North American Shale Gas - Implications for Global PetrochemicalsAndrew Lee FaggPrincipalNexant Asia [email protected]
APIC ANNUAL MEETING, Taipei, May 2013
1APIC 2013
Shale Gas Overview Opportunities and Developments in Chemicals Impact and Outlook on Global Markets
Agenda
2APIC 2013
Shale Gas Overview
3APIC 2013
Unconventional feedstocks – Is this the final chapter of the oil & gas age?
Shale Gas Overview
Source: EIA
4APIC 2013
Fracking wrenches (fractures) open rockdeep beneath the earth’s surface, freeing uptrapped natural gas.
Fracturing process begins with smallexplosive charges deep in the well. Millionsof gallons of fracking fluid (sand, chemicalsand water) are then pumped into the well athigh pressure creating the shale fracture andgas release.
Key Issues
Ground water and air contamination.
Waste water storage & disposal
Potentially a catalyst for earthquakes
Shale Gas Overview
Hydraulic fracking technology has enabled access to unprecedented oil and gas reserves in North America and potentially across all global regions longer term
Source: Total
5APIC 2013
Natural Gasoline (C5+)
Dry Gas Field (non Associated Gas)
Gas Condensate Field(Non Associated Gas)
Conventional Oil Field
NGL Fractionation
Petroleum Refining
Refinery GasPropaneButanesNaphthaGasoil
GasolineJet/KeroDieselHeating Oil
Sales Gas(Primarily Methane)
Ethane
Propane
ButanesLPG
LPG
Refined Products
Crude Oil
Heavy Condensate
Gas
Gas Gas Processing (NGL Recovery)
NGLs
AssociatedGas
Shale Oil Field
AssociatedGas
Shale Gas Field (non Associated
Gas)
Shale resources have resulted in increased availability of ethane and other NGLs therefore increasing the availability of petrochemical feedstocks
Shale Gas Overview
Conventional Feedstock sources
6APIC 2013
Overview of major shale gas basins in North America. Which span most of the continent. Today, the only significant shale gas producing region in the world.
NORTH AMERICAN SHALE GAS RESERVES NORTH AMERICA GAS SUPPLY MIX, 2006-2030
0
200
400
600
800
1000
2006 2009 2012 2015 2018 2021 2024 2027 2030Bi
llion
Cubic
Metr
es
Conventional Shale Tight CBM
Shale Gas Overview
Production of shale gas, and other non-conventional gas sources, are more than sufficient to coverdeclining gas production from conventional sources.
AAGR -0.5%
AAGR 1.7%
7APIC 2013
0%
20%
40%
60%
80%
100%
120%
0
2
4
6
8
10
12
14
16
18
20
22
2001 2003 2005 2007 2009 2011
Gas a
s a %
of cr
ude o
il pric
e
US$ p
er M
BTUs
Disparity in global gas pricing set to continue longer-term despite increasing connectivity enabled by LNG
Source: Nexant
OVERVIEW OF GLOBAL GAS PRICES
Shale gas has enabled a disconnect in North American gas prices relative to the wider energy market
Shale Gas Overview
Source: Nexant
NORTH AMERICAN GAS PRICING TRENDS
Crude Oil (WTI) Natural Gas Price Gas Price as % of Crude
PROJECTED WELLHEAD PRICES(2015Est, $/MMBtu)
(Units = Thousand Metric Tons)
$2
Source: EIA
$10
$15$1-2
$2
$4$5 $2
8APIC 2013
Opportunities and Developments in Chemicals
9APIC 2013
Ethane43%
Propane28%
iso-Butane6%
n-Butane10%
Condensate13%
4.000 3.0675.000
7.16218.103
0
5
10
15
20
25
30
Dry Gas 1000 Btu Wet/Gas/Unprocessed1250 Btu
Processed Gas 1250Btu
Crude Oil
Reve
nue f
rom
Millio
n Mcfe
Dry Gas Value Wet Gas Value NGL Value Crude Value
Source: Nexant
ASSOCIATED ENERGY VALUES
TYPICAL NGL SPECIFICATION
Source: Nexant/BP/Dow
Gas companies are targeting wet/heavy fields due to the attractive co-product values associated with 3rd party sales of NGLs. Thus increasing domestic availability of ethane and propane and pushing prices lower.
Opportunities & Developments in Chemicals
1000 Mcf of 1000 Btu
Content Dry Gas – Not Processed
1000 Mcf of 1250 Btu Gas – Not
Processed
125 Bbls NGLs
1000 Mcf of 1250 Btu Gas Processed
770 Mcf Dry Gas
125 Bbls NGLs
1000 Mcf of 1000 Btu Gas Converted to Oil Equivalent
~5.8 to 1
Gas = $4/MM Btu, NGLs = $57/Bbl, Crude = $105/Bbl
Source: Nexant
GAS COST SUPPLY CURVE
Gas P
rices
Dry GasWet Gas
Gas Resources
10APIC 2013
US ETHYLENE FEEDSTOCK RATIO
26%45%
69% 76%
0%
20%
40%
60%
80%
100%
2005 2011 2015F 2020F
Weig
ht Pe
rcent
Ethane Propane Butanes Heavier than C4's
200
400
600
800
1000
1200
1400
1600
2005.1 2007.1 2009.1 2011.1US
dolla
rs pe
r ton
Ethane E/P Naphtha
US ETHYLENE CASH COST OF PRODUCTION
Opportunities & Developments in Chemicals
Ethylene cracking feedstock slate has shifted predominantly into more ethane, therefore improving product margins and production competitiveness versus heavier feedstock slates
Many of the regions existing crackers have undergone feedstock conversions/process optimisationinvestments to maximise ethane cracking potential
Source: NexantSource: Nexant
11APIC 2013
0
200
400
600
800
1000
1200
1400
1600
0 20 40 60 80 100 120 140 160
Ethy
lene C
ash C
ost (
$/ ton
ethy
lene)
Ethylene Cumulative Capacity (million tons)
Note: * Mainly includes ethane and E/P crackers in Venezuela, Africa, W. Canada, Malaysia and Australia.
ME Ethane and E/P
Others Ethane and E/P* N. America Ethane, E/P, Mixed Feed
Asia/ Naphtha
Asia/W. Europe Naphtha
Source: Nexant
GLOBAL ETHYLENE COST CURVE
Opportunities & Developments in Chemicals
The shale gas effect has resulted in a structural change in global ethylene competitiveness. Despite this ethylene producers in the Middle East continue to hold a significant advantage
12APIC 2013
US18%
Others82%
164
0
50
100
150
200
250
2015 2025
Millio
n ton
s
The key question is how much new production capacity will come from the US based on the availability of competitively priced ethane and other NGLs? The answer is tied to natural gas production.
PROJECTED ETHYLENE GLOBAL CAPACITY CHANGE
ETHYLENE CAPACITY ADDITIONS, 2025
Base Case1% Gas Production
Growth
US13%
Others87%
Global capacity addition = 68 million tons
Global capacity addition = 68 million tons Source: Nexant
232+68
High Case2% Gas Production
Growth
NB this analysis assumes a standardised gas specification across the forecast
Opportunities & Developments in Chemicals
13APIC 2013
US ETHANE: POSSIBLE SUPPLY SCEARIOS
Source: Nexant
The total additional supply of US ethylene based on ethane fall within a range of 8.5-12 million tons (6 – 9 steam crackers).
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Millio
n bar
rels
per d
ay
Base case High case
Additional ethane supply during 2013-2017 Base case 222 MM BPD, or Ethylene 3.7 kta High case 377 MM BPD, Ethylene 6.2 kta
Additional ethane supply during 2018-2025 Base case 306 MM BPD, or Ethylene 5.1 kta High case 345 MM BPD, Ethylene 5.7 kta
INITIAL INVESTMENT STEP SECONDRY INVESTMENT STEP
SHORT TERM ETHANE SURPLUS
Opportunities & Developments in Chemicals
Surplus ethane is keeping prices low. This will change is the market over invests in new ethane basedethylene capacity – thus changing the supply and demand dynamic.
14APIC 2013
• HIGHER GAS PRODUCTION• INCREASED ETHANE RECOVERY• LOWER ETHANE PRICING
GOVERNMENT POLICY SUPPORTING LNG EXPORTS
POWER SECTOR CONVERSIONS (COAL)
INCREASED ECONOMIC ACTIVITY/GDP
SEVERE WEATHER (HOT/COLD)
C1 DERIVATIVE INVESTMENTS
– GTL
– CHEMICALS (METHANOL/AMMONIA)
INCREASED GAS DEMAND
Investment opportunities in new ethane crackers will primarily depend on total US gas production and the factors that support this.
Opportunities & Developments in Chemicals
LOW HIGH
15APIC 2013
• LOWER GAS PRODUCTION• REDUCED ETHANE RECOVERY• HIGHER ETHANE PRICING
GOVERNMENT POLICY OPPOSING LNG EXPORTS
POWER SECTOR CONVERSIONS (GREEN ENERGY)
DEREASED ECONOMIC ACTIVITY/GDP
ENERGY EFFICIENCY POLICY
– CONSTRUCTION REGULATIONS
– LOW ENERGY CONSUMING APPLIANCES
INCREASED GAS DEMAND
However in reality there is significant downward pressure on gas consumption principally due to energy efficiency /green policy. However the market may expand if proposed LNG projects are approved.
Opportunities & Developments in Chemicals
LOW HIGH
16APIC 2013
Source: TIMERA ENERGY Source: Nexant
POTENTIAL US LNG EXPORT PROJECTS LNG DELIVERED COST 2015E
Approximately 100 bcma of additional LNG export capacity is under review. However to date the Department of energy has only approved around half of these projects.
Jordan CoveCapacity:12 bcma
Cove pointCapacity:11 bcma
ApprovedNot Approved
Freeport:12.5 bcma
Sabine Pass:22 bcma
Lake Charles:19.3 bcma
Cameron:24 bcma
0
2
4
6
8
10
12
$ mm
BTUS
TX LA
Opportunities & Developments in Chemicals
17APIC 2013
Impact and Outlook
18APIC 2013
0
100
200
300
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Index
(198
4 Q1=
100)
WE USA
~$200
Average cash margins in the US have been considerably higher versus European and other conventional naphtha based producers in Asia – despite weaker market conditions
Source: Nexant
BASE CHEMICALS CASH MARGIN INDEX(Petrochemicals and Polymers)
Impact & Outlook
19APIC 2013
40%
6%
7%
3%
3%
3%2%
2%
3%
0%1%
-1%0%
-1000
0
1000
2000
3000
4000
5000
6000
Methanol Ammonia Urea Ethylene PE EO MEG EDC Propylene PP Butadiene Benzene ParaXylene
Speculative 2012-2017 Firm 2012-2017
Source: Nexant
US TOTAL CAPACITY CHANGES OVER 2012-2017
The prospect of higher returns is promoting significant interest in new petrochemical investments. These are primarily focused across C1 and C2 product value chains.
C1 C2 C4 AromaticsC3
Unit: Thousand tons, % AAGR
Interest in propylene production via PDH is also forecast due to increased availability of propane.
Impact & Outlook
20APIC 2013
Propylene output from stream crackers has declined as US olefin producers optimise to crack more ethane. PDH projects are expected to cover the shortfall created from ethylene crackers
Refinery output of propylene is expected to remain largely unchanged with most operators running at highrates and benefitting from the impact of both shale gas and shale oil.
Source: Nexant
0
2
4
6
8
10
12
14
2008 2010 2012 2014 2016
Millio
n ton
s
Steam cracker Refinery On-Purpose Domestic Demand
US PROPYLENE PRODUCTION & DEMAND
Impact & Outlook
-600
-400
-200
0
200
400
600
800
1000
1200
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Thou
sand
tons
Steam cracker - naphtha Steam cracker - mixed feedFCC offgas recovery Propane dehydrogenationSteam cracker - E/P Steam cracker - heavy liquidSpeculativeSource: Nexant
US NET PROPYLENE CAPACITY CHANGES
Petrologistics
Dow
Enterprise
21APIC 2013
-4
-3
-2
-1
0
1
2
3
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Millio
n ton
s
North America WE
10
15
20
25
30
35
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Mi
llion t
ons
North America WE
North American production is forecast to show reasonable trend growth over the next few years as new investments in ethylene and derivatives capacity are realised and global markets recover
Source: Nexant
ETHYLENE PRODUCTION EQUIVALENT
Source: Nexant
ETHYLENE PRODUCTION EQUIVALENT (NET CHANGE)
Noted: product includes PE, SM, EO, EDC Noted: product includes PE, SM, EO, EDC
Impact & Outlook
AAGR 3.5%
AAGR 0.7%
22APIC 2013
-4
-3
-2
-1
0
1
2
3
4
5
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Millio
n ton
s
China Middle East North America
Global chemicals production growth is now clearly concentrated in 3 regions.
Source: Nexant
ETHYLENE PRODUCTION EQUIVALENT (NET CHANGE)
Noted: product includes PE, SM, EO, EDC
ETHYLENE PRODUCTION EQUIVALENT
Noted: product includes PE, SM, EO, EDC
Impact & Outlook
10
15
20
25
30
35
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Mi
llion t
ons
China Middle East North AmericaSource: Nexant
23APIC 2013
-7000
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
Methanol Ammonia Urea Ethylene PE EO MEG EDC Propylene PP Butadiene Benzene Para Xylene
Source: Nexant
US TRADE PATTERN OVER 2012-2017
The impact of shale gas on US trade is not expected to be too significant in the short-term as the main investment wave is not anticipated until post 2017.
C1 C2 C4 AromaticsC3
Unit: Thousand tons 2012 2017
Positive numbers indicate net exportNegative numbers indicate net import
Impact & Outlook
24APIC 2013
US energy boom expected to result in a sustained gas surplus and lower average prices relative tocrude oil markets
Associated supply of ethane and other NGLs will also increase and support significant investmentopportunities across North America.
Short-term impact of additional capacity in the region will not have a significant impact on globalmarkets or global trade of ethylene derivatives.
A more substantial investment wave will commence post 2016/2017. However the full potential of thiswill depend on overall gas demand & production in the region
Ultimately shale resources present new opportunities across all regions, and are not unique to NorthAmerica, and will support future expansions of the petrochemical sector for the longer-term.
Some final thoughts
Impact & Outlook
25APIC 2013
GLOBAL ESTIMATE OF SHALE GAS RESOURCES (TRILLION M3)
17
19
US
Mexico
22Argentina 14South Africa
11Canada
6Brazil
Source: EIA
15NorthAfrica
18Europe
11Australia
2India
36China
26APIC 2013
For more information about Nexant, visit www.nexant.com
or contact us at:
Nexant LimitedGriffin House 1st Floor South 161 Hammersmith Road London W6 8BS UK
Tel: + 44 20 7950 1600 Fax: + 44 20 7950 1550
Nexant Asia22nd Floor, Rasa Tower 1555 Phahonyothin Road Kwaeng Chatuchak, Khet ChatuchakBangkok 10900, ThailandTel: + 66 2 793 4600Fax: + 66 2 937 0144Email: [email protected]
Nexant Inc44 South Broadway White Plains NY 10601 USA
Tel: + 1 914 609 0300Fax: + 1 914 609 0399
Nexant Contacts