500

600700

800

900

1,000

1,100

Ethane

Propane

Natural Gasoline

I-Butane

N-Butane

Periods of high gas-to-crude ratios

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New Processing Plants

13 BCFD of new gas

processing capacitybeing built by 2015. 40% in the TX Inland

and Gulf Coast

regions. 34% will be built in the

Marcellus/Uticaregion.

Probable that another

4.9 BCFD would bebuilt between 2015and 2020.

Announced Processing Capaci ty

(1000 CFD)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Rockies Bakken TX Inland TX GC Mid-Cont. SE NM Marc/Utica

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Forecast of US NGL Extraction Capability

Gas processing industrys NGL extraction capability: 2.45 MM

BPD in 2011 to about 3.42 MM BPD by 2020.

Ethane extraction capability: 1.04 MM BPD in 2011 to 1.63MM BPD by 2020.

Forecast Max NGL Extraction Capability(1000 BDD)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Propane, Butanes,

Natural Gasoline

Ethane

Forecast

Ethane forecast

includes 240 MBPDfrom Marcellus/Uticapost 2016.

NGL and ethane

supplies from theM/U region could begreater, depends oneconomics and

logistics.

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Potential Ethane Extraction in Marcellus/Utica

Potential Marcellus/Utica Ethane Extraction: 390 - 490MBPD. Fractionation Capacity to De-Ethanize Ethane ~200 MBPD.

Ethane Takeaway Capability will be 240 MBPD-ATEX (190 MBPD)and Mariner West (50 MBPD) .

However, Marcellus/Utica ethane has high T&F fees to Mt.Belvieu of 22/gal to 30/gal or $3.47 to $4 52/mm btu.

Basic question will there be the economic incentive tobring more Marcellus/Utica ethane to market?

Depends on future ethane demand by the petrochemical industry.

If ethane demand is lacking then what? Marcellus/Utica ethane gets blended in the gas stream, and/or

Producers have to throttle back rich gas production.

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Distribution of Ethylene Capacity and Plantsin North America*

Sarnia

Alber ta

Midwest

Gulf

Coast

* Excludes Mexico

12.5%

80.0%

3.3%

3.6%

0.6%

4 plants: 8.6 B Lb/Yr

2 plants: 2.3 B Lb/Yr 2 plants: 2.5 B Lb/Yr

1 plants: 0.4 B Lb/Yr

33 plants: 55.2 B Lb/Yr

N. America: 42 Plants: 69.0 Billion Lbs/Yr% of total N.A.ethylene capacity

Ethane Cracking Capability1,2

US 1,050 MBPD (2011)

Alberta 250 MBPD

Sarnia 45 MBPD

Total NA 1295 MBPD

1 Includes refining ethane2Assumes 100% operating rate

Source: En*Vantage, Hodson, Industry Contacts

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Ethane Cracking Can Soar in aLow Gas-to-Crude Price Environment

Source: En*Vantage, Hodson, Industry Contacts

Since 2008, ethane has been the most preferred petrochemical feedstock,driving its consumption to record levels ethane cracking above 1 MM BPDwhen ethylene industry operates ~ 95% of capacity

-20

-10

0

10

20

30

40

50

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Ethylene Feedstock Margins(Cents per Pound)

Ethane Feedstock Margins

Naphtha Feedstock Margins

Record High Crude Prices

Recession

Crude PriceCollapse

High Gas-to-Crude

Environment

Very Low Gas-to-Crude

Environment

U.S. Ethylene Feedstock Consumption - MBPD(Jan-00 to April-12)

0

100

200

300

400

500

600

700

800

900

1000

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Individual

FeedVolumes(MBPD)..

0

100

200

300

400

500

600

700

800

900

1000

Ethane

Propane

Heavy Feeds

N-Butane

Source: Hodson Reports andEn*Vantage

Hurricanes

High Gas-to-CrudeRatio Environment

Low Gas-to-CrudeRatio Environment

Hurricanes&

Recession

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US Ethylene Industry Continuing to EnhanceEthane Capability at Existing Plants

Capability to Crack Ethane at End of 2011 1.055 MM BPD

Ethane cracking capability is expected to increase - furnace conversions,plant expansions and a plant restart:

Source: En*Vantage, Industry Contacts

YearEnd

Increases in C2

Cracking Capability

Cumulative Increase in

C2 Cracking Capability

Total Industry C2

Cracking Capability(MBPD) (MBPD) (MM BPD)

2012 100 100 1.155

2013 35 135 1.190

2014 85 220 1.2752015 18 238 1.293

2016 25 263 1.318

Assumes 100% operating rates at plants maximizing ethane as a feed

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New World-Scale US Ethylene PlantsAnnounced or Under Consideration

~18.7 billion lbs/yr of new ethylene plant capacity has been announced orbeing considered, representing 526 MBPD of ethane cracking capability.

High probability for 4 new plants -- 320 MBPD of ethane cracking capability.

Fair chance that Sasol will build a new plant in Lake Charles.

Foreign petrochemical companies are also doing feasibility studies to build new

ethylene plants in US.

Company Location Est. Cap

B Lb/Yr

Ethane Cracking

Capabil ity (MBPD)

Est. to be

Online

Probability

Formosa Pt Comfort, TX 1.763 53 2016 High

Exxon Baytown, TX 3.300 95 2016 High

Dow Freeport, TX 3.300 77 2017 High

CP Chem Cedar Bayou, TX 3.300 95 2017 High

Sasol Lake Charles, LA 3.300 95 2017 Fair

Shell Western PA 2.600 78 2018 Unknown

Oxy/Mexichem Ingleside, TX 1.102 33 2018 Unknown

Total 18.665 526

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Lets Not Forget Canada

In total, 90 to 100 MBPD of US Ethane is expected to be

exported to Canada.

Alberta ethane crackers facing a 40 to 80 MBPD ethanesupply shortfall over the next ten years. Will import 40 to 50 MBPD of ethane from the Bakken Shale through the

proposed Vantage pipeline (late 2013).

Sarnia ethylene plants can crack about 45 MBPD of ethane. The Mariner West project (mid-2013) will send Marcellus ethane to Sarnia.

Likely that Nova will expand Sarnia ethylene plant.

Kinder Morgan transporting 10 to 15 MBPD of E/P mix toNova in Sarnia via their Cochin pipeline. Sourcing E/P mix from Conway via Enterprises MAPL system.

Only a bridge for Nova until Mariner West is completed.

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Maximum Demand for US Ethane

Max ability to crack US

ethane is expected togrow from 1.05 MMBPD in 2011 to ~ 1.75MM BPD by 2018.

Enhancements to existingethylene plants - 265 MBPD ofethane cracking capability.

Ethane exports to Canada -100 MBPD by 2015.

High probability new ethylene

plants - 320 MBPD of ethanecracking capability by 2017.

Source: En*Vantage, Industry Contacts

Max Cracking Capabilit y for US Ethane(1000 BPD)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Low Probability New Plants

Fair Probabilty New Plants

High Probability New Plants

US Ethane Cracked in Canada

Converisons/Expansions/Restarts

Base C2 Cracking Capability

If Sasol builds new ethane cracker, max demand for US ethaneapproaches 1.85 MM BPD. If low probability plants are built,max ethane demand reaches 2 MM BPD by 2019.

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Max US Ethane Supply Capability vsMax Ethane Cracking Capability

Through 2013, closebalance between ethanesupply and demand.

From 2014 to 2015ethane supply overhang islikely, but can be resolved

by rejecting ethane in theMarcellus/Utica.

Post 2015, more ethaneneeded to support 4 to 7world-scale ethanecrackers. Incrementalethane will come from theMarcellus/Utica.

Source: En*Vantage, Industry Contacts

Max US Ethane Supply vs Max Ethane Cracking Capability(1000 BPD)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200Low Probability New PlantsModerate Probability New PlantsHigh Probability New PlantsUS Ethane Cracked in CanadaConverisons/Expansions/RestartsBase C2 Cracking Capability

Max C2 Supply

Additonal C2 Supply f rom Marcellus

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Outlook for Ethane Frac Spreads

Source: En*Vantage, Industry Contacts

Ethane Frac Spreads

$0.00

$0.05

$0.10

$0.15

$0.20

$0.25

$0.30

$0.35

$0.40

$0.45

$0.50

$0.55

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

CentsPerGal

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$PerMMB

TU

ForecastActual

Mt Belvieu

Conway

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In SummaryExpect ethane balances to improve for the remainder of the

year and into 2013 - need the ethylene industry operating atabove 90% of capacity.

Marginal frac spreads for ethane in 2014 and 2015 toregulate the flow of ethane from the Marcellus/Utica and

keep ethane markets balanced.Post 2015, full ethane extraction is needed as world-scaleethylene plants come on line.

Ethane imbalances will occur, but they wont be chronic.

Ethane will always be very susceptible to ethylene industryswings.

Biggest threats to ethane - a global recession, a collapse incrude prices, and/or a spike in gas prices.