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Presented to PFAA’s Eleventh Annual Conference

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1 Presented to PFAA’s Eleventh Annual Conference
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:
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 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.
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 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/Bbl Source: 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*Vantage Study 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 = 0.63 Trough Conditions Source: 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 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.


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 Plants Basic Types of Ethylene Plants Effective Capacity1 2004 2000 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 1 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 Production Effective Utilization Ethane Cracking Levels1 (MBPD) (B Lb/Yr) (%) Min. Max. Flex. Range Trendline 49 51 53 55 57 59 61 79.0 82.2 85.5 88.7 91.9 95.2 98.4 495 545 595 645 695 735 775 655 675 710 725 745 160 130 100 65 30 10 575 610 740 1 Excludes Refinery Ethane 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.

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 Cracking High Probability of Ethane Cracking Swings Between MBPD with a Bias to Minimize Ethane Cracking as long as Co-Product Production is Not an Inhibitor At 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 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

19 Source: Platts, En*Vantage and Hodson
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

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 Cracking Period US GDP AGR US Ethylene AGR US 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) 9.2% 55.9 680 2005 2006 2007 2008 2009 2010 3.2% 2.5% 2.0% 2.9% 2.2% 1.8% 57.5 58.7 59.7 60.8 61.9 63.0 715 735 755 770 790 805 Production 2 Excludes Ref. Ethane Source: 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 Processed 590 processing plants BCFD capacity 56% of plant capacity is cryogenic 70 fractionators 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% Texas Inland 222 33% Texas Gulf Coast Louisiana Gulf Coast New Mexico 58 9% % of US Ethane Production Upper Midwest Other Source: 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 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

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 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

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.

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