Presentation on theme: "Presented to PFAA’s Eleventh Annual Conference"— Presentation transcript:
1 Presented to PFAA’s Eleventh Annual Conference US Ethane Outlook: Implications for US Processors and Ethylene ProducersPresented to PFAA’s Eleventh Annual ConferenceBarton CreekAustin, TexasNovember 3rd – 5th, 2004Peter FasulloEn*Vantage, Inc
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 Source: DOE, En*Vantage, Hodson 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 CrackingEthylene business cycleCracker capacities &feedstock capabilitiesCompeting feedstocksEthylene co-productsDerivative Imports/ExportsEthane ExtractionFrac spreadsProcessing contractsPlant typePlant locationGas quantity & qualitySource: DOE, En*Vantage, Hodson
5 Our analysis of ethane supply & demand focused on two primary drivers. RationalInfluenceNatural 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.ProcessingMarginsFeedstockEconomicsUS Ethylene Production as driven by GDP growthUS 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 Source: Platts, DOE and En*Vantage 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/BblSource: Platts, DOE and En*Vantage
7 Source: Platts & En*Vantage NGL frac spreads are inversely correlated to the gas to crude price ratio.....Source: Platts & En*VantageStudy Completed
8 Source: DOE and En*Vantage ....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 = 0.63Trough ConditionsSource: DOE and En*Vantage
9 Source: DOE and En*Vantage 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 ConditionsSource: 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.
15 Shift in US Ethylene Plants 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 PlantsBasic Types ofEthylene PlantsEffective Capacity120042000B Lb/Yr%Purity Ethane Crackers22.214.171.1241.0E/P Crackers20.232.623.238.6Flexi Crackers29.347.327.145.1Heavy Feed Crackers6.410.33.25.3Total Effective Capacity62.0100.060.11 Capacity numbers exclude ethylene plants that are mothballed.Source: Hodson and En*Vantage
16 Effective Utilization Ethane Cracking Levels1 Our analysis indicates the following implications for ethane demand at different levels of US ethylene production.Ethylene ProductionEffective UtilizationEthane Cracking Levels1(MBPD)(B Lb/Yr)(%)Min.Max.Flex. RangeTrendline4951535557596179.082.285.588.791.995.298.44955455956456957357756556757107257451601301006530105756107401 Excludes Refinery EthaneHigher 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, particularlywhen ethylene industry utilization rates are between 80% to 90%. Gas to crude price ratiosabove 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.
17 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 MBPD Are Possible with a Bias to Maximize Ethane CrackingHigh Probability of Ethane Cracking Swings Between MBPD with a Bias to Minimize Ethane Cracking as long as Co-Product Production is Not an InhibitorAt 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/yrHigh Probability of Sustainable Ethane Cracking at or Above 650 MBPDBelow 90%Gas to Crude Price RatioAbove 90%Below 53 B LB/YRAbove 53 B LB/YREthylene Production
19 Source: Platts, En*Vantage and Hodson To support greater ethane cracking levels, the ethane “frac” spread increases to encourage more ethane extraction.Q3 ‘04Q1 ‘04Q2 ‘04Source: 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.Source: En*Vantage, ICE, DOE
21 Assuming ethylene production tracks GDP growth rate at a 0 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 CrackingPeriodUS GDP AGRUS Ethylene AGRUS Ethylene ProductionUS Ethane Cracking2Billion Lbs/YearMBPDQ1 ’85 – Q4 ’9920002001200220033.0%3.7%0.2%2.1%3.1%4.0%-0.8%-9.2%3.4%-1.0%55.8155.450.352.151.26887226426736132004(e)9.2%55.96802005200620072008200920103.2%2.5%2.0%2.9%2.2%1.8%57.558.759.760.861.963.0715735755770790805Production2 Excludes Ref. EthaneSource: History- CMAI, En*Vantage and Hodson; Est & Forecast - En*Vantage
22 5-Year Average Ethane Regional Production from Processing 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 Processed590 processing plants BCFD capacity56% of plant capacity is cryogenic70 fractionators million BPD capacity85 % of Frac capacity at market centersUS Processing NGLs: 1843 MBPDUS Processing Ethane: 682 MBPDUS 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%91%8012%203%8512%Rocky Mtn.9714%Mid-Continent11116%Texas Inland22233%Texas Gulf CoastLouisiana Gulf CoastNew Mexico589%% of US Ethane ProductionUpper MidwestOtherSource: EIA and En*Vantage
23 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 downethane extraction to meet ethane demand.Analysis of each region’s cost of getting ethane to market shows that theRockies is not always the swing producer. “East LA” often provides the swing.Source: EIA & En*Vantage
24 La GC and Rockies will be the incremental producers of ethane in the ’05 to ’10 time period. Source: DOE, En*Vantage
25 Feedstock Capabilities Regional Ethane Production 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 FactorsEthylene DemandEthylene ProductionFeedstock CapabilitiesEthane DemandGas to Crude Price RatioEffective Operating RateComposition of PlantsGDP GrowthRegional Ethane ProductionRegional Extraction EconomicsEthane to MarketEthane Frac SpreadSupply 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.