LSU Natural Gas Conference

Transcription

1 LSU Natural Gas Conference Presented by: Bob Purgason VP Gulfcoast Region Williams Companies

2 Introduction Structural shift in natural gas pricing The crude to gas ratio: A critical relationship for NGL processing Implications of a sustained shift in gas, crude, and NGL pricing relationships Implications for ethane Implications for heavier NGL s

3 Hydrocarbon Value Chain Y-Grade Storage Caverns Purity Storage Caverns Refineries Purity Product Pipelines Gas Plant Y-Grade Pipelines Fractionator Well Storage Tanks Chemical Plants Production Gas Processing Residue Gas to Interstate Pipelines Storage Agricultural/Residential Distribution Industrial Fuels Production Gathering Gas Processing Transportation Liquids Processing Marketing

4 Propane 9% Butanes 4% Natural Gasoline 2% Cont. 4% Ethane 13% Methane 68% TYPICAL UNPROCESSED GAS

5 Evolution of Gas Pricing in North America Henry Hub Natural Gas Price Phase I : The Abundant Commodity Phase II : The Tenuous Balance Phase III : The Supply Squeeze $ per MMBTu Jan-91 Jul-91 Supply Perspective Source: Platts Jan-92 Jul-92 Jan-93 Just Another Commodity Manufacturing Strategies Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Declines in Traditional Basins Select Growth Regions Advent of the Deepwater Growing Imports Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 The Supply Treadmill Prospect Shortfall Unprecedented Volatility Growth of Frontiers

6 The Crude to Gas Relationship Gulf Coast Natural Gas Price vs. NYMEX Crude $/MMBtu $/Barrel Gulf Coast Natural Gas NYMEX Crude Oil The relationship between natural gas and crude has varied widely over time

7 The Crude to Gas Relationship Historical Crude to Gas Ratio Crude/Gas The crude to gas ratio (crude divided by gas) has trended down as gas has strengthened relative to crude oil

8 The Crude to Gas Relationship Crude to Gas Ratio versus Gulf Coast Frac Spread Crude/Gas cents per gallon Crude to Gas Ratio Gulf Coast Frac Spread The crude to gas ratio correlates highly with historical NGL processing spreads

9 The Crude to Gas Relationship Crude to Gas Ratio versus Gulf Coast Frac Spread Crude/Gas cents per gallon Crude to Gas Ratio Gulf Coast Frac Spread Historically, low points in the crude to gas ratio have meant hard times for gas processors

10 The Crude to Gas Relationship Crude to Gas Ratio versus Gulf Coast Frac Spread Crude/Gas cents per gallon Crude to Gas Ratio Gulf Coast Frac Spread Historically, low points in the crude to gas ratio have meant hard times for gas processors

11 The Crude to Gas Relationship Gulf Coast NGL Frac Spread Nat. gas - $ J-99 M-99 S-99 J-00 M-00 S-00 J-01 M-01 S-01 J-02 M-02 S-02 J-03 cents per gallon M-03 Crude - $29.30 Ratio - 11 Ethylene - $.27/lb Strong Economy Nat. gas - $8.69 Crude - $28.40 Ratio 3.3 Ethylene - $.27/lb Recession begins Nat. gas - $2.19 Crude - $25.93 Ratio 11.8 Ethylene - $.17/lb Weak Economy Nat. gas - $5.76 Crude - $28.07 Ratio 4.9 Ethylene - $.19/lb Weak Economy Analysis of recent frac spreads the economy also plays a role

12 The Crude to Gas Relationship Natural Crude Crude/Gas Gas Oil Ratio Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Note: As of 9/30/2003 Crude/Gas Historical & NYMEX Futures Crude to Gas Ratio Crude to Gas Ratio NYMEX Futures Current NYMEX price strips suggest a continuation of low crude to gas ratios

13 Implications of the Pricing Trends US NGL Production vs. Gulf Coast Frac Spread MBPD cents per gallon Total US Gas Plant NGL Production Gulf Coast Frac Spread Unprecedented NGL rejection has occurred during periods of low ratios/low frac spreads

14 Implications of the Pricing Trends During January of /3 of total NGL production lost to rejection 650 MBPD 2.2 BCFD natural gas Between May and August of MBPD of ethane and 80 MBPD of propane remained in natural gas stream 0.85 BCFD The US has seen some degree of continual ethane rejection for the last year

15 Implications - Ethane Mont Belvieu Ethane vs. Gulf Coast Natural Gas $/MMBtu cents per gallon Gulf Coast Natural Gas MB Ethane Because it is the most readily rejected NGL, ethane is the most responsive NGL to changes in gas price

16 Implications - Ethane High gas prices relative to crude oil places ethane at a competitive disadvantage to heavier petrochemical feedstocks While ethane production suffers, demand for ethane has been equally weak Despite weak production, ethane inventories are near the 5-year-average

17 Implications - Heavier NGL s Propane & Heavier NGL's vs. NYMEX Crude $/Barrel NYMEX Crude Oil C3 IC4 NC4 C5 The heavier NGL s are highly correlated to crude oil

18 Hydrocarbon Value Chain Y-Grade Storage Caverns Purity Storage Caverns Refineries Purity Product Pipelines Gas Plant Y-Grade Pipelines Fractionator Well Storage Tanks Chemical Plants Production Gas Processing Residue Gas to Interstate Pipelines Storage Agricultural/Residential Distribution Industrial Fuels Production Gathering Gas Processing Transportation Liquids Processing Marketing

19 Implications - Heavier NGL s NGL Gulf Coast Frac Spreads by Product cents per gallon C2 C3 IC4 NC4 C5 meaning that their processing margins are hardest hit when crude to gas ratios are low

20 Implications - Heavier NGL s Propane & Heavier NGL's Production vs. Gulf Coast Frac Spread % of max production 100% 95% 90% 85% 80% 75% C3+ Production C3+ Gulf Coast Frac Spread cents per gallon Weak processing margins do result in some lost production of heavier NGL s

21 Implications - Heavier NGL s Millions of Barrels Net US Waterborne LPG Imports Includes both propane and butane imports YTD 9/03 However, heavy waterborne imports supplement propane and butane supplies

22 Implications - Heavier NGL s API US NGL Inventory Levels (Millions of Bbls) w/out Current Five-Year % Over/ Waterborne 8/31/03 Average Under Imports Ethane % -1.2% Propane % -33.3% N. Butane % -30.5% I. Butane % -32.0% N. Gasoline % -0.5% Total NGL's % -25.5% Keeping inventories closer to five-year averages

23 Merchantability The heavy rejection of NGL s in recent years has caused significant operational problems for natural gas pipelines In response, natural gas pipeline companies have begun issuing merchantability notices These notices enforce the requirement that some NGL s be removed to meet pipeline specs before entering the system

24 Conclusions Strengthening natural gas prices relative to crude oil have significantly reduced the production of NGL s in the US Waterborne imports will continue to play a critical role in balancing the heavier NGL s The weakened feedstock desirability of ethane, combined with a struggling economy, have reduced demand and kept ethane supplies in balance

25 Conclusions CMAI NT Ethylene vs. Spot Ethylene J-98 M-98 S-98 J-99 M S-99 J-00 M-00 S-00 J-01 M-01 S-01 J-02 M-02 S-02 J-03 M-03 cents per lb ethylene CMAI NT Ethylene Spot Ethylene The growing gap between NT and spot - an indication of an inactive spot market

26 Conclusions CMAI NT Ethylene vs. Spot Ethylene vs. Mont Belvieu Ethane J-98 M-98 S-98 J-99 M-99 S-99 J-00 M-00 S-00 J-01 M-01 S-01 J-02 M-02 S-02 J-03 cents per lb ethylene cents per gallon ethane M-03 CMAI NT Ethylene Spot Ethylene MB Ethane

27 Conclusions High natural gas prices will result in high feedstock costs for ethane Ethane pricing quickly responds to pricing changes in natural gas Reasonable price transparency Probable margin squeeze within ethylene chain Improving economy Minimal ethylene price transparency

28 LSU Natural Gas Conference Presented by: Bob Purgason VP Gulfcoast Region Williams Companies

29 Structural Shift Supply Side Many traditional North American supply basins are in decline Western Canadian production, the marginal supply of the last decade, is prominent among the declining basins LNG and Arctic gas represent the marginal supply of the new era, but it will take years to develop the infrastructure

30 Structural Shift Supply Side Production per Well (Mcf per Day) Number of Wells Production per Well Number of Wells (thousands) Source: Cambridge Energy Research Associates. Data: Energy Information Administration More wells have not meant more production

31 Structural Shift Demand Side 8.0 Incremental Gas Demand for Power Generation (Growth over 2002) Bcf per Day Expected increases in future natural gas demand for power generation

32 Structural Shift - Supply Gap MMcf per day 68,000 66,000 64,000 62,000 60,000 58,000 56,000 54,000 52,000 50, US Production US Consumption Note: Consumption excludes pipeline, lease and plant fuel. Production excludes imports, storage and balancing adjustments.