U.S. Ethane Ready for Liftoff: But, Will It Be Sustainable and Why? Presented to: Platts 7 th Annual NGLs Conference October 31, 217 Peter Fasullo Principal En*Vantage, Inc. pfasullo@envantageinc.com www.envantageinc.com
Liftoffs Can Have Two Basic Outcomes Successful Unsuccessful Ethane s supply and demand comes into balance supporting sustainable extraction economics. Ethane s supply and demand balance is temporary, causing extraction economics to plunge. 2
Ethane s Erratic Flight Pattern As Shown By Its Price Spread to Natural Gas 8 6 4 2 Mt. Belvieu Ethane Frac Spread* * Frac Spread: Based on Mt. Belvieu Ethane Prices minus Ethane's equivalent value to Henry Hub Gas prices. Average +$1 Oil 1 st Round of Ethane Conversions at Olefin Plants Ethane Surplus from Shales Plans for New Ethane Crackers (2) Jan- Jan-4 Jan-8 Jan-12 Jan-16 High Gas-to- Sub $6 Oil, Hurricanes Oil Ratios Financial Crisis Sub $5 Oil 3 Start of 1 st Wave of New Crackers & Exports
Forecasting Ethane s Future Doesn t Require Rocket Science, But It s Becoming More Complex to Predict Ethane Supply shale plays, ethane content, gas processing capacity, type and age of plant. (+97% of US ethane from gas plants). Geographic Distribution of Ethane Extraction - Location of the Incremental Ethane Barrel to Meet Demand. The Logistics to Transport and Handle Ethane. The Ability to Crack Ethane by the US Ethylene Industry. The Economics to Crack Ethane gas-to-crude price ratio, alternative feedstock values, and the global economy. Export Markets for US Ethane and the Ability to Export Ethane. Influence of Factors Above on Ethane Prices & Extraction Economics. 4
Lower-48 States Gas Processing Industry as of 1/1/17 Estimated Active Plants 686. Inlet Capacity 91.5 BCFD. 64% cryogenic. Plant Op. Rate ~ 7% to 75% Older plants have shut down in S.TX and LA Gulf Coast. 28.1 BCFD of new processing capacity added from 211 to 216, with the following regional distribution: Permian/Eagle Ford/Other TX: 37% Marcellus/Utica: 32% Bakken/Rockies: 14% Midcontinent: 8% Other: 9% 5
Ethane Extraction Capability vs Actual Ethane Extraction MBPD 2, 1,5 1, US Capability to Extract Ethane vs Actual Extraction vs Demand Max C2 Extraction Capability Actual C2 Extraction Cracking Demand * Difference represents the amount of ethane rejected Difference represents the amount of ethane stored 5 28 212 216 * Ethane extraction capability is the gas processing industry's ability to extract ethane barring economic constraints. 6
Ethane Stocks - Million Bbls Ethane Days of Supply Ethane Frac Spreads $/Gal 6 5 4 Ethane Inventories and the Impact on Ethane Frac Spreads Year-End Commercial Ethane Inventories & Days of Supply Refinery & Gas Plant Stocks Pipeline Stocks Bulk Stocks Days of Supply 6 5 4 $.6 $.4 Ethane Frac Spreads (Mt Belvieu) vs Days-of-Inventory Supply 3 3 $.2 2 1 2 1 $. 27 29 211 213 215 217 H1 Ethane soared in 216 due to rapid rise in ethane extraction capability. However, ethane days-of-supply has not shown the same increase due to increasing ethane demand. 7 -$.2 15 2 25 3 35 4 45 Days-of-Supply In the past, when ethane days of supply dropped below 3, ethane frac spreads vastly improved. 2% of ethane storage not readily available to market.
A Greater % of C2 Extraction Capability Now in Regions with High T&F Costs 28 Regional Distribution of Ethane Extraction Capability 216 Regional Distribution of Ethane Extraction Capability 6% 34% 13% 6% 16% 13% 11% Upper Midwest Rockies New Mexico Mid Continent TX Inland TX Gulf Coast LA. Gulf Coast 36% 5% 6% 5% 12% 11% 8% 11% 5% Williston Appalachia Upper Midwest Rockies New Mexico Mid Continent TX Inland TX Gulf Coast LA. Gulf Coast In 28, 22% of the 8 MBPD of US ethane extraction capability located in regions furthest from the Gulf Coast ethane markets. In 216, 36% of the 1.9 MM BPD of US ethane extraction capability located in regions furthest from the Gulf Coast ethane markets. 8
Surplus Ethane Also Caused a Rapid Rise in Ethane Rejection 7 6 5 4 3 2 1 Estimated Ethane Rejection by EIA Regions (1 BPD) Appalachia Upper MW Williston Rockies New Mexico Mid Cont TX Inland TX Gulf Coast LA Gulf Coast 29 21 211 212 213 214 215 216 217 H1 +5% of US ethane rejection in regions with the highest T&F costs to Mt. Belvieu. Not all rejected ethane is available to USGC ethane markets, which will impact USGC ethane balances and prices. 9
Ethane Extraction Capability is Expected to Increase Will it All be Accessible? From 216 to 222, US ethane extraction capability is expected to increase by 695 MBPD to 2.55 MM BPD. Much of the increase will come from the Marcellus/Utica and the Permian. MBPD 3, 2,5 2, Forecast of US Ethane Extraction Capability by EIA Region Williston Upper Mid-West Okla-KS ARKLA TX Gulf Coast Appalachia Rockies New Mexico TX Inland LA Gulf Coast 36% 1,5 1, 5 214 216 218 22 222 1
To Assess Ethane s Availability -- Need to Understand the Logistics for Ethane Ethane in Raw NGL Mix Flows Ethane Batched or Dedicated Flows Vantage Pipeline: 4 to 68 MBPD of ethane. Commissioned Q1 214 Ethane supplies and markets west of Marcellus/Utica Enterprise Morgan s Point export terminal 2 MBPD capacity. Completed Q3 216. WCSB Rocky Mountains San Juan Permian Edmonton/ Ft. Saskatchewan Bakken Shale South Texas Conway Anadarko Arkoma Mt. Belvieu Kinder s Utopia line to Windsor, Ont. - 5 to 75 MBPD - early 218. River Exports Mariner West: 5 MBPD of ethane. Q4-213. Sarnia Mariner East: 4 MBPD of ethane 216; 7 MBPD H1-218 Marcellus Utica Europe ATEX Ethane Line: 13 MBPD capacity, moving ~115 MBPD. Expandable to 265 MBPD - needs capital & long-term contracts. Small expansion to 145 MBPD in Q4 217.
Producers Not Too Interested in Committing to Long-Term, Long-Haul Transport Contracts Leveraged to Ethane Got burned on existing ethane transport contracts - especially from transportation disadvantaged processing regions. Some producers simply don t trust ethane want to see proof that ethane extraction economics will be sustainable. Some major producers are reluctant to be the anchor tenant. Consequences: Takes time to get the necessary commitments to expand ATEX to 265 MBPD - unlikely to happen before 22, if at all. EPD and MPLX put on hold reversing the Centennial line to move propane/ethane from the Northeast to USGC. Overall, several NGL and ethane pipeline projects from the Marcellus to the Gulf Coast have failed to launch. 12
Ethane Balances Need to Be Performed For The Two Geographic Regions West of Marcellus/Utica Marcellus /Utica For Each Region - Need to Examine Ethane Supplies, Inter-Regional Transfers, Cracking Demand, and Exports. 13
By 221, Gulf Coast Ethane Cracking Demand Expected to Increase by 674 MBPD Companies Building Plants First Wave of New US Ethylene Plant Capacity by 221 Location Capacity (Billion Lb/Yr) Ethane Cracking Capability (MBPD) Completion Date LyondellBasell ¹ Corpus Christi, TX.8 22 Q1 217 OxyChem JV ² Ingleside, TX 1.2 34 Q1 217 DowDuPont ¹ Plaquemine, LA.55 15 Q2 217 Westlake ¹ Calvert City, KY.1 3 Q2 217 DowDuPont ² Freeport, TX 3.31 93 Q4 217 Indorama ³ Lake Charles, LA.82 16 Q4 217 ExxonMobil ² Baytown, TX 3.31 93 Q2 218 CP Chem ² Cedar Bayou, TX 3.31 93 Q2 218 Shintech ² Plaquemine, LA 1.1 31 Q2 218 Sasol ² Lake Charles, LA 3.31 93 Q4 218 Westlake/Lotte ² Lake Charles, LA 2.2 62 Q1 219 Formosa ² Point Comfort, TX 3.5 98 Q2 219 DowDuPont ¹ Orange, TX.2 6 Q2 219 DowDupont ¹ Freeport, TX 1.1 31 22 Total/Borealis/Nova JV ² Port Arthur, TX 2.2 62 221 ¹ Expansion to an existing plant; ² New plant; ³ Restart of a closed plant Total (1% Op Rate) 27.1 749 Total (9% Op Rate) 24.31 674 En*Vantage 14
By 222, 2 nd Wave of New Crackers Could Add Another 243 MBPD of Ethane Demand Possible Second Wave of New US Ethylene Plant Capacity Post 221 Companies Location Capacity (Billion Lb/Yr) Ethane Cracking Capability (MBPD) Shell Monaca, PA 3.5 98 Comments Construction underway, but completion date not set, yet. Likely H2 221 PTT Global Chemical Belmont Co, OH 2.2 62 Postponed decision to build till Q4 217. Site preparation nearly complete. Exxon Sabic Portland, TX 3.95 111 Selected Site, Engineering study being planned. Likely completion 222. Total (1% Op Rate) 9.65 271 Total (9% Op Rate) 8.69 243 En*Vantage 15
MBPD 1, 8 Incremental Ethane Cracking Demand For the Two Geographic Regions West of the Marcellus/Utica Incremental Ethane Cracking From 217 to 222 2nd Wave of Cracker Expansions 1st Wave of Cracker Expansions MBPD 3 Marcellus/Utica Incremental Ethane Cracking From 217 to 222 PTT Cracker Shell Cracker 6 2 4 1 2 1% Op Rate 9% Op Rate West of Marcellus/Utica ethane cracking increases by 775 MBPD from 217 to 222. Most of the increase in the 217 to 219 period. * 1% Op Rate 9% Op Rate Marcellus/Utica assumes Shell cracker comes online in 221. PTT cracker a possibility in 222. * Ethane balances based on US crackers operating at 9% of capacity. 16
Forecast of Waterborne Ethane Exports MBPD 25 2 15 1 5 For the Two Geographic Regions Ethane Exports West of the Marcellus/Utica Morgan's Pt. Exports Vantage Exports 216 217 218 219 22 221 222 West of Marcellus/Utica ethane exports are expected to increase from 12 MBPD in 217 to 235 MBPD by 219. Major increase is mainly from EPD s Morgan s Point terminal. 17 MBPD 2 18 16 14 12 1 8 6 4 2 Ethane Exports From the Marcellus/Utica Utopia Exports ME 2 Exports ME 1 Exports Mariner West 216 217 218 219 22 221 222 Marcellus/Utica ethane exports are expected to increase from 75 MBPD in 217 to 18 MBPD by 221. Increase driven by M.E.2 and Utopia.
18 Northeast Ethane Markets Remain Long Through 222 MBPD 6 5 4 3 2 ATEX Mariner West Mariner East Utopia Shell Cracker 145 MBPD Marcellus/Utica Ethane Supply & Demand Outlook 17 MBPD Enough Excess Ethane to Support PTT Cracker 8 MBPD 1 216 217 218 219 22 221 222
US Gulf Coast Ethane Markets Tighten over the 217 to 222 Period MBPD 2,5 2, Ethane Supply/Demand Outlook West of the Marcellus/Utica 2nd Wave of New Crackers Ethane Exports 1st Wave of New Crackers Base Ethane Demand Ethylene Plants Operating at 9% of Capacity 1,5 Excess Supplies 1, 5 214 216 218 22 222 19
2 MBPD 2,8 2,4 2, As Ethane Balances Tighten, USGC Markets Will Need to Economically Dispatch Ethane From the Bakkens West of Marcellus/Utica NGL Extraction Capability vs Demand Bakken ATEX New Mexico Gulf Coast Rockies Midcont TX Inland Ethane Demand Bakken Rockies Cost of Delivering Ethane to Market 3 /gal 1,6 1,2 ATEX Midcon New Mex 15-18 /gal 14-2 /gal 8 4 214 216 218 22 222 TX Inland Gulf Coast 8-11 /gal
As Ethane Demand Grows, Ethane Balances Should Tighten Even at High Stock Levels Days 5 Ethane Days-of-Supply for Different Commercial Inventory Levels 6 MM Bbls 5 MM Bbls 4 MM Bbls 4 3 2 1 217 218 219 22 221 222 21
The Marginal Supply for Ethane Will Set the Value for Mt. Belvieu Ethane in the Future Premium Needed to Clear Fees from the Bakken and the Rockies. Premium of 15 to 25 /gal Premium of 25 to 3 /gal Forward Ethane Frac Spread Curve is Still Discounted /gal 16 Forward Curve of Mt. Belvieu Ethane Frac Spread 14 Equivalent to Btu Value of Henry Hub Equivalent to Btu Value of Henry Hub Equivalent to Btu Value of Henry Hub 12 1 8 6 213-216 Mt. Belvieu Value 219-221 Mt. Belvieu Value Post 221 Mt. Belvieu Value 4 Nov-17 Mar-18 Jul-18 Nov-18 Mar-19 Jul-19 22
In a Tight Ethane Market Can US Ethane Be Competitive? 2 cases were examined based on the assumption that naphtha cracking in Asia sets the global price of polyethylene (PE). Case 1 exporting US PE from ethylene derived from ethane cracking to Asia vs producing PE in Asia from ethylene derived from naphtha cracking in Asia. Case 2 exporting US ethane to Asia to produce PE vs producing PE in Asia from ethylene derived from naphtha cracking in Asia. In a tight US ethane market, our analysis indicated the following: Case 1 -- US PE derived from US ethane cracking will be competitive with ASIA PE derived from naphtha cracking as long as crude prices stay above $3/Bbl. Case 2 -- Exporting ethane to Asia to produce PE remained competitive with ASIA PE derived from naphtha cracking as long as crude prices stay above $5/Bbl. 23
Although Ethane s Mt. Belvieu Value Will Improve, More Price Volatility is Likely. Hurricane Harvey initially shut down 62% of US ethylene capacity. Reduced ethane cracking by 79 MBPD. Resulted in a 2% drop in ethane prices. Under normal circumstances, ethylene plant outages can cause wide swings in ethane cracking volumes this trend will increase. MBPD 4 35 3 Range of Ethane Cracking That Could be Affected by Outages from 216 to 22 Max Avg Min 25 2 15 1 5 Max Avg Min 216 217 218 219 22 24
Shifting Ethane Supplies and Logistical Bottlenecks Will Propel Ethane s Liftoff West of Marcellus/Utica ethane balances tighten from 218-222 as demand fully kicks-in. Marcellus/Utica will remain in surplus. Higher Mt. Belvieu ethane prices and frac spreads will benefit producers and gas processors West of Marcellus/Utica. Domestic & international petrochemical markets should be able to absorb higher US ethane prices of the magnitude presented today. For USGC ethylene producers, tighter ethane supplies and higher prices present challenges: Over time, must economically dispatch ethane from the Bakken. Might have to contract for transportation to secure supplies. Expect more price volatility ethylene plant outages to cause wide swings in ethane demand storage becomes more critical. Major threat to ethane s liftoff delays in completing new crackers. 25
Thank You Questions? 26