Shale Gas andEthylene: Implicationsof Increased NGLProduction

Claire L. CagnolattiVP, Chemicals StudiesSolomon Associates

Bill Gwozd,Senior VP, Gas ServicesZiff Energy Group (a division of SolomonAssociates)

1

Shale Gas/LPG Production Forces

Resisting Forces (Cons)

Driving Forces (Pros)

Non-Renewable

Less Co-Prod

Unemploymentin Coal Industry

Safety

Fleets Only

Protectionof NA Interests

Ecology

Glut ofLPGs

NaphthaEconomics

PipelinesNeeded

DiscourageEfficiency

Over-Investment

Resistanceto Change

Regulation

RiskAversion

EarlyEnv. Issues

ConflictingPriorities

NIMBY

Conservation

“Fad”

RegionalFavoritism

EmissionsReduction

Target

Reserves100 yrs

CompetitiveCracker Feed

Low Emissions

“U-Turn”Terminals

“Wet” Gas: LPGsLocation

EnergyIndependence Early

Adapters

PR AdCampaign

JOBS!

Shift inTrade Balance

“Buzz”

Boost NAEconomy

Exports LNGDiscoveries

LowCost

Propane asTransport Fuel

EthaneEconomics

Infrastructure

AvailableCapital

Helps Energy-IntensiveIndustries

2

Ziff Energy Group Extends Solomon’s Reach

Solomon acquired Ziff Energy Group, July 2013

International Energy E&Pbenchmarking/consulting

North American NG forecasting/consulting

Creates the #1 benchmarking service providerfrom wellhead to specialty chemicals

Combines Ziff’s shale gas E&P knowledge withSolomon’s actual ethylene plant operating data

3

Ziff’s NG & NGL Supply & Infrastructure Studies46 Subscriptions with 24 Clients

4

Shale Gas Reserves inthe U.S. and Canada,Wet Gas vs Dry Gas

5

Added Value of Wet Gas vs Dry Gas

Many shale gas wells produce significant quantityof NGLs (ethane, propane, butane, C5s), referredto as “wet” gas wells

If little or no NGLs, well is considered “dry gas”

Separating NGLs adds to well cost, but increasedrevenue more than offsets cost

In some cases, ability to sell NGLs limits wellproducing capacity of natural gas

6

“Wet” gas wells produce more ethylene feedstock

Which NorthAmerican Shale GasWells Have MoreNGLs?

77

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

Williston

BigHorn

PowderRiver

Wind River

Green River

Piceance

Paradox

San Juan

Palo Duro

Sacramento

SanJoaquin

CACoastal

DJSalina

Sedgwick

Anadarko

GraniteWash

Permian

TX Gulf Coast

NemahaUplift

Cherokee

Ardmore

Ft. Worth

Eagle Ford

Fayetteville

Woodford

EastTX

LAGulf Coast

TX Offshore

LA Offshore

AL Offshore

Arkla-Haynesville

AL-MS-FL

BlackWarrior

Appalachian

MarcellusSouth Core

MarcellusNorth Core

Michigan

MT ThrustBelt

Uinta

Montney BC North

Montney AB

Duvernay

Bbl/M ft³

Low

Medium

High

Very High

8

How do NGLs addRevenue to GasWells?

99

Impact of Liquid Content on Revenue

Raw Gas with LiquidsEquiv

ale

ntG

as

Price

,M

ultip

leofD

ryG

as

Basi

s

Example of LiquidsUplift Calculation

Nat’lGas

C5+

N-Butane

I-Butane

Propane

Ethane 0.1

0.3

<0.1

0.2

0.3

0.7

2.74

0.7

0.5

Assumes 1%plant fuel

Based on:Royalties 30%Shrinkage up to 30%Average Liquids Price US $60/bbl

1.0

10

Impact of Liquid Content on Revenue

11

0 20 40 60 80 100

Liquids Yield, Bbl/MMcf

Equiv

ale

nt

Gas

Price

,M

ultip

leof

Dry

Gas

Basi

s

Gas Price Liquids Uplift

1.01.2

1.5

1.6

2.2

2.6

What do SolomonOlefin StudyResults Say?

1212

Feedstock Changes for Ethylene Productionin 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-plantbasis

More feed-flexible plants than other regions

Some plants making permanent changes to allowmore light feed cracking

13

North America plants taking advantageof ethane economics

North American Feedstock Trends 2007–2011

14

0

20

40

60

80

100

2007 2009 2011

Study Year

Perc

ent

of

Cra

cker

Feed

Ethane LPG NRC Gas Oil

What Happened to Co-Product Propylene &Butadiene?

Switch to more ethane feed in North America

Less propylene and butadiene produced in NorthAmerica

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, pricesmoderating 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 C3splitter

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 catalyticmethods (metathesis), methanol (MTP), biomass

16

Alternative Production of Butadiene

Metathesis

Butane Dehydrogenation

Biomass

Economic feasibility depends on product pricerelative 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 pipelinelogistics, and on how quickly these other uses are putinto practice.

18

How Much Shale Gas is Out There?

North American reserves: 100+ years1

Today, limit to North America natural gas production insome 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)

Driving Forces (Pros)

Non-Renewable

Less Co-Prod

Unemploymentin Coal Industry

Safety

Fleets Only

Protectionof NA Interests

Ecology

Glut ofLPGs

NaphthaEconomics

PipelinesNeeded

DiscourageEfficiency

Over-Investment

Resistanceto Change

Regulation

RiskAversion

EarlyEnv. Issues

ConflictingPriorities

NIMBY

Conservation

“Fad”

RegionalFavoritism

EmissionsReduction

Target

Reserves100 yrs

CompetitiveCracker Feed

Low Emissions

“U-Turn”Terminals

“Wet” Gas: LPGsLocation

EnergyIndependence Early

Adapters

PR AdCampaign

JOBS!

Shift inTrade Balance

“Buzz”

Boost NAEconomy

Exports LNGDiscoveries

LowCost

Propane asTransport Fuel

EthaneEconomics

Infrastructure

AvailableCapital

Helps Energy-IntensiveIndustries

20

Which Forcesare Stronger?

2121

Shale Gas/LPG Production Forces

Resisting Forces (Cons)

Driving Forces (Pros)

Non-Renewable

Less Co-Prod

UnemploymentIn Coal Industry

Safety

Fleets Only

Protectionof NA Interests

Ecology

Glut ofLPGs

NaphthaEconomics

PipelinesNeeded

Over-Investment

Resistanceto Change

Regulation

RiskAversion

EarlyEnv. Issues

ConflictingPriorities

NIMBY

Conservation

“Fad”

RegionalFavoritism

EmissionsReduction

Target

Reserves100 yrs

CompetitiveCracker Feed

Low Emissions

“U-Turn”Terminals

“Wet” Gas: LPGsLocation

EnergyIndependence Early

Adapters

PR AdCampaign

JOBS!

Shift inTrade Balance

“Buzz”

Boost NAEconomy

Exports LNGDiscoveries

LowCost

Propane asTransport Fuel

EthaneEconomics

Infrastructure

AvailableCapital

Helps Energy-IntensiveIndustries

DiscourageEfficiency

22

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Thank you!

Claire L. CagnolattiVP, Chemicals StudiesSolomon Associates

Bill Gwozd, Senior VP, Gas ServicesZiff Energy Group (a division of SolomonAssociates)

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