US Ethane Outlook: Part III Will the Good Times Last for Ethane Extraction

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US Ethane Outlook Part IIIWill the Good Times
Last for Ethane Extraction?
Presented to the 87th Annual GPA Convention March
4, 2008
Peter Fasullo EnVantage, Inc pfasullo_at_envantagein
c.com
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This is Our 3rd Ethane Speech in 4 years for the
GPA

• In our previous two speeches we emphasized 4
  basic facts
• Ethane constitutes 40 of the US NGL stream
  from gas processing.
• Ethane has only one end-use as a feedstock to
  produce ethylene.
• Ethane feedstock usage can, at times, be quite
  volatile.
• The incentive to extract ethane is only as good
  as the economic viability of the US petrochemical
  industry.
• This years speech will not deviate from these 4
  basic facts
• and will provide an update of our latest views on
  ethane.

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In 2005 We Forecasted Better Times for Ethane
Extraction.

• Key Points
• Lingering effects of an 2002/2003 economic
  downturn were over.
• Gas prices would remain low relative to crude
  oil.
• US ethylene production would be strong enough to
  support higher levels of ethane cracking.
• Main Conclusion Favorable conditions for ethane
  cracking
• would support ethane extraction across all
  processing regions
• from existing processing plants.

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Last Year We Focused on Ethane Again. Why?

• In 2006, midstream players announced 2 billion
  in projects to support 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 least 40 of the total
  incremental NGL stream.
• 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?

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Lets Review Last Years Observations for 07 to
11.

• Demand Side
• US ethylene capacity not expected to increase.
  Contraction possible.
• US ethylene producers striving for greater
  feedstock flexibility.
• Demand range for ethane from processing 600 to
  725 MBPD.
• Supply Side
• US NGL (ethane) extraction declining, but new
  announced plants will more than offset this
  decline and create a surplus.
• Plus, ethane recovered from LNG could add to this
  overhang.
• POP and fixed-fee processing contracts can
  prolong the surplus.
• Regional shifts in NGL extraction spurring new
  logistics heavily dependent on ethane.

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Last Years Conclusions

• The US Midstream Sector can no longer take for
  granted that the US Petrochemical Industry will
  always be there for ethane.
• Any processor considering to add more cryo
  capacity must
• Carefully follow and evaluate the state of the US
  petrochemical industry.
• Examine your degree of integration across the NGL
  value chain.
• Have the ability to re-inject ethane, because
  ethane market conditions will be more volatile.
• Structure processing deals to minimize economic
  damage when a downturn occurs.
• Logistic players will need to recognize and
  manage the risks of having projects that handle
  high ethane content NGL streams .

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So, Whats Changed in One Year?

• 2007 was a great year for ethane extraction and
  demand.
• More cryogenic plant capacity was announced in
  2007.
• Starting to see signs that ethane extraction is
  rapidly increasing.
• Ethane prices relative to crude and natural gas
  are beginning to show the strains of supplies
  exceeding demand.
• Were the great conditions seen in 2007 the Calm
  before the Storm?

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Ethane Frac Spreads Hit Record Highs in 2007
Source Platts EnVantage
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Very Low Gas to Crude Ratios along with Record
Crude Prices were a Major Driver for Record Frac
Spreads.
Source Platts, DOE and EnVantage
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Plus, Decent Ethane to Crude Ratios Contributed
to Record Frac Spreads and Record High Ethane
Prices.
Source Platts, DOE and EnVantage
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Basically the Planets Aligned Perfectly for Gas
Processors to Maximize Ethane Profitability in
2007.
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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Lets take a closer look at petrochemical demand
for ethane from gas processing
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2007 was a Fairly Good Year for US Ethylene
Producers.

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

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Despite 2007, Growth in US Ethylene Production
and Capacity has Basically Stagnated Over the
Past 5 yrs.
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Ethane Demand Higher in 2007 (680 MBPD), but Only
Slightly Above 8 Year Average (660MBPD).
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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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US Ethylene Production Forecast Scenarios
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The Amount of Ethane Cracking Positively
Correlates with the Amount of Ethylene Produced.
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Best Case, Call on Ethane from Processing will be
720 to 780 MBPD. Most Likely Case 680 to 700
MBPD.
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Are Our Assumptions About Ethane Extraction
Holding UP?
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Prior to 2007,US NGL Extraction Declined 2.5/yr
since Peak in 2001. In Late 2007, the Trend
Reversed.

• 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.

Source EIA and EnVantage
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In Late 2007, the Rebound in Ethane Extraction
Capability was Greater than We Predicted Last
Year .
Source EIA and EnVantage
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Gulf Coast Processors Showing the Greatest
Declines, TX Inland and Rockies Showing the
Greatest Growth.
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Recently Completed Announced Cryo-Plant
Additions Exceeds the 3 BCFD Additions Cited Last
Year.

• The 5.8 BCFD of processing additions represent an
  incremental
• 267 MBPD of NGLs
• 107 MBPD of Ethane

Because of timing of start-ups, volumes will take
time to ramp up.
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In Addition to Incremental NGLs from Processing,
One USGC LNG terminal will be Recovering NGLs by
2009.

• 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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Very Good Likelihood an Ethane Extraction
Overhang Will Develop in 2008 and Continue
Through 2011.
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Ethanes Forward Frac Spread and Value Relative
to Crude have fallen since Late October 07.
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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 years convention theme.
• Whats 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.

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

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

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In Conclusion

• Last years conclusions still stand.
• Good times may last a little longer for ethane,
  but a storm is brewing.
• 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.
• The gas processing industry must be more market
  oriented and it needs to closely follow the
  actions of the petrochemical industry.