NGL s Markets Beyond Mont Belvieu

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NGL s - Spring 2012 Wandering in the Wilderness Looks like we have a way to go to reach the Promised Land of Orderly Markets again! $5.00 $4.00 $3.00 $2.00 $1.00 $- $(1.00) $(2.00) $(3.00) Ethane Frac Spread $/Mmbtu Frac Spread @Opal Frac Spread @Conway

NGL s - Spring 2012 Wandering in the Wilderness Pressure on midcontinent NGL s as inventory builds 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% NGL Barrel as % of WTI FOB Cushing 20% Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 MB Basis Conway Basis Linear (MB Basis) Linear (Conway Basis)

NGL s - Spring 2012 Long Term Survival Guide The NGL Commandments: Surplus NGL should seek Mont Belvieu Export markets will handle supply that cannot find a home here

Pipeline Expansions Underway All Heading to Mont Belvieu Newly announced Source: Oil & Gas Journal, May 7, 2012 *In development/construction

What Will They Find There? Mont Belvieu: Storage Over 170 million barrels capacity; space for 2+ months of daily NGL production Fractionation Capacity Capacity for 43% of US NGL production Markets?

Mont Belvieu Markets The Promised Land for Ethane 60% Ethane for Ethylene Production: % of Feedstock Market 2,500 Total Feedstock Market 50% 40% 30% 20% 10% 0% C2 C3 NC4 C5+ Gasoil 2004-2007 Avg 2009-2012 Avg 2,000 1,500 1,000 500 0 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Total demand still 191M BPD less than 2004 Ethane produces more ethylene with fewer pounds of feedstock

Mont Belvieu Ethane for Ethylene - Outlook Expansions under way will add 60-80M BPD demand to the area by 2013 New units planned for 2017 could add 200M BPD more Most are reachable via Mont Belvieu, but Ethylene demand increase: 950M BPD 2010 1.2 million BPD by 2015 West Texas barrels can access most of these without coming there

Mont Belvieu Propane Already Long Seeing price pressure: 90% Propane Price as % of WTI 80% 70% 60% 50% 40% 30%

Beyond Mont Belvieu Propane Heading Offshore Already Rising Inventories and Exports: 200 180 160 140 120 100 80 60 40 20 0 Jan-2009 Mar-2009 Propane Exports Mont Belvieu 000 BPD May-2009 Jul-2009 Sep-2009 Nov-2009 Jan-2010 Mar-2010 May-2010 Jul-2010 Sep-2010 Nov-2010 Jan-2011 Mar-2011 May-2011 Jul-2011 Sep-2011 Nov-2011 Jan-2012 Terminal Capacity Booked through 2013 Prices will settle at levels that encourage buying for winter Source: EIA

Mont Belvieu Propane Outlook for the Next Barrel Near term petrochemical demand probably flat Low ethane prices make propane a hard sell for ethylene feedstock Projected surpluses are encouraging development of on purpose propylene production Demand in other sectors flat to falling: High price relative to gas, warm weather have levelled demand in other domestic sectors Unless motor fuel demand grows, limited growth seen here

Mont Belvieu Butane Also switching from imports to exports: Source: Waterborne LPG Report, April 26, 2012

Mont Belvieu Gateway to Global Markets Current options for propane & butane heading to Mont Belvieu are storage or export Unlike in the US, international markets use propane and butane mixes (LPG) as a gas substitute What are these markets like?

International Markets Overview Global LPG Chemical Industrial Refinery/Agricultural Residential Vehicle Fuel 9% 6% 24% 13% 48% 16

International Markets Overview N. America ex USA - Canada & Mexico Canada Petchem & Other Residential/Commercial Exports Mexico Farming & Industry Vehicle Fuel Commercial Residential 9% 28% 10% 13% 63% 64% 13% 17

Propane (LPG) Demand USA Different from the Rest of the World USA Residential Industrial/Vehicle Fuel/Retail Agricultural Commercial Chemical 5% 31% 45% 9% 10% 18

International Markets Factors That Drive Prices Domestic Price Subsidy Levels Domestic Demand Domestic Supply Domestic Market Prices Import/Export Volumes to Balance Domestic Markets International Market Prices 19

International Markets Global Market Factors This is the marginal barrel in the LPG market The price for the last barrel sold is set here Premium (less price-sensitive) demand grows with GDP supply grows with drilling Price sensitive demand (aka chemicals) picks up the surplus Prices fall until: Premium demand growth absorbs supply Chemical capacity expands enough to increase baseload demand and raise feedstock prices Producers reduce optional output or energy production falls 20

International NGL/LPG Markets Primary Trade Routes for Waterborne Shipments About 1.6 to 1.8 Million BPD (4.4 million metric tons/month) of LPG moves in the international cargo markets nearly 20% of global LPG supply Surplus in Atlantic Basin and Middle East Clears to Highest Price Market at the Time Based on Arbitrage 21

International LPG Trade Patterns 10 days 5 days 16 days 21 days 14 days 3 days West of Suez East of Suez Traditional moves are from the MidEast to Asia and West Africa/North Sea to Europe. Moves to/from U.S. only when arb window is open. 22

International LPG Who s Buying? April 2012 Destinations 23

International LPG Trade Patterns Pricing Points Middle East Saudi CP (contract price) North Sea BP CP Atlantic Basin (includes West Africa, Algeria, Central and South America): Price reference = Mont Belvieu 24

International LPG Importance of Mont Belvieu to Global Markets Global clearing market Highest overall storage capacity 2 terminals Most transparent pricing Usually considered market of last resort for global sellers Is currently a supply source since we are long LPG prices are low enough to attract chemical buyers replacing naphtha with LPG But, these barrels reduce costs for other ethylene producers who compete with US 25

International Markets Correlation Between Major Markets - Propane 200.00 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 - Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 MB Propane Saudi Propane Correlation Coefficient 2007 to Apr 2011 =.87 Saudi CP vs. Mont Belvieu 26

Section 4 International Markets Propane Big Change in Correlations in the Past Year 2.50 2.00 US $/Gallon 1.50 1.00 0.50 Mont Belvieu switching from price setter to price taker? 0.00 Saudi Arabia CP MB CPG Algerian CP Correlation Coefficients (R 2 ) = Saudi CP to MB.62 Algerian CP to MB.46 27

International Markets Waterborne LPG - Shipping Oceangoing Vessels Can hold up over 600,000 Bbl. (75,000 tonnes) Big terminals have fully refrigerated storage 28

International Markets Waterborne LPG How Trades Work Pricing depends on destination and contract terms Atlantic Basin usually OPIS Mont Belvieu based +/- a differential Asia usually based on Saudi CP +/- a differential Buyer can hedge by selling in the destination market during the lifting window Pricing usually determined when the cargo is lifted; average of the day before, day after, and day of lifting; some cargoes have 5 day pricing windows Hedge sales can move the markets due to the volume involved 29

International Markets Waterborne LPG Trends Export terminals are being expanded to handle more cargoes (2 nd half 2012, 2013) Expansion of the Panama Canal in 2014 will shorten the distance to Asia from the US Gulf Coast Japan is a premium market But, Asian market prices may be lower if more NGL is produced by LNG facilities in Australia Race to the bottom for prices if domestic demand does not grow 30

Mont Belvieu What About C5+? $2.60 $2.40 $2.20 $2.00 $1.80 $1.60 $1.40 Diluent Sale WTI @ Cushing In Upper Plains and Rockies a new market commandment is emerging Strong demand for diluent in Canadian syncrude blending is pulling these barrels north for producers with access to rail Can blend some butane into these barrels

C5+ Demand as Diluent Moving South to North Southern Lights line can bring 180 M BPD into the market via pipeline; rail supply coming from other places goes directly to Canada; US Gulf Coast barrels can come via Capline pipeline from St. James, LA terminal to Chicago for staging on Southern Lights From Gulf Coast

C5+ Demand for Diluent Longer Term Views Outlook for crude prices >$70 Bbl. FOB Canada supports continued development in the oilsands High costs of coking projects make diluent blending attractive as long as supply can be found Diluent is about 33% of a dilbit (diluted bitumen) barrel can afford to pay WTI+ prices Tariffs on Southern Lights should fall as throughput volumes rise Kinder Morgan export line to Western Canada provides an outlet for diluent other than recycle from US refiners using Canadian crude

Beyond Mont Belvieu Challenges Ahead Costs to access this hub from other regions are $6- $12/barrel much higher than in the past Will markets connected here grow enough to accommodate the volume heading here at a price that continues to be attractive? It s the best outlet to global markets for propane and butane surpluses outside of the Marcellus But, ethane demand is growing in other areas (Texas Gulf Coast, Louisiana) with direct access to shale production Demand pull for C5+ and some butane is north, not south the direct sales route may be better than circulating in and out of the hub 34