US Ethane Outlook: Implications for US Processors and Ethylene Producers

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US Ethane OutlookImplications for US Processors
and Ethylene Producers

• Presented to PFAAs Eleventh Annual Conference
• Barton Creek
• Austin, Texas
• November 3rd 5th, 2004

Peter Fasullo EnVantage, Inc pfasullo_at_envantagein
c.com
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Background

• Last December 03, Enterprise commissioned
  EnVantage to
• Determine the sensitivity of the NGL midstream
  environment to the business cycles of the US
  ethylene industry.
• Assess how the GulfTerra merger changes
  Enterpises sensitivity to ethylene business
  cycles and to different price decks for crude and
  natural gas.
• Study completed in February 04 and was presented
  to rating agencies, bankers and security
  analysts, made public at security analyst meeting
  on May 26, 2004.
• Challenge was to develop simple bench marks to
  gauge whether the NGL business environment would
  improve or worsen.
• Part 1 of the study primarily centered on the
  fundamentals driving ethane supply/demand and
  frac spreads.
• Today Walk through methodology and share updated
  findings regarding the outlook for ethane and its
  implications.

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Why Ethane? --- It is the one NGL component that
has frustrated processors and ethylene producers
the most.

• On average, ethane constitutes 37 of the US NGL
  barrel extracted, but yields have varied from 34
  to 46 when processing economics dictated.
• Ethane extraction is mostly discretionary and
  very sensitive to economic conditions, frac
  margins and location of the processing facility.
• When extraction economics are good for ethane,
  they are good for the entire processing
  operation, and the opposite is true - especially
  for cryogenic plants.
• Unlike other NGLs with multiple end uses,
  virtually all ethane is used in ethylene
  production, competing with other NGL and
  petroleum feedstocks.
• On average, ethane constitutes 45 of the US
  ethylene feedstock mix and it provides the
  highest ethylene yield of all the feedstocks.
• But, history indicates that ethane cracking can
  swing quickly from 38 to 51 of the mix when
  feedstock economics dictate or cracker
  utilization rates change.
• Overall, ethane supply and demand can easily
  swing 100 MBPD or more in a market that has
  averaged around 750 MBPD.

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Ethane is extremely dependent on gas processing
and ethylene production. Supply Demand
fundamentals may appear simplistic, but they are
complex and volatile.

• Key market drivers influencing ethane cracking
  and extraction
• Ethane Cracking
• Ethylene business cycle
• Cracker capacities
• feedstock capabilities
• Competing feedstocks
• Ethylene co-products
• Derivative Imports/Exports
• Ethane Extraction
• Frac spreads
• Processing contracts
• Plant type
• Plant location
• Gas quantity quality

Source DOE, EnVantage, Hodson
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Our analysis of ethane supply demand focused
on two primary drivers.
Both being inversely related to the gas to crude
price ratio
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The relative value of gas to crude plays an
important role in driving U.S. NGL supply/demand,
particularly for ethane.
Based on 5.8 MM BTU/Bbl
Source Platts, DOE and EnVantage
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NGL frac spreads are inversely correlated to the
gas to crude price ratio.....
Source Platts EnVantage
Study Completed
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....and that inverse relationship is reflected in
the amount of NGLs extracted versus the gas to
crude price ratio. But what causes this
particular pattern and variability?
R2 0.63
Trough Conditions
Source DOE and EnVantage
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The pattern and variability seen in NGL
extraction versus the gas to crude price ratio is
mostly due to the fundamentals driving ethane
extraction. Needs further investigation.
Trough Conditions
Source DOE and EnVantage
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Ethane extraction closely tracks ethane cracking,
influenced by the gas to crude price ratio. But,
how do competing feedstocks ethylene business
cycles affect the amount of ethane cracked?
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The gas to crude price ratio appears to influence
the cracking of ethane versus heavy feedstocks.
So, how does the absolute level of ethylene
production affect ethane cracking?
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For the past 5 years, U.S. ethylene production
varied anywhere between 48 and 58 billion lbs/yr
rates and it is currently rebounding from the
mid-year 2003 trough.
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As ethylene production increases, ethane cracking
increases and the flexibility to swing ethane
volumes diminishes.
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The shift in US ethylene capacity, the past few
years, is estimated to shift the ethane cracking
range downwards by about 15 to 20 MBPD.
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Our analysis indicates the following implications
for ethane demand at different levels of US
ethylene production.

• Higher ethylene production requires greater
  ethane cracking (min and max) and the industrys
  flexibility to swing ethane volumes diminishes.
• The gas to crude price ratio also influences
  ethane cracking levels, particularly
• when ethylene industry utilization rates
  are between 80 to 90. Gas to crude price ratios
• above 90 increase the probability of
  minimizing ethane cracking.
• However, it appears that the US Ethylene Industry
  can not stay at minimum ethane cracking levels
  for more than 3 months without creating a surplus
  of ethylene co-products.

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So what does the future hold for ethane cracking
and extraction?
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Back in February 2004, we felt that conditions in
2004 should provide a better environment for
ethane cracking.
High Probability of Sustainable Ethane Cracking
at or Above 650 MBPD
Below 90
Gas to Crude Price Ratio
Above 90
Below 53 B LB/YR
Above 53 B LB/YR
Ethylene Production
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To support greater ethane cracking levels, the
ethane frac spread increases to encourage more
ethane extraction.
Q3 04
Q1 04
Q2 04
Source Platts, EnVantage and Hodson
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A paradigm shift to tighter crude markets should
provide reasonable gas to crude price ratios (90
or below) and favorable conditions for ethane
cracking and extraction.
Source EnVantage, ICE, DOE
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Assuming ethylene production tracks GDP growth
rate at a 0.9 multiple, ethane cracking could
reach 800 MBPD by 2010.
Source History- CMAI, EnVantage and Hodson Est
Forecast - EnVantage
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US ethane extraction is distributed across the
major processing regions. Regional costs of
getting ethane to market is determined by TF
fees and gas basis.
5-Year Average Ethane Regional Production from
Processing (MBPD )

• 80 of US Gas Production is Processed
• 590 processing plants - 72 BCFD capacity
• 56 of plant capacity is cryogenic
• 70 fractionators - 2.0 million BPD capacity
• 85 of Frac capacity at market centers

• US Processing NGLs 1843 MBPD
• US Processing Ethane 682 MBPD
• US Ethane/US NGLs 37
• Rockies Ethane/NGLs 40
• NM Ethane/NGLs 47
• Tex Inland Ethane/NGLs 39
• Tex GC Ethane/NGLs 42
• La GC Ethane/NGLs 35
• Mid-Cont Ethane/NGLs 36

9 1
80 12
20 3

85 12
Rocky Mtn.
97 14
Mid-Continent
111 16
222 33
Texas Inland
Texas Gulf Coast
Louisiana Gulf Coast
New Mexico
58 9
of US Ethane Production
Upper Midwest
Other
Source EIA and EnVantage
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Data indicate that the processing industry can
ramp up ethane extraction to near 800 MBPD, which
supports 62 to 63 billion lb/yr of ethylene
production.

• Each processing region responds to economic
  signals to throttle up or down
• ethane extraction to meet ethane demand.
• Analysis of each regions cost of getting ethane
  to market shows that the
• Rockies is not always the swing producer. East
  LA often provides the swing.

Source EIA EnVantage
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La GC and Rockies will be the incremental
producers of ethane in the 05 to 10 time period.
Source DOE, EnVantage
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Our study demonstrated how ethylene production
along with the gas to crude price ratio can
determine ethane supply demand and the amount
of swing that can be expected.
Demand Side Factors
Ethylene Demand
Ethylene Production
Feedstock Capabilities
Ethane Demand
Gas to Crude Price Ratio
Effective Operating Rate
Composition of Plants
GDP Growth
Regional Extraction Economics
Regional Ethane Production
Ethane Frac Spread
Ethane to Market
Supply Side Factors
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In Conclusion
Ethane is very much alive!!! --- barring a
recession.

• As ethylene production grows, ethane cracking
  must increase and the flexibility to switch off
  ethane diminishes.
• Paradigm shift to a tighter crude market will
  keep ethane competitive with heavier feedstocks.
• Ethane frac spreads should remain strong to
  encourage extraction in all regions.
• This is not the time for processors to retreat
  from cryogenic plants.
• Current infrastructure is in place to support
  ethane extraction in the 750 to 800 MBPD range,
  which can support ethylene production levels of
  60 to 62 billion lbs/year as the economy
  moderately grows.
• By 2010, ethane production should reach and
  sustain the 800 MBPD level, with the Rockies and
  La Gulf Coast contributing a larger share.
• Ethylene producers need to closely track the
  regional shift in ethane supplies.