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
2
Background:
Last December ‘03, Enterprise commissioned En*Vantage to:1. Determine the sensitivity of the NGL midstream environment to the business
cycles of the US ethylene industry.
2. 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
US Ethane Supply & Demand5-Year Average
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
Ethane Supply Ethane Demand
Etha
ne M
BPD Gas Processing
680 MBPD
Petrochemicals(Primarily Ethylene)
751 MBPD89%
84 MBPD
Crude Oil Refining
764 MBPD 764 MBPD
Peak Shaving13 MBPD
98%
Source: DOE, En*Vantage, Hodson
5
Our analysis of ethane supply & demand focused on two primary drivers.
Primary Driver Rational Influence
Natural Gas to Crude Price Ratio(Henry Hub Gas/Cushing WTI on a BTU basis)
Gas sets price floor for NGLs (ethane) and petroleum derived feedstocks and products set the market price.
Processing Margins
Feedstock Economics
US Ethylene Production as driven by GDP growth
US ethylene industry consumes 54% of total NGLs supplied and virtually all of the ethane extracted from natural gas.
The amount of ethane consumed should increase as ethylene production increases.
Need to determine how co-products can affect ethane cracking.
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.
Source: Platts, DOE and En*Vantage
Gas to Crude Price Ratio*(Henry Hub Gas to WTI on a BTU Basis)
1/91 thru 10/04
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
Jan-
91
Jul-9
1
Jan-
92
Jul-9
2
Jan-
93
Jul-9
3
Jan-
94
Jul-9
4
Jan-
95
Jul-9
5
Jan-
96
Jul-9
6
Jan-
97
Jul-9
7
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
’91-’94: 56%’95-’98: 70%’99-’02: 78% ’03: 103%’04 YTD: 86%
Winter ‘00/’01
Winter/Spring ’03
"Gas Bubble" Mid '80s to Early '90s
End of "Gas Bubble" Late '90s to Now
"The Emergence of Gas Fired Power Plants"
Time period where we focused our study
* Based on 5.8 MM BTU/Bbl
7
NGL frac spreads are inversely correlated to the gas to crude price ratio.....
NGL Frac Spreads (Mt Belvieu minus Henry Gas)
(15.00)
(10.00)
(5.00)
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
NG
L F
rac
Sp
read
cp
g
40%
60%
80%
100%
120%
140%
160%
180%
Gas
to
Cru
de
Rat
io %
Ethane Frac Spread
Gas to Crude Ratio Propane Frac Spread
Butane+ Frac Spread
Study Completed
Source: Platts & En*Vantage
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?
U.S. Gas Processing NGL Production vs Gas to Crude Price Ratio
1500
1600
1700
1800
1900
2000
2100
40.0%50.0%60.0%70.0%80.0%90.0%100.0%110.0%120.0%130.0%140.0%
Gas to Crude Price Ratio
NG
L E
xtra
ctio
n (M
BP
D)
Q2 '03
Q3 '03
Q4 '03Q1 '03
Q1 '01
Q2 '01 Q3 '01
Q4 '01
Q4 '00
Q1 '00
Q2 '00Q3 '00
Q4 '99
Q1 '99
Q2 '99
Q3 '99Q4 '02 Q1 '02
Q3 '02Q2 '02
Trough Conditions
R2 = 0.63
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 Cracking & Ethane Extraction vs Gas to Crude Ratio
350
400
450
500
550
600
650
700
750
800
Q1'99
Q2'99
Q3'99
Q4'99
Q1'00
Q2'00
Q3'00
Q4'00
Q1'01
Q2'01
Q3'01
Q4'01
Q1'02
Q2'02
Q3'02
Q4'02
Q1'03
Q2'03
Q3'03
Q4'03
Q1'04
Q2'04
Eth
an
e E
xtra
ctio
n o
r C
rack
ing
(M
BP
D)
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
Ga
s to
Cru
de
Ra
tio (
He
nry
Hu
b/W
TI)
Ethane Cracking (excluding
refinery ethane)Gas to Crude Ratio
Ethane Extraction
Source: Hodson, EIA, En*Vantage
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?
U.S. Ethylene Feedstock Consumption(Q1 '99 to Q3 '04)
0
100
200
300
400
500
600
700
800
Q1'99
Q2'99
Q3'99
Q4'99
Q1'00
Q2'00
Q3'00
Q4'00
Q1'01
Q2'01
Q3'01
Q4'01
Q1'02
Q2'02
Q3'02
Q4'02
Q1'03
Q2'03
Q3'03
Q4'03
Q1'04
Q2'04
Q3'04
Fee
dst
ock
s C
rack
ed M
BP
D
0%
20%
40%
60%
80%
100%
120%
140%
160%
Gas
to
Cru
de
Pri
ce R
atio
Source: Hodson, En*Vantage
Ethane (excl. refinery ethane)
Heavy Feeds(naphthas & gas oils)
Gas to Crude Ratio
Propane
N-Butane
Study Completion
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.
US Ethylene Quarterly Ethylene Production on an Annualized Basis Versus Industry Operating Rates
30
35
40
45
50
55
60
65
Q1'99 Q3'99 Q1'00 Q3'00 Q1'01 Q3'01 Q1'02 Q3'02 Q1'03 Q3'03 Q1'04 Q3'04
Eth
yle
ne P
rodu
ctio
n B
illio
n Lb
/Yr
70
75
80
85
90
95
100
105
Ope
ratin
g R
ate
%
Ethylene Production Effective Operating Rate Nameplate Operating Rate
Source: NPRA, CMAI, Hodson and En*Vantage Estimate based on preliminary 3rd Quater '04 production
Trough Conditions
13
As ethylene production increases, ethane cracking increases and the flexibility to swing ethane volumes diminishes.
E th a n e C ra c k in g v e rsu s
E th yle n e P ro d u c tio n
(E xc lu d in g R e fin e ry
E th a n e )
4 5 05 0 0
5 5 06 0 0
6 5 07 0 0
7 5 08 0 0
4 7 .
0
4 8 .
0
4 9 .
0
5 0 .05 1 .
0
5 2 .
0
5 3 .
0
5 4 .
0
5 5 .
0
5 6 .
0
5 7 .
0
5 8 .
0
5 9 .
0
E th yle n e P ro d u c tio n
(b illio n lb /yr)
Ethane Cracking versus Ethylene Production(Excluding Refinery Ethane)
450
500
550
600
650
700
750
800
47.0 48.0 49.0 50.0 51.0 52.0 53.0 54.0 55.0 56.0 57.0 58.0 59.0
Ethylene Production (billion lb/yr)
Eth
ane
Cra
ckin
g M
BP
D
Effective Op Rate: 79.0% 80.7% 82.3% 83.9% 85.5% 87.1 % 88.7% 90.3% 91.9% 93.5%
Qrtly Ethane Cracking Volumes: Hodson: Q1'99 thru Q4'03 Annualized Qtrly Ethylene Production: Hodson & CMAI
Max. Cracking Level
Min.Cracking Level
Q1
Q2 ’04
Q3
Q1 & Q2 ‘03
14
Minimum ethane cracking levels are not sustained more than 1 quarter without creating a surplus of ethylene co-products.
E th a n e C ra c k in g v e rsu s
E th yle n e P ro d u c tio n
(E xc lu d in g R e fin e ry
E th a n e )
4 5 05 0 0
5 5 06 0 0
6 5 07 0 0
7 5 08 0 0
4 7 .
0
4 8 .
0
4 9 .
0
5 0 .05 1 .
0
5 2 .
0
5 3 .
0
5 4 .
0
5 5 .
0
5 6 .
0
5 7 .
0
5 8 .
0
5 9 .
0
E th yle n e P ro d u c tio n
(b illio n lb /yr)
Ethane Cracking versus Ethylene Production(Excluding Refinery Ethane)
450
500
550
600
650
700
750
800
47.0 48.0 49.0 50.0 51.0 52.0 53.0 54.0 55.0 56.0 57.0 58.0 59.0
Ethylene Production (billion lb/yr)
Eth
ane
Cra
ckin
g M
BP
D
Effective Op Rate: 80.3% 82.0% 83.6% 85.2% 86.9% 88.5 % 90.2% 91.8% 93.4% 95.1%
Qrtly Ethane Cracking Volumes: Hodson: Q1'99 thru Q4'03 Annualized Qtrly Ethylene Production: Hodson & CMAI
Q2’03; 108%
Q3’03; 96%
Q4’03; 94%
Q1’02; 63%
Q1’01; 143%
Q2’01; 97%
Q1’00; 51% Q4’99; 61%
Q3’99; 69%
Quarter; Gas to Crude R atio
Q1’03; 112% Q2’02;
75%
Q4’02; 82%Q3’02; 65%
Q1’99; 77%
Q2’99; 71%Q2’00; 69%
Q3’00; 78%
Q4’00;96%
Q1 ’04; 92%
Q2 ’04; 93%
Q3 ’04; 73%
Effective Op Rate: 79.0% 80.7% 82.3% 83.9% 85.5% 87.1 % 88.7% 90.3% 91.9% 93.5%
15
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.
Shift in US Ethylene Plants
Basic Types of Ethylene Plants
Effective Capacity1
2004 2000
B Lb/Yr % B Lb/Yr %
Purity Ethane Crackers 6.1 9.8 6.6 11.0
E/P Crackers 20.2 32.6 23.2 38.6
Flexi Crackers 29.3 47.3 27.1 45.1
Heavy Feed Crackers 6.4 10.3 3.2 5.3
Total Effective Capacity 62.0 100.0 60.1 100.0
1 Capacity numbers exclude ethylene plants that are mothballed. Source: Hodson and En*Vantage
16
Our analysis indicates the following implications for ethane demand at different levels of US ethylene production.
Ethylene Production
Effective Utilization
Ethane Cracking Levels1 (MBPD)
(B Lb/Yr) (%) Min. Max. Flex. Range Trendline
49515355575961
79.082.285.588.791.995.298.4
495545595645695735775
655675695710725745775
1601301006530100
575610645675710740775
1 Excludes Refinery Ethane
1. Higher ethylene production requires greater ethane cracking (min and max) and the industry’s flexibility to swing ethane volumes diminishes.
2. 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.
3. 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.
So what does the future hold for ethane cracking and extraction?
18
Back in February 2004, we felt that conditions in 2004 should provide a better environment for ethane cracking.
Ethane Cracking Swings Between 500 -700 MBPD Are Possible with a Bias to Maximize Ethane Cracking
High Probability of Ethane Cracking Swings Between 500 -700 MBPD with a Bias to Minimize Ethane Cracking as long as Co-Product Production is Not an Inhibitor
At 53-55 B Lb/yr, Moderate to Good Probability of Ethane Cracking at or above 650 MBPD. Gas to Crude Ratio Less of a Factor at Production Rates above 55 B Lb/yr
Gas
to
Cru
de P
rice
Rat
io
Bel
ow 9
0%A
bove
90%
Ethylene ProductionBelow 53 B LB/YR Above 53 B LB/YR
High Probability of Sustainable Ethane Cracking at or Above 650 MBPD
19
To support greater ethane cracking levels, the ethane “frac” spread increases to encourage more ethane extraction.
Mt. Belvieu Ethane Frac Spread vs Ethane Cracking
0
2
4
6
8
10
12
14
16
18
20
22
24
500 525 550 575 600 625 650 675 700 725 750 775 800
Ethane Cracking MBPD
Fra
c S
pre
ad c
pg
When cracking levels exceed 675 MBPD, ethane fracs have a greater probability to expand rapidly, particularily when gas to crude ratios are below 90%
129%
113%94%
81%
75%
94%
120%69%
107%
89%
68%65%
92%60%
73%
68%
73%
82%
59%
52%
73%
93%
92%
Q1 '99 thru Q4 '03
Q1 '04 thru Q3 '04
Gas to Crude Ratio
Q3 ‘04
Q1 ‘04
Q2 ‘04
Source: Platts, En*Vantage and Hodson
20
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.
Gas to Crude Price RatioHenry Hub Gas to WTI (BTU Basis)*
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
160%
170%
2003
2004
2002
Expected Range of '05 Gas to Crude Ratio
* 5.8 MM BTU/Bbl
Study Completion
2004
2002
2003 Period WTI Prices WTI Prices Natural Gas Prices Gas to Crude Ratio Gas Premium to Crude$/Bbl $/MM Btu $/MM Btu % $/MM Btu
1st 10 mos '03 $31.03 $5.35 $5.51 103% $0.161st 10 mos '04 $40.04 $6.90 $5.77 84% ($1.14)Delta '04 -'03 $9.01 $1.55 $0.26 -19% ($1.29)
Source: En*Vantage, ICE, DOE
21
Assuming ethylene production tracks GDP growth rate at a 0.9 multiple, ethane cracking could reach 800 MBPD by 2010.
Forecast of Ethylene Production and Ethane CrackingPeriod US GDP
AGRUS Ethylene
AGRUS Ethylene Production
US Ethane Cracking2
Billion Lbs/Year MBPD
Q1 ’85 – Q4 ’99
2000
2001
2002
2003
3.0%
3.7%
0.2%
2.1%
3.1%
4.0%
-0.8%
-9.2%
3.4%
-1.0%
55.81
55.4
50.3
52.1
51.2
688
722
642
673
613
2004(e) 4.0% 9.2% 55.9 680
2005
2006
2007
2008
2009
2010
3.2%
2.5%
2.0%
2.0%
2.0%
2.0%
2.9%
2.2%
1.8%
1.8%
1.8%
1.8%
57.5
58.7
59.7
60.8
61.9
63.0
715
735
755
770
790
8051 1999 Production 2 Excludes Ref. Ethane
Source: History- CMAI, En*Vantage and Hodson; Est & Forecast - En*Vantage
22
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.
80 12%
Rocky Mtn.Mid-Continent
Texas Inland
Texas Gulf Coast
Louisiana Gulf CoastNew Mexico
Upper Midwest
Other
5-Year Average Ethane Regional Production from Processing
(MBPD )
85 12%
222 33%
58 9%
111 16%
97 14%
203%
9 1%
% of US Ethane Production
• 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%
• 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
Source: EIA and En*Vantage
23
• 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
Monthly Min-Max Range of Regional Ethane Production from Processing(MBPD)
1999 2000 2001 2002 2003Region Avg Min Max Avg Min Max Avg Min Max Avg Min Max Avg Min Max
Texas Inland 227 211 238 233 192 242 219 163 240 225 209 237 204 169 228
Texas G.C. 60 49 67 68 59 72 56 15 67 58 50 64 44 34 56
LA. G.C. 116 77 150 128 72 146 109 45 143 115 91 133 84 64 111
New Mexico 93 78 103 97 89 104 100 83 110 97 88 104 99 90 106
Rocky Mountain 59 29 81 85 70 94 86 64 93 87 72 99 83 60 108
Mid Continent 99 86 106 92 52 107 84 55 96 78 64 91 71 63 86
Upper Midwest 4 4 4 3 0 4 28 3 38 32 17 43 36 22 45
Other 10 3 12 10 7 13 9 8 10 6 4 9 4 1 9
Total Ethane 668 537 761 716 541 782 691 435 797 699 594 779 625 503 749
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.
24
La GC and Rockies will be the incremental producers of ethane in the ’05 to ’10 time period.
Source: DOE, En*Vantage
U.S. Regional Ethane Production Outlook(MBPD)
130 111 117 82 115 136217
98 100 9799
106109
102
302274 281
245
257
258
8585 87
89
99106
127113 110
101
103101
94
251
270
0
100
200
300
400
500
600
700
800
2000 2001 2002 2003 2004 2005 2010
MB
PD
La Gulf Coast New Mexico Texas Rockies Mid Cont. Other
18%
14%
42%
12%
13%
13%
16%
40%
15%
16%
27%
13%
32%
16%
12%720
618
805
Forecast
680715692 699
25
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.
Ethylene Demand
Ethylene Production
Feedstock Capabilities
Ethane Demand
GDP GrowthEffective
Operating RateComposition
of Plants
Gas to Crude Price Ratio
Ethane Frac Spread
Regional Extraction Economics
Regional Ethane
Production
Ethane to Market
Demand Side Factors
Supply Side Factors
26
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.