US Ethane Outlook: Ethane: It’s Available and For Sale

1. US Ethane Outlook:Ethane: It’s Available and For Sale Presented to the 15th Annual PFAA Conference November 13, 2008 Peter Fasullo En*Vantage, Inc pfasullo@envantageinc.com

2. Introduction Our recent studies on ethane have indicated: Supply Side • US ethane extraction starting to increase – rising gas production and new plants. • Plant expansions will create an overhang of ethane extraction capability. • More logistical infrastructure (fractionation and distribution) is needed. • Processors incurring more economic risks on ethane, unless demand increases. Demand Side • Total US ethylene capacity not expected to increase. Contraction is highly possible. • Ethylene industry maximizing ethane cracking, but level is not enough. • It will take time and capital to increase the capability to crack more ethane. • Less co-product production could be an issue.

3. Our Basic Message About Ethane Gas Processors Ethylene Producers Face challenges in managing excess ethane extraction capability and dealing with the consequences. Have the opportunity to increase feedstock optionality by accessing greater ethane supplies.

4. Quick Overview

5. Basic Facts About Ethane • Ethane constitutes ~ 40% of the US NGL stream from gas processing. • Ethane is the most economically sensitive NGL and its extraction is discretionary. • Ethane has only one major end use -- feedstock to produce ethylene. • About 50% of US ethylene is produced from ethane -- 5-yr avg. • The amount of ethane cracked is a function of ethylene production. • But, ethane feedstock usage can be volatile when ethylene industry’s operating rates are below 90%. • The incentive to extract ethane is only as good as the economic viability of the US petrochemical industry and its ability to crack ethane.

6. Overview of Ethane Supply & Demand Ethane supply & demand fundamentals appear simple, but they are complex and volatile. Market range for ethane*: Low-- 475 MBPD; High-- 850 MBPD • Market drivers for ethane extraction and cracking: • Ethane Extraction • Frac spreads • Processing contracts • Plant type • Plant location • Gas quantity & quality • Ethane Cracking • Ethylene business cycles • Cracker capacities & feedstock capabilities • Competing feedstocks • Ethylene co-products • Derivative Imports/Exports Source: DOE, En*Vantage, Hodson; * Includes Ethane from Refining

7. Key Drivers for Ethane Supply and Demand Both being inversely related to gas to crude price ratio

8. Key Pricing Drivers for Ethane Supply & Demand Source: DOE, En*Vantage, OPIS, ICE

9. The Planets Aligned Perfectly for Gas Processors to Maximize Ethane Profitability in ‘07 and 1st Half of ‘08. • Low Gas-to-Crude Ratios • High Crude Prices • Decent Ethane-to-Crude Ratios Great for: Keep Whole • High Ethane Frac Spreads • High Ethane Prices % of Proceeds • Two Factors to Consider: • Record high ethane prices and frac spreads would not have been possible if the US ethylene industry was doing poorly. • Additional ethane from newly constructed processing plants had not fully impacted the market yet.

10. Concentration of Processing Plants and Regional Distribution of Ethane Extracted US Gas Processing Industry • # of Plants: ~500 • Inlet Gas Capacity: 65.5 BCFD • Gas Throughput: 43.2 BCFD • Industry Operating Rate: 66% • Gas Production Processed: 80% Regional Ethane Extraction* • LA Gulf Coast……….13% • TX Gulf Coast….........6% • TX Inland…………….34% • Midcontinent…………12% • New Mexico………….14% • Rockies………………13% • Upper Midwest……….6% • Other…………………..2% * 5-year average Source: DOE, En*Vantage, LPG Almanac

11. NGL Extraction Will Continue to Shift Further Inland Source: DOE and En*Vantage

12. Outlook For Ethane Extraction

13. Ethane Extraction From Processing Can Be Volatile Source: EIA and En*Vantage

14. Prior to ‘07 Ethane Extraction Capability was Declining Source: EIA and En*Vantage

15. Gas Reserve Additions in Key Processing Regions Source: EIA and En*Vantage

16. Gas Production is UP 11% or +5.8 BCFD since 2006. Source: EIA and En*Vantage

17. Recently Completed & Announced Plant Additions ~6.8 BCFD. Rockies-- 54%; TX Inland-- 29%; MidCont-- 11%; G.C.-- 6% Source: En*Vantage and Company Announcements

18. In Addition to Incremental NGLs from Processing, One USGC LNG Terminal will have NGL Extraction Capability • Trunkline is building a 1.050 BCFD NGL extraction plant at its Lake Charles LNG Terminal, completion in late 2008/early 2009. • Depending on the quality of LNG being imported, anywhere between 18 MBPD to 48 MBPD could be extracted. • Most likely, the Trunkline LNG terminal will process Nigerian LNG with an average BTU content of 1150 +/- 25. • That would imply an NGL recovery rate of at least 39 MBPD, with ethane extraction about 24 MBPD.

19. Announced Plants Boosting Ethane Extraction Capability Source: EIA and En*Vantage

20. Financial Crisis Could Delay Unannounced Plants Another 0.5 - 1 BCFD of cryo-plant capacity could be built in next few years. Represents 30 to 60 MBPD of NGLs of which 12 to 24 MBPD is ethane.

21. Outlook For US Ethane Demand

22. Fairly Good Business Environment for the US Ethylene Industry in ’07 & 1st Half of ’08 • Low gas-to-crude ratios in the US made US ethylene producers more competitive globally. • The US ethylene industry’s ability to shift to ethane and E/P gave it a competitive edge over heavy feedstock crackers in Europe and Asia. • Although the US economy was slowing, the low US dollar created an export market for US petrochemicals. • In 2007 and 1st Half of 2008, US ethylene operating rates were 88.5% and 87.3%, respectively. • However, those US ethylene producers leveraged to heavy-feedstocks suffered in the high crude price environment during Q1 and Q2 ‘08.

23. Growth in US Ethylene Production and Capacity has Basically Stagnated Over the Past 5 yrs. Source: En*Vantage, Hodson, CMAI

24. Over the Past Few Years, US Ethylene Capacity has Shifted More to Flexi and Heavy Feed Crackers. Plus, 21% of US ethylene plant capacity is aging (35 years and older) and this capacity represents 33% of total ethane consumption.

25. Cracking of Gas Processors’ Ethane 8 Year Average is 670 MBPD.Peaked at 800 MBPD in ’01.High in ’08 was 745 MBPD.

26. The Amount of Ethane Cracking Positively Correlates with the Amount of Ethylene Produced. Source: Hodson and En*Vantage.

27. US Ethylene Production Forecast Scenarios

28. High Likelihood That an Ethane Extraction Overhang Will Continue Through 2012. US economy grows at 3%/yr. Max C2 Cracking US economy stagnates and an ethylene surplus develops worldwide Source: DOE, En*Vantage, Hodson

29. Implications

30. Lower Ethane Values Relative to Crude (WTI) Source: DOE, En*Vantage, OPIS, ICE

31. Greater Ethane Volumes and Poor Economy Pressuring Ethane Frac Spreads Source: DOE, En*Vantage, OPIS, ICE

32. Ethane Overhang Will Affect Gas Processors Differently

33. Opportunities and Bottlenecks Occurring Across NGL Value Chain Wellhead Production Gas Gathering & Processing NGL Transport NGL Fractionation NGL Storage Product Distribution Greater Gas Production Volumes More Opportunities for Gathering & Processing. Greater Need for Long Haul NGL Takeaway Capacity. Greater Need for Full Fractionation Capacity. Storage Plays a Greater Role in Balancing Supply & Demand Greater Need for More Ethane Distribution to Petro- Chemicals Keeps Gas-to-Crude Ratios Low Expansions are being completed:- MAPL - Overland Pass - Sterling - West Texas P/L - Arbuckle Belvieu Fracs at capacity. More Barrels being diverted to Louisiana More Capacity may be needed

34. US Ethylene Industry Faces Challenges and Opportunitiesto IncreaseEthane Consumption Ethane cracking capability could increase by another 50 to 75 MBPD at existing plants, but…. • Some heavy-feed crackers are isolated from large ethane distribution systems. Additional ethane distribution is needed to access these plants. • Midstream companies are reluctant to bear the full risk in building more logistics to handle ethane. (The Chicken and Pig Fable) • Maximizing ethane cracking at some heavy-feed ethylene plants may require investments to retool process equipment. • Ethylene producers need to be convinced that ethane supplies will last. • Co-product production could suffer and petrochemical companies will need to find ways to meet downstream co-product requirements. • Economic slowdown plus more ethylene plants worldwide could dampen enthusiasm to make investments to access and handle more ethane.

35. Is There A Happy Ending? • Cooperation and sharing of risks between midstream and petrochemical companies is required to increase ethane distribution and demand. • Current economic recession may delay aggressive actions by both parties. • In the meantime, gas processors will need to prepare for a greater frequency of marginal ethane extraction economics. • Careful study and planning is required by individual processors looking to build that next cryogenic processing plant. • Although additional US ethylene capacity is unlikely, petrochemical companies have the opportunity to increase feedstock optionality by taking advantage of ethane’s growing availability and lower valuation relative to competing feedstocks.