US Ethane Outlook: Implications for Processors and Ethylene Producers

1. US Ethane Outlook:Implications for Processors and Ethylene Producers Presented to the 84th Annual GPA Convention March 15, 2005 Peter Fasullo En*Vantage, Inc pfasullo@envantageinc.com

2. Background Just 2 years ago, US gas processors faced many challenges, especially for ethane. • Lingering effects of an economic recession • High gas prices relative to crude oil • Poor processing margins – considerable ethane rejection • A depressed petrochemical environment • Fears that US ethylene industry would pack up and leave

3. Currently Ethane is back!!! • Economy is stronger • Petrochemicals have rebounded • Processing margins are strong • Ethane extraction is good across all processing regions But how long will it last?

4. Topics to be covered today • Review the analysis from our NGL study completed in February ’04 which forecasted better times for ethane. • Examine fundamentals driving ethane supply/demand and frac spreads. • Present simple bench marks that help indicate whether ethane’s economic conditions will improve or worsen. • Share updated findings regarding the outlook for ethane and its implications.

5. 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.

6. Ethane supply & demand fundamentals appear 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

7. Our analysis of ethane supply & demand focused on two primary drivers. Both being inversely related to the gas to crude price ratio

8. Relative value of gas to crude can affect U.S. NGL supply/demand, particularly for ethane. Source: Platts, DOE and En*Vantage

9. NGL frac spreads are inversely correlated to the gas to crude price ratio..... Source: Platts & En*Vantage

10. ....and that inverse relationship is reflected in the amount of ethane extracted. Trough Conditions Source: DOE and En*Vantage

11. Ethane extraction closely tracks ethane cracking, influenced by the gas to crude price ratio.

12. The gas to crude price ratio can influence the cracking of ethane versus heavy feedstocks. But what is the relationship between ethylene production and ethane cracking?

13. As ethylene production increases, ethane cracking increases and the flexibility to swing ethane usage diminishes. Trough conditions

14. The shift in US ethylene capacity, the past few years, is estimated to shift the ethane cracking range downwards by about 15 to 20 MBPD.

15. Our analysis indicates the following implications for ethane demand at different levels of US ethylene production. • Higher ethylene production requires greater ethane cracking and the flexibility to swing ethane volumes diminishes. • Gas to crude price ratios also influence ethane cracking levels, particularly when ethylene industry utilization rates are between 80% to 90%. • 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.

16. To support greater ethane cracking levels, the ethane “frac” spread increases to encourage more ethane extraction. Source: Platts, En*Vantage and Hodson

17. So what does the future hold for ethane cracking and extraction?

18. Back in February 2004, we felt that economic conditions going forward would provide a better environment for ethane cracking.

19. Entering a new era where crude oil supplies are constrained and high prices are the norm.

20. A paradigm shift to tighter crude markets provides lower gas to crude price ratios and favorable conditions for ethane. Source: En*Vantage, ICE, DOE

21. Assuming ethylene production tracks GDP growth rate at a 0.9 multiple, ethane cracking could reach 800 MBPD by 2010. Source: History- CMAI, En*Vantage and Hodson; Est & Forecast - En*Vantage

22. Data indicate that the processing industry can ramp up ethane extraction to near 780 MBPD, which supports 61 billion lb/yr of ethylene production. • 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

23. La GC and Rockies will be the incremental producers of ethane in the ’05 to ’10 time period. Source: DOE, En*Vantage

24. Our study demonstrated how ethylene production along with the gas to crude price ratio can estimate ethane supply & demand and the amount of swing that can be expected. Demand Side Factors Ethylene Demand Ethylene Production Feedstock Capabilities Ethane Demand Gas to Crude Price Ratio Effective Operating Rate Composition of Plants GDPGrowth Regional Ethane Production Regional Extraction Economics Ethane to Market Ethane Frac Spread Supply Side Factors

25. In Conclusion:Ethane is very much alive!!! --- barring a recession. Conditions should remain favorable for ethane cracking and extraction, even with moderate ethylene production growth: • Ethane frac spreads should remain strong to encourage extraction in all processing regions. • This is not the time for processors to retreat from cryogenic plants. • A tighter crude market keeps gas to crude price ratios below 90%. • As ethylene production grows, ethane cracking increases and the flexibility to switch off ethane diminishes. • By 2010, ethane production should reach and sustain the 800 MBPD level, with the Rockies and La Gulf Coast contributing a larger share. • Ethylene producers need to closely track the regional shift in ethane supplies.