NGL’s Markets Beyond Mont Belvieu NGEAO - Tulsa May 2012 Anne B. Keller Aerial View of Mont Belvieu, TX © Midstream Energy Group, Inc. 2012 All rights reserved

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Midstream Energy Group The “Fine Print” The combination of groupthink and too much money wrecks a lot of forecasts, even the ones that were right to start with…..

Ethane Frac Spread $/Mmbtu NGL’s - Spring 2012 Wandering in the Wilderness Looks like we have a way to go to reach the Promised Land of Orderly Markets again! Ethane Frac Spread $/Mmbtu

Wandering in the Wilderness NGL’s - Spring 2012 Wandering in the Wilderness Pressure on midcontinent NGL’s as inventory builds NGL Barrel as % of WTI FOB Cushing

Long Term Survival Guide NGL’s - Spring 2012 Long Term Survival Guide The NGL Commandments: Surplus NGL should seek Mont Belvieu Export markets will handle supply that cannot find a home here

Pipeline Expansions Underway All Heading to Mont Belvieu Newly announced Source: Oil & Gas Journal, May 7, 2012 *In development/construction

What Will They Find There? Mont Belvieu: Storage Over 170 million barrels capacity; space for 2+ months’ of daily NGL production Fractionation Capacity Capacity for 43% of US NGL production Markets?

The “Promised Land” for Ethane Mont Belvieu Markets The “Promised Land” for Ethane Ethane for Ethylene Production: % of Feedstock Market Total Feedstock Market Total demand still 191M BPD less than 2004 Ethane produces more ethylene with fewer pounds of feedstock

Ethane for Ethylene - Outlook Mont Belvieu Ethane for Ethylene - Outlook Expansions under way will add 60-80M BPD demand to the area by 2013 New units planned for 2017 could add 200M BPD more Most are reachable via Mont Belvieu, but West Texas barrels can access most of these without coming there Ethylene demand increase: 950M BPD 2010 1.2 million BPD by 2015

Mont Belvieu Propane – Already Long Seeing price pressure: Propane Price as % of WTI

Propane Exports Mont Belvieu 000 BPD Beyond Mont Belvieu Propane – Heading Offshore Already Rising Inventories and Exports: Propane Exports Mont Belvieu 000 BPD Terminal Capacity Booked through 2013 Prices will settle at levels that encourage buying for winter Source: EIA

Outlook for the Next Barrel Mont Belvieu Propane Outlook for the Next Barrel Near term petrochemical demand probably flat Low ethane prices make propane a hard sell for ethylene feedstock Projected surpluses are encouraging development of on purpose propylene production Demand in other sectors flat to falling: High price relative to gas, warm weather have levelled demand in other domestic sectors Unless motor fuel demand grows, limited growth seen here

Mont Belvieu Butane Also switching from imports to exports: Source: Waterborne LPG Report, April 26, 2012

Gateway to Global Markets Mont Belvieu Gateway to Global Markets Current options for propane & butane heading to Mont Belvieu are storage or export Unlike in the US, international markets use propane and butane mixes (LPG) as a gas substitute What are these markets like?

International Markets Overview

International Markets Overview N. America ex USA - Canada & Mexico

Propane (LPG) Demand USA – Different from the Rest of the World

Domestic Price Subsidy Levels International Markets Factors That Drive Prices Import/Export Volumes to Balance Domestic Markets Domestic Demand Domestic Price Subsidy Levels Domestic Supply Domestic Market Prices International Market Prices

International Markets Global Market Factors This is the marginal barrel in the LPG market The price for the last barrel sold is set here “Premium” (less price-sensitive) demand grows with GDP – supply grows with drilling “Price sensitive” demand (aka chemicals) picks up the surplus Prices fall until: Premium demand growth absorbs supply Chemical capacity expands enough to increase baseload demand and raise feedstock prices Producers reduce optional output or energy production falls

International NGL/LPG Markets Primary Trade Routes for Waterborne Shipments About 1.6 to 1.8 Million BPD (4.4 million metric tons/month) of LPG moves in the international cargo markets – nearly 20% of global LPG supply Surplus in Atlantic Basin and Middle East Clears to Highest Price Market at the Time Based on Arbitrage

International LPG Trade Patterns 10 days 5 days 16 days 14 days East of Suez West of Suez Traditional moves are from the MidEast to Asia and West Africa/North Sea to Europe. Moves to/from U.S. only when “arb window” is open.

International LPG Who’s Buying? April 2012 Destinations

International LPG – Trade Patterns Pricing Points Middle East Saudi “CP” (contract price) North Sea BP “CP” Atlantic Basin (includes West Africa, Algeria, Central and South America): Price reference = Mont Belvieu

International LPG Importance of Mont Belvieu to Global Markets Global clearing market Highest overall storage capacity 2 terminals Most transparent pricing Usually considered market of last resort for global sellers Is currently a supply source since we are long LPG – prices are low enough to attract chemical buyers replacing naphtha with LPG But, these barrels reduce costs for other ethylene producers who compete with US

International Markets Correlation Between Major Markets - Propane Correlation Coefficient 2007 to Apr 2011 = .87 Saudi CP vs. Mont Belvieu

Section 4 – International Markets – Propane Big Change in Correlations in the Past Year US $/Gallon Mont Belvieu switching from price setter to price taker? Correlation Coefficients (R2) = Saudi CP to MB .62 Algerian CP to MB .46

International Markets “Waterborne” LPG - Shipping Oceangoing Vessels Can hold up over 600,000 Bbl. (75,000 tonnes) Big terminals have fully refrigerated storage

International Markets Waterborne LPG – How Trades Work Pricing depends on destination and contract terms Atlantic Basin – usually OPIS Mont Belvieu based +/- a differential Asia – usually based on Saudi CP +/- a differential Buyer can hedge by selling in the destination market during the lifting “window” Pricing usually determined when the cargo is lifted; average of the day before, day after, and day of lifting; some cargoes have 5 day pricing windows Hedge sales can move the markets due to the volume involved

International Markets Waterborne LPG – Trends Export terminals are being expanded to handle more cargoes (2nd half 2012, 2013) Expansion of the Panama Canal in 2014 will shorten the distance to Asia from the US Gulf Coast – Japan is a premium market But, Asian market prices may be lower if more NGL is produced by LNG facilities in Australia Race to the bottom for prices if domestic demand does not grow

Mont Belvieu What About C5+? In Upper Plains and Rockies a new market “commandment” is emerging Strong demand for diluent in Canadian syncrude blending is pulling these barrels north for producers with access to rail Can blend some butane into these barrels

C5+ Demand as Diluent Moving South to North Southern Lights line can bring 180 M BPD into the market via pipeline; rail supply coming from other places goes directly to Canada; US Gulf Coast barrels can come via Capline pipeline from St. James, LA terminal to Chicago for staging on Southern Lights From Gulf Coast

C5+ Demand for Diluent Longer Term Views Outlook for crude prices >$70 Bbl. FOB Canada supports continued development in the oilsands High costs of “coking” projects make diluent blending attractive as long as supply can be found Diluent is about 33% of a “dilbit” (diluted bitumen) barrel – can afford to pay WTI+ prices Tariffs on Southern Lights should fall as throughput volumes rise Kinder Morgan export line to Western Canada provides an outlet for diluent other than recycle from US refiners using Canadian crude

“Beyond Mont Belvieu” Challenges Ahead Costs to access this hub from other regions are $6-$12/barrel – much higher than in the past Will markets connected here grow enough to accommodate the volume heading here at a price that continues to be attractive? It’s the best outlet to global markets for propane and butane surpluses outside of the Marcellus But, ethane demand is growing in other areas (Texas Gulf Coast, Louisiana) with direct access to shale production Demand pull for C5+ and some butane is north, not south – the direct sales route may be better than circulating in and out of the hub