Shale Gas and Ethylene: Implications of Increased NGL Production

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1 Shale Gas and Ethylene: Implications of Increased NGL Production Claire L. Cagnolatti VP, Chemicals Studies Solomon Associates Bill Gwozd, Senior VP, Gas Services Ziff Energy Group (a division of Solomon Associates) 1

2 Shale Gas/LPG Production Forces Non-Renewable Less Co-Prod Protection of NA Interests Safety Ecology Glut of LPGs Resisting Forces (Cons) Pipelines Needed Over- Investment Regulation Risk Aversion Conflicting Priorities NIMBY Regional Favoritism Emissions Reduction Target Unemployment in Coal Industry Fleets Only Naphtha Economics Discourage Efficiency Resistance to Change Early Env. Issues Fad Conservation Reserves 100 yrs Low Emissions Exports Competitive Cracker Feed U-Turn Terminals Discoveries Location Wet Gas: LPGs Propane as Transport Fuel Ethane Economics Energy Independence Available Capital LNG Driving Forces (Pros) Infrastructure Early Adapters Low Cost PR Ad Campaign JOBS! Buzz Shift in Trade Balance Boost NA Economy Helps Energy- Intensive Industries 2

3 Ziff Energy Group Extends Solomon s Reach Solomon acquired Ziff Energy Group, July 2013 International Energy E&P benchmarking/consulting North American NG forecasting/consulting Creates the #1 benchmarking service provider from wellhead to specialty chemicals Combines Ziff s shale gas E&P knowledge with Solomon s actual ethylene plant operating data 3

4 Ziff s NG & NGL Supply & Infrastructure Studies 46 Subscriptions with 24 Clients 4

5 Shale Gas Reserves in the U.S. and Canada, Wet Gas vs Dry Gas 5

6 Added Value of Wet Gas vs Dry Gas Many shale gas wells produce significant quantity of NGLs (ethane, propane, butane, C5s), referred to as wet gas wells If little or no NGLs, well is considered dry gas Separating NGLs adds to well cost, but increased revenue more than offsets cost In some cases, ability to sell NGLs limits well producing capacity of natural gas Wet gas wells produce more ethylene feedstock 6

7 Which North American Shale Gas Wells Have More NGLs? 7

8 NGL Content of Gas Wells (Bbl NGL/M ft³ Dry Gas) Montney BC North Duvernay Montney AB MT Thrust Belt Big Horn Wind River Sacramento Williston Powder River Michigan Green River Uinta Nemaha Uplift Salina DJ Piceance CA Coastal Anadarko San Juan Marcellus South Core Sedgwick Paradox San Joaquin Marcellus North Core Appalachian Bbl/M ft³ Cherokee Granite Wash Fayetteville Palo Duro Woodford Black Warrior Ardmore Permian Ft. Worth East TX AL-MS-FL LA Gulf Coast AL Offshore TX Gulf Coast LA Offshore Eagle Ford TX Offshore 8 Low Arkla-Haynesville Medium High Very High

9 How do NGLs add Revenue to Gas Wells? 9

10 Based on: Royalties 30% Shrinkage up to 30% Average Liquids Price US $60/bbl Equivalent Gas Price, Multiple of Dry Gas Basis Impact of Liquid Content on Revenue Ethane 0.1 Propane I-Butane N-Butane 0.3 C Nat l Gas 0.7 < Raw Gas with Liquids Example of Liquids Uplift Calculation 10 Assumes 1% plant fuel

11 Equivalent Gas Price, Multiple of Dry Gas Basis Impact of Liquid Content on Revenue Liquids Yield, Bbl/MMcf Gas Price Liquids Uplift

12 What do Solomon Olefin Study Results Say? 12

13 Feedstock Changes for Ethylene Production in North America Region with the most feedstock changes Olefin Study North American Trend Group Approx 50% of ethylene production capacity Trends over three study cycles on same-plant basis More feed-flexible plants than other regions Some plants making permanent changes to allow more light feed cracking North America plants taking advantage of ethane economics 13

14 Percent of Cracker Feed North American Feedstock Trends Study Year Ethane LPG 14 NRC Gas Oil

15 What Happened to Co-Product Propylene & Butadiene? Switch to more ethane feed in North America Less propylene and butadiene produced in North America Prices rose worldwide, peaking in 2011 Both had higher value per ton than ethylene High prices improved alternate (non-cracker) production economics Severe propylene shortages were short term, prices moderating as alternative production increases 15

16 Alternative Production of Propylene Alternate (non-cracker) production to increase Polymer-grade propylene from refineries Must invest in mercury, arsine removal, and C3 splitter Propylene from propane dehydrogenation (PDH) Eight announced PDH units for USA NA PDH economics could turn on export plans PDH also being pursued in ME, E. Europe, Asia Other On-Purpose Propylene (OPP) via catalytic methods (metathesis), methanol (MTP), biomass 16

17 Alternative Production of Butadiene Metathesis Butane Dehydrogenation Biomass Economic feasibility depends on product price relative to raw materials, investment cost 17

18 Other Uses for LNG, LPGs from Shale Gas Transportation Fuel Exports to Europe, South America, Asia Currently fleet vehicles such as buses Need infrastructure to use in personal vehicles LPGs for cracker feedstock, transportation LNG for fuel Syngas, Gas-to-Liquid (GTL) Fuel Power Generation half the emissions of coal Price, especially for LPGs, will depend on pipeline logistics, and on how quickly these other uses are put into practice. 18

19 How Much Shale Gas is Out There? North American reserves: 100+ years1 Today, limit to North America natural gas production in some areas is disposal of ethane & propane2 New ethane crackers coming online in North America More room to produce natural gas More supply can lead to lower natural gas prices Shale gas also in Middle East, China, South America, Australia, East Europe 1 Chemplants.com, 30 June Platts.com, 30 Aug

20 Shale Gas/LPG Production Forces Resisting Forces (Cons) Protection of NA Interests Non-Renewable Glut of LPGs Less Co-Prod Unemployment in Coal Industry Reserves 100 yrs Fleets Only Exports Naphtha Economics Discourage Efficiency Resistance to Change Discoveries U-Turn Terminals Propane as Competitive Transport Fuel Cracker Feed NIMBY Early Env. Issues Energy Independence Ethane Economics Infrastructure Conservation Available Capital Driving Forces (Pros) 20 Boost NA Economy Low Cost Early Adapters PR Ad Campaign Regional Favoritism Fad LNG Location Wet Gas: LPGs Low Emissions Conflicting Priorities Risk Aversion Pipelines Needed Ecology Safety OverRegulation Investment Emissions Reduction Target Buzz JOBS! Shift in Trade Balance Helps EnergyIntensive Industries

21 Which Forces are Stronger? 21

22 Shale Gas/LPG Production Forces Resisting Forces (Cons) Protection of NA Interests Non-Renewable Glut of LPGs Less Co-Prod Unemployment In Coal Industry Reserves 100 yrs Fleets Only Exports Naphtha Economics Discourage Efficiency Resistance to Change Discoveries U-Turn Terminals NIMBY Energy Independence Propane as Ethane Competitive Transport Fuel Economics Cracker Feed Infrastructure Conservation Available Capital Driving Forces (Pros) 22 Boost NA Economy Low Cost Early Adapters PR Ad Campaign Regional Favoritism Fad Early Env. Issues LNG Location Wet Gas: LPGs Low Emissions Conflicting Priorities Risk Aversion Pipelines Needed Ecology Safety OverRegulation Investment Emissions Reduction Target Buzz JOBS! Shift in Trade Balance Helps EnergyIntensive Industries

23 Thank you! Claire L. Cagnolatti VP, Chemicals Studies Solomon Associates Bill Gwozd, Senior VP, Gas Services Ziff Energy Group (a division of Solomon Associates) The material appearing in this presentation is for general information purposes only. Technip S.A. and its affiliated companies ("Technip") assume no responsibility for any errors or omissions in these materials. TECHNIP MAKES NO, AND EXPRESSLY DISCLAIMS ANY, REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE MATERIALS CONTAINED IN THE PRESENTATION, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Under no circumstances shall Technip, the other sponsors, presenters and any of their respective partners, officers, directors, employees, agents or representatives be liable for any damages, whether direct, indirect, special or consequential, arising from or in connection with the use of materials and information contained in the presentation. The materials contained in this presentation may not be reproduced, republished, distributed, or otherwise exploited in any manner without the express prior written permission of Technip. 23

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