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US Ethane Outlook: US Ethane Outlook: Ethane: It’s Available and For Sale Ethane: It’s Available and For Sale Peter Fasullo En*Vantage, Inc [email protected] Presented to the 15 th Annual PFAA Conference November 13, 2008
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Page 1: Us ethane outlook

US Ethane Outlook:US Ethane Outlook:Ethane: It’s Available and For SaleEthane: It’s Available and For Sale

Peter Fasullo

En*Vantage, Inc

[email protected]

Presented to the 15th Annual PFAA Conference

November 13, 2008

Page 2: Us ethane outlook

22

Our recent studies on ethane have indicated:Our recent studies on ethane have indicated:

Supply SideSupply Side

US ethane extraction starting to increase – rising gas production and new plants.US ethane extraction starting to increase – rising gas production and new plants.

Plant expansions will create an overhang of ethane extraction capability. Plant expansions will create an overhang of ethane extraction capability.

More logistical infrastructure (fractionation and distribution) is needed.More logistical infrastructure (fractionation and distribution) is needed.

Processors incurring more economic risks on ethane, unless demand increases. Processors incurring more economic risks on ethane, unless demand increases.

Demand SideDemand Side

Total US ethylene capacity not expected to increase. Contraction is highly Total US ethylene capacity not expected to increase. Contraction is highly

possible.possible.

Ethylene industry maximizing ethane cracking, but level is not enough. Ethylene industry maximizing ethane cracking, but level is not enough.

It will take time and capital to increase the capability to crack more ethane. It will take time and capital to increase the capability to crack more ethane.

Less co-product production could be an issue.Less co-product production could be an issue.

IntroductionIntroduction

Page 3: Us ethane outlook

33

Our Basic Message About Ethane

Gas Processors Ethylene Producers

Face challenges in managing excess ethane extraction capability and dealing with the consequences.

Have the opportunity to increase feedstock optionality by accessing greater ethane supplies.

Page 4: Us ethane outlook

Quick OverviewQuick Overview

Page 5: Us ethane outlook

55

Basic Facts About EthaneBasic Facts About Ethane

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 is the most economically sensitive NGL and its extraction is Ethane is the most economically sensitive NGL and its extraction is discretionary.discretionary.

3.3. Ethane has only one major end use -- feedstock to produce ethylene.Ethane has only one major end use -- feedstock to produce ethylene.

4.4. About 50% of US ethylene is produced from ethane -- 5-yr avg. About 50% of US ethylene is produced from ethane -- 5-yr avg.

5.5. The amount of ethane cracked is a function of ethylene production. The amount of ethane cracked is a function of ethylene production.

6.6. But, ethane feedstock usage can be volatile when ethylene industry’s But, ethane feedstock usage can be volatile when ethylene industry’s operating rates are below 90%. operating rates are below 90%.

7.7. 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 and its ability to crack ethane.of the US petrochemical industry and its ability to crack ethane.

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66

Ethane supply & demand fundamentals appear simple, but they are complex Ethane supply & demand fundamentals appear simple, but they are complex and volatile. Market range for ethane*: Low-- 475 MBPD; High-- 850 MBPDand volatile. Market range for ethane*: Low-- 475 MBPD; High-- 850 MBPD

Market drivers for ethane extraction and cracking:

Ethane Extraction Frac spreads Processing contracts Plant type Plant location Gas quantity & quality

Ethane Cracking

Ethylene business cycles

Cracker capacities & feedstock capabilities

Competing feedstocks

Ethylene co-products

Derivative Imports/Exports

Source: DOE, En*Vantage, Hodson; * Includes Ethane from Refining

US Ethane Supply & DemandUS Ethane Supply & Demand

5-Year Average5-Year Average(2003-2007)(2003-2007)

SupplySupply DemandDemand

SourceSource MBPDMBPD %% End UseEnd Use MBPDMBPD %%

ProcessingProcessing 667667 8989 EthyleneEthylene 737737 9898

RefiningRefining 8383 1111 Blending Blending into into

PropanePropane

1313 22

TotalTotal 750750 100100 TotalTotal 750750 100100

Overview of Ethane Supply & Demand

Page 7: Us ethane outlook

77

Key Drivers for Ethane Supply and DemandKey Drivers for Ethane Supply and Demand

Primary Drivers Influences

Natural Gas to Crude Price Ratio(Henry Hub Gas/WTI on a BTU basis)

ProcessingMargins

Ethane Feedstock Economics

Absolute Value of WTI Absolute spreads and price

Ethane to Crude Price Ratio Absolute Ethane Price.Ethane Frac Spreads.

Natural Gas Production & Quality Volume of ethane that can be extracted given the capacities and types of gas processing plants.

US Ethylene Production & Industry Configuration

Ethane consumption versus competing feedstocks.

Both being inversely related to gas to crude price ratio

Page 8: Us ethane outlook

88

Key Pricing Drivers for Ethane Supply & DemandKey Pricing Drivers for Ethane Supply & Demand

Gas-to-Crude Ratio

WTI Price

Gas BTU Discount to WTI

Ethane to Crude Ratio

Ethane Price

Ethane Frac Spread

(BTU Basis) $/Bbl $/BTU (Volume Basis) (MB $/gal) (MB $/gal)1998 87.6% $14.4 $0.32 54.3% $0.19 $0.0431999 71.8% $19.2 $1.00 61.3% $0.28 $0.1252000 81.3% $30.3 $0.96 55.9% $0.40 $0.1202001 87.3% $25.9 $0.47 53.3% $0.33 $0.0702002 74.2% $26.1 $1.14 42.0% $0.26 $0.0392003 102.0% $31.1 -$0.11 53.8% $0.40 $0.0352004 83.6% $41.3 $1.26 51.0% $0.50 $0.1132005 89.6% $56.4 $0.89 46.2% $0.62 $0.0382006 59.2% $66.1 $4.71 41.4% $0.65 $0.2102007 57.6% $72.5 $5.53 45.6% $0.79 $0.331

2008* 50.3% $114.4 $9.80 40.0% $1.08 $0.42310-Yr AVG 79.4% $38.34 $1.62 50.5% $0.44 $0.112* Jan - Aug 08

Key Pricing Metrics For Ethane

Source: DOE, En*Vantage, OPIS, ICE

Page 9: Us ethane outlook

99

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

High Crude PricesHigh Crude Prices

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

The The Planets Aligned Perfectly Planets Aligned Perfectly for Gas Processors to for Gas Processors to Maximize Ethane Profitability in ‘07 and 1Maximize Ethane Profitability in ‘07 and 1stst Half of ‘08. Half of ‘08.

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

Page 10: Us ethane outlook

1010

Concentration of Processing Plants and Regional Distribution of Ethane Extracted

US Gas Processing Industry

# of Plants: ~500 Inlet Gas Capacity: 65.5 BCFD Gas Throughput: 43.2 BCFD Industry Operating Rate: 66% Gas Production Processed: 80%

Regional Ethane Extraction*

LA Gulf Coast……….13% TX Gulf Coast….........6% TX Inland…………….34% Midcontinent…………12% New Mexico………….14% Rockies………………13% Upper Midwest……….6% Other…………………..2% * 5-year average

Source: DOE, En*Vantage, LPG Almanac

Page 11: Us ethane outlook

1111

NGL Extraction Will Continue to Shift Further Inland NGL Extraction Will Continue to Shift Further Inland

Regional Change in Total NGL and Ethane Extraction Volumesmax 2001 vs max 2008

(160)

(140)

(120)

(100)

(80)

(60)

(40)

(20)

0

20

40

60

80

100

Vo

lum

e C

ha

ng

e M

BP

D

Change in Total NGL Extraction Change in Ethane Extraction

TX Inland

TX Gulf Coast LA Gulf Coast

N. LA/Ark

New Mexico

Rockies

Mid-Continent

Upper Midwest Other

+10%

+15%

-30%

-34%

+57% +257%

-26%

-26%

+35%

-17%

-20%

+42%

-4%

+2%+21%

-21%

-93%-4%

Source: DOE and En*Vantage

Page 12: Us ethane outlook

Outlook For Ethane ExtractionOutlook For Ethane Extraction

Page 13: Us ethane outlook

1313Source: EIA and En*Vantage

Ethane Extraction From Processing Can Be Volatile Ethane Extraction From Processing Can Be Volatile

Total Ethane Extraction From US Gas Processing(Data for Jan '00 thru Aug '08)

250

300

350

400

450

500

550

600

650

700

750

800

850

Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

NG

L E

xtr

actio

n M

BP

D .

High Gas-to-Crude Ratios

Page 14: Us ethane outlook

1414Source: EIA and En*Vantage

Prior to ‘07 Ethane Extraction Capability was Declining Prior to ‘07 Ethane Extraction Capability was Declining

Range of US Ethane ExtractionMBPD

300

400

500

600

700

800

2000 2001 2002 2003 2004 2005 2006

Min C2 Extraction AVG C2 Extraction Max C2 Extraction

Page 15: Us ethane outlook

1515Source: EIA and En*Vantage

Major Changes in Regional Proved Natural Gas Reserves - 2000 to 2007(Wet after Lease Seperation)

(-49%) (-12,883)

(-36%) (-2,313)

(-12%)(-1,455)

(-25%) (-1434)

(-4%) -501

389 (+10%)

1991 (+45%)

2,499 (+56%)

3,063 (+32%)

3,093 (+93%)

5,350 (+84%)

5,641 (+39%)

11,643 (+107%)

13,685 (+80%)

22,244 (+533%)

(20,000) (16,000) (12,000) (8,000) (4,000) 0 4,000 8,000 12,000 16,000 20,000 24,000Billion Cubic Feet

Federal G.O.M………

Texas (Barnett Shale)……………………………………………………

Wyoming……………………………………………………………………

Colorado……………………………………………………………………

Oklahoma………………………………………………………………….

North Louisiana…………………………………………………………..

East Texas…………………………………………………………………

Utah…………………………………………………………………………

New Mexico (San Juan)…………………………………

Texas Panhandle…………………………………………………………

New Mexico (Permian)……………………………………………………

West Texas (Permian)…………………………………………………..

South Texas…………………………………………

South Louisiana………………………………

Kansas (Hugoton)…………………………………

Gas Reserve Additions in Key Processing Regions

Page 16: Us ethane outlook

1616Source: EIA and En*Vantage

Gas Production is UP 11% or +5.8 BCFD since 2006.

US Natural Gas Production versus Rig Count(Average Monthly Rig Count versus Marketed Gas Production)

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

Ma

rke

ted

Ga

s P

rod

uctio

n (

BC

FD

)

100

200

300

400

500

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

Ro

tary

Ga

s R

ig C

ou

nt

Marketed Natural Gas Production Gas Rig Count

Hurricanes

Page 17: Us ethane outlook

1717

Recently Completed & Announced Plant Additions ~6.8 BCFD. Rockies-- 54%; TX Inland-- 29%; MidCont-- 11%; G.C.-- 6%

Region Year

Processing Capacity

(MM CFD)

NGL Production Capabilty (MBPD)

Ethane Extraction Capability (MBPD)

Rockies 2007 1100 52 26Texas Inland 2007 825 51 20Mid-Continent 2007 0 0 0Gulf Coast 2007 0 0 0

Total 2007 1925 103 46Rockies 2008 1520 71 35Texas Inland 2008 510 34 13Mid-Continent 2008 360 28 11Gulf Coast 2008 295 17 7

Total 2008 2685 106 67Rockies 2009 700 33 16Texas Inland 2009 655 48 19Mid-Continent 2009 380 31 16Gulf Coast 2009 100 7 3

Total 2009 1835 58 54Rockies 2010 350 30 15Texas Inland 2010 0 0 0Mid-Continent 2010 0 0 0Gulf Coast 2010 0 0 0

Total 2010 350 30 15Rockies Total '07-'10 3670 185 93Texas Inland Total '07-'10 1990 132 53Mid-Continent Total '07-'10 740 59 27Gulf Coast Total '07-'10 395 24 10

Grand Total 6795 401 182*Assumes 100% utilization rates

Additions to US Gas Processing Capacity and NGL Production Capability*

Source: En*Vantage and Company Announcements

Page 18: Us ethane outlook

1818

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 have NGL Extraction CapabilityUSGC LNG Terminal will have NGL Extraction Capability

Page 19: Us ethane outlook

1919Source: EIA and En*Vantage

Announced Plants Boosting Ethane Extraction CapabilityAnnounced Plants Boosting Ethane Extraction Capability

Forecast of US Ethane Extraction Capability

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

900Ethane Extraction from Existing Plants as of 2006 Ethane Extraction From Announced Plants

Level of C2 Extraction Capability Predicted for 2007 was 756

778

Level of C2 Extraction Capability Predicted for 2008 was 817

803

Did not include C2 extracted from LNG at Trunkline's LC terminlal

Page 20: Us ethane outlook

2020

Another 0.5 - 1 BCFD of cryo-plant capacity could be built in next few years. Represents 30 to 60 MBPD of NGLs of which 12 to 24 MBPD is ethane.

Potential Production Change in Growing Gas Processing Basins2006 to 2015

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Billio

n C

FD

6.8 BCFD of cryogenic capacity just completed or under construction.

Potentially another ~3.4 BCFD of incremental gas is rich of enough to be processed over the next 10 years.

Source: EIA, Enterprise, Energy Transfer, Williams, Broadwalk

+4.9 BCFD

+1.7 BCFD

+1.0 BCFD +1.0 BCFD +1.0 BCFD+0.6 BCFD

Financial Crisis Could Delay Unannounced Plants

Page 21: Us ethane outlook

Outlook For US Ethane DemandOutlook For US Ethane Demand

Page 22: Us ethane outlook

2222

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 and 1In 2007 and 1stst Half of 2008, US ethylene operating rates were 88.5% Half of 2008, US ethylene operating rates were 88.5% and 87.3%, respectively. and 87.3%, respectively.

However, those US ethylene producers leveraged to heavy-feedstocks However, those US ethylene producers leveraged to heavy-feedstocks suffered in the high crude price environment during Q1 and Q2 ‘08. suffered in the high crude price environment during Q1 and Q2 ‘08.

Fairly Good Business Environment for the US Fairly Good Business Environment for the US Ethylene Industry in ’07 & 1Ethylene Industry in ’07 & 1stst Half of ’08 Half of ’08

Page 23: Us ethane outlook

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Growth in US Ethylene Production and Capacity has Growth in US Ethylene Production and Capacity has Basically Stagnated Over the Past 5 yrs. 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 H108

Bill

ion

Lb

s/Y

ea

r

0

10

20

30

40

50

60

70

80

Ethylene 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.

Source: En*Vantage, Hodson, CMAI

Page 24: Us ethane outlook

2424

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.

Page 25: Us ethane outlook

2525

Cracking of Gas Processors’ Ethane

U.S. Ethylene Feedstock Consumption - MBPD(Jan-00 to Aug-08)

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

8 Year Average is 670 MBPD. Peaked at 800 MBPD in ’01. High in ’08 was 745 MBPD.

Page 26: Us ethane outlook

2626

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

Ethylene Production Rate

Ethylene Operating Rate

Min Ethane Cracking

Avg Ethane Cracking

Max Ethane Cracking

Billion Lb/Yr % MBPD MBPD MBPD

50 80% 480 598 680

52 84% 530 629 710

54 87% 580 660 740

56 90% 620 691 770

58 93% 670 722 800

60 96% 710 753 830

62 100% 750 784 860

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

Source: Hodson and En*Vantage.

Page 27: Us ethane outlook

2727

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

High Case: 3.5% AGRHistorical Ethylene Production

Historical Data: CMAI, HodsonForecast: En*Vantage

Low Case: 1.5% AGR

Page 28: Us ethane outlook

2828

High Likelihood That an Ethane Extraction Overhang High Likelihood That an Ethane Extraction Overhang Will Continue Through 2012.Will Continue Through 2012.

US economy grows at 3%/yr.

Max C2 Cracking

US economy stagnates and an ethylene surplus develops worldwide

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 2012

MB

PD

500

550

600

650

700

750

800

850

900

Max Ethane from Existing Plants Prior to '07 Max Ethane from Announced Plants Ethane from LNG

Forecasted range of demand for ethane from gas processing

Ethane Extraction Capability

HISTORIC MAXIMUM ETHANE CRACKING ABILITY

Historical Demand for Ethane from Processing

Additions came in Q4 07

Source: DOE, En*Vantage, Hodson

Page 29: Us ethane outlook

ImplicationsImplications

Page 30: Us ethane outlook

3030

Lower Ethane Values Relative to Crude (WTI)Lower Ethane Values Relative to Crude (WTI)

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%

Source: DOE, En*Vantage, OPIS, ICE

Page 31: Us ethane outlook

3131

Greater Ethane Volumes and Poor Economy Greater Ethane Volumes and Poor Economy Pressuring Ethane Frac SpreadsPressuring Ethane Frac Spreads

Ethane Frac Spreads Mt. Belvieu Ethane minus Henry Hub Gas

(Cents per Gallon)

(20)

(10)

0

10

20

30

40

50

60

70

Eth

an

e F

rac S

pre

ad

(C

en

ts/G

allo

n)

-20

-10

0

10

20

30

40

50

60

70

Winter ‘95/’96Winter ‘00/’01

'05 Hurricanes

Asian Crises/Crude Price Collapse

Econmomic Recession/ Crude Collapse Winter/Spring '03

Record High Crude Prices & Low Gas-to-Crude Ratios

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.

Source: DOE, En*Vantage, OPIS, ICE

Page 32: Us ethane outlook

3232

Ethane Overhang Will Affect Gas Processors DifferentlyEthane Overhang Will Affect Gas Processors Differently

High Exposure to Economic RiskHigh Exposure to Economic Risk Lower Exposure to Economic RiskLower Exposure to Economic 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

Page 33: Us ethane outlook

3333

Wellhead Production

Gas Gathering & Processing

NGL Transport

NGLFractionation

NGLStorage

ProductDistribution

Opportunities and Bottlenecks Occurring Across NGL Value Chain

Greater Gas Production Volumes

Greater Need for Long Haul NGL Takeaway Capacity.

More Opportunities for Gathering & Processing.

Greater Need for Full Fractionation Capacity.

Storage Plays a Greater Role in Balancing Supply & Demand

Greater Need for More Ethane Distribution to Petro- Chemicals

Keeps Gas-to-Crude Ratios Low

Expansions are being completed: - MAPL - Overland Pass - Sterling - West Texas P/L - Arbuckle

Belvieu Fracs at capacity.

More Barrels being diverted to Louisiana

More Capacity may be needed

Page 34: Us ethane outlook

3434

US Ethylene Industry Faces Challenges and US Ethylene Industry Faces Challenges and OpportunitiesOpportunities to Increaseto Increase Ethane ConsumptionEthane Consumption

Some heavy-feed crackers are isolated from large ethane distribution systems. Some heavy-feed crackers are isolated from large ethane distribution systems. Additional ethane distribution is needed to access these plants.Additional ethane distribution is needed to access these plants.

Midstream companies are reluctant to bear the full risk in building more logistics Midstream companies are reluctant to bear the full risk in building more logistics to handle ethane. (to handle ethane. (The Chicken and Pig FableThe Chicken and Pig Fable))

Maximizing ethane cracking at some heavy-feed ethylene plants may require Maximizing ethane cracking at some heavy-feed ethylene plants may require investments to retool process equipment. investments to retool process equipment.

Ethylene producers need to be convinced that ethane supplies will last.Ethylene producers need to be convinced that ethane supplies will last.

Co-product production could suffer and petrochemical companies will need to Co-product production could suffer and petrochemical companies will need to find ways to meet downstream co-product requirements.find ways to meet downstream co-product requirements.

Economic slowdown plus more ethylene plants worldwide could dampen Economic slowdown plus more ethylene plants worldwide could dampen enthusiasm to make investments to access and handle more ethane. enthusiasm to make investments to access and handle more ethane.

Ethane cracking capability could increase by another 50 to 75 MBPD at existing plants, but….

Page 35: Us ethane outlook

3535

Is There A Happy Ending?Is There A Happy Ending?

Cooperation and sharing of risks between midstream and petrochemical Cooperation and sharing of risks between midstream and petrochemical companies is required to increase ethane distribution and demand.companies is required to increase ethane distribution and demand.

Current economic recession may delay aggressive actions by both parties. Current economic recession may delay aggressive actions by both parties.

In the meantime, gas processors will need to prepare for a greater In the meantime, gas processors will need to prepare for a greater frequency of marginal ethane extraction economics.frequency of marginal ethane extraction economics.

Careful study and planning is required by individual processors looking to Careful study and planning is required by individual processors looking to build that next cryogenic processing plant.build that next cryogenic processing plant.

Although additional US ethylene capacity is unlikely, petrochemical Although additional US ethylene capacity is unlikely, petrochemical companies have the opportunity to increase feedstock optionality by taking companies have the opportunity to increase feedstock optionality by taking advantage of ethane’s growing availability and lower valuation relative to advantage of ethane’s growing availability and lower valuation relative to competing feedstocks. competing feedstocks.


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