1. Presented to PFAA’s Eleventh Annual Conference
US Ethane Outlook: Implications for US Processors and Ethylene Producers
Presented to PFAA’s Eleventh Annual Conference
Barton Creek
Austin, Texas
November 3rd – 5th, 2004
Peter Fasullo
En*Vantage, Inc

2. Background: Last December ‘03, Enterprise commissioned En*Vantage to:
Determine the sensitivity of the NGL midstream environment to the business cycles of the US ethylene industry.
Assess how the GulfTerra merger changes Enterpise’s sensitivity to ethylene business cycles and to different price decks for crude and natural gas.
Study completed in February ‘04 and was presented to rating agencies, bankers and security analysts, made public at security analyst meeting on May 26, 2004.
Challenge was to develop simple bench marks to gauge whether the NGL business environment would improve or worsen.
Part 1 of the study primarily centered on the fundamentals driving ethane supply/demand and frac spreads.
Today: Walk through methodology and share updated findings regarding the outlook for ethane and its implications.

3. Why Ethane? --- It is the one NGL component that has frustrated processors and ethylene producers the most.
On average, ethane constitutes 37% of the US NGL barrel extracted, but yields have varied from 34% to 46% when processing economics dictated.
Ethane extraction is mostly discretionary and very sensitive to economic conditions, frac margins and location of the processing facility.
When extraction economics are good for ethane, they are good for the entire processing operation, and the opposite is true - especially for cryogenic plants.
Unlike other NGLs with multiple end uses, virtually all ethane is used in ethylene production, competing with other NGL and petroleum feedstocks.
On average, ethane constitutes 45% of the US ethylene feedstock mix and it provides the highest ethylene yield of all the feedstocks.
But, history indicates that ethane cracking can swing quickly from 38% to 51% of the mix when feedstock economics dictate or cracker utilization rates change.
Overall, ethane supply and demand can easily swing 100 MBPD or more in a market that has averaged around 750 MBPD.

4. Source: DOE, En*Vantage, Hodson
Ethane is extremely dependent on gas processing and ethylene production. Supply & Demand fundamentals may appear simplistic, but they are complex and volatile.
Key market drivers influencing ethane cracking and extraction:
Ethane Cracking
Ethylene business cycle
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

5. Our analysis of ethane supply & demand focused on two primary drivers.
Rational
Influence
Natural Gas to Crude Price Ratio
(Henry Hub Gas/Cushing WTI on a BTU basis)
Gas sets price floor for NGLs (ethane) and petroleum derived feedstocks and products set the market price.
Processing
Margins
Feedstock
Economics
US Ethylene Production as driven by GDP growth
US ethylene industry consumes 54% of total NGLs supplied and virtually all of the ethane extracted from natural gas.
The amount of ethane consumed should increase as ethylene production increases.
Need to determine how co-products can affect ethane cracking.
Both being inversely related to the gas to crude price ratio

6. Source: Platts, DOE and En*Vantage
The relative value of gas to crude plays an important role in driving U.S. NGL supply/demand, particularly for ethane.
* Based on 5.8 MM BTU/Bbl
Source: Platts, DOE and En*Vantage

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

8. Source: DOE and En*Vantage
....and that inverse relationship is reflected in the amount of NGLs extracted versus the gas to crude price ratio. But what causes this particular pattern and variability?
R2 = 0.63
Trough Conditions
Source: DOE and En*Vantage

9. Source: DOE and En*Vantage
The pattern and variability seen in NGL extraction versus the gas to crude price ratio is mostly due to the fundamentals driving ethane extraction. Needs further investigation.
Trough Conditions
Source: DOE and En*Vantage

10. Ethane extraction closely tracks ethane cracking, influenced by the gas to crude price ratio. But, how do competing feedstocks & ethylene business cycles affect the amount of ethane cracked?

11. The gas to crude price ratio appears to influence the cracking of ethane versus heavy feedstocks. So, how does the absolute level of ethylene production affect ethane cracking?

12. For the past 5 years, U.S. ethylene production varied anywhere between 48 and 58 billion lbs/yr rates and it is currently rebounding from the mid-year 2003 trough.

13. As ethylene production increases, ethane cracking increases and the flexibility to swing ethane volumes diminishes.

15. Shift in US Ethylene Plants
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.
Shift in US Ethylene Plants
Basic Types of
Ethylene Plants
Effective Capacity1
2004
2000
B Lb/Yr %
Purity Ethane Crackers
6.1
9.8
6.6
11.0
E/P Crackers
20.2
32.6
23.2
38.6
Flexi Crackers
29.3
47.3
27.1
45.1
Heavy Feed Crackers
6.4
10.3
3.2
5.3
Total Effective Capacity
62.0
100.0
60.1
1 Capacity numbers exclude ethylene plants that are mothballed.
Source: Hodson and En*Vantage

16. Effective Utilization Ethane Cracking Levels1
Our analysis indicates the following implications for ethane demand at different levels of US ethylene production.
Ethylene Production
Effective Utilization
Ethane Cracking Levels1
(MBPD)
(B Lb/Yr)
(%)
Min.
Max.
Flex. Range
Trendline 49 51 53 55 57 59 61
79.0
82.2
85.5
88.7
91.9
95.2
98.4
495
545
595
645
695
735
775
655
675
710
725
745
160
130
100 65 30 10
575
610
740
1 Excludes Refinery Ethane
Higher ethylene production requires greater ethane cracking (min and max) and the industry’s flexibility to swing ethane volumes diminishes.
The gas to crude price ratio also influences ethane cracking levels, particularly
when ethylene industry utilization rates are between 80% to 90%. Gas to crude price ratios
above 90% increase the probability of minimizing ethane cracking.
However, 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.

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

18. Back in February 2004, we felt that conditions in 2004 should provide a better environment for ethane cracking.
Ethane Cracking Swings Between MBPD Are Possible with a Bias to Maximize Ethane Cracking
High Probability of Ethane Cracking Swings Between MBPD with a Bias to Minimize Ethane Cracking as long as Co-Product Production is Not an Inhibitor
At B Lb/yr, Moderate to Good Probability of Ethane Cracking at or above 650 MBPD. Gas to Crude Ratio Less of a Factor at Production Rates above 55 B Lb/yr
High Probability of Sustainable Ethane Cracking at or Above 650 MBPD
Below 90%
Gas to Crude Price Ratio
Above 90%
Below 53 B LB/YR
Above 53 B LB/YR
Ethylene Production

19. Source: Platts, En*Vantage and Hodson
To support greater ethane cracking levels, the ethane “frac” spread increases to encourage more ethane extraction.
Q3 ‘04
Q1 ‘04
Q2 ‘04
Source: Platts, En*Vantage and Hodson

20. A paradigm shift to tighter crude markets should provide reasonable gas to crude price ratios (90% or below) and favorable conditions for ethane cracking and extraction.
Source: En*Vantage, ICE, DOE

21. Assuming ethylene production tracks GDP growth rate at a 0
Assuming ethylene production tracks GDP growth rate at a 0.9 multiple, ethane cracking could reach 800 MBPD by 2010.
Forecast of Ethylene Production and Ethane Cracking
Period
US GDP AGR
US Ethylene AGR
US Ethylene Production
US Ethane Cracking2
Billion Lbs/Year
MBPD
Q1 ’85 – Q4 ’99
2000
2001
2002
2003
3.0%
3.7%
0.2%
2.1%
3.1%
4.0%
-0.8%
-9.2%
3.4%
-1.0%
55.81
55.4
50.3
52.1
51.2
688
722
642
673
613
2004(e)
9.2%
55.9
680
2005
2006
2007
2008
2009
2010
3.2%
2.5%
2.0%
2.9%
2.2%
1.8%
57.5
58.7
59.7
60.8
61.9
63.0
715
735
755
770
790
805
Production
2 Excludes Ref. Ethane
Source: History- CMAI, En*Vantage and Hodson; Est & Forecast - En*Vantage

22. 5-Year Average Ethane Regional Production from Processing
US ethane extraction is distributed across the major processing regions. Regional costs of getting ethane to market is determined by T&F fees and gas basis.
5-Year Average Ethane Regional Production from Processing
(MBPD )
80% of US Gas Production is Processed
590 processing plants BCFD capacity
56% of plant capacity is cryogenic
70 fractionators million BPD capacity
85 % of Frac capacity at market centers
US Processing NGLs: 1843 MBPD
US Processing Ethane: 682 MBPD
US Ethane/US NGLs: 37%
Rockies Ethane/NGLs: 40%
NM Ethane/NGLs: 47%
Tex Inland Ethane/NGLs: 39%
Tex GC Ethane/NGLs: 42%
La GC Ethane/NGLs: 35%
Mid-Cont Ethane/NGLs: 36% 9 1% 80
12% 20 3% 85
12%
Rocky Mtn. 97
14%
Mid-Continent
111
16%
Texas Inland
222
33%
Texas Gulf Coast
Louisiana Gulf Coast
New Mexico 58 9%
% of US Ethane Production
Upper Midwest
Other
Source: EIA and En*Vantage

23. Data indicate that the processing industry can ramp up ethane extraction to near 800 MBPD, which supports 62 to 63 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’s cost of getting ethane to market shows that the
Rockies is not always the swing producer. “East LA” often provides the swing.
Source: EIA & En*Vantage

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

25. Feedstock Capabilities Regional Ethane Production
Our study demonstrated how ethylene production along with the gas to crude price ratio can determine 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
GDP Growth
Regional Ethane Production
Regional Extraction Economics
Ethane to Market
Ethane Frac Spread
Supply Side Factors

26. In Conclusion: Ethane is very much alive!!! --- barring a recession.
As ethylene production grows, ethane cracking must increase and the flexibility to switch off ethane diminishes.
Paradigm shift to a tighter crude market will keep ethane competitive with heavier feedstocks.
Ethane frac spreads should remain strong to encourage extraction in all regions.
This is not the time for processors to retreat from cryogenic plants.
Current infrastructure is in place to support ethane extraction in the 750 to 800 MBPD range, which can support ethylene production levels of 60 to 62 billion lbs/year as the economy moderately grows.
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.