NATURAL GAS LIQUIDS (NGLS) IN NORTH AMERICA: AN UPDATE PART I - UPSTREAM

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1 Study No. 139 CANADIAN ENERGY RESEARCH INSTITUTE NATURAL GAS LIQUIDS (NGLS) IN NORTH AMERICA: AN UPDATE PART I - UPSTREAM Canadian Energy Research Institute Relevant Independent Objective

2 Natural Gas Liquids (NGLs) in North America: An Update 1 Part I - Upstream Introduction This report is part of an update to CERI Study No. 130: Natural Gas Liquids (NGLs) in North America: Overview and Outlook to 2035, published in the summer of (the NGLs study). Given the high level of interest from various audiences, CERI has undertaken the task to update its NGLs overview and outlook by incorporating and considering various issues and trends that have developed since Study No. 130 was first published. Furthermore, given the importance of natural gas supply and demand dynamics in the outlook for NGLs, CERI is incorporating four natural gas scenarios developed over the last year and outlined in a recently published CERI report: Study No. 138: North American Natural Gas Pathways. 2 This is the first of five parts (or reports) that make up the NGL update. Parts I-III will focus on a discussion of historical data (2002 to 2012) as well as currently evolving trends that are shaping NGL markets in both Canada and the United States (US). 3 This report (Part I) will provide context in regards to production of NGLs from different sources (upstream), Part II discusses existing and evolving NGL infrastructure and NGL end-users (midstream and downstream), while Part III discusses supply and demand (S/D) balances for each NGL, as well as pricing and economics. These reports will be complemented with a discussion of what CERI believes to be some of the most relevant issues currently transforming NGL markets. The first section of each report will focus on Canada while the second chapter will focus on the US, with a Canadian-focused analysis presented in the final section of each report. Given the increased importance of global energy markets and continued demand increases in the Asia-Pacific region, Part IV will discuss NGLs in the global context as well as opportunities and challenges for Canadian NGLs/petrochemicals in global markets and the importance of the Asia-Pacific region as a target market. Part V will use the insights from this overview and emerging trends analysis (Parts I-IV) in order to develop an outlook for NGLs in North America based on the four natural gas scenarios. A discussion of the outlook methodology will be presented in that report, and each NGL will be discussed in the context of a supply and demand balance outlook based on the different scenarios. Lastly, Part V will include a discussion on what the different outlook scenarios mean for different industries that rely on NGLs in terms of opportunities, challenges, and possible future prospects. The scenario-based approach has been chosen as it allows CERI to consider a range of possibilities in the context of NGLs availability and demand in a long-term timeframe. 1 Available at: 2 Available at: 138_-_North_American_Natural_Gas_Pathways.pdf 3 With a more in-depth focus on Canada

3 2 Canadian Energy Research Institute This is in contrast to a base case scenario (Study No. 130) whereby results were given around a general set of assumptions and where there were possibilities of significant downside or upside revisions on the results given the sensitivity of certain key variables. The scenario-based approach thus allows for a broader examination of possible outcomes. While Study No. 130 was an introduction to NGLs in North America and served the purpose of generating awareness on the importance of NGLs within the context of the energy industry in North America, this report assumes a certain level of understanding of NGL markets and will focus on more specific issues.

4 Natural Gas Liquids (NGLs) in North America: An Update 3 Part I - Upstream Executive Summary Canada is one of the world s largest producers of natural gas liquids (NGLs), 4 with output originating primarily at gas processing plants, but also crude oil refineries, oil sands upgrader off-gas processing plants, and at the field level as field or wellhead condensate. Between 2002 and 2012, total NGL production levels in Canada fluctuated with peak levels reached at close to 760 thousand barrels per day (kb/d) in 2007, ensued by a declining trend and a trough of 657 kb/d in 2010, a point from which production levels have turned around to reach close to 680 kb/d by While production of NGLs from natural gas plants 5 accounted for 91 percent of total Canadian NGL production in 2012, declining volumes of liquefied petroleum gases (LPG) 6 from refineries, due to a combination of refinery closures and changes in the crude slate, have contributed to overall NGLs declining volumes. Meanwhile, production of synthetic gas liquids (SGLs) 7 from offgas processing plants has increased rapidly, driven by strong oil sands activity and synthetic crude oil production (SCO), not only supporting overall NGL production levels, but also providing an alternative source of NGLs and large potential for further future growth in NGLs extraction volumes. Refineries accounted for 7 percent of Canada s NGL production in 2012 while off-gas plants accounted for 2 percent. Gas plants NGL production comes primarily from Western Canadian provinces with almost all extraction occurring in Alberta (AB) (90 percent of gas plants NGLs) and British Columbia (BC) (9 percent), where ethane and propane (combined) accounted for about 2/3 of the gas plant NGL barrel in Given the significance of gas plants NGL production, an understanding of issues affecting natural gas production volumes in these provinces is the foundation of understanding factors that will affect NGLs production in years to come. In the United States (US), overall NGL production levels (from gas plants and refineries combined) were on a flat to declining trend until around 2008 (2,414 kb/d) from which point extraction of NGLs from gas plants accelerated rapidly and led to total NGL production levels of over 3,000 kb/d by Increased production of gas plants NGLs in the US has in turn been the result of rapid increases in natural gas production volumes from unconventional sources (including shale, tight, and coalbed methane formations) led by process innovation around production (such as horizontal drilling and hydraulic fracturing), but also due to underlying commodity pricing conditions that have favoured extraction of NGL-rich or wet gas. Production of NGLs from gas plants accounted for 80 percent of total US NGL production in Includes ethane (C2H6), propane (C3H8), butanes (n-c4h10 and i-c4h10), and pentanes plus/condensate (C5+) 5 Includes field plants, straddle plants, fractionators, and field condensate 6 Propane and butanes 7 Mix of paraffinic (NGLs) and olefinic (ethylene, propylene, butylene, and olefinic condensate) hydrocarbons

5 4 Canadian Energy Research Institute Given the US role as Canada s main trading partner in goods and services, but more importantly, energy commodities; increasing natural gas production volumes unmatched by equivalent demand increases in the US has meant that import requirements continue to decrease. While US demand for gas has increased, primarily in the power generation sector, supply increases have far outpaced demand increases, displacing costly overseas liquefied natural gas (LNG) imports first, followed by Canadian gas in various traditional markets including the US Upper Midwest and US Northeast markets. Furthermore, Eastern Canadian markets which were traditionally served by Western Canada s gas, are increasingly meeting their own needs by acquiring closer US-sourced gas. In Canada, gas demand has increased, driven by increases in the power generation and industrial sectors (including oil sands), but demand increases have not been large enough to compensate for increasing US imports and lost US export volumes, leading WCSB producers to scale back on production activities and to look for alternative markets both domestically and abroad (as LNG). These changes in market fundamentals point to a rapidly evolving natural gas market in North America and a re-organization of flow patterns from producing areas to market centers. While various economic factors have also affected WCSB producers including volatile prices, currency exchange rate fluctuations, and increasing transportation tolls (amongst others), supply cost efficiencies and monetization of NGLs have become important components of WCSB producers profitability and competitiveness strategies in the North American market. This has led to a unique situation in the upstream context of Canadian NGLs whereby overall gas production levels have continued to decline while NGL production volumes are recovering, increasing rapidly, and expected to continue to do so over the long-term. Going forward, understanding the demand for Canadian gas across North America and possibly in the global market (as LNG), as well as natural gas prices, the composition of the gas, and the focus of producers on given areas of the WCSB, will help in shaping the expected volumes of NGLs available for extraction in the WCSB. NGL availability will be the foundation for different NGL outlook scenarios that will be presented in Part V of the NGLs study update. But understanding changes in natural gas markets and NGL availability needs to be complemented by an understanding of NGL infrastructure; NGL markets supply, demand, pricing, and economics (market fundamentals), but also an understanding of global NGL markets. These subjects are discussed in Parts II IV of the NGLs update.