us ethane outlook: implications for processors and ethylene producers peter fasullo en*vantage, inc...
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US Ethane Outlook:US Ethane Outlook:Implications for Processors and Ethylene ProducersImplications for Processors and Ethylene Producers
Peter Fasullo
En*Vantage, Inc
Presented to the 84th Annual GPA Convention
March 15, 2005
22
BackgroundBackground
Just 2 years ago, US gas processors faced many challenges, Just 2 years ago, US gas processors faced many challenges,
especially for ethane.especially for ethane.
Lingering effects of an economic recessionLingering effects of an economic recession
High gas prices relative to crude oilHigh gas prices relative to crude oil
Poor processing margins – considerable ethane rejectionPoor processing margins – considerable ethane rejection
A depressed petrochemical environmentA depressed petrochemical environment
Fears that US ethylene industry would pack up and leaveFears that US ethylene industry would pack up and leave
33
CurrentlyCurrently
Ethane is back!!!Ethane is back!!!
Economy is strongerEconomy is stronger
Petrochemicals have reboundedPetrochemicals have rebounded
Processing margins are strongProcessing margins are strong
Ethane extraction is good Ethane extraction is good across all processing regionsacross all processing regions
But how long But how long will it last?will it last?
44
Topics to be covered todayTopics to be covered today
Review the analysis from our NGL study completed in Review the analysis from our NGL study completed in February ’04 which forecasted better times for ethane.February ’04 which forecasted better times for ethane.
Examine Examine fundamentals driving ethane fundamentals driving ethane supply/demand and frac spreads. supply/demand and frac spreads.
Present simple bench marks that help indicate whether Present simple bench marks that help indicate whether ethane’s economic conditions will improve or worsen.ethane’s economic conditions will improve or worsen.
Share updated findings regarding the outlook for ethane Share updated findings regarding the outlook for ethane and its implications. and its implications.
55
Why Focus on Ethane?Why Focus on Ethane?
Major NGL component – constitutes 37% of the US NGL barrel. Yields have fluctuated from 34% to 46% when processing economics dictated.
Ethane extraction mostly discretionary - sensitive to economic conditions.
Acts as the “canary in the mine shaft” - strong ethane frac spreads indicate a strong processing environment - especially for cryogenic plants.
Ethane has only one major end use - ethylene feedstock, competing with other NGL & petroleum feedstocks.
Ethylene industry needs ethane - constitutes 45% of their feedstock mix.
But ethane’s usage has swung from 38% to 51% of the mix depending on feedstock economics and ethylene plant utilization rates.
Overall, ethane supply/demand has demonstrated swings of 100 MBPD or more in a market averaging around 750 MBPD.
66
Ethane supply & demand fundamentals appear Ethane supply & demand fundamentals appear simple, but they are complex and volatile.simple, but they are complex and volatile.
Key market drivers influencing ethane cracking and extraction:
Ethane Cracking
Ethylene business cycles
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
US Ethane Supply & DemandUS Ethane Supply & Demand
5-Year Average5-Year Average
SupplySupply DemandDemand
SourceSource MBPDMBPD %% End UseEnd Use MBPDMBPD %%
ProcessingProcessing 680680 8989 EthyleneEthylene 751751 9898
RefiningRefining 8484 1111 Peak Peak ShavingShaving
1313 22
TotalTotal 764764 100100 TotalTotal 764764 100100
77
Our analysis of ethane supply & demand focused Our analysis of ethane supply & demand focused on two primary drivers.on two primary drivers.
Primary DriverPrimary Driver RationalRational InfluenceInfluence
Natural Gas to Crude Price Ratio(Henry Hub Gas/Cushing WTI on a BTU basis)
Gas sets price floor for ethane and petroleum derived feedstocks set the market price.
Processing Margins
Feedstock Economics
US Ethylene Production (as driven by GDP growth)
US ethylene industry consumes virtually all of the ethane extracted from natural gas.
The amount of ethane consumed should increase as ethylene production increases.
But, co-products can affect ethane cracking.
Both being inversely related to the gas to crude price ratio
88
Relative value of gas to crude can affect U.S. NGL Relative value of gas to crude can affect U.S. NGL supply/demand, particularly for ethane.supply/demand, particularly for ethane.
Source: Platts, DOE and En*Vantage
Gas to Crude Price Ratio*(Henry Hub Gas to WTI on a BTU Basis)
1/91 thru 2/05
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
’91-’94: 56%’95-’98: 70%’99-’02: 78% ’03: 103% ’04: 84%
Winter ‘00/’01
Winter/Spring ’03
"Gas Bubble" Mid '80s to Early '90s
End of "Gas Bubble" Late '90s to Now
"The Emergence of Gas Fired Power Plants"
Time period where we focused our study
* Based on 5.8 MM BTU/Bbl
99
NGL frac spreads are inversely correlated to the gas NGL frac spreads are inversely correlated to the gas to crude price ratio.....to crude price ratio.....
NGL Frac Spreads (Mt Belvieu minus Henry Gas)
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
Q1'99
Q2'99
Q3'99
Q4'99
Q1'00
Q2'00
Q3'00
Q4'00
Q1'01
Q2'01
Q3'01
Q4'01
Q1'02
Q2'02
Q3'02
Q4'02
Q1'03
Q2'03
Q3'03
Q4'03
Q1'04
Q2'04
Q3'04
Q4'04
NG
L F
rac
Sp
read
cp
g
40%
60%
80%
100%
120%
140%
Gas
to
Cru
de
Rat
io %
Ethane Frac Spread
Gas to Crude Ratio
Propane Frac Spread
Butane+ Frac Spread
Source: Platts & En*Vantage
1010
....and that inverse relationship is reflected in the ....and that inverse relationship is reflected in the amount of ethane extracted. amount of ethane extracted.
Trough Conditions
Source: DOE and En*Vantage
US Ethane Extraction versus Gas to Crude Price Ratio
R2 = 0.52
500
550
600
650
700
750
800
40%50%60%70%80%90%100%110%120%130%140%
Gas to Crude Price Ratio
Eth
ane
Ext
ract
ion
MB
PD
Q4 '00
Q3 '00
Q2 '00
Q1 '00
Q4 '99
Q3 '99
Q2 '99
Q1 '99
Q1 '01
Q2 '01Q3 '01
Q4 '01
Q1 '02Q2 '02
Q3 '02Q4 '02
Q1 '03
Q2 '03
Q3 '03
Q4 '03
Q4 '04
Q3 '04
Q2 '04
Q4 '01
Trough Conditions
Qrtly Ethane Extraction Volumes: EIA: Q1'99 thru Q4'04
1111
Ethane extraction closely tracks ethane cracking, influenced by the gas to crude price ratio.
Ethane Cracking & Ethane Extraction vs Gas to Crude Ratio
350
400
450
500
550
600
650
700
750
800
Q1'99
Q2'99
Q3'99
Q4'99
Q1'00
Q2'00
Q3'00
Q4'00
Q1'01
Q2'01
Q3'01
Q4'01
Q1'02
Q2'02
Q3'02
Q4'02
Q1'03
Q2'03
Q3'03
Q4'03
Q1'04
Q2'04
Q3'04
Q4'04
Eth
ane
Ext
ract
ion
or
Cra
ckin
g M
BP
D
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
Gas
to C
rud
e R
atio
-- H
enry
Hu
b/W
TI
Ethane Cracking
(excluding refinery ethane)
Gas to Crude Ratio
Ethane Extraction
Source: Hodson, EIA, En*Vantage
1212
The gas to crude price ratio can influence the cracking of The gas to crude price ratio can influence the cracking of ethane versus heavy feedstocks. But what is the relationship ethane versus heavy feedstocks. But what is the relationship between ethylene production and ethane cracking?between ethylene production and ethane cracking?
U.S. Ethylene Feedstock Consumption(Q1 '99 to Q4 '04)
0
100
200
300
400
500
600
700
800
Q1'99
Q2'99
Q3'99
Q4'99
Q1'00
Q2'00
Q3'00
Q4'00
Q1'01
Q2'01
Q3'01
Q4'01
Q1'02
Q2'02
Q3'02
Q4'02
Q1'03
Q2'03
Q3'03
Q4'03
Q1'04
Q2'04
Q3'04
Q4'04
Fee
dst
ock
s C
rack
ed M
BP
D
20%
40%
60%
80%
100%
120%
140%
Gas
to
Cru
de
Pri
ce R
atio
Source: Hodson, En*Vantage
Ethane (excl. refinery ethane)
Heavy Feeds(naphthas & gas oils)
Gas to Crude Ratio
Propane
N-Butane
1313
As ethylene production increases, ethane cracking increases As ethylene production increases, ethane cracking increases and the flexibility to swing ethane usage diminishes.and the flexibility to swing ethane usage diminishes.
E th a n e C ra c k in g v e rsu s
E th yle n e P ro d u c tio n
(E xc lu d in g R e fin e ry
E th a n e )
4 5 05 0 0
5 5 06 0 0
6 5 07 0 0
7 5 08 0 0
4 7 .
0
4 8 .
0
4 9 .
0
5 0 .05 1 .
0
5 2 .
0
5 3 .
0
5 4 .
0
5 5 .
0
5 6 .
0
5 7 .
0
5 8 .
0
5 9 .
0
E th yle n e P ro d u c tio n
(b illio n lb /yr)
Ethane Cracking versus Ethylene Production(Excluding Refinery Ethane)
450
500
550
600
650
700
750
800
47.0 48.0 49.0 50.0 51.0 52.0 53.0 54.0 55.0 56.0 57.0 58.0 59.0 60.0
Ethylene Production (billion lb/yr)
Eth
ane
Cra
ckin
g M
BP
D
Effective Op Rate: 79.0% 80.7% 82.3% 83.9% 85.5% 87.1 % 88.7% 90.3% 91.9% 93.5% 95.2%
Qrtly Ethane Cracking Volumes: Hodson: Q1'99 thru Q4'04 Annualized Qtrly Ethylene Production: Hodson & CMAI
Q1 ’04; 93% Q2 ’04; 92%
Q3 ’04; 73%
Q4 ’04; 76%
Q1’01; 143%
Q2’01; 97%
Q1’03; 112%
Q2’03; 108%
Q3’03; 96%
Q4’03; 94%Q1’02; 63%
Q2’02; 75%
Q3’02; 65%
Q4’02; 82%
Q1’00; 51%
Q2’00; 69%
Q3’00; 78%
Q4’00; 96%
Q4 ’99; 61%
Q3 ’99; 69%
Q2 ’99; 71%
Q1 ’99; 79%
Quarter, Gas to Crude Ratio
Trough conditions
1414
The shift in US ethylene capacity, the past few years, is The shift in US ethylene capacity, the past few years, is estimated to shift the ethane cracking range downwards by estimated to shift the ethane cracking range downwards by about 15 to 20 MBPD.about 15 to 20 MBPD.
100.0
5.3
45.1
38.6
11.0
%
100.0
10.3
47.3
32.6
9.8
% B Lb/YrB Lb/Yr
60.1
3.2
27.1
23.2
6.6
20002004
1 Capacity numbers exclude ethylene plants that are mothballed. Source: Hodson and En*Vantage
62.0Total Effective Capacity
29.3Flexi Crackers
6.1Purity Ethane Crackers
6.4Heavy Feed Crackers
20.2E/P Crackers
Effective Capacity1
Basic Types of Ethylene Plants
Shift in US Ethylene Plants
100.0
5.3
45.1
38.6
11.0
%
100.0
10.3
47.3
32.6
9.8
% B Lb/YrB Lb/Yr
60.1
3.2
27.1
23.2
6.6
20002004
1 Capacity numbers exclude ethylene plants that are mothballed. Source: Hodson and En*Vantage
62.0Total Effective Capacity
29.3Flexi Crackers
6.1Purity Ethane Crackers
6.4Heavy Feed Crackers
20.2E/P Crackers
Effective Capacity1
Basic Types of Ethylene Plants
Shift in US Ethylene Plants
1515
Our analysis indicates the following implications for ethane Our analysis indicates the following implications for ethane demand at different levels of US ethylene production.demand at different levels of US ethylene production.
1 Excludes Refinery Ethane
1601301006530100
Flex. Range
79.082.285.588.791.995.298.4
49515355575961
575610645675710740775
655675695710725745775
TrendlineMax.
495545595645695735775
Min.(%)(B Lb/Yr)
Ethane Cracking Levels1
(MBPD)Effective
Utilization Ethylene
Production
1 Excludes Refinery Ethane
1601301006530100
Flex. Range
79.082.285.588.791.995.298.4
49515355575961
575610645675710740775
655675695710725745775
TrendlineMax.
495545595645695735775
Min.(%)(B Lb/Yr)
Ethane Cracking Levels1
(MBPD)Effective
Utilization Ethylene
Production
1. Higher ethylene production requires greater ethane cracking and the flexibility to swing ethane volumes diminishes.
2. Gas to crude price ratios also influence ethane cracking levels, particularly when ethylene industry utilization rates are between 80% to 90%.
3. 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.
1616
To support greater ethane cracking levels, the ethane “frac” To support greater ethane cracking levels, the ethane “frac” spread increases to encourage more ethane extraction.spread increases to encourage more ethane extraction.
Source: Platts, En*Vantage and Hodson
Mt. Belvieu Ethane Frac Spread vs Ethane Cracking
0
2
4
6
8
10
12
14
16
18
20
22
24
500 525 550 575 600 625 650 675 700 725 750 775 800
Ethane Cracking MBPD
Fra
c S
pre
ad
cp
g
When cracking levels exceed 675 MBPD, ethane fracs have a greater probability to expand rapidly, particularily when gas to crude ratios are below 90%
129%
113%94%
81%
75%
94%
120%69%
107%
89%
68%65%
92%60%
73%
68%
73%
82%
59%
52%
73%
93%
92%
Q1 '99 thru Q4 '03
Q1 '04 thru Q4 '04
Gas to Crude Ratio
77%
Q1 '04
Q2 '04
Q4 '04
Q3 '04
So what does the future So what does the future hold for ethane cracking hold for ethane cracking
and extraction?and extraction?
1818
Back in February 2004, we felt that economic conditions going Back in February 2004, we felt that economic conditions going forward would provide a better environment for ethane cracking.forward would provide a better environment for ethane cracking.
At 53-55 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 ethane cracking swings between 500 -700 MBPD with a bias to minimize ethane cracking as long as co-product production is not an inhibitor
Ethane cracking swings between 500 -700 MBPD are possible with a bias to maximize ethane cracking
Ga
s t
o C
rud
e P
ric
e R
ati
o
Be
low
9
0%
Ab
ove9
0%
Ethylene Production
Below 53 B LB/YR Above 53 B LB/YR
High probability of sustainable ethane cracking at or above 650 MBPD
1919
Entering a new era where crude oil supplies are constrained Entering a new era where crude oil supplies are constrained and high prices are the norm.and high prices are the norm.
2020
A paradigm shift to tighter crude markets provides lower gas to A paradigm shift to tighter crude markets provides lower gas to crude price ratios and favorable conditions for ethane.crude price ratios and favorable conditions for ethane.
Gas to Crude Price RatioHenry Hub Gas to WTI (BTU Basis)*
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
150%
160%
170%
2003
2004
2005
Expected Range of '05 Gas to Crude Ratio
* 5.8 MM BTU/Bbl
2004
2005
2003
Source: En*Vantage, ICE, DOE
Period Gas to Crude Ratio Gas Discount to CrudeThru 3/8 % $/MM Btu02 YTD 66% $1.1803 YTD 109% ($0.51)
04 YTD 96% $0.23 05 YTD 75% $2.12
2121
Assuming ethylene production tracks GDP growth rate at a 0.9 Assuming ethylene production tracks GDP growth rate at a 0.9 multiple, ethane cracking could reach 800 MBPD by 2010.multiple, ethane cracking could reach 800 MBPD by 2010.
Source: History- CMAI, En*Vantage and Hodson; Est & Forecast - En*Vantage
715
735
755
770
790
805
57.5
58.7
59.7
60.8
61.9
63.0
1.4%
2.2%
1.8%
1.8%
1.8%
1.8%
3.2%
2.5%
2.0%
2.0%
2.0%
2.0%
2005
2006
2007
2008
2009
2010
US Ethane Cracking2
US Ethylene Production
US Ethylene AGR
US GDP AGR
Period
2 Excludes Ref. Ethane1 1999 Production
69256.710.7%4.0%2004
688
722
642
673
613
55.81
55.4
50.3
52.1
51.2
4.0%
-0.8%
-9.2%
3.4%
-1.0%
3.0%
3.7%
0.2%
2.1%
3.1%
Q1 ’85 – Q4 ’99
2000
2001
2002
2003
MBPDBillion Lbs/Year
Forecast of Ethylene Production and Ethane Cracking
715
735
755
770
790
805
57.5
58.7
59.7
60.8
61.9
63.0
1.4%
2.2%
1.8%
1.8%
1.8%
1.8%
3.2%
2.5%
2.0%
2.0%
2.0%
2.0%
2005
2006
2007
2008
2009
2010
US Ethane Cracking2
US Ethylene Production
US Ethylene AGR
US GDP AGR
Period
2 Excludes Ref. Ethane1 1999 Production
69256.710.7%4.0%2004
688
722
642
673
613
55.81
55.4
50.3
52.1
51.2
4.0%
-0.8%
-9.2%
3.4%
-1.0%
3.0%
3.7%
0.2%
2.1%
3.1%
Q1 ’85 – Q4 ’99
2000
2001
2002
2003
MBPDBillion Lbs/Year
Forecast of Ethylene Production and Ethane Cracking
2222
• Each processing region responds to economic signals to throttle up or down
ethane extraction to meet ethane demand. • Analysis of each region shows that the Rockies is not always the swing producer. Upper MW, LA & TX GC often provide the swing.
Source: EIA & En*Vantage
Data indicate that the processing industry can ramp up ethane extraction to near 780 MBPD, which supports 61 billion lb/yr of ethylene production.
5 Year Avg Range of Regional Ethane Extraction Thousand Barrels Per Day
Region Avg Min Max Max - Min Swing Swing as % of AvgUpper MW 34 19 42 23 68.5%LA. G.C. 107 71 131 60 55.7%Texas G.C. 55 40 63 24 42.6%Rocky Mtn. 85 67 98 30 35.3%Mid Cont 81 61 94 33 40.6%Texas Inland 222 190 237 47 21.4%New Mexico 98 88 105 17 17.2%Other 7 4 9 5 NATotal Ethane 690 540 779 239 34.6%
2323
La GC and Rockies will be the incremental producers of ethane in the ’05 to ’10 time period.
Source: DOE, En*Vantage
U.S. Regional Ethane Production Outlook(MBPD)
130 111 117 82 115 136217
98 100 9799
106109
102
302274 281
245
257
258
8585 87
89
99106
12795
113 110
101
103101
94
251
0
100
200
300
400
500
600
700
800
2000 2001 2002 2003 2004 2005 2010
MB
PD
La Gulf Coast New Mexico Texas Rockies Mid Cont. Other
18%
14%
42%
12%
13%
13%
16%
40%
15%
16%
27%
13%
32%
16%
12%720
618
805
Forecast
680715692 699
2424
Our study demonstrated how ethylene production along with Our study demonstrated how ethylene production along with the gas to crude price ratio can estimate ethane supply & the gas to crude price ratio can estimate ethane supply & demand and the amount of swing that can be expected.demand and the amount of swing that can be expected.
Ethylene Demand
Ethylene Production
Feedstock Capabilities
Ethane Demand
GDP GrowthEffective
Operating RateComposition
of Plants
Gas to Crude Price Ratio
Ethane Frac Spread
Regional Extraction Economics
Regional Ethane
Production
Ethane to Market
Demand Side Factors
Supply Side Factors
2525
In Conclusion:In Conclusion: Ethane is very much alive!!! --- barring a recession.Ethane is very much alive!!! --- barring a recession.
Conditions should remain favorable for ethane cracking and extraction, Conditions should remain favorable for ethane cracking and extraction, even with moderate ethylene production growth:even with moderate ethylene production growth: Ethane frac spreads should remain strong to encourage extraction in all Ethane frac spreads should remain strong to encourage extraction in all
processing regions.processing regions.
This is not the time for processors to retreat from cryogenic plants.This is not the time for processors to retreat from cryogenic plants.
A tighter crude market keeps gas to crude price ratios below 90%.A tighter crude market keeps gas to crude price ratios below 90%.
As ethylene production grows, ethane cracking increases and the As ethylene production grows, ethane cracking increases and the flexibility to switch off ethane diminishes. flexibility to switch off ethane diminishes.
By 2010, ethane production should reach and sustain the 800 MBPD By 2010, ethane production should reach and sustain the 800 MBPD level, with the Rockies and La Gulf Coast contributing a larger share.level, with the Rockies and La Gulf Coast contributing a larger share.
Ethylene producers need to closely track the regional shift in ethane Ethylene producers need to closely track the regional shift in ethane supplies.supplies.