Shale Gas and Ethylene: Implications of Increased NGL Production

Claire L. Cagnolatti VP, Chemicals Studies Solomon Associates

Bill Gwozd, Senior VP, Gas Services Ziff Energy Group (a division of Solomon Associates)

1 Shale Gas/LPG Production Forces

Resisting Forces (Cons) Emissions Protection Glut of Over- Regulation Conflicting Reduction Non-Renewable of NA Interests LPGs Investment Priorities Target

Less Co-Prod Pipelines Risk Regional Safety Ecology Needed Aversion NIMBY Favoritism

Naphtha Resistance Early “Fad” Unemployment Economics to Change Env. Issues in Coal Industry Fleets Only Discourage Conservation Efficiency

Reserves Exports Discoveries LNG Boost NA 100 yrs Location Low Economy “Wet” Gas: LPGs Cost Low Emissions Infrastructure “Buzz” Energy JOBS! “U-Turn” Independence Early Terminals Adapters Helps Energy- Competitive Propane as Ethane Available PR Ad Shift in Intensive Cracker Feed Transport Fuel Economics Capital Campaign Trade Balance Industries Driving Forces (Pros)

2 Ziff Energy Group Extends Solomon’s Reach

. Solomon acquired Ziff Energy Group, July 2013 . International Energy E&P benchmarking/consulting . North American NG forecasting/consulting . Creates the #1 benchmarking service provider from wellhead to specialty chemicals . Combines Ziff’s shale gas E&P knowledge with Solomon’s actual ethylene plant operating data

3 Ziff’s NG & NGL Supply & Infrastructure Studies 46 Subscriptions with 24 Clients

4 Shale Gas Reserves in the U.S. and Canada, Wet Gas vs Dry Gas

5 Added Value of Wet Gas vs Dry Gas

. Many shale gas wells produce significant quantity of NGLs (ethane, propane, butane, C5s), referred to as “wet” gas wells . If little or no NGLs, well is considered “dry gas” . Separating NGLs adds to well cost, but increased revenue more than offsets cost . In some cases, ability to sell NGLs limits well producing capacity of natural gas

“Wet” gas wells produce more ethylene feedstock

6 Which North American Shale Gas Wells Have More NGLs?

7 NGL Content of Gas Wells (Bbl NGL/M ft³ Dry Gas)

Montney BC North

Duvernay Montney AB

MT Thrust Belt Williston

Big Horn Wind River Powder Michigan River Marcellus North Core Green River Nemaha Sacramento Salina Uplift DJ Uinta Marcellus Piceance South Core Sedgwick Appalachian Paradox San Anadarko Joaquin Cherokee San Juan Granite Bbl/M ft³ Wash Fayetteville CA Coastal Palo Duro Woodford Black Low Ardmore Warrior Arkla-Haynesville East Ft. Worth Medium Permian TX AL-MS-FL LA High Gulf Coast AL Offshore TX Gulf Coast Very High

Eagle Ford LA Offshore

TX Offshore

8 How do NGLs add Revenue to Gas Wells?

9 Impact of Liquid Content on Revenue s i s a

B Based on:

s Royalties 30% a

G Shrinkage up to 30%

y Average Liquids Price US $60/bbl r D f o

Ethane 0.1 e l p

i 0.3 7

. Propane t l 5 0 . u 0 I-Butane <0.1 M

N-Butane 0.2 , e c i C5+ r 0.3 P s a 2.74 G

Nat’l

t Assumes 1% 1.0 0.7 n Gas e plant fuel l a v i u q

E Raw Gas with Liquids Example of Liquids Uplift Calculation

10 Impact of Liquid Content on Revenue y r D f o e

l 2.6 p i t l

u 2.2 s M i

, s 1.6 e a c B i r 1.5 s P a s G 1.2 a

G 1.0 t n e l a v i u q E 0 20 40 60 80 100 Liquids Yield, Bbl/MMcf

Gas Price Liquids Uplift

11 What do Solomon Olefin Study Results Say?

12 Feedstock Changes for Ethylene Production in North America . Region with the most feedstock changes . Olefin Study North American Trend Group . Approx 50% of ethylene production capacity . Trends over three study cycles on same-plant basis . More feed-flexible plants than other regions . Some plants making permanent changes to allow more light feed cracking

North America plants taking advantage of ethane economics

13 North American Feedstock Trends 2007–2011

100 d e e F

80 r e k c 60 a r C f

o 40 t n e

c 20 r e P 0 2007 2009 2011 Study Year

Ethane LPG NRC Gas Oil

14 What Happened to Co-Product Propylene & Butadiene? . Switch to more ethane feed in North America . Less propylene and butadiene produced in North America . Prices rose worldwide, peaking in 2011 . Both had higher value per ton than ethylene . High prices improved alternate (non-cracker) production economics

Severe propylene shortages were short term, prices moderating as alternative production increases

15 Alternative Production of Propylene

. Alternate (non-cracker) production to increase . Polymer-grade propylene from refineries . Must invest in mercury, arsine removal, and C3 splitter . Propylene from propane dehydrogenation (PDH) . Eight announced PDH units for USA . NA PDH economics could turn on export plans . PDH also being pursued in ME, E. Europe, Asia . Other On-Purpose Propylene (OPP) via catalytic methods (metathesis), methanol (MTP), biomass

16 Alternative Production of Butadiene

. Metathesis . Butane Dehydrogenation . Biomass

Economic feasibility depends on product price relative to raw materials, investment cost

17 Other Uses for LNG, LPGs from Shale Gas

. Transportation Fuel . Currently fleet vehicles such as buses . Need infrastructure to use in personal vehicles . Exports to Europe, South America, Asia . LPGs for cracker feedstock, transportation . LNG for fuel . Syngas, Gas-to-Liquid (GTL) Fuel . Power Generation – half the emissions of coal

Price, especially for LPGs, will depend on pipeline logistics, and on how quickly these other uses are put into practice.

18 How Much Shale Gas is Out There?

. North American reserves: 100+ years1 . Today, limit to North America natural gas production in some areas is disposal of ethane & propane2 . New ethane crackers coming online in North America . More “room” to produce natural gas . More supply can lead to lower natural gas prices . Shale gas also in Middle East, China, South America, Australia, East Europe

1 Chemplants.com, 30 June 2013 2 Platts.com, 30 Aug 2013

19 Shale Gas/LPG Production Forces

Resisting Forces (Cons) Emissions Protection Glut of Over- Regulation Conflicting Reduction Non-Renewable of NA Interests LPGs Investment Priorities Target

Less Co-Prod Pipelines Risk Regional Safety Ecology Needed Aversion NIMBY Favoritism

Naphtha Resistance Early “Fad” Unemployment Economics to Change Env. Issues in Coal Industry Fleets Only Discourage Conservation Efficiency

20 Which Forces are Stronger?

21 Shale Gas/LPG Production Forces

Resisting Forces (Cons) Emissions Protection Glut of Over- Regulation Conflicting Reduction Non-Renewable of NA Interests LPGs Investment Priorities Target

Less Co-Prod Pipelines Risk Regional Safety Ecology Needed Aversion NIMBY Favoritism

Naphtha Resistance Early “Fad” Unemployment Economics to Change Env. Issues In Coal Industry Fleets Only Discourage Conservation Efficiency

22 Thank you!

Claire L. Cagnolatti VP, Chemicals Studies Solomon Associates

Bill Gwozd, Senior VP, Gas Services Ziff Energy Group (a division of Solomon Associates)

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