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US Ethane Outlook: Implications for US Processors and Ethylene Producers

US Ethane Outlook: Implications for US Processors and Ethylene Producers. Presented to PFAA’s Eleventh Annual Conference Barton Creek Austin, Texas November 3 rd – 5 th , 2004. Peter Fasullo En*Vantage, Inc pfasullo@envantageinc.com. Background:.

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US Ethane Outlook: Implications for US Processors and Ethylene Producers

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  1. US Ethane Outlook:Implications for US Processors and Ethylene Producers Presented to PFAA’s Eleventh Annual Conference Barton Creek Austin, Texas November 3rd – 5th, 2004 Peter Fasullo En*Vantage, Inc pfasullo@envantageinc.com

  2. Background: • Last December ‘03, Enterprise commissioned En*Vantage to: • Determine the sensitivity of the NGL midstream environment to the business cycles of the US ethylene industry. • Assess how the GulfTerra merger changes Enterpise’s 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.

  3. 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.

  4. 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, En*Vantage, Hodson

  5. Our analysis of ethane supply & demand focused on two primary drivers. Both being inversely related to the gas to crude price ratio

  6. 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 En*Vantage

  7. NGL frac spreads are inversely correlated to the gas to crude price ratio..... Source: Platts & En*Vantage Study Completed

  8. ....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 En*Vantage

  9. 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 En*Vantage

  10. 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?

  11. 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?

  12. 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.

  13. As ethylene production increases, ethane cracking increases and the flexibility to swing ethane volumes diminishes.

  14. 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.

  15. 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 industry’s 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.

  16. So what does the future hold for ethane cracking and extraction?

  17. 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

  18. To support greater ethane cracking levels, the ethane “frac” spread increases to encourage more ethane extraction. Q3 ‘04 Q1 ‘04 Q2 ‘04 Source: Platts, En*Vantage and Hodson

  19. 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: En*Vantage, ICE, DOE

  20. Assuming ethylene production tracks GDP growth rate at a 0.9 multiple, ethane cracking could reach 800 MBPD by 2010. Source: History- CMAI, En*Vantage and Hodson; Est & Forecast - En*Vantage

  21. US ethane extraction is distributed across the major processing regions. Regional costs of getting ethane to market is determined by T&F 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 En*Vantage

  22. 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 region’s cost of getting ethane to market shows that the • Rockies is not always the swing producer. “East LA” often provides the swing. Source: EIA & En*Vantage

  23. La GC and Rockies will be the incremental producers of ethane in the ’05 to ’10 time period. Source: DOE, En*Vantage

  24. 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 Ethane Production Regional Extraction Economics Ethane to Market Ethane Frac Spread Supply Side Factors

  25. 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.

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