US Ethane Outlook: Ethane: Its Available and For Sale

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US Ethane OutlookEthane Its Available and For
Sale
Presented to the 15th Annual PFAA
Conference November 13, 2008
Peter Fasullo EnVantage, Inc pfasullo_at_envantagein
c.com
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Introduction

• Our recent studies on ethane have indicated
• Supply Side
• US ethane extraction starting to increase
  rising gas production and new plants.
• Plant expansions will create an overhang of
  ethane extraction capability.
• More logistical infrastructure (fractionation and
  distribution) is needed.
• Processors incurring more economic risks on
  ethane, unless demand increases.
• Demand Side
• Total US ethylene capacity not expected to
  increase. Contraction is highly possible.
• Ethylene industry maximizing ethane cracking, but
  level is not enough.
• It will take time and capital to increase the
  capability to crack more ethane.
• Less co-product production could be an issue.

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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.
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Quick Overview
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Basic Facts About Ethane

• Ethane constitutes 40 of the US NGL stream
  from gas processing.
• Ethane is the most economically sensitive NGL and
  its extraction is discretionary.
• Ethane has only one major end use -- feedstock to
  produce ethylene.
• About 50 of US ethylene is produced from ethane
  -- 5-yr avg.
• The amount of ethane cracked is a function of
  ethylene production.
• But, ethane feedstock usage can be volatile when
  ethylene industrys operating rates are below
  90.
• The incentive to extract ethane is only as good
  as the economic viability of the US petrochemical
  industry and its ability to crack ethane.

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Ethane supply demand fundamentals appear
simple, but they are complex and volatile. Market
range for ethane Low-- 475 MBPD High-- 850 MBPD
Overview of Ethane Supply Demand

• 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, EnVantage, Hodson Includes
Ethane from Refining
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Key Drivers for Ethane Supply and Demand
Both being inversely related to gas to crude
price ratio
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Key Pricing Drivers for Ethane Supply Demand
Source DOE, EnVantage, OPIS, ICE
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The Planets Aligned Perfectly for Gas Processors
to Maximize Ethane Profitability in 07 and 1st
Half of 08.
Great for

• Low Gas-to-Crude Ratios
• High Crude Prices
• Decent Ethane-to-Crude Ratios

Keep Whole

• High Ethane Frac Spreads
• High Ethane Prices

of Proceeds

• Two Factors to Consider
• Record high ethane prices and frac spreads would
  not have been possible if the US ethylene
  industry was doing poorly.
• Additional ethane from newly constructed
  processing plants had not fully impacted the
  market yet.

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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
• Midcontinent12
• New Mexico.14
• Rockies13
• Upper Midwest.6
• Other..2
• 5-year average

Source DOE, EnVantage, LPG Almanac
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NGL Extraction Will Continue to Shift Further
Inland
Source DOE and EnVantage
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Outlook For Ethane Extraction
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Ethane Extraction From Processing Can Be Volatile

Source EIA and EnVantage
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Prior to 07 Ethane Extraction Capability was
Declining
Source EIA and EnVantage
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Gas Reserve Additions in Key Processing Regions
Source EIA and EnVantage
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Gas Production is UP 11 or 5.8 BCFD since 2006.
Source EIA and EnVantage
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Recently Completed Announced Plant Additions
6.8 BCFD. Rockies-- 54 TX Inland-- 29
MidCont-- 11 G.C.-- 6
Source EnVantage and Company Announcements
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In Addition to Incremental NGLs from Processing,
One USGC LNG Terminal will have NGL Extraction
Capability

• Trunkline is building a 1.050 BCFD NGL extraction
  plant at its Lake Charles LNG Terminal,
  completion in late 2008/early 2009.
• Depending on the quality of LNG being imported,
  anywhere between 18 MBPD to 48 MBPD could be
  extracted.
• Most likely, the Trunkline LNG terminal will
  process Nigerian LNG with an average BTU content
  of 1150 /- 25.
• That would imply an NGL recovery rate of at least
  39 MBPD, with ethane extraction about 24 MBPD.

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Announced Plants Boosting Ethane Extraction
Capability
Source EIA and EnVantage
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Financial Crisis Could Delay Unannounced Plants
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.
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Outlook For US Ethane Demand
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Fairly Good Business Environment for the US
Ethylene Industry in 07 1st Half of 08

• Low gas-to-crude ratios in the US made US
  ethylene producers more competitive globally.
• The US ethylene industrys ability to shift to
  ethane and E/P gave it a competitive edge over
  heavy feedstock crackers in Europe and Asia.
• Although the US economy was slowing, the low US
  dollar created an export market for US
  petrochemicals.
• In 2007 and 1st Half of 2008, US ethylene
  operating rates were 88.5 and 87.3,
  respectively.
• However, those US ethylene producers leveraged to
  heavy-feedstocks suffered in the high crude price
  environment during Q1 and Q2 08.

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Growth in US Ethylene Production and Capacity has
Basically Stagnated Over the Past 5 yrs.
Source EnVantage, Hodson, CMAI
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Over the Past Few Years, US Ethylene Capacity 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.
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Cracking of Gas Processors Ethane
8 Year Average is 670 MBPD. Peaked at 800 MBPD in
01. High in 08 was 745 MBPD.
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The Amount of Ethane Cracking Positively
Correlates with the Amount of Ethylene Produced.
Source Hodson and EnVantage.
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US Ethylene Production Forecast Scenarios
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High Likelihood That an Ethane Extraction
Overhang Will Continue Through 2012.
US economy grows at 3/yr. Max C2 Cracking
US economy stagnates and an ethylene surplus
develops worldwide
Source DOE, EnVantage, Hodson
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Implications
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Lower Ethane Values Relative to Crude (WTI)
Source DOE, EnVantage, OPIS, ICE
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Greater Ethane Volumes and Poor Economy
Pressuring Ethane Frac Spreads
Source DOE, EnVantage, OPIS, ICE
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Ethane Overhang Will Affect Gas Processors
Differently
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Opportunities and Bottlenecks Occurring Across
NGL Value Chain
Wellhead Production
Gas Gathering Processing
NGL Transport
NGL Fractionation
NGL Storage
Product Distribution
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
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US Ethylene Industry Faces Challenges and
Opportunities to Increase Ethane Consumption
Ethane cracking capability could increase by
another 50 to 75 MBPD at existing plants, but.

• Some heavy-feed crackers are isolated from large
  ethane distribution systems. Additional ethane
  distribution is needed to access these plants.
• Midstream companies are reluctant to bear the
  full risk in building more logistics to handle
  ethane. (The Chicken and Pig Fable)
• Maximizing ethane cracking at some heavy-feed
  ethylene plants may require investments to retool
  process equipment.
• Ethylene producers need to be convinced that
  ethane supplies will last.
• Co-product production could suffer and
  petrochemical companies will need to find ways to
  meet downstream co-product requirements.
• Economic slowdown plus more ethylene plants
  worldwide could dampen enthusiasm to make
  investments to access and handle more ethane.

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Is There A Happy Ending?

• Cooperation and sharing of risks between
  midstream and petrochemical companies is required
  to increase ethane distribution and demand.
• Current economic recession may delay aggressive
  actions by both parties.
• In the meantime, gas processors will need to
  prepare for a greater frequency of marginal
  ethane extraction economics.
• Careful study and planning is required by
  individual processors looking to build that next
  cryogenic processing plant.
• Although additional US ethylene capacity is
  unlikely, petrochemical companies have the
  opportunity to increase feedstock optionality by
  taking advantage of ethanes growing availability
  and lower valuation relative to competing
  feedstocks.