mid stream industry in texas 2018: a year with some...

MID STREAM INDUSTRY IN TEXAS2018: a year with some surprises2019-2020: more surprises likely?

MARCH 5-6, 2019TXOGA ANNUAL PROPERTY TAX CONFERENCE

economic circumstances

low crude/low gas

high crude/low gas

low crude/high gas

Slide # 2

variations in economic circumstances:THE GREAT CIRCLE OF LIFE

FOR MIDSTREAM COMPANIES

Petral Consulting CompanyKNOWLEDGE TO BRIDGE THE GAP

copyright © 2019; all rights reservedwww.petrall.com

crude oil & refined

products

SLIDE # 3

midstream industry:the bulls eye at the center of a GROWING vortex

ethylene

international

natural gas



Midstream:integratinghorizontally

USA petroleum products exports:quarterly trends (2017-2018)

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thou

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refined products crude oil NGL

Slide # 4



ECONOMIC SURPRISES? strong & rising crude oil

prices until Q4 steady gas prices until Q4;

prices began to retreat in January

weak ethylene prices after Q1

NONE WERE “SURPRISES”

MARKET SURPRISES?» start up delays for new

& ethylene polyethylene facilities

» ethane demand growth slower than expected

» delayed completion of Mariner East 2

» NONE WERE TRULY SURPRISES

» NGL pipelines & fracs ran full & on allocation

Slide # 5

2018: A YEAR OF SURPRISESeconomic, market, and political



DOMESTIC POLITICS immigration debate boiled

over (again) EPA revoked more than 100

regulations (2017-2018) GOP lost control of House

of Representatives but increased control of US Senate (unless you discount RINO)

INTERNATIONAL GEOPOLITICS» USA-China trade war» Saudi Arabia’s

Khashoggi crisis» Trump gives waivers for

Iranian crude buyers» IMO mandate moves to

the front burner: global shipping industry began converting to low sulfur fuels

Slide # 6

2018: A YEAR OF SURPRISESeconomic, market, and political



USA-China trade war:» exports of crude oil and propane to China were zero after

August; both are fungible commodities & Asia/Pacific trade patterns adjusted; tariffs had limited impact on US crude or propane

Trump grants waivers for 8 major buyers of Iranian crude» after months of sending strong signals that an array of financial

sanctions would be imposed on Iran, President Trump, at the 11th hour, provided waivers for 8 major crude oil buyers

» waivers contributed to the erosion of bullish sentiment and sparked the 40% decline in global crude oil prices in Sep-Dec. NYMEX traders scrambled to cover short positions in January.

Slide # 7

2018 INTERNATIONAL POLITICAL SURPRISES:consequences of significance for midstream



International Maritime Organization:» IMO is an agency of the United Nations; IMO has no

independent enforcement authority. Enforcement is delegated to flag states.

» Each merchant ship flies a flag of the owner’s choice. Ship owners follow the rules and regulations of their respective flag states. Flag States are the only countries that have jurisdiction to enforce IMO regulations.

» When IMO issued sulfur regulations; a review of global LSFO s-d was required. IMO contracted with various consultancies to evaluate global LSFO supply.

Slide # 8




Impact of LSFO regulations on midstream companies» Conclusions of IMO review studies: 1) global refining industry

has the necessary capacity to produce LSFO 2) regulations will not causing chronic surpluses of any other refined product

» IMO LSFO regulations become effective January 1, 2020.

Did IMO LSFO regulation contribute to global collapse in gasoline/crude oil price differentials in Q4 2018?» Simultaneous with the collapse in global crude oil prices, motor

gasoline price premiums v. international crude prices were negative in Nov/Dec/Jan/Feb & remained at zero in early March. LS diesel fuel price premiums surged to record highs.

Slide # 9




price trends for WTI-Cushing & Henry Hub:history & forecast (December 2018)

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WTI forecast WTI actual hi case HENRY HUB

Slide # 10



price trends for ethane & propane+ :West TX gas plant netback values (Jan 2019)

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actual forecast HENRY HUB ethane

Slide # 11



Take or pay contracts complicategas plant netback & ethane rejectioncalculations.

WTI-Midland & dated Brent:trends in prices and differentials (2017-2019)

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WTI Midland dated Brent Brent - WTI M

Slide # 12



crude oil production in TX & NM:trends in quarterly supply growth (2017-2020)

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mm

b/d

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per

yea

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Texas New Mexico annualized growth

Slide # 13



crude oil pipeline expansion projectsexpected on-stream dates

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Sunrise Sem-Red EPIC M/S Gray Oak Cactus II PP JV

Slide # 14



associated gas pipeline expansion projectsexpected on-stream dates

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mm

b/d

GC Express Pecos Trail BW Sempra

Slide # 15



new crude oil pipelines:» combined capacity = 3.5 mm b/d» at 1.0-1.5 mm b/d per year growth, new pipelines cover

2.25-3.5 years of supply growth

new gas pipelines:» Gas to oil ratios in TX & NM are 3 MCF/bbl» 3 mm b/d of new oil production (2 years growth) yields 9

BCFD of new associated gas production; 6 BCFD of new gas pipeline capacity cover less than 2 years of supply growth

Slide # 16

crude oil & associated gas pipelines:overview of new capacity vs. supply growth



critical elements of midstream infrastructure:» raw mix pipeline capacity between West TX the TX

Gulf Coast became a constraint in Q2 2018» raw mix fractionation capacity in the Upper TX Gulf

Coast became a constraint in Q2 2018

ethylene producers:» 2 maverick ethylene producers took advantage of

fractionation constraints & bought raw mix for use as cracker feed; a temporary band aid

Slide # 17

NGL midstream infrastructure:upstream supply growth drivesmidstream infrastructure requirements



TX+NM NGL production | ethane & propane+history & forecast

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ethane propane+ ethane rejection annualized growth

+

Slide # 18



NGL raw mix pipeline expansion projectsexpected on-stream dates

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Shin Oak Grand Prix LS express

Slide # 19



NGL raw mix fractionation projectsexpected on-stream dates

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Lone Star P66 Targa EPROD

Slide # 20



Slide # 21

highlights, headlines & sound bites

CRUDE OIL & NATURAL GAS INFRASTRUCTURE:» 2018: WTI-Midland crude oil prices slipped to deep

discounts versus WTI-Cushing & international benchmarks; projects to expand crude oil pipeline capacity were already underway

» 2019-2020: Projects to expand crude oil pipelines will increase capacity 3.5 million b/d by late 2020; crude oil production growth rates will recover to 1+ mm b/d. Projects to expand gas pipelines will increase capacity by 6 BCFD by mid 2020.



Slide # 22


NGL INFRASTRUCTURE:» 2018: NGL supply growth in 2h 2017 & 1h 2018 exceeded

expectations; some raw mix pipelines reached full capacity rates; fractionation throughput rates in Mont Belvieu also reached capacity limits.

» projects to expand NGL pipelines & fractionation capacity were already underway by mid-2018.

» 2019-2020: Additional pipeline and fractionation capacity will allow gas plants in West TX/NM to run at full recovery rates. NGL supply growth will rebound.

» Midstream industry will begin the next wave of infrastructure expansion projects in 2021-2022.



Slide # 23


INFRASTRUCTURE EXPANSION BEYOND MONT BELVIEU:» 2021-2024: ExxonMobil Chemical and SABIC will start

up a basic olefin/polyolefin complex at Corpus Christi in 2023 or 2024.

» EPIC Midstream will complete construction of a raw mix pipeline & fractionator in 2019-2020. The fractionator will provide ethane feed to the JV chemical complex.

» other NGL components that are surplus to local markets will be pumped to storage in Markham Dome or Mont Belvieu.

» Projects in Corpus Christi will spark a change in how the industry defines “Mont Belvieu”.



Slide # 24


MIDSTREAM MOVES DOWNSTREAM:» ethylene export terminals: Enterprise Products

Company plans to build a merchant ethylene export terminal (2.2 billion lb/year capacity) & will be in service by late 2019/early 2020

» Targa Resources operates the only existing terminal with a capacity of 660 mm lb/year

» two other ethylene export terminal projects are under consideration but neither has moved beyond the PR/planning stage



mid stream industry in texas 2018: a year with some...

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