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

Peter Fasullo

En*Vantage, Inc

pfasullo@envantageinc.com

Presented to the 87th Annual GPA Convention

March 4, 2008

22

This is Our 3This is Our 3rdrd Ethane Speech in 4 years for the GPA Ethane Speech in 4 years for the GPA

In our previous two speeches we emphasized 4 basic facts:In our previous two speeches we emphasized 4 basic facts:

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

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

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

4.4. The incentive to extract ethane is only as good as the economic viability The incentive to extract ethane is only as good as the economic viability

of the US petrochemical industry.of the US petrochemical industry.

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

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

33

Key Points:Key Points:

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

Gas prices would remain low relative to crude oil.Gas prices would remain low relative to crude oil.

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

Main Conclusion:Main Conclusion: Favorable conditions for ethane cracking Favorable conditions for ethane cracking

would support ethane extraction across all processing regions would support ethane extraction across all processing regions

from existing processing plants. from existing processing plants.

In 2005:In 2005: We Forecasted Better Times for Ethane Extraction.We Forecasted Better Times for Ethane Extraction.

44

Last Year:Last Year: We Focused on Ethane Again. Why?We Focused on Ethane Again. Why?

In 2006, midstream players announced $2 billion in projects to support In 2006, midstream players announced $2 billion in projects to support growing gas producing basins.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 These projects are heavily leveraged to ethane, as ethane constitutes at least 40% of the total incremental NGL stream.least 40% of the total incremental NGL stream.

Major concerns: 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?

55

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

Demand Side:Demand Side:

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

US ethylene producers striving for greater feedstock flexibility.US ethylene producers striving for greater feedstock flexibility.

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

Supply SideSupply Side

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

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

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

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

66

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

Any processor considering to add more cryo capacity must:Any processor considering to add more cryo capacity must: Carefully follow and evaluate the state of the US petrochemical industry.Carefully follow and evaluate the state of the US petrochemical industry. Examine your degree of integration across the NGL value chain.Examine your degree of integration across the NGL value chain. Have the ability to re-inject ethane, because ethane market conditions will Have the ability to re-inject ethane, because ethane market conditions will

be more volatile.be more volatile. Structure processing deals to minimize economic damage when a downturn Structure processing deals to minimize economic damage when a downturn

occurs.occurs.

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

Last Year’s ConclusionsLast Year’s Conclusions

77

So, What’s Changed in One Year?So, What’s Changed in One Year?

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

More cryogenic plant capacity was announced in 2007. More cryogenic plant capacity was announced in 2007.

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

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

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

88

Ethane Frac Spreads Hit Record Highs in 2007Ethane Frac Spreads Hit Record Highs in 2007

Source: Platts & En*Vantage

Ethane Frac Spreads Mt. Belvieu Ethane minus Henry Hub Gas

(Cents per Gallon)

(20)

(10)

0

10

20

30

40

50

60

Eth

an

e F

rac S

pre

ad

(C

en

ts/G

allo

n)

-20

-10

0

10

20

30

40

50

60

Winter ‘95/’96

Winter ‘00/’01

2005 Hurricanes

Asian Crises/Crude Price Collapse

Econmomic Recession/ Crude Collapse

Winter/Spring '03

Extreme Gas Storage Overhang & Record Crude Prices

Average 10.6¢/gal

Over the past 206 months (~17 yrs), ethane frac spreads have traded 66% of the time below 10¢/gal and have traded 30% of the time below 5¢/gal.

99

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

Source: Platts, DOE and En*Vantage

Natural Gas to Crude Price Ratio*(Henry Hub Cash Price to WTI Price on a Thermal Basis)

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Pri

ce

Ra

tio

%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Winter ‘00/’01

Winter/Spring ’03

'05 Hurricanes

’91 -’94: 56% ’95 -’98: 70% ’99 -’02: 78% ’03 -'05: 92% '06 -'07: 65% '07: 58%

"Gas Bubble" Mid '80s to Early '90s "The Emergence of Gas Fired Power Plants"

Extreme Gas Storage Overhang

* Based on 5.8 MM BTU/Bbl

Average 71%

Competing with Heating Oil

Competing with Coal

Competing with Residual Fuel

1010Source: Platts, DOE and En*Vantage

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

Ethane Price Relationship to WTI(On a $/Bbl Basis)

20%

30%

40%

50%

60%

70%

80%

90%

20%

30%

40%

50%

60%

70%

80%

90%

Long-Term Avg 49% 2007 Avg 46%

1111

Low Gas-to-Crude RatiosLow Gas-to-Crude Ratios

High Crude PricesHigh Crude Prices

Decent Ethane-to-Crude RatiosDecent Ethane-to-Crude Ratios

Basically the Basically the Planets Aligned Perfectly Planets Aligned Perfectly for Gas for Gas Processors to Maximize Ethane Profitability in 2007.Processors to Maximize Ethane Profitability in 2007.

High Ethane Frac SpreadsHigh Ethane Frac Spreads

High Ethane PricesHigh Ethane Prices

Two Factors to Consider:

1. Record high ethane prices and frac spreads would not have been possible if the US ethylene industry was doing poorly.

2. Additional ethane from newly constructed processing plants had not fully impacted the market yet.

Great for:

Keep Whole

% of Proceeds

Let’s take a closer look at petrochemical Let’s take a closer look at petrochemical demand for ethane from gas processingdemand for ethane from gas processing

1313

Low gas-to-crude ratios in the US made US ethylene producers more Low gas-to-crude ratios in the US made US ethylene producers more competitive globally.competitive globally.

The US ethylene industry’s ability to shift to ethane and E/P gave it a 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.competitive edge over heavy feedstock crackers in Europe and Asia.

Although the US economy was slowing, the low US dollar created an Although the US economy was slowing, the low US dollar created an export market for US petrochemicals. export market for US petrochemicals.

In 2007, US ethylene production was up 1.3% for the year to ~55.5 In 2007, US ethylene production was up 1.3% for the year to ~55.5 billion lbs/yr (89% operating rate). billion lbs/yr (89% operating rate).

2007 was a Fairly Good Year for US Ethylene Producers.2007 was a Fairly Good Year for US Ethylene Producers.

1414

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

US Ethylene Capacity versus Production(Billion Pounds per Year)

0

10

20

30

40

50

60

70

80

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Bill

ion

Lb

s/Y

ea

r

0

10

20

30

40

50

60

70

80Ethylene Capacity Ethylene Production

During the 1990's U.S. ethylene production and capacity were growing at a rate 1.5 times GDP.

During the 2000's U.S. ethylene production and capacity have basically flatlined.

Feedstock Demand (MBPD)* Total Ethane Propane Butane C5's Gas Oil1990 1099 40.7% 19.1% 5.4% 27.6% 7.2%1995 1411 38.4% 24.2% 4.4% 25.8% 7.2%2000 1647 43.8% 18.7% 3.3% 27.8% 6.4%2006 1674 39.5% 22.4% 4.6% 26.3% 7.2%2007 1680 40.8% 22.3% 4.7% 25.5% 6.7%* Excludes refinery ethane/ethylene streams

1515

U.S. Ethylene Feedstock Consumption - MBPD(Jan-00 to Dec-07)

0

100

200

300

400

500

600

700

800

900

Ind

ivid

ua

l F

ee

d V

olu

me

s M

BP

D…

..

0

100

200

300

400

500

600

700

800

900

Ethane (from gas processors)

Propane

Heavy Feeds

N-Butane

Source: Hodson Reports and En*Vantage

Hurricanes

High Gas-to-Crude Ratio Environment

Low Gas-to-Crude Ratio Environment

Ethane Demand Higher in 2007 (680 MBPD), but Only Slightly Above 8 Year Average (660MBPD).

1616

¹ Capacity excludes plants that are mothballed; Source Hodson and En*Vantage

100.0%60.1100.0%62.2Total Effective Capacity

5.3%3.214.4%8.9Heavy Feed Crackers

45.1%27.150.5%31.4Flexi Feed Crackers

38.6%23.228.0%17.4E/P Crackers

11.0%6.67.2%4.5Purity Ethane Crackers

%Billion Lb/Yr%Billion Lb/Yrof Ethylene Plants

20002007Basic Types

Effective Capacity¹

Shift in US Ethylene Capacity

¹ Capacity excludes plants that are mothballed; Source Hodson and En*Vantage

100.0%60.1100.0%62.2Total Effective Capacity

5.3%3.214.4%8.9Heavy Feed Crackers

45.1%27.150.5%31.4Flexi Feed Crackers

38.6%23.228.0%17.4E/P Crackers

11.0%6.67.2%4.5Purity Ethane Crackers

%Billion Lb/Yr%Billion Lb/Yrof Ethylene Plants

20002007Basic Types

Effective Capacity¹

Shift in US Ethylene Capacity

Over the Past Few Years, US Ethylene Capacity Over the Past Few Years, US Ethylene Capacity has Shifted More to Flexi and Heavy Feed Crackers.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.

1717

US Ethylene Production Forecast ScenariosUS Ethylene Production Forecast Scenarios

US Ethylene Capacity versus Ethylene Production(Billion Pounds per Year)

30

35

40

45

50

55

60

65

70

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

Bill

ion

Lb

s/Y

ea

r

US net exports of ethylene products declines as foreign production increases

Historical Ethylene CapacityEthylene Capacity Forecast

Ethylene Production Forecast for 1.5% AGR

Historical Ethylene Production

Historical Data: CMAI, HodsonForecast: En*Vantage

Ethylene Production Forecast for -0.4% AGR

1818

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

Ethylene Production Rate

Ethylene Operating Rate Low Average High

Billion Lb/Yr % MBPD MBPD MBPD

50 80% 490 591 690

52 84% 530 622 710

54 87% 580 654 740

56 90% 620 685 760

58 93% 665 716 780

60 96% 700 748 800

62 100% 730 779 820

Call on Ethane from Gas ProcessingEthane Cracking as a Function of Ethylene Production

1919

Best Case, Call on Ethane from Processing will be 720 Best Case, Call on Ethane from Processing will be 720 to 780 MBPD. Most Likely Case: 680 to 700 MBPD. to 780 MBPD. Most Likely Case: 680 to 700 MBPD.

Max Ethylene Feedstock Demand for Ethane from Gas Processing(Thousand Barrels per Day)

600

620

640

660

680

700

720

740

760

780

800

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

Eth

an

e C

rackin

g M

BP

D

600

620

640

660

680

700

720

740

760

780

800

Implied Max Ethane Consumption using Low Ethylene Production Forecast

Implied Max Ethane Consumption using 1.5%/Yr Production Forecast

Most Likely Call on Processing Ethane

Historical Data: HodsonForecast: En*Vantage

Maximum Call on Processing Ethane

Are Our Assumptions About Ethane Are Our Assumptions About Ethane Extraction Holding UP?Extraction Holding UP?

2121Source: EIA and En*Vantage

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.

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

Total NGL Extraction versus Marketed Gas Production(Data for Jan '99 thru Nov '07)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

NG

L Ex

tract

ion

MBP

D .

47

48

49

50

51

52

53

54

55

56

57

58

59

60

Mar

kete

d G

as P

rodu

ctio

n BC

FD .

Total NGLs from Processing

Marketed Gas Production

Total Ethane Extraction from Processing

2.03 MM BPD

1.87 MM BPD

781 MBPD758 MBPD

Total Propane Plus Extraction from Processing

2222Source: EIA and En*Vantage

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

Max Ethane Extraction From Gas Processing(Thousand BPD)

600

650

700

750

800

850

2000 2001 2002 2003 2004 2005 2006 2007

MB

PD

Level of Ethane Predicted Last Year for 2007 was 756 MBPD

775

716

797

2323

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

Regional Change in Total NGL and Ethane Extraction Volumesmax 2001 vs max 2007

(160)

(140)

(120)

(100)

(80)

(60)

(40)

(20)

0

20

40

60

80

Vo

lum

e C

ha

ng

e M

BP

D

Change in Total NGL Extraction Change in Ethane ExtractionTX Inland

TX Gulf Coast LA Gulf Coast

N. LA/Ark

New Mexico

Rockies

Mid-Continent

Upper Midwest Other

+9%

+12%

-24%

-37%

+28%+198%

-18%

-30%

+13%

-16%

-18%

+19%

-4%

+1%+18%

-17%

-84%-3%

2424

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

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

Region Year

Processing Capacity

(MM CFD)

NGL Production Capabilty (MBPD)

Ethane Extraction Capability (MBPD)

Rockies 2007 1100 52 21Texas Inland 2007 825 51 20Mid-Continent 2007 0 0 0Gulf Coast 2007 0 0 0

Total 2007 1925 103 41

Rockies 2008 1520 53 21Texas Inland 2008 340 13 5Mid-Continent 2008 360 27 11Gulf Coast 2008 270 13 5

Total 2008 2490 106 43

Rockies 2009 700 24 10Texas Inland 2009 380 18 7Mid-Continent 2009 120 5 2Gulf Coast 2009 200 11 4

Total 2009 1400 58 23

Additions to US Gas Processing Capacity and NGL Production Capability

The 5.8 BCFD of processing additions represent an incremental:

• 267 MBPD of NGLs

• 107 MBPD of Ethane

2525

Trunkline is building a 1.050 BCFD NGL extraction plant at its Lake Trunkline is building a 1.050 BCFD NGL extraction plant at its Lake Charles LNG Terminal, completion in late 2008/early 2009.Charles LNG Terminal, completion in late 2008/early 2009.

Depending on the quality of LNG being imported, anywhere between 18 Depending on the quality of LNG being imported, anywhere between 18 MBPD to 48 MBPD could be extracted.MBPD to 48 MBPD could be extracted.

Most likely, the Trunkline LNG terminal will process Nigerian LNG with Most likely, the Trunkline LNG terminal will process Nigerian LNG with an average BTU content of 1150 +/- 25.an average BTU content of 1150 +/- 25.

That would imply an NGL recovery rate of at least 39 MBPD, with That would imply an NGL recovery rate of at least 39 MBPD, with ethane extraction about 24 MBPD.ethane extraction about 24 MBPD.

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

2626

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

Ethane Extraction Capability versus Ethane Demand

500

550

600

650

700

750

800

850

900

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

MB

PD

500

550

600

650

700

750

800

850

900

Ethane from Existing Plants Ethane from Announced Plants Ethane from LNG

Range of demand for ethane from gas processing

Ethane Extraction Capability

2727

Ethane’s Forward Frac Spread and Value Relative to Ethane’s Forward Frac Spread and Value Relative to Crude have fallen since Late October ’07.Crude have fallen since Late October ’07.

12 Month Ethane to Crude Ratio Forward Curve

30%

32%

34%

36%

38%

40%

42%

44%

46%

48%

50%12 Month Ethane to Crude Ratio on 10/4/07

12 Month Ethane to Crude Ratio on 02/27/08

12 Month Belvieu Ethane Frac Spread Curve

0

10

20

30

40

50

60

Cen

ts p

er G

allo

n

12 month Ethane Frac on 10/24/07

12 month Ethane Frac on 02/27/08

2828

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.

2929

An ethane supply overhang:An ethane supply overhang: Increases the frequency of marginal ethane frac spreads.Increases the frequency of marginal ethane frac spreads. Lowers the relative value of ethane to crude. Lowers the relative value of ethane to crude.

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

Subject to Higher RiskSubject to Higher Risk Subject to Lower RiskSubject to Lower Risk

Processors with the following:Processors with the following: ““Keep Whole” contractsKeep Whole” contracts No ability to re-inject ethaneNo ability to re-inject ethane Little or no integration along the NGL Little or no integration along the NGL

value chain. value chain. High T&F feesHigh T&F fees High Fuel Usage & CostsHigh Fuel Usage & Costs Little or no gas basis offset Little or no gas basis offset Low value market for ethaneLow value market for ethane Little integration with gas producerLittle integration with gas producer

Processors with the following:Processors with the following: POP ContractsPOP Contracts Ability to re-inject ethaneAbility to re-inject ethane High degree of integration along High degree of integration along

the NGL value chain. the NGL value chain. Low T&F feesLow T&F fees Low Fuel Usage & CostsLow Fuel Usage & Costs Wide gas basis offset Wide gas basis offset High value market for ethaneHigh value market for ethane Integration with gas producerIntegration with gas producer

3030

In ConclusionIn Conclusion

Last year’s conclusions still stand.Last year’s conclusions still stand. Good times may last a little longer for ethane, but Good times may last a little longer for ethane, but

a storm is brewing.a storm is brewing. Prepare for a greater frequency of marginal ethane Prepare for a greater frequency of marginal ethane

extraction economics.extraction economics. Careful study and planning is required by individual Careful study and planning is required by individual

processors looking to build that next cryogenic processors looking to build that next cryogenic processing plant.processing plant.

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