1. 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

2. Midstream Energy Group Who We Are
Midstream Consultancy
Business & Asset strategy advisory services
Feasibility studies – commercial & technical
Market analysis & forecasts
Transaction due diligence & transition services support
Training Services Provider
Author & instructor – “NGL Fundamentals”
Have trained over 500 professionals since 2004
Specialty Interests
Petrochemical feedstocks, fuels blending, producer services

3. 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…..

4. 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

5. 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

6. 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

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

8. 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?

9. 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

10. 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 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

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

12. 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

13. 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

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

15. 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?

16. International Markets
Overview

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

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

19. 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

20. 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

21. 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

22. 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.

23. International LPG
Who’s Buying? April 2012 Destinations

24. 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

25. 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

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

27. 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
Algerian CP to MB .46

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

29. 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

30. 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

31. 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

32. 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

33. 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

34. “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