North American Propane and Butane Demand, Markets and Pricing

Transcription

1 North American Propane and Butane Demand, Markets and Pricing Platt s 4 th Annual NGLs Conference September 29, 2014 Michael Sloan Principal ICF International Michael.Sloan@icfi.com

2 Disclaimer THIS PRESENTATION PRESENTS VIEWS OF ICF INTERNATIONAL. THE PRESENTATION INCLUDES FORWARD-LOOKING STATEMENTS AND PROJECTIONS. ICF HAS MADE EVERY REASONABLE EFFORT TO ENSURE THAT THE INFORMATION AND ASSUMPTIONS ON WHICH THESE STATEMENTS AND PROJECTIONS ARE BASED ARE CURRENT, REASONABLE, AND COMPLETE. HOWEVER, A VARIETY OF FACTORS COULD CAUSE ACTUAL MARKET RESULTS TO DIFFER MATERIALLY FROM THE PROJECTIONS, ANTICIPATED RESULTS OR OTHER EXPECTATIONS EXPRESSED IN THIS PRESENTATION. 1

3 Introduction to ICF ICF International (NASDAQ:ICFI) is a global consulting firm with more than 60 offices and 4,500 employees worldwide, headquartered in the Washington DC area. Prominent position in each area of expertise: Energy, environment, and infrastructure Health and social programs Public safety and defense Growing commercial work, especially in the energy, environment, and infrastructure space. Long-standing relationships with diverse energy industry and association clients: INGAA AGA API CERI PERC NGSA Growing Houston area and Marcellus area energy practices. Track record of strong organic growth and successful acquisitions. 2

4 ICF's Oil, Gas, and NGL Practices Experts Joel Bluestein, Environmental Issues Frank Brock, Gas Markets Jim Brown, Canadian Markets Greg Hopper, O&G Advisory Services Tom O Connor, Oil Markets Tom.O Connor@icfi.com Kevin Petak, Fuel Markets Kevin.Petak@icfi.com Don Robinson, Oil Markets Don.Robinson@icfi.com Mike Sloan, Gas and NGL Markets Mike.Sloan@icfi.com Harry Vidas, Hydrocarbon Supplies Harry.Vidas@icfi.com Warren Wilczewski, NGL Markets Warren.Wilczewski@icfi.com KEY AREAS OF WORK Market Evaluation and Analysis Strategic Planning Support Scenario Analysis Economic Impact Analysis Due Diligence Support for Investments and Acquisitions Regulatory Analysis Financial Modeling and Risk Assessments Environmental Policy Analysis Environmental Impact Assessments Testimony and Litigation 3

5 Today's Questions Outlook for NGL Production Balancing Propane Market Supply and Demand Impact of Infrastructure Changes on Propane Markets A look at Butane Markets Implications on NGL value and price 4

6 Recent NGL Production Growth North American NGL production increased by 35% from 2010 Q1 through 2014 Q2. Propane and Butane constitute about 60% of this historical growth. 5

7 Growth in NGL Value has not Kept Up with Growth in Production The impact of falling prices has more than offset the value of the growth in production. Propane value has increased by 16% and butane values have increased by 20% Ethane value has decreased by 50% Until petrochemical demand catches up, the only outlet for ethane is pipeline gas, where ethane value = natural gas value. 6

8 NGL Production Will Continue to be Linked to Natural Gas Markets and Demand Total gas consumption (including exports from the U.S. and Canada) is projected to increase at a rate of 1.8% per year By 2025, total gas consumption in the U.S. and Canada is projected to reach an average of almost 105 Bcfd. NGLs continue to be a byproduct of natural gas production As demand for natural gas drives its production, so natural gas production drives NGL output While producers do have a choice of where to drill, all NGL production will remain associated No one drills for NGLs. 7

9 NGL Production by Basin in ICF's Base Case NGL production is expected to almost double between 2013 and 2025 Production growth is broad based: Marcellus/Utica Eagle Ford Bakken Western Canada The Marcellus and Utica area accounts for roughly 25 percent of total U.S. and Canadian production by Most of the growth is in light products: 40% Ethane 35% Propane 15% Butane 8

10 Regional NGL Fractionation in ICF s Base Case (MBPD) U.S. and Canada fractionation rises to 6 million barrels per day by 2035 Most of the capacity is concentrated in the Gulf Coast area where a significant amount of new LPG export capacity and most new/expanded crackers and PDH facilities are being built Capacity in both the Midwest and Northeast serves Marcellus/Utica Arctic Western Canada Central Southwest Midwest Offshore Northeast Southeast

11 Projected Inter-regional NGL Flows Through

12 Domestic Propane Supply Growth Propane production expected to nearly double by Majority of growth in propane supply from NGLs. Near term refinery production expected to increase due to changes in crude slate Imports from Canada are likely to increase due to growth in WCSB production. 11

13 Propane Produced from NGL's Production nearly doubles by 2025 Roughly one-half of the growth comes from the Marcellus and Utica area Significant growth in production from the WCSB, Bakken, and Eagle Ford 12

14 Broad Energy Market Trends Reducing Seasonal Propane Transportation Capacity Propane Production and Exports Northeast propane production Moving propane to Mont Belvieu Ethane Production and Demand Moving ethane to the Gulf Coast demand centers Canadian Diluent Demand Rapid growth in demand to serve Alberta oil sands industry High load factor load is displacing seasonally available capacity on liquids pipelines Pipeline Conversions 13

15 Impact of the Repurposing of the Cochin Pipeline on Midwest Propane Markets The Cochin delivered about 320 million gallons of propane to the Midwest in 2013 Fort Whyte Lack of Cochin changes the Canadian propane supply dynamic Reduced access to Alberta storage Lack of Cochin will push Midwest marketers to other supply sources Cochin NuStar MAPL OneOk North System Griffith Todhunter Coshocton TEPPCO System Dixie Potential to create supply disruptions in the Midwest Chaparral and Seminole Pipelines OneOk Sterling Pipelines 14

16 Impact of the Repurposing of the TEPPCO Pipeline on Northeast Propane Markets Development of the ATEX pipeline removed one line of the TEPPCO pipeline from south to north service Cochin Fort Whyte Much of the decrease in capacity will be offset by growth in production in the Marcellus/Utica. NuStar MAPL OneOk North System Griffith Todhunter Coshocton TEPPCO System However, limited access to propane storage in the Northeast increases seasonal supply concerns Chaparral and Seminole Pipelines OneOk Sterling Pipelines Dixie 15

17 Can Rail Take Up the Slack? Rail requirements: Rail system capacity Propane capable rail cars Rail loading capacity Rail unloading capacity Rail reliability concerns 16

18 Outlook for Consumer Propane Demand ICF is currently projecting relatively flat consumer propane demand through 2020 Demand in most traditional consumer propane markets is projected to fall Continuing decline in residential households heated with propane Improvements in efficiency. Fuel oil conversions in the Northeast will lead to modest growth Overall decline offset by growth in internal combustion engine markets 17

19 Consumer Propane Market Growth Opportunities Propane has an opportunity to develop in new markets wherever gasoline, diesel fuel, or fuel oil are widely used. With two general exceptions: 1) where natural gas is available and appropriate. 2) Where the electric alternative is more attractive than the propane alternative. (Million Gallons) 1, Primary Growth Opportunities Heating oil conversions On-road vehicles Commercial mowers Irrigation engines Internal Combustion Engine Propane Consumption in New Markets Diesel Injection On-Road Vehicles Non-Road Engines 0 18

20 Petrochemical Demand for Propane 19

21 Planned/Existing Propane Dehydrogenation Facilities Company Output Volume (tons/yr) Propane Consumption (bbl/d) Location Start-up Year PetroLogistics 640,000 30,000 Houston, TX 2010 Dow Chemical 750,000 35,000 Freeport, TX 2015 Enterprise 750,000 35,000 Chambers County, TX 2016 Formosa Plastics 650,000 31,000 Point Comfort, TX 2016 C3 (Ascend) Petrochemicals 1,000,000 47,000 Alvin, TX 2017 REXtac 300,000 14,000 Odessa, TX 2017 Williams 500,000 23,000 Redwater, AB 2018 Dow Chemical 550,000 25,000 TX/LA 2018 Total 5.2 million+ 240,

22 Planned Export Terminals Significantly Add to Current Export Capacity Company Capacity (MBPD) Location Cost* Start-up ($Million) Targa Resources 120 Galena Park, TX 2014, Q3 240 Sunoco Logistics LP 40 Marcus Hook, PA 2014, Q3 270 Sunoco Logistics LP 100 Nederland, TX 2015, Q1 400 Occidental 75 Corpus Christi, TX 2015, Q1 400 Enterprise 50 Houston Ship Channel, TX 2015, Q1 100 Enterprise 225 Houston Ship Channel, TX 2015, Q4 500 Phillips Freeport, TX 2016, Q3 1,000 Pembina Pipeline Co. 40 Prince Rupert, BC Sage Midstream 47 Longview, WA 2016, Q4 275 Pembina Pipeline Co. 37 Portland, OR Total Proposed 880 $4,250 Current + Proposed 1,340 * ICF estimates Project capacity reduced to account for terminal/pipeline capacity utilized for non-lpg exports 21

23 Propane Supply Demand Balance Planned propane export capacity is likely to better integrate international markets with the North American market. If all export capacity is built, it will result in an overbuild with propane supply falling below market potential. 22

24 Changes in Propane Economics when Export Capacity is Greater than Supply The availability of additional propane export capacity does not guarantee that the capacity will be used. Instead, it links the domestic propane market to the international propane market. Domestic and international prices will equilibrate Propane will flow to the markets that value it the most. As an exporter, domestic propane prices will be below international prices rather than above international prices. Price volatility is likely to increase. Seasonal stock builds for winter demand will no longer be automatic. Propane in storage will not automatically be available to the domestic market. Will require contracted storage, or price bidding into the market. 23

25 Butanes Supply Dominated by Gas Plant Production Butanes production expected to increase almost double between 2013 and 2025 Majority of growth from gas plant production. Recent increase in refinery production due to changing crude feed slate Refinery production projected to grown through 2018, then slowly decline Lifting of Crude export ban would result in exports of lighter crudes, reducing domestic production. 24

26 Butanes Demand Seasonal demand for gasoline blending, along with alky unit consumption, will provide baseline demand for butanes Petrochemical feedstock demand expected to boost consumption, displacing some propane due to pricing Canada also expected to absorb some U.S. butanes sourced primarily from the Marcellus/Utica and Bakken The major growth market will be overseas exports 25

27 Propane Inventories Leading into the 2014/15 Winter At 76.0 million barrels, current nation-wide propane inventories are at record levels 14.5 million barrels above 5-year average 5.5 million barrels above previous 5-year maximum, for the same week 26

28 PADD 2 and PADD 3 Propane Inventories As Of Sept, 19, 2014 PADD 2 PADD 2 inventories started the heating season at the lowest level in the last five years. Fairly steady growth, with large additions well into September Current levels nearly 600,000 barrels above the 5-year average PADD 3 At 39 million barrels, PADD 3 inventories at an all time high Strong production, early-season export facility maintenance, and delays in new export terminal commissioning have contributed to strong injections 27

29 Change in Propane Export Capacity Relative to Change in North American Propane Production Expected* Export Capacity New PDH Capacity North American export capacity undergoing a dramatic expansion Not all capacity will go to propane Demand growth also to come from new PDH Facilities Strong likelihood any new capacity will be 100% utilized * Expected export capacity reflects ICF s assessment of likelihood of project completion and share of project capacity allocated to LPG. 28

30 Change in LPG Export Capacity Relative to Change in North American Propane & Butanes Production Incremental Growth in Butanes Surplus Expected* Export Capacity New PDH Capacity Total LPG Export Capacity poised for significant expansion in 2015 and MBPD of LPGdedicated terminal throughput Purity propane will also see demand growth from Gulf Coast PDH facilities * Expected export capacity reflects ICF s assessment of likelihood of project completion and share of project capacity allocated to LPG. 29

31 Implications on NGL Price Outlook Propane/butane export capacity is likely to exceed available supply in the near term. Exports will balance the market, and prices will be set by international prices. Propane prices will become more volatile: Growth in PDH capacity, and decline in propane as a petrochemical cracking feedstock reduces the demand elasticity of the propane market. Integration with international markets makes U.S. propane prices more sensitive to weather conditions in Europe. Domestic propane prices likely to increase relative to international prices in the near term as additional export capacity comes on line. Longer term propane prices likely to decline somewhat as growth in exports pushes down international propane prices, and as export distance (and cost) increases. International butane supply glut will keep butane prices relatively low. 30

32 Michael Sloan Principal ICF International