NATURAL GAS LIQUIDS (NGLS) IN NORTH AMERICA: AN UPDATE PART IV GLOBAL MARKETS AND OPPORTUNITIES

Transcription

1 Study No. 139 CANADIAN ENERGY RESEARCH INSTITUTE NATURAL GAS LIQUIDS (NGLS) IN NORTH AMERICA: AN UPDATE PART IV GLOBAL MARKETS AND OPPORTUNITIES Canadian Energy Research Institute Relevant Independent Objective

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3 NATURAL GAS LIQUIDS (NGLs) IN NORTH AMERICA: AN UPDATE PART IV GLOBAL MARKETS AND OPPORTUNITIES

4 Natural Gas Liquids (NGLs) in North America: An Update Part IV Global Markets and Opportunities Copyright Canadian Energy Research Institute, 2014 Sections of this study may be reproduced in magazines and newspapers with acknowledgement to the Canadian Energy Research Institute ISBN Author: Carlos A. Murillo Acknowledgements: The author wishes to acknowledge the support and contributions of Peter Howard and Megan Murphy in the production, reviewing, and editing of this report. Julie Dalzell and Anthony Mersich provided most of the research and material on the United States sections. Staff from RBAC Inc. (Sherman Oaks, California) and RBN Energy LLC (Houston, Texas) provided feedback and data for crossreferencing and due diligence purposes on the United States. Additionally, industry peerreviewers from across the integrated oil and gas, midstream, and consulting segments provided valuable feedback and suggestions that helped make these reports more relevant, independent, and objective in accordance with CERI s mandate. CANADIAN ENERGY RESEARCH INSTITUTE 150, Street NW Calgary, Alberta T2L 2A6 Canada Printed in Canada Front cover photo s courtesy of Pembina Pipeline Corporation, Corporate Update January 2014; and

5 Natural Gas Liquids (NGLs) in North America: An Update Part IV Global Markets and Opportunities Table of Contents iii LIST OF FIGURES... EXECUTIVE SUMMARY... 1 GLOBAL NGL MARKETS AND THE IMPORTANCE OF THE ASIAPACIFIC REGION... 5 Global NGL Prices and Arbitrage Opportunities to WCSB Producers ENTERING THE GLOBAL LPG MARKET GLOBAL PETROCHEMICALS: CANADIAN COMPETITIVENESS AND GROWTH OPPORTUNITIES v

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7 Natural Gas Liquids (NGLs) in North America: An Update Part IV Global Markets and Opportunities List of Figures v 1.1 World NGL, LPG and Naphtha Supply and Disposition and 2011 % Shares Global NGL, LPG and Naphtha Production by Region Global NGL and Naphtha Demand by Enduse and by Liquid NGL and Naphtha Demand by Region Global NGL and Naphtha Supply, Demand and Trade Flows Relationship between Oil Consumption per Capita and GDP per Capita by Region and for Selected Countries Global Demand for NGLs and Naphtha Global Natural Gas Prices Natural Gas Heating Values around the World Global LPG Prices and Saudi LPG CP Correlation to Global Crude Oil Prices Global Naphtha Prices WCSB to AsiaPacific NGL Arbitrage Opportunity and Ease of Transport WCSB Extraction Economics with AsiaPacific Option Global LPG Supply and Demand LPG Production by Region and by Source LPG Demand by Region and Enduse Interregional Net LPG Trade and Changing Trade Flows North American Propane Netbacks by Route and Destination to AsiaPacific Destinations World LPG Demand Outlook World Demand of NGLs and Naphtha for Use as a Petrochemical Feedstock World Petrochemical Feedstock Prices Energy Costs Share of Total Production Costs by Product Olefin Yield by Feedstock World Steam Cracking Capacity by Region and Type of Feedstock, Feedstock Requirements by Region and Type, and Global Ethylene Cost Curve and Capacity Global NGL and Naphtha Petrochemical Feedstock Demand Outlook Global Ethylene and Propylene Capacity Additions Global Polyethylene and Polypropylene Balances by Region... 45

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9 Natural Gas Liquids (NGLs) in North America: An Update 1 Part IV Global Markets and Opportunities Executive Summary Worldwide production of NGLs (C 2, C 3, C 4s, and C 5+ /condensate) and naphtha 1 was estimated at close to 22 million barrels per day (MMb/d) 2 in 2011, 3 with just over half of these liquids (53 percent) produced at refineries, while the remainder was produced from gas developments/gas plants. About two thirds of these liquids are produced by countries outside the Organization of Petroleum Exporting Countries (nonopec), where approximately 80 percent of production volumes came from refineries. Meanwhile, the remaining volumes of NGLs and naphtha are produced by OPEC countries, with the largest portion (around 84 percent in 2011) coming from gas plants and being produced primarily by a handful of OPEC s Middle Eastern and African members including Saudi Arabia, Qatar, the United Arab Emirates (UAE), Iran, Algeria, and Nigeria. On a global basis, about half of the demand for these liquids comes from the petrochemical sector (all liquids), while refining of condensate is also a major demand segment followed by energy demand (primarily LPG) at the residential/commercial sector, industry, and last but not least, in the transportation sector. In 2011, OPEC members accounted for 20 percent of global demand for these liquids compared to 80 percent for nonopec members, of which countries in the AsiaPacific region accounted for about 36 percent of total global demand for NGLs and naphtha. With low demand levels compared to high production volumes, OPEC member countries have significant surplus volumes available for trade in global markets. On the other hand demand from countries in the AsiaPacific region far exceed their production volumes, leading to high requirements for interregional trade in NGLs and naphtha. While most other regions of the world participate in global trade of NGLs and naphtha, the volumes traded in these regions are much smaller compared to those available from OPEC members and those needed in the Asia Pacific region. Meanwhile, North America s long NGL supply is resulting in more volumes reaching the global NGLs and naphtha markets (primarily LPG, but possibly ethane in the future), and can provide supply diversification to global trade in these liquids. 1 Naphtha is added in this analysis as it is the largest feedstock used for production of petrochemicals (olefins, primarily). NGLs and naphtha includes ethane, liquefied petroleum gases (LPG) (propane/butanes), pentanes plus/condensate, and petrochemical naphtha 2 According to the latest (2013) World Energy Outlook (WEO) from the International Energy Agency (IEA), total 2012 demand for ethane (2.7 MMb/d), LPG (7.9 MMb/d), and naphtha (6.4 MMb/d), combined, accounted for a total of 17 MMb/d or 19% of the world s total liquids demand of 89.7 MMb/d. This estimate excludes approximately 5.3 MMb/d of condensate volumes that get transferred from NGL supplies primarily to crude oil refining markets. Total world estimated NGLs/condensate and naphtha demand is therefore estimated at 22.3 MMb/d for Latest year for which a complete dataset from the International Energy Agency (IEA) was available at the time of writing

10 2 Canadian Energy Research Institute Going forward, based on the latest analysis from the International Energy Agency (IEA) it is expected that countries in the AsiaPacific region will exhibit some of the highest economic and population growth rates as well as urbanization rates, leading these countries to be a primary source for energy demand growth but also finished goods. Given a newly realized surplus position but also proximity to the region, Canadian and North American NGLs and petrochemical players should look at the AsiaPacific region when contemplating opportunities to expand to new markets. Given regional price disparities in energy prices, the best opportunities exist for Canadian producers to target liquefied natural gas (LNG) and liquefied petroleum gas markets (LPG) (primarily propane) in the AsiaPacific region in order to obtain higher prices for their output. Alternatively, AsiaPacific buyers could benefit from lower prices for these commodities, as well as supply diversification, if they were to acquire their supplies in North America. But these regional price disparities also present opportunities for energyintensive industries in North America, such as petrochemicals, to have a feedstock cost advantage and obtain higher margins in an environment where petrochemical derivative product prices are primarily determined through global crude oil priceinduced channels. Global LPG markets, a subset of global NGLs and naphtha markets, thus reflect similar conditions to NGL/naphtha markets and are characterized by high demand levels in the Asia Pacific region unmet by local supplies and a high degree of dependence on OPECdominated trade volumes. With the largest demand segments being residential/commercial and petrochemical feedstock, future demand growth for LPG will depend on these two major pieces of the puzzle. Meanwhile, given the nature of LPG as a byproduct of both gas production and crude oil refining, increased LPG supplies will hinge on future developments in gas and crude oil markets. If LPG supplies rise rapidly, demand can increase in the residential sector via fuel switching to cleaner and more affordable fuels, but also across the price sensitive petrochemical sector, including large volumes needed for a large planned buildup of propane dehydrogenation (PDH) plants in China and also feedstock switching for olefins crackers, both of which could serve as swing demand factors to balance the LPG market. The resulting development of such a situation can be potentially lower worldwide LPG prices and a lessened dominance of OPEC members in the market. In the context of petrochemical industry expansion, the Canadian petrochemical industry is currently one of the most competitive on a global basis, based on feedstock and thus production costs. This is the case as the industry relies predominantly on advantaged priced lighter feedstock such as ethane and propane, while about half of the world s capacity is configured to run on heavier feeds such as naphtha, for which prices are mainly driven by global crude oil markets

11 Natural Gas Liquids (NGLs) in North America: An Update 3 Part IV Global Markets and Opportunities Going forward, naphtha is expected to remain the dominant source of petrochemical feedstock for production of high value olefins. While some industry observers have contemplated the idea of Chinese CoaltoOlefin (CTO) plants as a threat to other players in the industry, there are a series of technical and economic issues that are yet to be solved for development of such plants to gain large scale momentum. Further analysis indicates that petrochemical and derivative prices will continue to be driven by naphthacracking economics, indicating that Canadian petrochemical producers can maintain a competitive advantage assuming prevailing pricing and feedstock availability conditions. Over the coming years, demand for ethylene and propylene s main derivatives, polyethylene (PE) and polypropylene (PP) are expected to continue to increase, led by rapid increases in the AsiaPacific region. As this situation develops, production capacity for PE/PP is expected to be built primarily in the AsiaPacific region but also in North America. This can in turn result in surplus volumes of PE/PP being produced before 2020, resulting in lower prices. Within the AsiaPacific region, countries such as China and Indonesia will continue to suffer from a deficit of these products, while countries such as South Korea and Singapore will continue to produce levels above and beyond their domestic needs. In that case, the main competitors to Canadian petrochemical producers reaching the Asia Pacific market lie within North America (the United States) and the AsiaPacific market itself. While feedstock pricing, availability, and target markets are but some of the considerations for expanding petrochemical facilities in North America, these indicators are for the most part positive and point to future opportunities. With Canadian NGLs and petrochemicals looking for outlets for increasing supplies, an understanding of global NGLs and petrochemical markets is a useful tool for understanding future opportunities and challenges. Taking into consideration the research and analysis presented in Parts IIV of the NGL study update, Part V (forthcoming), will present CERI s results of the NGL modelling exercise for North America.

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13 MMb/d Natural Gas Liquids (NGLs) in North America: An Update 5 Part IV Global Markets and Opportunities Global NGL Markets and the Importance of the AsiaPacific Region 4 This is the fourth part of the update to CERI s 2012 NGL study. 5 While Parts IIII focused on North American upstream, infrastructure, and market fundamentals, the purpose of this report is to provide background information in regards to global NGL markets. Figure 1.1 displays the world s supply and disposition balance for NGLs, 6 LPG, 7 and naphtha 8 combined. These will be referred to as NGLs and naphtha in the context of this section. 9 Figure 1.1: World NGL, LPG and Naphtha Supply and Disposition (MMb/d) ( ) and 2011 % Shares Energy Demand NonEnergy Demand Stocks/ Adjustment Refinery Naphtha Refinery LPG Gas Plants NGLs 47% 53% 25% 5.0 Total NGLs/ LPG Production Total Supply (NGLs/ LPG/ Naphtha) 75% S D S D S D S D S D S D S D S D S D S D Total Demand Gas Plants Refineries NonEnergy Demand Energy Demand Source: Data from IEA. 10 Figures by CERI 4 Given that this report is primarily based on data from the International Energy Agency (IEA), the AsiaPacific region will be defined as the aggregate of OECD Asia Oceania, Asia (excluding China), and China (P.R. of China and Hong Kong) regions as defined by the IEA. These regions in turn include Australia, Bangladesh, Brunei Darussalam, Cambodia, China, Chinese Taipei (Taiwan), India, Indonesia, Japan, Korea (both DPR and South), Malaysia, Mongolia, Myanmar, Nepal, New Zealand, Pakistan, Philippines, Singapore, Sri Lanka, Thailand, and Vietnam. See: 5 CERI Study 130, Natural Gas Liquids in North America: Overview and Outlook to 2035, Carlos A. Murillo, July Includes liquids from separators, field facilities, and gas processing plants including but not limited to ethane, propane, butanes, pentanes, natural gasoline, and condensate as per IEA definitions 7 Light paraffin hydrocarbons derived from refinery processes, crude oil stabilization plants, and natural gas processing plants, comprising propane and butane or a combination of the two. Could include propylene, butylene, isobutene, and isobutylene as per IEA definitions 8 Feedstock destined for petrochemical industry (ethylene manufacture or aromatics production) or for gasoline production by reforming or isomerization. Includes materials that distill between 30 and C as per IEA definitions 9 While adding NGLs and LPG is consistent with the approach used by CERI to quantify NGL supply in the previous reports (Parts IIII), naphtha has been added to this section for the purpose of discussing ethylene cracking demand, for which naphtha is a primary one on a global basis 10 International Energy Agency (IEA), IEA World Energy Statistics and Balances: IEA, World Energy Outlook 2013:

14 6 Canadian Energy Research Institute As can be observed, total global NGL and naphtha supply was estimated at close to 22 million barrels per day (MMb/d) in 2011, 11 for which production was almost evenly split between gas plants (ethane, propane, butanes, pentanes, and condensate) and refineries (LPG and naphtha). As in the case for Canada, the majority of demand for these liquids on a global basis was for the purpose of nonenergy use (threequarters in 2011), while onequarter was used for energy purposes (primarily LPG). In 2011, approximately twothirds of production of these liquids was sourced from nonopec countries, 12 while about onethird was sourced from OPEC countries 13 as seen in Figure 1.2. However, there are important differences in regards to the sources (gas plants versus refineries) of these liquids across these two major world regions. In regards to OPEC countries (top portion of Figure 1.2), approximately 84 percent of NGLs and naphtha were produced from gas plants in NGL production has increased rapidly over the last decade, especially across OPEC s Middle Eastern member countries such as Qatar, the UAE and Iran. These increases are primarily related to increases in gas production such as those tied to liquefied natural gas (LNG) projects (in Qatar s case). Meanwhile, Saudi Arabia remains the largest NGL producer among OPEC s Middle East members, indicating a large portion of these gas plant NGLs are coming from associated or solution gas tied to crude oil production. In 2011, the group of OPEC s Middle Eastern members accounted for about 80 percent of OPEC s total output of NGLs and naphtha. Across nonopec countries (bottom portion of Figure 1.2), refinery naphtha and LPGs (40 percent each) combined, accounted for about 80 percent of the output of NGLs and naphtha in 2011, while gas plants NGLs account for the remaining 20 percent. This is an important distinction because it means most of these liquids are produced by refineries, which is consistent with nonopec countries consumption of crude oil. Approximately 60 percent of nonopec gas plants NGL output comes from North America (including Mexico), 14 roughly 20 percent comes from nonoecd Europe and Eurasia (primarily Russia), while the remaining 20 percent comes primarily from the AsiaPacific, OECD Europe (Norway and the United Kingdom), and Latin American regions, with small volumes produced from nonopec members in the Middle East and Africa is the latest year for which both supply and demand data are complete and consistent 12 All countries that are not members of the Organization of Petroleum Exporting Countries (OPEC) across North America, Latin America (Central and South America), Europe and Eurasia, the Middle East, Africa, and the AsiaPacific region 13 Includes OPEC Middle East (Iraq, Islamic Republic of Iran, Kuwait, Saudi Arabia, Qatar, and the United Arab Emirates (UAE)); OPEC Africa (Algeria, Angola, Libya, and Nigeria), and OPEC Latin America (Ecuador and Venezuela) 14 OECD North America

15 MMb/d % MMb/d % Natural Gas Liquids (NGLs) in North America: An Update 7 Part IV Global Markets and Opportunities Figure 1.2: Global NGL, LPG and Naphtha Production by Region (MMb/d) ( ) Refinery Naphtha Refinery LPG Gas Plants NGLs Total OPEC OPEC Middle East % share of OPEC 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % 35% 30% % % Refinery Naphtha Refinery LPG Gas Plants NGLs Total NONOPEC North America % share of NONOPEC Asia Pacific % share of NONOPEC 15% 10% 5% 0% Source: Data from IEA. Figures by CERI The AsiaPacific region accounted for approximately 50 percent of refinery naphtha and LPG production in 2011, followed by Europe/Eurasia (OECD Europe plus nonoecd Europe and Eurasia) at about 30 percent, North America at 13 percent, with the remaining 7 percent produced across Latin America and Africa. Production of nonopec refinery LPG and naphtha has increased rapidly over the last decade primarily led by increases in production from the AsiaPacific region given increased crude oil and overall energy demand in the region. Increased production has been notably the case in China, but also in other parts of the region including India, Thailand, and Singapore, while production and demand has been relatively flat in the AsiaOceania area (Japan, Korea, Australia, and New Zealand). Figure 1.3 illustrates global demand for NGLs and naphtha by enduse and by liquid.

16 MMb/d MMb/d 8 Canadian Energy Research Institute Figure 1.3: Global NGL and Naphtha Demand by Enduse (Top) and by Liquid (Bottom) (MMb/d) ( ) Energy Use: Transport Energy Use: Industry Energy Use: Residential/ Commercial/ Other 15.0 Energy Industry Own Use 10.0 Transformation Processes Petrochemical Feedstocks 5.0 Total NonEnergy Demand Total Demand Naphtha NGLs LPG Ethane Total Demand Source: Data from IEA. Figures by CERI In 2011, the single largest use for NGLs and naphtha at the global level was as petrochemical feedstock (48 percent, primarily for ethylene production), followed by transformation processes at 26 percent (primarily blending of condensate into the crude refining stream), energy use at the residential/commercial/other (agriculture and forestry) level (18 percent), with the smallest endusers found across the industrial, transport, and energy industry ownuse categories (8 percent combined). Over the 2002 to 2011 timeframe, growth in demand for NGLs and naphtha has occurred across the petrochemical feedstock, transformation, residential/commercial/other, and transport levels as continued economic growth and development has led to increased demand for finished goods, transportation fuels, and overall energy demand.

17 MMb/d % MMb/d Natural Gas Liquids (NGLs) in North America: An Update 9 Part IV Global Markets and Opportunities By liquid, demand for NGLs and naphtha has increased over the 2002 to 2011 time period across all liquids with demand growing the fastest for NGLs (5 percent CAGR, mainly for crude blending), followed by ethane at a 4 percent CAGR (petrochemical feedstock), while both LPG and naphtha demand have increased at a CAGR of 2 percent each. Figure 1.4 displays demand for NGLs and naphtha by region (OPEC vs. nonopec) and by liquid. Figure 1.4: NGL and Naphtha Demand by Region (MMb/d) ( ) NGLs Transferred to Crude market (as Condensate) NGL Crude Blending (for Refining) Total Naphtha Demand (Mainly Petrochemical) Total LPG Demand (All Uses) Ethane Demand (Petrochemical) TOTAL OPEC DEMAND NGLs Transferred from Crude market (as Condensate) NGL Crude Blending (for Refining) Total Naphtha Demand (Mainly Petrochemical) Total LPG Demand (All Uses) Ethane Demand (Petrochemical) TOTAL NONOPEC DEMAND North America % share of NONOPEC Asia Pacific % share of NONOPEC % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Source: Data from IEA. Figures by CERI Among OPEC countries, the single largest demand source for NGLs and naphtha is for exports as crude oil (37 percent), 15 and this is the case primarily for condensate exported to be refined as crude oil in other regions of the world. 15 This is the case since these volumes do not enter the NGLs and naphtha supply side. While this is technically an export flow and therefore a supply component in another region of the world, it is categorized in the context of this analysis as OPEC demand because it is transferred from the NGLs and naphtha market to the crude oil market (as exports). The crude oil market is beyond the scope of this analysis.

18 10 Canadian Energy Research Institute Among OPEC members, condensate exports are common practice by both Middle Eastern members such as Qatar and Iran but also African members such as Nigeria and Algeria. The next most important source of NGLs and naphtha demand is for crude blending in OPEC countries, that is, condensate refined into RPPs locally, which is mostly done in the UAE, Saudi Arabia, Qatar, and Venezuela. Ethane is the preferred petrochemical feedstock among OPEC members, although Saudi Arabia s petrochemical facilities use smaller volumes of LPG and naphtha as well. Over the last few years, ethane production and demand has grown rapidly in Iran, Kuwait, and to a lesser extent Qatar and the UAE, yet Saudi Arabia remains the largest user of ethane among OPEC members. LPG is primarily used by the commercial/residential/other sectors (about 70 percent in 2011), with the remainder used as petrochemical feedstock and as energy at the industrial level. Among nonopec members, LPGs are the most widely used liquids among NGLs and naphtha, and they are used across a variety of sectors (LPGs will be discussed in more detail later). Naphtha is the second most important of these liquids on the demand front, with the Asia Pacific region accounting for about 65 percent of naphtha demand among nonopec countries while Europe/Eurasia accounted for about 25 percent of demand, with the remaining 10 percent of demand allocated to North America, Latin America, and Africa (combined). It is important to note that while naphtha is the largest petrochemical feedstock both in the AsiaPacific and Europe/Eurasia regions, these regions do not produce enough naphtha volumes from their refining operations to satisfy their petrochemical demand and therefore rely on imports to meet a portion of their naphtha demand. Ethane demand among nonopec countries comes primarily from North America (the US, Canada, and Mexico, in that order) which accounted for 90 percent of ethane demand from nonopec countries in Small volumes of ethane are also used as a petrochemical feedstock in the Europe/Eurasia region (primarily the United Kingdom, Norway, and Sweden), as well as across Latin America (Argentina) and the AsiaPacific region (Australia and Thailand). Condensate refining is the last significant source of NGLs and naphtha demand among non OPEC countries. Demand for condensate as a refinery feedstock is the highest in North America (primarily in the US), the Europe/Eurasia region (Russia in particular), and the AsiaPacific region (primarily in Japan). With an understanding of supply and demand balances for NGLs and naphtha across each of the world s regions and sectors, we can place into context world trade for these products. This is illustrated in Figure 1.5.

19 MMb MMb MMb MMb MMb MMb/d MMb Natural Gas Liquids (NGLs) in North America: An Update 11 Part IV Global Markets and Opportunities Figure 1.5: Global NGL and Naphtha Supply, Demand and Trade Flows (MMb/d) ( ) NORTH AMERICA (S/D) Total Production Total Demand Local Surplus (Deficit) (1.0) TRADE FLOWS EXPORTS Africa Latin America North America Europe/ Eurasia Asia Pacific EUROPE/ EURASIA (S/D) Total Production Total Demand Local Surplus (Deficit) (2.0) OPEC (1.0) (3.0) (4.0) IMPORTS NET BALANCE (1.0) OPEC (S/D) Total Production NGLs Transferred to Crude market (as Condensate) Total Local Demand 5.0 Traditional Flows Emerging Flows Expected Flows LATIN AMERICA (S/D) 0.4 AFRICA (S/D) 10.0 ASIA PACIFIC (S/D) Total Production Total Demand Local Surplus (Deficit) 0.1 Total Production Total Demand Local Surplus (Deficit) Total Production Total Demand Local Surplus (Deficit) (0.1) (2.0) (0.2) (0.2) (4.0) Source: Background image from BP. 16 Data from IEA. Figures by CERI 16 BP, About BP, Energy Economics, Statistical Review of World Energy 2013:

20 12 Canadian Energy Research Institute This figure shows the local supply (primarily domestic production) of a given region compared to its local demand in order to identify whether a region has a surplus or a deficit of supply of NGLs and naphtha. A supply surplus implies that NGLs and naphtha are available to be exported, whereas a deficit indicates that imports from other regions are required in order to satisfy demand. The middle top figure summarizes which regions have export volumes available and which regions require imports. Because there are no significant interregion volumes of ethane traded due to transportation challenges, interregional trade is limited to LPG, naphtha, and condensate. OPEC supplies come primarily from its Middle East and African members (approximately 96 percent of OPEC supplies in 2011), and since demand for NGLs and naphtha in this region has grown at about the same pace as supplies, available export volumes have remained relatively flat over the last few years. Yet, as can be observed, the OPEC region is the region with the largest surplus on a global basis and it acts as the main export supplier to other regions, indicating dominance of global trade for NGLs and naphtha, as is also the case with crude oil (and LNG to a certain extent). Among nonopec regions, Latin America and Africa have shown similar trends between 2002 and 2011 where demand has increased faster than local supplies resulting in an increase in required NGLs and naphtha imports. If these trends continue, there will be an increased need for NGLs and naphtha imports, yet these regions are not the largest in terms of overall demand on a global basis. The Europe/Eurasia region has narrowed its deficit position over the last few years given lower demand in the OECD Europe region, coupled with increased output from the nonoecd Europe and Eurasia region (former Soviet Union (FSU) countries). If these trends continue, this region will rely less and less on imports of NGLs and naphtha from other regions. The AsiaPacific region has seen increases in both production and demand, yet it appears that demand is outpacing production increases, resulting in an increased deficit position. This region requires the largest amount of imports among any other region worldwide, and thus has a large degree of dependence on OPEC supplies of NGLs and naphtha. Prospects for increased demand outpacing local production will result in increased import dependence. North America is the only region to have gone from a deficit to surplus position over the last few years. This is the case given the rapid increase in output of NGLs coming from the US and Canada. While ethane demand is expected to increase in the region (both in the US and Canada), demand for LPG and naphtha is expected to remain flat to declining. Under the assumption of continued production increases, this will mean North America will continue to improve its surplus position and provide the world with an alternative to OPEC dominated imports of NGLs and naphtha. This will without a doubt change the dynamics of global NGLs and naphtha trading, and will have an impact on prices and global balances.

21 Natural Gas Liquids (NGLs) in North America: An Update 13 Part IV Global Markets and Opportunities Going forward, the dynamics between increased demand for NGLs and naphtha across the Asia Pacific region (and to a lesser extent Latin America and Africa) coupled with increased demand in the Middle East (which in turn leads to reduced export availability) will have the AsiaPacific countries looking to diversify their import sources and presents an opportunity for North American NGLs and naphtha suppliers to fill the gap. The relationship between economic growth and energy use 17 is one that has been widely discussed and covered in economic and energy literature, and is presented in Figure 1.6. While countries such as Canada, the US, Japan and South Korea have high rates of GDP and energy use per capita, countries such as India and China as well as others in the AsiaPacific region are on a trajectory of increasing GDP per capita which will translate into higher energy demand. Not only are these countries on such a trajectory, but they also hold a large majority of the world s population (as per the size of the bubbles in Figure 1.6). Figure 1.6: Relationship between Oil Consumption per Capita and GDP per Capita, by Region and for Selected Countries (2010) Source: Gapminder 18 In its latest version of World Energy Outlook (WEO) (2013), 19 based on data from the International Monetary Fund (IMF) and the World Bank, the IEA predicts that economic growth between 2012 and 2035 will be driven by nonoecd countries, in particular those in the Asia Pacific region (China and India), Africa, and the Middle East, in that order. 17 In Figure 1.6 oil consumption is used as a proxy for energy consumption given that oil is the single largest source of primary energy demand in the world (about 30% in 2011) and it is expected to remain so according to the IEA s New Policies Scenario in its latest World Energy Outlook (WEO) 18 Gapminder: 19 Unless otherwise noted when referring to the IEA s WEO projection data the reference is in regards to their main scenario known as the New Policies Scenario (NPS)

22 MMb/d 14 Canadian Energy Research Institute Countries in those regions are also expected to have population growth rates below their economic growth rates and increased urbanization rates. This in turn points to increased GDP per capita, increased disposable incomes, and increased energy demand. All these trends combined will lead to increased demand across these regions for NGLs and naphtha as petrochemical feedstock for the production of final goods, as well as an increased need for refined fuels and heating fuels. Demand for NGLs and naphtha are expected to continue to increase well into the future (Figure 1.7). Figure 1.7: Global Demand for NGLs and Naphtha (MMb/d) ( ) Naphtha NGLs LPG Ethane Total NGLs and naphtha HISTORICAL OUTLOOK Source: Data from IEA. Figure by CERI Given expected low economic growth rates for North America 20 and increased NGL availability, North America is likely to continue to improve on its NGLs and naphtha surplus position. While it is clear that nonoecd countries will see higher demand into the future, led by countries in the AsiaPacific region, Africa, and the Middle East, it is less certain where their import supplies will come from. Increased energy demand across the Middle East is likely to lead to lower export surplus availability from OPEC countries. Given the size of the AsiaPacific region there is a compelling case for North American NGLs and naphtha suppliers to target the region going forward. Given Canada s expected increased ethane and propane supply position, petrochemical industry expansions beyond current announcements are possible as long as local petrochemical producers remain competitive in a global setting and as long as increased supply can be absorbed by increased demand for finished goods. 20 As well as other OECD economies

23 Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep $/GJ Natural Gas Liquids (NGLs) in North America: An Update 15 Part IV Global Markets and Opportunities Furthermore, a shrinking export market for LPGs in the US means Canadian producers need to find new markets abroad to diversify their customer base. The AsiaPacific region seems like a logical choice to expand petrochemical and LPG trade from a Canadian perspective. These issues are discussed next. But first, a quick discussion of global prices will add important information to the global NGL markets context. Global NGL Prices and Arbitrage Opportunities to WCSB Producers While a discussion of the LNG market and global gas prices is beyond the scope of this report, 21 gas prices are nonetheless relevant in the context of ethane prices given its discretionary extraction nature. This is because the alternative value of a barrel of ethane extracted (for use as a petrochemical feedstock) is the heating value of ethane left in the sales gas stream, which is equivalent to the prevailing gas price on a $/GJ basis. Figure 1.8 illustrates natural gas prices at different locales around the world. The main observation being that over the last few years, wide price differences have developed around the world as local gas market fundamentals have evolved through divergently different paths as in the case of rapid shale gas development in North America. Figure 1.8: Global Natural Gas Prices ($/GJ) ( ) $25.00 $20.00 $15.00 PRICING BAND WCSB ASIA PACIFIC ARBITRAGE ($/GJ) AB ($/GJ) HENRY USGC ($/GJ) RUSSIAN GERMANY ($/GJ) INDONESIAN JAPAN ($/GJ) NORTH SEA EUROPE ($/GJ) $10.00 $5.00 $ $(5.00) Source: Data from ADOE, EIA, IMF, 22 and World Bank. 23 Figure by CERI 21 For more on the LNG market and Canadian prospects see CERI Study No. 131, Global LNG: Now, Never, or Later?, January 2013: Global_LNG.pdf 22 International Monetary Fund, IMF Primary Commodity Prices: 23 The World Bank, Data & Research, Prospects, Commodity Markets: PK: ~piPK: ~theSitePK:476883,00.html

24 16 Canadian Energy Research Institute In the context of ethane (and to a certain extent LPG, primarily propane), the main implication of these price disparities is that if a block of WCSB raw natural gas supply is allocated to an LNG export project (as is the case with most of the prospective LNG projects in British Columbia as they are primarily proposed by upstream/integrated companies,) there are a couple of ethane monetization options. These options include extracting the C 2 /C 3 to be sold to local petrochemical/other endusers at the prevailing market price or at an agreed upon price formula. Alternatively, leaving the C 2 /C 3 in the gas feeding the LNG plant, thus increasing the heating value of the gas and obtaining the LNG price as the value of the liquids on a $/GJ basis. Last but not least, for large integrated companies which have expertise in all segments of the industry from upstream development to midstream infrastructure but also downstream operations such as LNG and petrochemicals, 24 using the C 2 /C 3 to produce high value chemicals such as ethylene and propylene and their corresponding derivatives is also worth considering. Of course, competition for ethane and LPG from LNG projects as heating content/increased volume or as an extracted liquid for petrochemical feedstock or other uses will depend on technical as well as economic considerations. Technical considerations include the composition of the raw gas, heating value and specs of LNG (as they would vary around the world, see Figure 1.9), as well as transportation constraints, among others. As an example, if the extracted gas is lean (such as Horn River gas) some ethane/lpg injection might be required in order to meet the heating value for the AsiaPacific market. Figure 1.9: Natural Gas Heating Values around the World (MJ/m 3 ) Source: KBR In the WCSB/LNG context these include companies such as Chevron, Exxon Mobil, and Shell, among others 25 KBR, Natural gas specification challenges in the LNG industry:

25 Natural Gas Liquids (NGLs) in North America: An Update 17 Part IV Global Markets and Opportunities Alternatively, if the gas is liquidsrich (like Montney gas) ethane/lpg can be left in the stream to increase the LNG heating value. This will be subject to transportation specs, as in pipelines, requiring some level of component/ngl extraction. Economic considerations primarily include the dynamics of LNG prices at the target or destination market versus local NGL prices. LNG prices will be dictated by a given LNG pricing formula (whether crudeindexed or gas plus costs) while NGL prices will be driven by local market fundamentals and NGL extraction economics (based on the spread between local natural gas and NGL prices). If the netback 26 received by a producer for extracting and marketing the NGLs in the local market is higher than that of leaving the NGLs for their heating value as LNG, the NGLs will be monetized locally with the assumption that NGLs are easier to extract and yield higher prices (such as butanes and pentanes) and will be extracted first. The opposite holds true if leaving the NGLs for their heating content in LNG (subject to technical constraints) would yield a higher netback to the gas producer. However, sending the NGLs as LNG does not imply the NGLs will be extracted at the receiving end and will generally end up being used for their energy content. Alternatively, a combination of these is possible whereas some components will be monetized locally and some will be left in the stream or extracted for export. As an example (in regards to gas produced for an LNG project), some level of ethane could be extracted and sold in the local market, while some level of LPG could be extracted to be sent to the overseas export market, while pentanes plus will most likely be extracted and sold in the local market. The resulting gas might still have enough heating content to target the AsiaPacific market to be sold as LNG. Ultimately, what will happen with the liquids in the gas feeding proposed LNG terminals in Western Canada will be determined by the complex interactions between technical and economic considerations as previously discussed. Much like natural gas, liquid ethane s physical properties make it difficult and costly to transport over long distances other than via pipeline, and therefore ethane is primarily used where it is extracted or where it can be economically transported to. This makes ethane markets, much like natural gas markets, primarily local rather than global. North America is the largest producer and enduser of ethane worldwide and regional ethane prices have been previously discussed. Ethane prices in other regions of the world are primarily determined by the cost of extracting ethane from the raw gas stream. 26 Received price for each NGL minus the costs to extract and market them

26 18 Canadian Energy Research Institute While there is little information on ethane prices from outside North America, CERI estimates average annual prices for ethane in Saudi Arabia to be about $4/bbl 27 and prices in the North Sea (United Kingdom (UK)/Norway) to be at least $30/bbl 28 compared to estimated prices in AB of $13/bbl and $16/bbl in the USGC. Clearly, ethane prices show wide regional disparities which reflect each region s energy market conditions, as is the case with natural gas. As an example, natural gas and NGL production in North America has increased rapidly over the last decade resulting in soft gas prices which have in turn translated into low ethane prices via market fundamentals and extraction economics. In the Middle East (in particular Saudi Arabia) ethane is a byproduct of crude oil production and thus the extraction cost structure is different, resulting in very low ethane prices. In the North Sea, while ethane prices are difficult to estimate, Statoil indicates that its ethane output is sold under longterm agreements, 29 which generally indicates cost of service or gas plus type of prices. Natural gas prices in the North Sea in turn remain relatively high compared to North America, meaning the same situation holds true for ethane. These regional price disparities translate into competitive advantages (or hindrances) for overall NGL endusers, but in particular, petrochemical producers as well as other energyintensive industries able to produce their own output (such as ethylene or propylene) at a lower cost compared to their global peers. Meanwhile, global prices for olefins and their derivatives are dictated by a combination of global economic conditions and consumer demand, energy and feedstock prices, but more importantly, the cost structure of the marginal producer which is required to satisfy a given level of demand (usually the highest cost producers). This means that the feedstock cost advantage generally stays with the low cost producers and translates into higher margins, but not necessarily lower olefin and derivative prices. 30 Higher margins however, can fuel reinvestment and expansion cycles. While interregional or waterborne ethane trade is almost nonexistent, some petrochemical producers in Europe are looking at the options to import costadvantaged ethane from North America using refrigerated ships similar to LNG carriers. 27 Based on a value of $1.5/MMBtu. See: Based on average gas prices of $11/MMBtu at the UK s NBP and Netherlands TTF trading hub, as per: 29 Statoil, Our operations, Trading, NGL, Ethane: 30 This is the same case as refineries in the US Midwest having access to discounted North American crudes, which were turned into higher refiner margins rather than lower gasoline prices, as gasoline is a globally traded commodity priced according to global fundamentals

27 Natural Gas Liquids (NGLs) in North America: An Update 19 Part IV Global Markets and Opportunities However, North America s ethane surplus and cost advantage seems to be unfolding primarily via the expansion of local petrochemical facilities (crackers and derivative plants) rather than via exports. In turn, local petrochemical producers can use the feedstock s cost advantage to produce lowcost bulk derivatives which can fetch a high margin in the global market. These derivatives are also much easier to transport than olefins and ethane. LPG prices are displayed in Figure 1.10, together with correlations for Saudi LPG contract prices (CP) to a global crude oil benchmark (Brent). The Saudi contract price is used as the benchmark for prices of waterborne LPG exports from the Middle East and North Africa (MENA) (the largest LPG exporting region) to other regions of the world. The contract price is set on a monthly basis and it is an FOB price, 31 indicating it is priced at the source (in this case, Saudi Arabia), and therefore, the price at destination (whether Europe, North America, or the AsiaPacific region) will be higher as marine freight and other marketing costs need to be added (these are generally incurred by the buyer). It can be observed that LPG contract prices have a high degree of correlation to global crude prices, with propane prices trading at an average of 70 percent of the Brent price between 2002 and 2013, and butanes at 80 percent, with both ratios displaying a downward trend. Regional price disparities are more markedly present for propane prices than butane prices with global propane prices offering an arbitrage opportunity to WCSB producers. While LPG is easier to transport than natural gas or ethane, there are still additional costs incurred in LPG transportation logistics versus crude oil and RPPs, including required pressurization and refrigeration (particularly for propane). Other commodities which are easier to transport between regions via marine transport, such as naphtha (Figure 1.11) (as well as crude oil, RPPs, and petrochemical derivatives), generally exhibit a much lower level of regional price disparity. Price differences for these types of commodities are generally given by transportation costs between regions. Therefore, these commodities tend to show a global price convergence and their prices generally will be determined by global supply and demand fundamentals. Having an understanding of prices for NGLs and naphtha on a global scale (and in particular those in the AsiaPacific region), Figure 1.12 identifies the arbitrage opportunities for WCSB producers. 31 Free on board

28 Saudi LPG CPs (%/bbl) Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep $/BBL % Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep $/BBL % 20 Canadian Energy Research Institute Figure 1.10: Global LPG Prices (Top and Middle) and Saudi LPG CP Correlation to Global Crude Oil Prices (Bottom) ($/bbl) ( ) $ $ $80.00 $60.00 $40.00 $20.00 $ PRICING BAND WCSB ASIA PACIFC ARBITRAGE ($/BBL) AB EDM ($/BBL) MT BELVIEU USGC ($/BBL) SAUDI PROPANE CP ME ($/BBL) SAUDI % OF CRUDE OIL (BRENT) 120% 100% 80% 60% 40% 20% $(20.00) 0% $ PRICING BAND AB EDM ($/BBL) SAUDI BUTANES CP ME ($/BBL) WCSB ASIA PACIFC ARBITRAGE ($/BBL) MT BELVIEU USGC ($/BBL) SAUDI % OF CRUDE OIL (BRENT) 140% $ % $ % $60.00 $40.00 $ % 60% $ 40% $(20.00) 20% $(40.00) 0% $ $ SAUDI LPG CP ME ($/BBL) SAUDI BUTANES CP ME ($/BBL) SAUDI PROPANE CP ME ($/BBL) $80.00 $60.00 $40.00 $20.00 $ y = x R² = y = x R² = y = x R² = $ $20.00 $40.00 $60.00 $80.00 $ $ $ Brent Crude ($/bbl) Source: Data from ADOE, CERI estimates, EIA, GAE, and HKEMSD. Figures by CERI

29 Temp. (C) Price Premium (x) Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep $/BBL Natural Gas Liquids (NGLs) in North America: An Update 21 Part IV Global Markets and Opportunities Figure 1.11: Global Naphtha Prices ($/bbl) $ $ $ $80.00 $60.00 $40.00 $20.00 $ NW Europe (Rotterdam) US Singapore DATED BRENT EUROPE (UK) (38 API) ($/BBL) Source: Data from IEA. Figure by CERI Figure 1.12: WCSB to AsiaPacific NGL Arbitrage Opportunity ( prices) and Ease of Transport Asia Pacific Price Premium Europe Price Premium Boiling Point [C] Price Convergence (50.00) (100.00) (150.00) (200.00) Natural Gas Ethane* Propane Butanes Pentanes/ *Heating Value Naphtha 1.00 Source: Data from ADOE, CERI estimates, EIA, GAE, HKEMSD, IEA, IMF, and World Bank. Figure by CERI This figure displays the boiling point of a given commodity (as an example, Celsius (C) for natural gas), or the temperature required to keep the commodity in a liquid state, 32 as a proxy for ease of transport, versus the premium for a given commodity in a region compared to the WCSB using prices. 32 A boiling temperature above 0 0 C indicates the temperature required for the liquid to evaporate, while a temperature below 0 o C is the temperature required to keep the commodity in a liquid state. Other physical considerations such as vapour pressure are equally important, but for simplicity sake, the boiling temperature is used here as a proxy for ease of transport

30 $/mcf Gas Heating Value (GJ/mcf) 22 Canadian Energy Research Institute As an example, in , gas prices in Japan ($17/GJ) and Europe ($11/GJ) were, respectively, 6.6 times and 4.3 times higher than in Western Canada ($2.6/GJ), yet natural gas is difficult to transport on an interregional basis and requires infrastructure to liquefy, transport, and regasify the commodity. With the expectation that these pricing conditions are to prevail in the future, WCSB producers are in a race to build LNG export terminals on the BC coast. In regards to NGLs, it appears that propane is the only liquid which offers a significant upside to WCSB producers. Once again, this is based on prices; whether the price gap will persist will depend on local supply and demand balances for propane as well as the evolution of global LPG prices. Furthermore, these price differences do not take into consideration increased transportation and marketing costs to get to the destination. Subtracting those costs will narrow the gross margin displayed in Figure With these considerations in mind, Figure 1.13 illustrates the possible NGL uplift to WCSB gas producers on a $/mcf basis under a host of marketing options including an assumption of access to the AsiaPacific energy markets. Figure 1.13: WCSB Extraction Economics with AsiaPacific Option ($/mcf) ( prices) $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $ $0.67 No Liquids Recovered* *NGLs value Ethane Butanes Total NGL component uplift ($/mcf) $1.66 WCSB Shallow Cut $2.15 $2.37 WCSB Deep Cut WCSB Shallow Cut/ Asian LPG Propane Pentanes Plus Gas Heating Value (GJ/mcf) $2.90 WCSB Deep Cut/ Asian LPG $4.50 Asian LNG*/ Asian LPG $4.61 Asian LNG* Source: Data from ADOE, CERI estimates, GAE, HKEMSD, IEA, IMF, and World Bank. Figure by CERI From left to right, the first case is one where all NGLs are left in the gas stream for their heating value and sold in the WCSB. Under this case, the NGL uplift to the gas producer is about $0.7/mcf. The second and third cases are for NGL extraction at different levels (shallow versus deepcut) to be sold in the WCSB market. The results indicate that deepcut extraction provides a 30 percent premium on a $/mcf NGL uplift basis (compared to 10 percent on $/bbl of NGL sold, as previously discussed in Part III). In sum, the first three cases represent the most common routes that currently exist for WCSB gas producers to obtain NGL uplifts from their gas operations While an option is available to WCSB producers via AuxSable/Alliance richgas premiums to the Chicago market, confidentiality and lack of publicly available information on such deals makes it difficult for CERI to quantify a representative NGL uplift for such agreements. However, given the fact that AuxSable/Alliance have recently announced various incremental volumes of such deals, including a recent 200 MMc/d deal with Encana/Phoenix Energy, CERI believes these premiums are competitive with currently available premiums in the WCSB

31 Natural Gas Liquids (NGLs) in North America: An Update 23 Part IV Global Markets and Opportunities The fourth and fifth cases assume access to LPG markets but not LNG markets. This is likely to occur over the next few years as the LPG export terminals which have been proposed are expected to be fed via rail, and they are expected to be online before LNG terminals are. In the shallowcut case, the ethane is sold as heating value in the gas, and the pentanes are sold in the WCSB market, while LPG is extracted to be sold in the global market. The difference for the deepcut case is that ethane is extracted and sold in Western Canada. The sixth and seventh cases assume access to LPG and LNG markets with the sixth case s assumption of leaving ethane as LNG (in gas form), extracting LPG to be sold in the global market, and selling pentanes plus in Western Canada. In the seventh and final case, pentanes are extracted to be sold in the local market while ethane and LPG are left in the LNG stream. The caveat to these scenarios is that they give an estimate for gross NGL uplift margins and do not consider the incremental cost of extracting and marketing NGLs under different scenarios. As an example, there are additional capital and operating costs associated with deepcut facilities that would shrink that 30 percent $/mcf premium over shallowcut. Under the LPG cases there will also be additional costs to marketing LPG to the global market versus the local market. Without a doubt, there are various dynamics that will play out to determine the best NGL marketing option for WCSB gas producers as LPG and LNG export proposals move forward. What is more certain is that these projects will generate new marketing opportunities and potential for increased profitability to WCSB gas producers. This concludes the discussion of global NGL prices and arbitrage opportunities to WCSB producers. The following sections of this report will discuss the global LPG market and petrochemical industry, as well as the prospects for Canadian producers and marketers in those markets

32 24 Canadian Energy Research Institute

33 MMb/d Natural Gas Liquids (NGLs) in North America: An Update 25 Part IV Global Markets and Opportunities Entering the Global LPG Market Figure 2.1 displays the global supply and disposition of LPGs. Figure 2.1: Global LPG Supply and Demand (MMb/d) ( ) NonEnergy Demand Energy Demand Stocks/ Adjustment Refineries Gas Plants 48% 52% 32% (1.0) S D S D S D S D S D S D S D S D S D S D Total Production Total Supply Total Demand Gas Plants Refineries 68% NonEnergy Demand Energy Demand Source: Data from IEA. Figures by CERI Between 2002 and 2011, global LPG production increased by over 1 MMb/d, led by increases in production from gas plants (63 percent of growth), while production from refineries also increased, albeit at a lower rate (CAGR of 1 percent compared to 2 percent for gas plants). By 2012, output from gas plants accounted for 52 percent of global LPG compared to 48 percent for refineries. On the demand side, demand increases have been led by increases in energy use (75 percent of the growth) while there has also been an increase in LPG use as a petrochemical feedstock but at a slower rate (CAGR of 1 percent compared to 2 percent for energy demand). Figure 2.2 displays LPG production by region (OPEC vs. nonopec) and by source (gas plants vs. refineries). Approximately onethird of global LPG production comes from OPEC countries with the majority of their output (over 90 percent) coming from gas plants, particularly in places like Saudi Arabia, Qatar, Algeria, Venezuela, and Iran. OPEC s Middle East and Africa members accounted for over 90 percent of OPEC s LPG gas plant output in Production of LPG from refineries in OPEC countries comes primarily from Iran, Saudi Arabia and the UAE. NonOPEC countries account for over twothirds of global LPG production with around 60 percent of the output coming from refineries and 40 percent from gas plants. Refinery production of LPG among nonopec countries is the largest across the AsiaPacific Region, where production has increased rapidly over the last decade from countries such as China and India.

34 MMb/d % MMb/d % 26 Canadian Energy Research Institute Figure 2.2: LPG Production by Region and by Source (MMb/d) ( ) % 29% 28% % % 0.5 Total OPEC Refinery LPG Production Total OPEC Gas plant LPG Production Total OPEC LPG Production OPEC % World Production 25% 24% 23% % 75% 74% 73% % Total NONOPEC Gas Plant LPG Production Total NONOPEC Refinery LPG Production Total NONOPEC LPG Production NonOPEC % World Production 71% 70% 69% 68% Source: Data from IEA. Figures by CERI This is an important point given that LPG production from refineries is a function of crude oil refining and consumption. Additionally, large volumes of refinery LPG production are not necessarily indicative of available indigenous crude oil production, as a portion of the crude refined might be imported from other regions, whereas gas plant LPG production is usually consistent with availability of local gas supply. Other large refinery LPG producing regions include the Europe/Eurasia region (OECD Europe declining production while nonoecd Europe and Eurasia production increasing rapidly, primarily from Russia), as well as North America (primarily the United States). Gas plant LPG production among nonopec countries comes primarily from North America (which accounted for about 50 percent of gas plant LPG production from nonopec countries in 2011), the AsiaPacific region (primarily from Asian countries other than China, Japan, and Korea), as well as Europe/Eurasia. Figure 2.3 displays LPG demand by region and by enduse.

35 MMb/d % MMb/d % MMb/d % Natural Gas Liquids (NGLs) in North America: An Update 27 Part IV Global Markets and Opportunities Figure 2.3: LPG Demand by Region and Enduse (MMb/d) ( ) % 7.4% 7.2% 7.0% 6.8% 6.6% 6.4% 6.2% Energy Industry OwnUse Petrochemical Feedstock Transport Industry Res./ Comm./ Agr., For., & Fish. Total OPEC Demand % 5.8% 5.6% Total Energy Demand OPEC % of World Demand % 94% 93% 93% 93% 93% 93% 92% 92% 92% 92% Energy Industry OwnUse Petrochemical Feedstock Transport Industry Res./ Comm./ Agr., For., & Fish. Total NonOPEC Demand Total Energy Demand NonOPEC % of World Demand % 45% 40% 35% 30% Energy Industry OwnUse Petrochemical Feedstock Transport Industry % Res./ Comm./ Agr., For., & Fish % 15% 10% 5% 0% Total Asia Pacific Demand Total Energy Demand Asia Pacific % of World Demand Asia Pacifc LPG Import Dependence Source: Data from IEA. Figures by CERI

36 28 Canadian Energy Research Institute As can be observed, demand across the world is split relatively evenly among energy and nonenergy uses (independent of the region), with about 50 to 60 percent of demand coming from the residential/commercial sector, about 20 percent from the petrochemical industry and the remaining demand coming from industry, the transport sector (primarily road vehicles), and ownuse by the energy industry (in that order). Total worldwide LPG demand has increased by over 1 MMb/d between 2002 and 2011 (or 16 percent compared to 2002 levels) Among OPEC members, Middle East members account for about 60 percent of OPEC demand, followed by Latin America at about 20 percent, and Africa at 10 percent. Demand has increased across all three regions, with the fastest increase in demand among OPEC s Latin American members. The majority of demand growth has been driven by demand in the residential/ commercial sector, followed by LPG use at the industry level, while LPG use at both THE petrochemical and auto levels has been relatively flat. In 2011, OPEC demand constituted about 7 percent of total LPG demand worldwide (half a million barrels per day) compared to total production of about 2.3 MMb/d. Among nonopec members, demand has grown by a total of close to 1 MMb/d between 2002 and 2011, or 16 percent compared to 2002 levels at a CAGR of 2 percent. In absolute terms, demand has increased the most in the residential/commercial sectors followed by the petrochemical and auto sectors, with flat and declining demand trends observed in LPG use by the energy industry and industrial sector demand, respectively. In 2011, demand from non OPEC countries accounted for a total of 7 MMb/d or 93 percent of total world demand, compared to production of 5.5 MMb/d. In the AsiaPacific region (a segment of nonopec countries), LPG demand has grown rapidly over the last decade in places like China and India. Net increases in demand in the region between 2002 and 2011 was 0.8 MMb/d (or 37 percent compared to 2002 levels), at a CAGR of 4 percent. This indicates that demand growth in this region accounted for 80 percent and 75 percent of total demand growth between 2002 and 2011 by nonopec countries and worldwide, respectively. In 2011, the AsiaPacific region accounted for 40 percent of total global LPG demand, and its share has been increasing continuously since While LPG import dependence 34 in the region has declined over time, given increases in LPG production from both refineries and gas plants, the region still relies heavily on overseas imports to meet its demand requirements. This however does not imply that the region does not export LPG, but rather the level of imports to the region compared to its production levels is rather significant (over 40 percent in 2011). The global regional disparities between production and demand levels lead to large levels of interregional trade as seen in Figure Reduced LPG import dependence does not necessarily indicate reduced crude oil import dependence

37 MMb/d Natural Gas Liquids (NGLs) in North America: An Update 29 Part IV Global Markets and Opportunities Figure 2.4: Interregional Net LPG Trade (MMb/d) ( ) and Changing Trade Flows (0.5) (1.0) (1.5) LPG TRADE FLOWS NET EXPORTS NET IMPORTS NonOPEC Middle East NonOPEC Africa Latin America North America Europe/ Eurasia Asia Pacfic OPEC Latin America OPEC Africa OPEC Middle East Traditional Emerging Flows Expected Flows Source: Background image from BP. Data from IEA. Figures by CERI Therefore, OPEC members, in particular Saudi Arabia and Qatar, have large surplus volumes of LPG available for exports and have a dominant position in world LPG trade, allowing them to be the waterborne LPG price setter. On the other hand, import requirements are the highest among the AsiaPacific region with large levels of imports required in countries such as Japan, Korea, India, and China. Meanwhile, North America is emerging as a potentially significant net exporting region, which could pose a challenge to OPEC dominated LPG prices and supplies on the global market. 35 Note that overall net export volumes are higher than overall net import volumes, thus implying that there is an LPG trade surplus. This is the case as there are inconsistencies between the LPG and NGL datasets from the IEA databases (most likely due to the subjectivity of NGLs vs. LPG definitions among different countries statistical agencies) as the data shows that North America (particularly the US) is in a net LPG importer position but net NGL exporter position. In order to adjust for this anomaly and better reflect reality, NGL net exports from North America were allocated to the LPG dataset resulting in a trade imbalance. This trade imbalance is estimated to account for less than 20% of total LPG trade and less than 10% of total LPG demand.

38 30 Canadian Energy Research Institute With increasingly available surplus LPG volumes in Canada and given the region s proximity to the Canadian West Coast, targeting LPG exports to the AsiaPacific region makes sense as long as demand is expected to continue to be strong and that transportation costs are reasonable enough not to erode the possible arbitrage margins. The following analysis (Figure 2.5) calculates propane netbacks at the wellhead for North American producers based on transportation costs to different export destinations in the Asia Pacific region (including Japan, China, and India), using average annual prices. The main underlying assumption of this analysis is that a gas producer has access to third party extraction and marketing infrastructure, on a feeforservice basis, all the way from the wellhead to the export destination, and that the producer is able to sell its LPG at the same price as the competing marker price at destination (e.g., Saudi CP FOB + transportation costs = Saudi destination). Alternatively, the netback is equivalent to the price savings that an AsiaPacific LPG buyer could achieve by sourcing Canadian LPG at the wellhead and incurring all the costs to get it to its destination, versus a Saudi CP delivered price. The first three options depict a situation in which LPG (propane) is moved from the WCSB (assume Edmonton) to the AsiaPacific market via rail to Kitimat, BC where it is shipped via very large gas carriers (VLGC) to destination. The next three cases are for propane moving from the WCSB to the USGC and WCSB LPG being exported from one of the USGC export terminals to the AsiaPacific region via the Panama Canal. The next two options represent selling WCSB propane in the Sarnia market via pipeline or rail. And the last two options for the WCSB cases are for propane sold in the Edmonton market and the USGC market. The remaining options are for USGCsourced propane and are provided as a means of comparison. The analysis shows that Canadian LPG exports to the AsiaPacific region could provide propane wellhead netbacks similar to those obtained by USGC LPG exporters but also that WCSB LPG exports via the USGC could provide improved netbacks versus the local North American markets. The shrinkage value is an important piece of information as it indicates the value of the propane in the gas stream. Since netbacks or margins for WCSB propane delivered to Sarnia or the USGC via rail are lower than the shrinkage value, this suggests that leaving the propane in the gas and selling it for its heating value provides a better return to the producer This is a particularly common situation with ethane in some regions of the US, known as ethane rejection. Propane rejection while not impossible is less common than ethane rejection given the nondiscretionary extraction nature of propane versus ethane. That is, more ethane can be left in the gas stream to meet gas quality transportation and enduse specs compared to propane

39 Natural Gas Liquids (NGLs) in North America: An Update 31 Part IV Global Markets and Opportunities Figure 2.5: North American Propane Netbacks by Route and Destination to AsiaPaci ic Destinations ($/bbl) ( prices) 37 $/bbl $80.00 $70.00 $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $ $38 $36 $29 $26 $24 $22 $39 $38 $35 $15 $9 $6 $15 $20 $12 $11 $11 $11 $11 $11 $11 $11 $11 $11 $11 $13 $13 $13 $13 $13 Japan China India Japan China India Via Pipeline Via Rail Mt. Belvieu, TX Edmonton, AB Japan China India Sarnia, ON Mt. Belvieu, TX Wellhead Port to Port Marine Freight Terminal Storage and Loading Fees Rail to Source Port/ Destination Pipeline Transport to Destination Spec Product Market Source NGL Mix T&F Shrinkage Costs/ Heating Value Market Destination WCSB to Asia Pacific via West Coast WCSB to Asia Pacific via USGC WCSB to Sarnia WCSB to WCSB to USGC Local Market USGC to Asia Pacific USGC to Sarnia USGC to Local Market Source: Data from ADOE, CERI estimates, EIA, GAE, Hess, 38 HKEMSD, Joachim Grieg & Co., 39 Sea Rates, 40 and Seddon. 41 Figure by CERI 37 Assumes marine shipping on a very large gas carrier (VLGC), and transit from the USGC through the Panama Canal to the AsiaPacific region, which will be possible after the Canal s expansion is completed around This timeframe is consistent with the proposed start of Canadian LPG exports. Canadian LPG exports are assumed to move from the Edmonton market to Kitimat via rail. 38 Hess, A Bakken producer s regional view on gas & NGL Markets: 39 Joachim Grieg & Co., Fundamentals of the fully refrigerated/vlgc market revisited, LP Gas Seminar: 40 SeaRates.com, Transit Time/Distance Calculator: 41 Duncan Seddon, Petrochemical Economics, Technology selection in a carbon constrained world. Imperial College Press, London. 2010

40 MMb/d 32 Canadian Energy Research Institute The main implication from this is that because of depressed prices in the Edmonton market, the wellhead netback to the Edmonton market (under the assumptions of this analysis) is at almost the heating value of propane in the gas, which means there is little incentive to extract propane to be sold in the local market and explains the need for WCSB propane market diversification, whether that means LPG exports or propane use as feedstock for PDH plants. While under the above hypothetical analysis the netbacks are best for WCSB LPG exports to the AsiaPacific region, this will remain the case going forward as long as the price spread remains wide. This could change if local prices strengthen or if international LPG prices are lower in the future. Whether that will be the case going forward is up for debate and will depend on changes to global LPG fundamentals and prices. In its latest World Energy Outlook (WEO) projections, the IEA expects LPG demand in the world to continue to grow, although at a more moderate pace than the previous decade (CAGR of 0.8 percent between 2012 and 2035). Figure 2.6: World LPG Demand Outlook (MMb/d) Petrochemical Feedstock Other (Energy Industry Own Use and Industrial) Road Transport Buidlings (Residential/ Commercial) Total LPG Demand HISTORICAL OUTLOOK: IEA NEW POLICIES SCENARIO Source: Data from IEA. Figure by CERI. The market is expected to be about 9.2 MMb/d by 2035 or grow by 21 percent compared to 2012 levels, while the residential/commercial and petrochemical sectors combined are expected to continue to account for about 80 percent of global LPG demand. This is an important feature of the projection because it means that overall demand changes will be driven by changes in those two main sectors. According to the IEA, the single largest increase in demand is expected to come from LPG use as a petrochemical feedstock, which is expected to grow at a CAGR of 1.4 percent or by 38 percent between 2012 (2.4 MMb/d) and 2035 (3.3 MMb/d).

41 Natural Gas Liquids (NGLs) in North America: An Update 33 Part IV Global Markets and Opportunities This is based not only on the assumption of continued strong demand for derivative products but also the availability of LPG as a competitively priced feedstock in the Middle East and North America. 42 The second largest increase in demand is expected to come from the residential/commercial sector (net worldwide 0.3 MMb/d increase between 2012 and 2035, or an 8 percent increase compared to 2012 levels at a CAGR of 0.3 percent), 43 under the assumption that most demand growth in this sector will come from the developing world given rising incomes and population growth leading to increased LPG use as a heating and cooking fuel. Growth in the transport and industry sectors is not expected to be significant. It is important to remember that LPG is primarily produced as a byproduct of both gas processing and crude oil refining which indicates that production of LPG is intrinsically tied to demand for crude oil and natural gas. The byproduct nature of LPG production then makes the LPG market supply driven, that is, LPG is not produced onpurpose to satisfy a given level of demand, but increases in supply levels can lead to increases in demand levels or generate new demand sources. Thus, increased demand will be driven by available supply and if more supplies become available, demand is likely to grow, resulting in lower LPG prices. This is certainly the case in the petrochemical sector, which serves to balance the LPG market depending on prices of competing petrochemical feedstock. Thus, if LPG supplies are expected to increase and exceed demand levels in traditional sectors such as the residential/commercial sector, softer prices will lead to demand creation in the price sensitive petrochemical sector. Within the AsiaPacific region, demand for LPG as a petrochemical feedstock is expected to increase going forward. This is the case particularly in China where over 10 Mt/yr of propylene production capacity from PDH facilities can be built by This total PDH capacity is in turn estimated to require over 0.4 MMb/d of LPG (propane) feedstock, which is almost half the expected increase in LPG petrochemical demand as per the IEA s projections. In addition to those in the AsiaPacific region, planned PDH plants in North America have the potential to absorb another 0.2 MMb/d of LPG (propane) feedstock. 42 Other industry observers have a more bullish outlook and expect LPG petrochemical demand to grow at a much faster annual pace of close to 0.3 MMb/d between 2012 and 2016, particularly in the Middle East and Asia. See: IHS, The Outlook for the Global LPG Market, International LP Gas Seminar 2013: 43 IHS expects residential/commercial demand to grow at a much faster pace of over 0.3 MMb/d on an annual basis between 2012 and See: ibid. 44 ICIS, Propane imports to surge on new PDH projects:

42 34 Canadian Energy Research Institute On the supply side, with planned LPG export capacity of over 1 MMb/d in North America, and current world LPG interregional trade at about 2 MMb/d, if all terminals were built, there is no question that North American supplies will put pressure on and will have a significant level of influence on global LPG prices. While demand in the residential/commercial sector will be driven by demographics, economic growth, fuel substitution, and other trends, price sensitivity of LPG supplies will have a larger effect on LPG use in the petrochemical industry. Softer LPG prices could in turn put downward pressure on Canadian propane netbacks but on the flipside, they have the ability to create market expansions in the petrochemical industry in particular. Increased North American LPG supplies reaching global markets, and in particular the Asia Pacific region, will also create a more diversified and competitive LPG market while providing supply diversification and energy security to importing countries. The following section discusses the prospects for the expansion of the Canadian petrochemical industry in the global context.

43 Natural Gas Liquids (NGLs) in North America: An Update 35 Part IV Global Markets and Opportunities Global Petrochemicals: Canadian Competitiveness and Growth Opportunities Figure 3.1 displays the worldwide demand of NGLs and naphtha as a petrochemical feedstock by region and by feedstock type. The focus here is on petrochemical feedstock for the production of olefins (ethylene in particular; aromatics are excluded from this analysis). On a feedstock basis, naphtha remains the dominant petrochemical feedstock accounting for about 56 percent (5.7 MMb/d) of the 2011 total estimated demand for NGLs and naphtha (10.2 MMb/d), followed by ethane at 23 percent (2.3 MMb/d) and LPG at 21 percent (2.2 MMb/d). On a regional basis, the feedstock slate relates to availability of NGLs and naphtha and it is markedly different across all regions. As an example, among OPEC members, particularly Middle East ones, ethane and LPG accounted for about 90 percent of the petrochemical feedstock demand in 2011, while among nonopec members naphtha was the predominant feedstock (62 percent) followed by LPG (22 percent) and ethane (16 percent). Among nonopec regions, North America seems to have the largest degree of petrochemical feedstock diversification with ethane and LPG accounting for close to 90 percent of their 2011 petrochemical feedstock demand. Meanwhile, the Europe/Eurasia and AsiaPacific regions rely heavily on naphtha as a feedstock for petrochemical production (68 percent and 91 percent in 2011, respectively). Overall, world demand for NGLs and naphtha as a petrochemical feedstock has increased by over 2.3 MMb/d between 2002 (7.8 MMb/d) and 2011 (10.2 MMb/d) or by 30 percent at a CAGR of 3 percent which is consistent with a CAGR of overall economic growth of 3.3 percent between 1990 and and reflects on the strong relationship between economic growth, energy use, and demand for enduse products. On a regional basis, OPEC countries accounted for 23 percent of the net growth ( ) in NGLs and naphtha demand as a petrochemical feedstock, while nonopec countries accounted for 77 percent of demand growth, with the AsiaPacific region accounting for 56 percent of the total demand growth worldwide. 45 IEA, 2013 World Energy Outlook

44 MMb/d MMb/d MMb/d MMb/d MMb/d MMb/d MMb/d 36 Canadian Energy Research Institute Figure 3.1: World Demand of NGLs and Naphtha for Use as a Petrochemical Feedstock (MMb/d) ( ) NORTH AMERICA EUROPE/ EURASIA Naphtha/ Heavy Feeds Naphtha/ Heavy Feeds LPG/ NGLs Ethane Total North America OPEC LPG/ NGLs Ethane Total Europe/ Eurasia 0.4 Naphtha/ Heavy Feeds LPG 0.2 Ethane Total OPEC LATIN AMERICA Naphtha/ Heavy Feeds LPG Ethane Total Latin America AFRICA Naphtha/ Heavy Feeds LPG Ethane Total Africa ASIA PACIFIC Naphtha/ Heavy Feeds LPG/ NGLs Ethane Total Asia Pacific WORLD TOTAL Naphtha/ Heavy Feeds LPG Ethane World Total % 2% 10% 28% Total OPEC Total North America Total Europe/ Eurasia Total Asia Pacific Total Latin America % Total Africa 2011 % OF TOTAL : 10.2 MMb/d Source: Background image from BP. Data from IEA. Figure by CERI

45 Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep $/t Natural Gas Liquids (NGLs) in North America: An Update 37 Part IV Global Markets and Opportunities By 2011, nonopec countries accounted for 90 percent of total worldwide demand for NGLs and naphtha as a petrochemical feedstock, with the AsiaPacific region accounting for the largest share of any single region on a global basis (at 40 percent). Regional differences in feedstock availability and demand levels also need to be considered in the context of feedstock costs and regional competitiveness of the petrochemical industry. Figure 3.2 displays global NGLs and naphtha prices on a dollar per metric tonne ($/t) basis. Figure 3.2: World Petrochemical Feedstock Prices ($/t) ( ) $1,400 $1,200 $1,000 $800 AECOC NG ($/t) HH NG ($/t) AB ETHANE ($/t) US ETHANE ($/t) AB PROPANE ($/t) US PROPANE ($/t) SAUDI LPG ($/t) WORLD AVERAGE NAPHTHA PRICE ($/t) $600 $400 $200 $ Source: Data from ADOE, CERI estimates, EIA, GAE, HKEMSD, and IEA. Figure by CERI Given that production of olefins is highly energyintensive, that is, the feedstock (NGLs and naphtha) as well as fuel and electricity costs account for the largest share of production costs (as seen on Figure 3.3); regional feedstock price disparities translate into production cost advantages or disadvantages depending on feedstock availability. This situation is exacerbated given the fact that some regions produce large volumes of NGLs and naphtha beyond their domestic needs (such as OPEC members), while other regions rely heavily on imports (generally costlier than domestic supplies) to meet their domestic needs (such as the AsiaPacific region). Additionally, the primary objective of steam cracking is to produce olefins such as ethylene and propylene, and given that heavier feeds such as naphtha usually result in lower yields of olefins than light NGL feeds (see Figure 3.4), this translates into larger volume requirements of feedstock to produce the same amount of olefins. 46 Figure 3.5 illustrates world ethylene cracking capacity in 2012 by region and by feedstock type (top left). 46 In economic terms however, the lower yield of olefins is compensated by higher production of aromatics and other byproducts that can be sold and credited to offset overall ethylene production costs

46 38 Canadian Energy Research Institute Figure 3.3: Energy (feedstock, fuel, and power) Costs Share (%) of Total Production Costs by Product Source: ACC 47 Figure 3.4: Olefin Yield (%) by Feedstock Source: ACC 47 American Chemistry Council (ACC), Shale Gas, Competitiveness, and New US Chemical Industry Investment: An Analysis Based on Announced Projects: