1. Presented to the 87th Annual GPA Convention
US Ethane Outlook: Part III Will the Good Times Last for Ethane Extraction?
Presented to the 87th Annual GPA Convention
March 4, 2008
Thanks Joel:
I appreciate the opportunity to be here and speak to the GPA about the outlook for ethane and its implications for gas processors and ethylene producers.
Peter Fasullo
En*Vantage, Inc

2. 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 year’s speech will not deviate from these 4 basic facts
and will provide an update of our latest views on ethane.
It was just 2 years ago, that I was here speaking to the GPA about the challenges facing the NGL midstream sector. One of those major challenges concerned ethane.
If you recall, the gas processing industry was suffering from:
The lingering effects of an economic recession
High gas prices relative to crude oil
Poor processing margins which resulted in considerable ethane
rejection.
A depressed petrochemical environment
And a real fear that the US ethylene industry would pack up and
leave as we witnessed Dow permanently shut down 2 ethylene
plants that cracked primarily ethane and E/P mix.

3. We Forecasted Better Times for Ethane Extraction.
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.
It was just 2 years ago, that I was here speaking to the GPA about the challenges facing the NGL midstream sector. One of those major challenges concerned ethane.
If you recall, the gas processing industry was suffering from:
The lingering effects of an economic recession
High gas prices relative to crude oil
Poor processing margins which resulted in considerable ethane
rejection.
A depressed petrochemical environment
And a real fear that the US ethylene industry would pack up and
leave as we witnessed Dow permanently shut down 2 ethylene
plants that cracked primarily ethane and E/P mix.

4. 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?
So why focus on ethane?
When we started our study early last year it became apparent that ethane was extremely important to the health of the gas processing and petrochemical industries.
On average, 37% of the US NGL barrel extracted by gas processors is ethane, so ethane is a major NGL component.
However ethane extraction yields have varied from 34% to 46% of the NGL barrel when processing economics dictated.
This is because ethane extraction is mostly discretionary and very sensitive to economic conditions.
Strong ethane extraction margins indicate a healthy processing environment - especially for cryogenic plants.
What makes ethane vulnerable is that it has only one major end-use and that is as a feedstock for ethylene production where it competes with other NGL & petroleum feedstocks.
Although it appears one sided, ethane, on average constitutes, 45% of the US ethylene feedstock mix, so it is a major feedstock for ethylene producers.
However, ethane cracking has been known to vary from 38% to 51% of the mix depending on feedstock economics and ethylene plant utilization rates.
Overall, when you sum all these factors together, ethane supply/demand has demonstrated swings of 100 MBPD or more in a market averaging around 750 MBPD. So ethane supply and demand can be quite volatile.

5. Let’s Review Last Year’s 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.
Reviewing our findings:
Ethane is very much alive!!! --- barring a recession
The 2 key points from this slide that I would like to leave with you are:
Ethane frac spreads should remain strong to encourage extraction in all regions.
This is not the time for processors to retreat from cryogenic plants.
Thank you very much.

6. Last Year’s 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 .
Reviewing our findings:
Ethane is very much alive!!! --- barring a recession
The 2 key points from this slide that I would like to leave with you are:
Ethane frac spreads should remain strong to encourage extraction in all regions.
This is not the time for processors to retreat from cryogenic plants.
Thank you very much.

7. So, What’s 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?”
To answer this question we have to go back to a study we did early last year before the rebound occurred for ethane. We were commissioned to study ethane market conditions and determine when they would improve and why?
So today, I would like to review the analysis performed in that study that was completed in February of 2004 which did forecast better times for ethane.
Specifically, we will examine the fundamentals driving ethane supply/demand and frac spreads.
Present simple benchmarks that we developed that can be used to indicate whether ethane’s economic conditions will improve or worsen;
And along the way we will share updated findings regarding the outlook for ethane and its implications.

8. Ethane Frac Spreads Hit Record Highs in 2007
As would be expected NGL frac spreads are inversely correlated to the gas to crude price ratio.
This chart shows frac spreads for ethane, propane and butane plus for each quarter between 1999 and 2004 overlaying the gas to crude ratio throughout this period.
During the winter and spring of 2003 the industry experienced some of the lowest NGL frac spreads, particularly for ethane. It was during this time that many market observers were becoming concerned whether ethane would ever bounce back and questioned if ethane extraction was worth it.
As can be seen in the chart, ethane margins did bounce back in the second half of 2004 coinciding with the drop in the gas to crude ratio and we will provide further explanations why this happened.
Source: Platts & En*Vantage

9. Source: Platts, DOE and En*Vantage
Very Low Gas to Crude Ratios along with Record Crude Prices were a Major Driver for Record Frac Spreads.
Charting the gas to crude ratio for the past 14 years shows that the value of gas has steadily increased relative to crude oil from the early 1990’s through 2003.
As the gas bubble dissipated by the mid to late 1990’s, the market experienced major price shocks in the winter of 2000/2001 and then again in the winter and spring in 2003 as measured by the spikes in the gas to crude price ratio.
Our study examined the period between 1999 and 2003 to get a better understanding of how these gas price shocks affected the processing and ethylene industries, specifically with regards for ethane.
Any of you who were in the processing business during these 2 episodes, know these periods were especially painful. The first spike that occurred in 2001 was sharp and dramatic as the gas to crude ratio soared to 180% but it only lasted for a couple of months, In 2003, the second spike did not reach the levels of the 2001 spike but the gas to crude ratios were well over a 100% for a period of 6 months.
Since mid 2003, gas prices relative to crude have been trending downward and we will address why this has been happening and whether the long term has been broken later on in the presentation.
Source: Platts, DOE and En*Vantage

10. Source: Platts, DOE and En*Vantage
Plus, Decent Ethane to Crude Ratios Contributed to Record Frac Spreads and Record High Ethane Prices.
Charting the gas to crude ratio for the past 14 years shows that the value of gas has steadily increased relative to crude oil from the early 1990’s through 2003.
As the gas bubble dissipated by the mid to late 1990’s, the market experienced major price shocks in the winter of 2000/2001 and then again in the winter and spring in 2003 as measured by the spikes in the gas to crude price ratio.
Our study examined the period between 1999 and 2003 to get a better understanding of how these gas price shocks affected the processing and ethylene industries, specifically with regards for ethane.
Any of you who were in the processing business during these 2 episodes, know these periods were especially painful. The first spike that occurred in 2001 was sharp and dramatic as the gas to crude ratio soared to 180% but it only lasted for a couple of months, In 2003, the second spike did not reach the levels of the 2001 spike but the gas to crude ratios were well over a 100% for a period of 6 months.
Since mid 2003, gas prices relative to crude have been trending downward and we will address why this has been happening and whether the long term has been broken later on in the presentation.
Source: Platts, DOE and En*Vantage

11. 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.
To answer this question we have to go back to a study we did early last year before the rebound occurred for ethane. We were commissioned to study ethane market conditions and determine when they would improve and why?
So today, I would like to review the analysis performed in that study that was completed in February of 2004 which did forecast better times for ethane.
Specifically, we will examine the fundamentals driving ethane supply/demand and frac spreads.
Present simple benchmarks that we developed that can be used to indicate whether ethane’s economic conditions will improve or worsen;
And along the way we will share updated findings regarding the outlook for ethane and its implications.

12. Let’s take a closer look at petrochemical demand for ethane from gas processing

13. 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 industry’s 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).
To answer this question we have to go back to a study we did early last year before the rebound occurred for ethane. We were commissioned to study ethane market conditions and determine when they would improve and why?
So today, I would like to review the analysis performed in that study that was completed in February of 2004 which did forecast better times for ethane.
Specifically, we will examine the fundamentals driving ethane supply/demand and frac spreads.
Present simple benchmarks that we developed that can be used to indicate whether ethane’s economic conditions will improve or worsen;
And along the way we will share updated findings regarding the outlook for ethane and its implications.

14. Despite 2007, Growth in US Ethylene Production and Capacity has Basically Stagnated Over the Past 5 yrs.

15. Ethane Demand Higher in 2007 (680 MBPD), but Only Slightly Above 8 Year Average (660MBPD).

16. Over the Past Few Years, US Ethylene Capacity has Shifted More to Flexi and Heavy Feed Crackers.
The composition of the US ethylene plants is the fundamental reason why the trends just discussed for ethane cracking exist.
There are basically 4 types of ethylene plants.
The plants that have the greatest amount of feedstock switching capability are the flexi crackers that can crack a wide range of feedstocks from ethane through naphthas and gas oils. The heavy crackers have little, if any, feedstock flexibility to crack ethane.
The purity and E/P cracker are basically stuck with cracking purity ethane and E/P mix and that is why there is a minimum amount of ethane that must be cracked by the industry.
As you can see the effective capacity of the ethylene industry has increased by 2 billion lbs/yr from about 60 billion pounds in 2000 to about 62 billion pounds as of the end 2004.
The capacity increase has shifted the mix of plants more to the flexi and heavy cracker categories as new plants in this category have come on line and as older purity and E/P crackers have been mothballed or permanently shutdown.
Based on this shift, we adjusted the ethane cracking range that is implied in the previous scatter chart downward by 15 to 20 MBPD.
But this revision may be temporary as there is talk that ChevronPhillips is seriously looking at restarting their 650 million lb/yr E/P cracker in Sweeny and there has been some noise out of Lyondell that they are studying whether to bring their 850 million lb/yr E/P cracker in Lake Charles out mothball status.
Plus, 21% of US ethylene plant capacity is aging (35 years and older) and this capacity represents 33% of total ethane consumption.

17. US Ethylene Production Forecast Scenarios

18. The Amount of Ethane Cracking Positively Correlates with the Amount of Ethylene Produced.

19. Best Case, Call on Ethane from Processing will be 720 to 780 MBPD
Best Case, Call on Ethane from Processing will be 720 to 780 MBPD. Most Likely Case: 680 to 700 MBPD.

20. Are Our Assumptions About Ethane Extraction Holding UP?

21. Prior to 2007,US NGL Extraction Declined ~2. 5%/yr since Peak in 2001
Prior to 2007,US NGL Extraction Declined ~2.5%/yr since Peak in In Late 2007, the Trend Reversed. :
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 En*Vantage

22. In Late 2007, the Rebound in Ethane Extraction Capability was Greater than We Predicted Last Year .
Source: EIA and En*Vantage

23. Gulf Coast Processors Showing the Greatest Declines, TX Inland and Rockies Showing the Greatest Growth.

24. 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
What that analysis showed is that processing industry has the capability to extract 800 MBPD of ethane by 2010.
The incremental ethane production will come from the Louisiana Gulf Coast and the Rockies.
Although we did not factor LNG as a source of ethane, it is probable that after 2010 LNG could be a source for as much as 50 to 100 MBPD of ethane if the LNG comes in “hot”.
Because of timing of start-ups, volumes will take time to ramp up.

25. In Addition to Incremental NGLs from Processing, One USGC LNG terminal will be Recovering NGLs by 2009.
Trunkline is building a 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 /- 25.
That would imply an NGL recovery rate of at least 39 MBPD, with ethane extraction about 24 MBPD.

26. Very Good Likelihood an Ethane Extraction Overhang Will Develop in 2008 and Continue Through 2011.

27. Ethane’s Forward Frac Spread and Value Relative to Crude have fallen since Late October ’07.

28. 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 year’s convention theme.
What’s 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.
What that analysis showed is that processing industry has the capability to extract 800 MBPD of ethane by 2010.
The incremental ethane production will come from the Louisiana Gulf Coast and the Rockies.
Although we did not factor LNG as a source of ethane, it is probable that after 2010 LNG could be a source for as much as 50 to 100 MBPD of ethane if the LNG comes in “hot”.

29. Should the Industry Build More Cryo-Plants
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.
Subject to Higher Risk
Subject to Lower Risk
Processors with the following:
“Keep Whole” contracts
No ability to re-inject ethane
Little or no integration along the NGL
value chain.
High T&F fees
High Fuel Usage & Costs
Little or no gas basis offset
Low value market for ethane
Little integration with gas producer
POP Contracts
Ability to re-inject ethane
High degree of integration along
the NGL value chain.
Low T&F fees
Low Fuel Usage & Costs
Wide gas basis offset
High value market for ethane
Integration with gas producer

30. In Conclusion Last year’s 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.