Reshaping the NGL Value Chain: Challenges and Opportunities

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1 Reshaping the NGL Value Chain: Challenges and Opportunities Presented to the: Platts 3 rd Annual NGL Conference September 24, 2013 Peter Fasullo En*Vantage, Inc

2 2 The Impact of the US Shale Plays: Transforming the US energy landscape and the companies that produce, process and transport hydrocarbons: Revitalizing the US petrochemical and refining industries. Making the US one of the World s lowest-cost energy producers and a net exporter of hydrocarbon products.

3 The Relative Value of Natural Gas to Crude 100% 90% Gas-to-WTI Price Ratio (On a Thermal Basis) vs the BTU Spread between WTI and Gas Gas-to-WTI Ratio $20 $18 Cheap gas and high crude prices are the primary driver for: Gas-to-Crude Ratio... 80% 70% 60% 50% 40% 30% 20% 10% 0% YTD WTI: $31/bbl Gas: $4.55/MM Btu WTI: $74/bbl Gas: $7.84/MM Btu BTU Spread Between WTI and Gas WTI: $85/bbl Gas: $3.77/MM Btu $16 $14 $12 $10 $8 $6 $4 $2 $0 $ per MM BTU The economics to drill rich shale plays. Robust increases in crude, gas and NGLs The low cost position for the US petrochemical to expand. The arbitrage to export hydrocarbon products. 3

4 Shale Plays Transforming the Energy Value Chain Particularly for NGLs Energy Value Chain Upstream Midstream Downstream Refining Gas Liquids (RGLs) Exploration & Production Gas Gathering Rich Gas Natural Gas Condensates Crude Oil Processing & Treating Lean Gas Diluent NGL (raw mix) Transportation NGLs Residue Gas Gas Transportation Stabilization & Splitting Fractionation & Splitting Gas Storage Refining Gas Liquids (RGLs) Purity NGL Transportation NGL Storage Local Gas Distribution Power Generation Power Distribution Refined Products Primary Petrochem. Fuel Uses Industrial Markets Res/Com Markets Power Markets Product Retailing Oil Gathering & Transportation Crude Oil Storage Crude Oil Refining 4 Product Transportation Product Terminals

5 5 The Transformation to a NGL Rich Environment can be Bumpy NGLs are mainly supply driven not demand driven: Processing plants built to service gas producers not end-users. NGL surpluses can occur until markets react. Market expansion can take time. Transportation bottlenecks can develop. Handling NGL market swings can be challenging where adequate storage capacity is lacking. Also, the development of the energy value chain and its timing can influence NGL supply & demand.

6 6 The Vastness of the Shale Plays Require Midstream Assets of Sizable Scale & Scope Large midstream systems are needed and being built to transport, fractionate, and distribute NGLs. Midstream players exercising leverage over producers and end-users to build NGL infrastructure. Focused on getting facilities contractually full than physically full. Requiring transport or pay and frac or pay contacts. Some processing contracts precluding ethane rejection or requiring a certain % of ethane in the y-grade stream. Implications of this midstream leverage: Can lend itself to overbuild NGL infrastructure. Could extend ethane supplies when extraction economics justify ethane rejection.

7 The Impact of Shales on Gas Production & Processing BCFD Gas Production & Processed vs Rig Count Marketed Gas Production Gas Processed Gas Rig Count Oil Rig Count Rig Count 1,600 1,400 1,200 1,

8 Lower 48 Gas Processing Industry as of 1/1/13 Active Plants 550. Inlet Cap. 70 bcfd. 55% cryogenic. Since 2006 added a net 12 bcfd of cap., all cryogenic Ind. Op. Rate 68%. Older plants shutting down. Source: OGJ, EIA and En*Vantage 8

9 9 NGL Extraction Capability Climbing 3,000 2,500 2,000 1,500 1, US NGL Extraction Capability (Thousand BPD) NGL Extraction Capability Avg NGL Extraction NGL extraction capability up 44% (804 MBPD) from 06 to MM BPD in % is ethane, up from 38% in Incremental NGL Bbl contains 50% ethane. Appears extraction capability will reach 2.8 MM BPD in 2013

10 Regional Changes in NGL Extraction Capability (2006 to 2012) +29 Northern Tier Increased Capability: 804 MBPD Upper Midwest +209 Mid-Content Source: EIA and En*Vantage 10

11 Bottlenecks Exposed Between 2006 and 2012 Conway Mt. Belvieu Wide Discounts But, there are more bottlenecks to be resolved. Source: Companies Press Releases 11

12 Gas Processing Additions 2013 to 2020 Another 2.5 to 3.5 BCFD Could Be Announced +0.5 BCFD Northern Tier Announced US GAS Processing Capacity: Upper Midwest BCFD by BCFD Mid-Content +1.2 BCFD +5.4 BCFD (37%) +0.4 BCFD +3.7 BCFD (37%) Another 2.0 BCFD Could Be Announced 12 Source: En*Vantage

13 Regional Changes in NGL Extraction Capability (2013 to 2020) Incremental NGLs: 605 MBPD +140* Northern Tier Incremental US NGLs: 1.02 to 1.52 MM BPD by Upper Midwest NGL extraction 3.7 to 4.2 MM BPD by Mid-Content to * 45 MBPD of Bakken Shale Ethane to Alberta 13 Source: En*Vantage

14 Future NGL Transportation Corridors New Y-Grade Lines Bakken Shale to Mid-Cont. 60 to 135 MBPD. Mid-Cont. to USGC: 543 to 660 MBPD Rockies to West Texas and to Conway: 289 to 415 MBPD. W. Texas to USGC: 580 to 640 MBPD. Marcellus/Utica to USGC: 200 to 400 MBPD (Bluegrass or the KMP/MWE line). WCSB Rocky Mountains San Juan Edmonton/ Ft. Saskatchewan Permian Bakken Shale South Texas Conway Anadarko 14 Arkoma Mt. Belvieu NGL Market Centers (Storage, Fractionation, Pipelines) Aux Sable River Raw NGL Mix Flows NGL Product Flows La Gulf Coast & Offshore Exports New Raw Mix Flows New Product Flows Sarnia Mariner West Marcellus Shale Major Processing Regions Mariner East Europe

15 Implications for Belvieu to Conway Spreads Mt. Belvieu to Conway Price Spreads (Cents per Gal) Ethane Propane N-Butane C5+ Tariff from Midcont. to Belvieu ytd

16 Increases to US Fractionation Capacity US fractionation as of 1/1/ MM BPD (33% at Belvieu) By MM BPD of new capacity will be added: MMBPD on the USGC. 550 MBPD in Marcellus/Utica. 60 MBPD in Bakken Probable that another 200 MBPD of capacity will be built on USGC. Seeing a trend to build new fractionators outside of Mt. Belvieu on USGC ,105 Capacities in MBPD Source: Companies Press Releases 16

17 17 What s Needed to Fill New Fractionators? 1,600 1,400 1,200 1, New Fractionation Capacity vs Incremental NGLs (1000 BPD) 1,505 MBPD (ex Marcellus) Probable New Capacity on USGC 200 MBPD Announced Capacity - Gulf Coast (1,245), Bakken Shale (60) 900 MBPD (1) Transfer of "legacy volumes" from regional fractionators to the USGC; (2) Y-grade pipeline volumes from the Marcellus/Utica. Incremental 605 MBPD NGLs from Texas, New Mexico, Rockies, Mid- Continent, and Bakken Shale 0 New Fractionation Capacity Incremental NGL Extraction

18 Can Additional Ethane Cracking Justify New USGC Fractionators? 18 1,600 1,400 Ethane Supplies From New USGC Fractionators vs Additional USGC Ethane Cracking Capacity (1000 BPD) 1,445 MBPD 1,200 1, New USGC Fractionation Capacity MBPD 780 MBPD 100 MBPD ATEX Ethane 650 MBPD of Ethane from New USGC Fractionators Fractionated Ethane MBPD Additional C2 Cracking Capacity MBPD Additional C2 Cracking Capacity

19 Future Ethane Transportation Corridors WCSB Edmonton/ Ft. Saskatchewan C2 in Raw NGL Mix Flows C2 Batched or Dedicated Flows Mariner West: 50 MBPD of ethane. Mid-2013 Vantage Pipeline: 40 to 60 MBPD of ethane. Q Rocky Mountains Bakken Shale Conway Sarnia Marcellus Utica Mariner East: 40 MBPD of ethane Europe Very possible that an ethane export terminal will be developed on US Gulf Coast San Juan Permian Anadarko South Texas Arkoma Mt. Belvieu Exports 19 River ATEX: 190 MBPD of ethane. Q Ethane Header Systems TX to LA

20 20 Propane Export Destinations and Projects ~258 MBPD of exports in 2013 YTD Far East Mexico: 53 MBPD Central America: Panama Canal expansion 2015 Canada: 23 MBPD Caribbean 21 MBPD 35 MBPD S. America: 41 MBPD US waterborne export capacity for propane on the Gulf Coast could expand to 700 MBPD by NW Europe: 57 MBPD North East Asia 28 MBPD Enterprise completed expanding its HSC fully-ref HD-2 propane export terminal from 4.0 to 7.5 MM bbls/mo. Enterprise is considering another expansion of 2.5 MM bbls/mo. to its HSC terminal by Targa s semi-ref HD-5 propane export capability on the HSC 1 to 1.5 MM bbls/mo. in Q3-12. Targa just begun exporting fully-ref HD-2 propane 2 MM bbl/mo. Expanding by another 2 MM bbls/mo. by Q3-14. Sunoco s Marcus Hook export terminal 25 MBPD, Q3-14. Energy Transfer/Sunoco Logistics/Regency 6 MM bbl/mo. export terminal at Nederland early Vitol has partnered with Itochu to consider building a 3 MM Bbl/mo., export facility near Beaumont by Q Williams/Boardwalk exploring export terminal near Lake Charles. Oxy is planning to build export terminal at Ingleside, TX.

21 21 NGL Storage The Next Bottleneck ~457 MM Bbls of NGL salt dome storage on USGC. Mt Belvieu salt storage capacity is ~210 MM Bbls, but there are brine pond limitations. Louisiana is estimated to have 139 MM Bbls of NGL salt storage. Marginal increases in salt capacity based on announcements: Increases to MM Bbls over the 2013 to 2020 period. Sinkhole Bills could inhibit salt dome development in Louisiana. USGC salt storage must handle an additional 1.4 MM BPD of NGLs coming to the USGC needed to fill new fractionation capacity. No major storage projects in Mid-Continent. Limited quality salt formations in Marcellus/Utica - cost of logistics is very high. Implications more stress to efficiently absorb incremental NGLs. Expect USGC NGL storage rates to increase.

22 22 What about NGL Product Distribution? With USGC fractionation capacity expanding, how will additional NGL products be distributed? Ethane Mariner West/East, ATEX and USGC ethane header systems will be distributing ethane to the petrochemical market. LPG export terminals -- act as a form of distribution for propane and butanes. Enterprise and Kinder working on C5+ takeaway solutions to Alberta. In the Marcellus/Utica Region product distribution more challenging for C3+ liquids. Propane and butane distribution becomes problematic during the summer months since storage is limited. Reversal of Cochin line should help C5+ takeaway in region.

23 23 In Summary Eventually, new infrastructure to handle NGLs will be full, but it will take a regional re-distribution of NGLs to fill this infrastructure. The challenge for USGC fractionators is disposing ethane during the 2013 to 2016 period ethane rejection most logical solution. Mt. Belvieu becomes more prominent as a major market center but some movement affront to diversify away from Belvieu. Lack of adequate storage increases chances of NGL imbalances and price volatility. Marcellus/Utica faces challenges to handle seasonal demand swings for propane and butanes y-grade line to USGC is needed. Greatest threat to NGL infrastructure utilization a collapse in crude prices and/or a significant rise in gas prices.

24 24 Some Closing Remarks Before the shale plays, the USGC was the largest market center for NGLs, being able to receive or deliver global LPGs when the world became long or short. After the shale plays, the US position as a major NGL producer is untouchable, along with the infrastructure to handle, distribute and export NGLs. We can source NGLs not from a few basins, but from multiple shale plays that span the continental US from West to East. This position provides the US with the world s strongest platform for petrochemical growth along with being a secure and stable supplier of NGLs to the world.

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