Title: US Ethane Outlook: Implications for Processors and Ethylene Producers
1US Ethane OutlookImplications for Processors
and Ethylene Producers
Presented to the 84th Annual GPA Convention March
15, 2005
Peter Fasullo EnVantage, Inc pfasullo_at_envantagein
c.com
2Background
- Just 2 years ago, US gas processors faced many
challenges, - especially for ethane.
- Lingering effects of an economic recession
- High gas prices relative to crude oil
- Poor processing margins considerable ethane
rejection - A depressed petrochemical environment
- Fears that US ethylene industry would pack up and
leave
3Currently
- Ethane is back!!!
- Economy is stronger
- Petrochemicals have rebounded
- Processing margins are strong
- Ethane extraction is good
- across all processing regions
- But how long will it last?
4Topics to be covered today
- Review the analysis from our NGL study completed
in February 04 which forecasted better times for
ethane. - Examine fundamentals driving ethane supply/demand
and frac spreads. - Present simple bench marks that help indicate
whether ethanes economic conditions will improve
or worsen. - Share updated findings regarding the outlook for
ethane and its implications.
5Why Focus on Ethane?
- Major NGL component constitutes 37 of the US
NGL barrel. - Yields have fluctuated from 34 to 46 when
processing economics dictated. - Ethane extraction mostly discretionary -
sensitive to economic conditions. - Acts as the canary in the mine shaft - strong
ethane frac spreads indicate a strong processing
environment - especially for cryogenic plants. - Ethane has only one major end use - ethylene
feedstock, competing with other NGL petroleum
feedstocks. - Ethylene industry needs ethane - constitutes 45
of their feedstock mix. - But ethanes usage has swung from 38 to 51 of
the mix depending on feedstock economics and
ethylene plant utilization rates. - Overall, ethane supply/demand has demonstrated
swings of 100 MBPD or more in a market averaging
around 750 MBPD.
6Ethane supply demand fundamentals appear
simple, but they are complex and volatile.
- Key market drivers influencing ethane cracking
and extraction - Ethane Cracking
- Ethylene business cycles
- 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
7Our analysis of ethane supply demand focused
on two primary drivers.
Both being inversely related to the gas to crude
price ratio
8Relative value of gas to crude can affect U.S.
NGL supply/demand, particularly for ethane.
Source Platts, DOE and EnVantage
9NGL frac spreads are inversely correlated to the
gas to crude price ratio.....
Source Platts EnVantage
10....and that inverse relationship is reflected in
the amount of ethane extracted.
Trough Conditions
Source DOE and EnVantage
11Ethane extraction closely tracks ethane cracking,
influenced by the gas to crude price ratio.
12The gas to crude price ratio can influence the
cracking of ethane versus heavy feedstocks. But
what is the relationship between ethylene
production and ethane cracking?
13As ethylene production increases, ethane cracking
increases and the flexibility to swing ethane
usage diminishes.
Trough conditions
14The shift in US ethylene capacity, the past few
years, is estimated to shift the ethane cracking
range downwards by about 15 to 20 MBPD.
15Our analysis indicates the following implications
for ethane demand at different levels of US
ethylene production.
- Higher ethylene production requires greater
ethane cracking and the flexibility to swing
ethane volumes diminishes. - Gas to crude price ratios also influence ethane
cracking levels, particularly when ethylene
industry utilization rates are between 80 to
90. - 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.
16To support greater ethane cracking levels, the
ethane frac spread increases to encourage more
ethane extraction.
Source Platts, EnVantage and Hodson
17So what does the future hold for ethane cracking
and extraction?
18Back in February 2004, we felt that economic
conditions going forward would provide a better
environment for ethane cracking.
19Entering a new era where crude oil supplies are
constrained and high prices are the norm.
20A paradigm shift to tighter crude markets
provides lower gas to crude price ratios and
favorable conditions for ethane.
Source EnVantage, ICE, DOE
21Assuming 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
22Data indicate that the processing industry can
ramp up ethane extraction to near 780 MBPD, which
supports 61 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 region shows that the Rockies
is not always the swing - producer. Upper MW, LA TX GC often provide
the swing.
Source EIA EnVantage
23La GC and Rockies will be the incremental
producers of ethane in the 05 to 10 time period.
Source DOE, EnVantage
24Our study demonstrated how ethylene production
along with the gas to crude price ratio can
estimate 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
25 In Conclusion
Ethane is very much alive!!! --- barring a
recession.
- Conditions should remain favorable for ethane
cracking and extraction, - even with moderate ethylene production growth
-
- Ethane frac spreads should remain strong to
encourage extraction in all processing regions. - This is not the time for processors to retreat
from cryogenic plants. - A tighter crude market keeps gas to crude price
ratios below 90. - As ethylene production grows, ethane cracking
increases and the flexibility to switch off
ethane diminishes. - 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.