THE GLOBAL IMPACT OF NGL SUPPLY GROWTH:

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1 A PIRA INDUSTRY STUDY September 2015 A NEW INDUSTRY STUDY FOCUSED ON ONE OF THE FASTEST GROWING SEGMENTS IN THE OIL INDUSTRY THE GLOBAL IMPACT OF NGL SUPPLY GROWTH: PIRA's Comprehensive Outlook to PIRA Energy Group

2 INDUSTRY STUDY NGL AND LPG SUPPLY, DEMAND, TRADE AND PRICE The Global Impact of NGL Supply Growth: PIRA s Comprehensive Outlook to 2035 The next 20 years will witness radical shifts in the supply, demand and trade balances for NGLs ethane, propane, butane, and pentanes plus. These shifts will have profound impacts, reaching beyond LPG and ethane markets and trade. They will affect upstream oil and gas economics, as well as downstream pricing for naphtha and other oil products, in turn impacting petrochemical feed choices and investments, refining margins and runs, and even crude oil production. On the supply side, the pace of change has accelerated, and the wave of NGL production growth in North America continues, even with the recent shock of lower prices in This trend is incentivizing investment in fractionation, local petrochemical facilities, and export infrastructure. The battle to capture global markets will generate both winners and losers everywhere exporters in North America and the Middle East, as well as importers in Europe, Asia and Latin America. On the demand side of the equation, the story is also rapidly changing as growing supply is pricing itself to create sufficient demand. Will the mix of feeds into petrochemicals be the most affected given its price sensitivity? What other markets will be impacted? How much and where? U.S. Propane Exports Grow, Competing to Supply Europe and, Increasingly, Asia Net U.S. Propane Balance, Million Tons/Year Trade will change dramatically as rapid increases in North American exports force their way into the market. Although initially focused on Europe and Latin America, destinations will shift more towards Asia with the widening of the Panama Canal in Together, these fundamental forces will impact price spreads for other products as the surge in NGLs ultimately displaces naphtha from petrochemicals and drives refiners to shift yields more towards middle distillates. Investment choices in upstream, midstream, tanker fleets, petrochemicals and refining will all be affected. PIRA assesses the impact of these forces in a new industry study, The Global Impact of NGL Supply Growth: PIRA s Comprehensive Outlook to The study, to be released in September 2015, features: A detailed look by country at upstream production of natural gas liquids and net refinery LPG production. Surging upstream supply will continue to price itself to find sufficient demand. An in-depth outlook of the factors driving each region s ethane, propane and butane product usage. Demand trends by sector by region/country show how rapid increases in some sectors/regions are partly offset by slow increases/decreases in others l l l l U.S. propane imports peaked in U.S. became a net exporter in Future export growth reflects rising production and ex pansion of export infrastructure, offset by rising local demand. Export destinations initially focused in Atlantic Basin; will expand more into Asia with widening of Panama Canal. 3 Park Avenue, 26 th Floor, New York, NY tel fax seminar@pira.com 2

3 Study features (continued): Analysis of the trade flows for ethane, propane and butane and how they will evolve, driven by regional supply and demand changes. For example, U.S. export growth will affect every region of the world both directly imports into Europe and Asia and indirectly by its longer-term impact on petrochemical regional investments. Meanwhile. infrastructure requirements to accommodate this change will challenge some regions. Regional price forecasts relative to natural gas, crude and oil products, as well as arbitrage opportunities and the key factors that will drive these relationships. Regional reference case supply, demand and trade projections through 2035 by year, as well as a discussion of how changes in key variables could affect those projections. The rapid volumetric changes and heightened price volatility seen in recent years are likely to continue, which will create both opportunities and risks. KEY QUESTIONS TO BE ANSWERED BY THE STUDY The Global Impact of NGL Supply Growth shows how an in-depth look at the underlying trends builds up to clear and actionable conclusions. The study demystifies NGLs and provides a balanced, long-term, global view both in by-country detail and in regional, by-markets aggregate by answering these important questions: What will change with respect to demand and trade in response to growing production in North America and the Middle East? What s new in the export and import trade flow story? Will there be a lasting impact from recent lower prices on production in the U.S.? Globally? What are the marginal demand layers by volume and region? What are the competing energy/oil products and price thresholds for switching? Export ethane or leave in rich gas? LPG versus naphtha into petrochemicals and the cascade of implications for gasoline and refining? Transportation uses? Will the incremental supply be absorbed by new facilities in North America and the Middle East, by substitution in Europe, or by growth/substitution in Asia? What are the marginal supply layers by volume and region? Oil-gas prices? NGL recovery economics? LPG from LNG projects? What are the broader implications for naphtha balances, refining economics, and crude oil production? What are the narrower implications for ethane, propane, butane, naphtha pricing, and gasoline vs. middle distillates? Value of octane? With the growth in trade, there will be winners and losers, as well as companies entering and exiting the business. What business segments will thrive? And which will not? 3 Park Avenue, 26 th Floor, New York, NY tel fax seminar@pira.com 3

4 WHY THE TIME IS RIGHT FOR THIS STUDY A New Assessment for NGL Supply Growth With the North American shale revolution has come a surge in NGL production. Over the last 10 years, production has grown by nearly 75%, such that by 2014 the United States production was equivalent to the next four largest producers combined. This growth is set to continue, but at a somewhat slower pace, affecting markets worldwide and capturing demand locally as well as in Europe and Asia. A Fresh Look at Demand Trends The increase in supply will ultimately find a home in demand mostly into petrochemicals. But regional differences will grow and feedstock preferences will shift. There will be revolutionary changes in trade patterns as the production growth of all NGLs in the U.S. leads to a surge in exports. NGL/LPG Demand Growth: Strongest of All the Oils Led by Pet Chem MB/D 3,500 3,000 2,500 2,000 1,500 1,000 NGL Field Production: United States as Large as Next Four Combined Production United Arab Emirates Qatar Canada Saudi Arabia MMB/D LPG - Other LPG - Pet Chem Ethane 0 United States Next 4 Largest *Canada does not include C5+ A Total View of Changing Price Relationships and Implications for the Rest of the Oil Barrel However, there is a lot of definitional confusion between countries/regions/organizations that cloud casual understanding of the trends. PIRA s study provides a clear, consistent framework across all countries/sectors. With this growth in supply, NGLs must price themselves to find sufficient demand. That in turn displaces naphtha from petrochemical/other demand and leads to a cascade of changes all along the oil barrel. Inconsistent Definitions of Upstream NGLs Impact of NGL Supply Growth Cascades Along the Oil Barrel NGL U.S. / Norway Canada Saudi Arabia Qatar/ UAE IEA Survey Ethane (C2) Sometimes Propane (C3) Butane (C4) Pentanes Plus (C5+) Field Condensate Sometimes Some Left in Gas Displaced Naphtha Goes to Gasoline NGL Supply Growth Priced to Find Demand Competes with Naphtha in Petrochemicals Displaces Oil Demand in Consumer Segments PIRA has researched the various upstream production of natural gas liquids and developed a consistent NGL bytype database of history and forecasts Boosts Octane Values Weighs on Gasoline Relative Price Refiners Shift Yields Lower Demand for Refinery Crude runs 3 Park Avenue, 26 th Floor, New York, NY tel fax seminar@pira.com 4

5 INDUSTRY STUDY NGL AND LPG SUPPLY, DEMAND, TRADE AND PRICE WHAT DO STUDY SUBSCRIBERS RECEIVE AND WHEN Companies purchasing The Global Impact of NGL Supply Growth: PIRA s Comprehensive Outlook to 2035 are entitled to have three users to each of the following deliverables (licensing options are available to add extra users): Written Report (September, 2015) The report spells out the findings of the study and the bases underlying those results, and it provides a discussion of the key uncertainties that impact the major findings. Approximately 100 pages long, the report includes an executive summary, as well as detailed discussion and illustrative charts on supply, demand, prices, trade and sensitivities. Study Presentation (October 6, 2015) Clients have the opportunity to see a presentation of the key results, discuss those findings and their implications, and question the study s authors via a WebEx workshop. The presentation will be recorded for review via PIRA's website at any time for study subscribers. Online Database (September, 2015) A comprehensive database providing historical data back through 2010 and forecasts through 2035 in Excel spreadsheets for: Country-level upstream supply with key species breakouts Country-level demand by sector including the outlook for steam cracker feeds to meet global olefin demand Country-level net refinery LPG production Inter-regional ethane and LPG trade flows Price forecasts, both absolute and relative to crude/products/natural gas 3-Month Free Access to PIRA s Global NGL Market Service Buyers of study receive free access to PIRA s Global NGL service for three months (from the point of their order). Through its regular deliverables (analytical reports and extensive databases), the NGL service provides timely insight and forecasts of relevant upstream, refinery, midstream, and petrochemical developments, along with various macroeconomic issues affecting NGL demand. FEES AND OPTIONS The Global Impact of NGL Supply Growth: PIRA s Comprehensive Outlook to 2035 can be purchased by both PIRA retainer clients and non-clients. Existing PIRA clients receive a reduced price; clients to PIRA s Global NGL Retainer Service receive a further discount. Companies that order before July 17, 2015, receive an earlybird discount. Subscriptions allow for 3 authorized users (3 user IDs to access online content and attend the Study Presentation). See the Acceptance Form on page 9. 3 Park Avenue, 26 th Floor, New York, NY tel fax seminar@pira.com 5

6 WHO WILL BENEFIT FROM THIS STUDY The stakes are high when it comes to making decisions regarding future NGL, LPG, ethane product supply, demand and pricing. The Global Impact of NGL Supply Growth study helps market participants keep ahead of the competition through a keen understanding of the future interplay between regional balances, regional pricing for different NGL species, inter-regional trade, and the impact of these factors on upstream economics and refining. The following market participants can all benefit: Upstream producers of gas, oil and NGLs know the importance of supply/demand balances and marginal supply/demand economics in setting NGL prices relative to oil and gas. Understanding these fundamentals is a key driver for informed NGL recovery investments and often affects gas/crude production economics. Petrochemical companies are one of the most affected industries as NGL supply growth drives price and shifts feed selection economics. This trend affects both new facilities in the U.S. and Middle East, as well as existing mostly naphtha-fed capacity in Europe and Asia. Knowing which feeds will be most advantageously priced and where they will be available will be crucial for informed investment choices. Refiners need to plan capacity changes based on the outlook for product demand, feedstock supply, and relative pricing. By providing a firm basis in evaluating future changes in these factors (e.g. naphtha demand), the study helps refiners evaluate the future profitability for different refinery configurations. Trading companies want to anticipate regional supply/demand changes and price dynamics. This study s analysis will aid in planning terminal and shipping infrastructure needs to best capture future opportunities. Shipping companies need to plan for growth to capture opportunities from increased seaborne trade, particularly with the widening of the Panama Canal, which will shift the U.S. exports focus towards Asia. (Currently only four VLGCs can fit through the canal; soon it will be over 200 vessels.) Policy makers need timely insight into how regulatory changes can affect supply, demand, price and industry profitability. This study enables them to better evaluate the impact of future regulatory changes. Many other end-users, ranging from motor vehicles to home use to commercial applications, constantly consider how changing gas/oil price dynamics will influence service choices and future capacity decisions. The study makes end-users better equipped to adapt to supply and price shifts, and it can help new project developers make more effective evaluations of fuel supply options and project viability. Financial institutions must make sound evaluations of how changing market conditions will affect the economics and financing of new upstream, midstream and marketing ventures. This study allows for more informed decision-making on potential projects. Integrated state and private oil companies need to have a consistent basis for planning and project evaluation, covering the entire spectrum of the gas/ngls/oil markets, from wellhead to refined products and including the impact of alternative fuels, transportation costs and regional differences. Other investors in oil infrastructure, such as storage, pipelines or rail facilities, who need to understand the prospective changes in gas, NGLs, and crude oil and LPG/refined product flows on a regional basis and the implications for supporting infrastructure. Investment firms (hedge funds, private equity) looking for future direction in rapidly changing industries and potentially profitable opportunities in all aspects of the NGL business fit that description. 3 Park Avenue, 26 th Floor, New York, NY tel fax seminar@pira.com 6

7 ABOUT PIRA PIRA Energy Group, founded in 1976, is an international energy research and consulting firm that offers Retainer Client Services as well as industry studies and customized consulting on a broad range of subjects in markets for international oil, natural gas (and LNG), NGLs, coal, electricity, biofuels, and freight, as well as related environmental and policy issues. PIRA provides evaluation of key U.S. and international energy developments that impact the behavior and performance of the industry and its various markets and sectors. Currently, more than 500 companies spread across some 60 countries retain PIRA, including international and national integrated oil and gas companies, independent producers, refiners, marketers, oil and gas pipelines, electric and gas utilities, industrials, trading companies, financial institutions, and government agencies. THE STUDY TEAM Richard L. Joswick Managing Director Global Oil Richard L. Joswick develops PIRA s outlook for crude and product pricing, refinery margins, and inter-regional supply balances. He is the lead consultant for PIRA s Oil Producer Marketing Service (OPMS). Rick authors PIRA's monthly European Oil Market Forecast. He was the study leader for a series of industry studies examining product markets: Bottom of the Barrel: The Future for Residual Fuel Oil; Heart of the Barrel: The Future of Middle Distillate Fuels; Top of the Barrel: The Future for Gasoline, Naphtha, and LPG, and the 2012 Updated Outlook for Residual Fuel Oil. Rick joined PIRA in 2004 after 20 years with ExxonMobil in supply logistics, planning, refining, and engineering. During his time at ExxonMobil, he had assignments developing near-term oil market forecasts, designing heavy oil upgrading processes and evaluating refining economics. Rick has M.S. and B.S. degrees from Rutgers University in chemical engineering. Alpman Ilker Senior Director Global NGLs Alpman Ilker leads PIRA s Natural Gas Liquids group. He joined PIRA in 2013 after four years at the global commodities firm GlencoreXstrata, where he was a senior oil trader focused on global crude oil arbitrage. Prior to Glencore, Alpman worked at Chevron, where he held various roles in process design and engineering, refinery planning and operations, and crude oil marketing and trading. Alpman has a B.S. in chemical engineering from the University of California, Berkeley and an M.B.A. from the University of Texas, Austin. Nancy Lin Senior Director Consulting Senior Advisor Global NGLs Nancy Lin joined PIRA in 2013 after almost 36 years with ExxonMobil. For several years, she led the development of ExxonMobil s long-term global supply/demand outlook for natural gas liquids and for natural gas/lng. She has also held senior positions in oil supply logistics and trading, refining technology planning, chemicals new business development, and environmental, health and safety legislative and regulatory affairs. Nancy holds a B.S.E. in chemical engineering from Princeton University and an M.B.A. in finance from New York University Stern School of Business. 3 Park Avenue, 26 th Floor, New York, NY tel fax seminar@pira.com 7

8 INDUSTRY STUDY NGL AND LPG SUPPLY, DEMAND, TRADE AND PRICE Ken Otto Consulting Senior Advisor Global NGLs Ken Otto was hired by PIRA in 2015 to assist in the research behind The Global Impact of NGL Supply Growth. He led the NGL consulting practice for Purvin & Gertz for over 13 years and was the director and primary author of over 20 North American and global NGL studies over his 27-year career with them. Ken has also directed many different types of single client studies for clients in the NGL, refining and petrochemical industries around the world during his 38-year career in the energy and chemical industries. He holds a B.S. in chemical engineering and chemistry and an M.A. in chemistry from the University of Texas. David A. Zinamon Managing Director Global Oil David A. Zinamon specializes in refined products, refinery operations, NGLs, biofuels and environmental issues. His work also includes analyzing the inter-relationship between the oil and chemical industries. In addition, he has authored studies on topics as varied as the U.S. and other national energy and oil requirements; the impact of the burgeoning U.S. NGL supply on international markets; oxygenates markets and the significance of the Clean Air Act; the ability of U.S. refiners to comply with both low sulfur diesel and reformulated gasoline requirements; the market implications of special California diesel and gasoline; the outlook for industrial energy use in the U.S.; European gasoline markets; and refinery turnaround activity. Dave joined PIRA in 1984 after seven years of international energy consulting experience with Chem Systems. This followed several years of manufacturing, marketing and planning positions with Celanese Chemical, GAF Corp., and Airco. He has a BCHE from City College of New York and an M.B.A. from Rutgers University. Peter Jaquette Senior Director Global Oil Peter Jaquette is a key contributor to PIRA's Scenario Planning Service, managing PIRA s World Energy Demand Forecast Portal and working closely with PIRA s Global Oil, Refining, Biofuels, and Freight groups. He was the study leader for the 2013 North American Crude by Rail industry study and is the coordinator of the Planning for Tomorrow study series. Peter joined PIRA in 2007 with more than 25 years of experience in corporate strategic planning and economic consulting, including 14 years with ARCO and nine years with Weyerhaeuser. Peter has a B.A. in economics from Swarthmore College and an M.A. in economics from Stanford University. Frederick W.A. (Bill) Fuller (Senior Director, International Oil) had over 30 years of energy forecasting and analytical experience with Exxon International before joining PIRA in He now oversees PIRA s analysis and forecasting of near-term industry oil balances, with particular emphasis on international supplies. He also develops PIRA's long-term oil supply outlook and monitors events impacting PIRA s oil market view. Bill has a B.S. in chemical engineering from Cornell University. Dr. James Mason Senior Analyst Global Oil Dr. James Mason has over 30 years experience working on energy issues. He is currently assessing U.S. and world shale oil and gas resources. James has an M.S. in environmental sociology from the University of New Orleans and a Ph.D. in economic sociology from Cornell University. 3 Park Avenue, 26 th Floor, New York, NY tel fax seminar@pira.com 8

9 INDUSTRY STUDY NGL AND LPG SUPPLY, DEMAND, TRADE AND PRICE Dr. Naing Oo Associate Director Global Oil Dr. Naing Oo joined PIRA s Global Oil Group in He focuses on quantitative and econometric analysis for forecasting oil demand and is responsible for maintaining PIRA s global short-term oil demand model. Naing is also involved in both short- and long-term analysis of crude and product supply/demand balances and trade flows, and he has contributed to numerous PIRA industry studies and consulting projects. Naing holds a Ph.D. in economics from the City University of New York. Ethan Groveman Director Product Development Ethan Groveman oversees PIRA s project consulting practice, where he has headed up studies in crude and product trade, refining, and vehicle fuel demand. In addition, he built and currently manages PIRA s North American rail and pipeline infrastructure databases and contributes to PIRA s work on refining, supply/demand balances, and vehicle technologies. He led the rail cost and capacity modeling for PIRA s 2013 North American Crude by Rail study. Previous to PIRA, he served in product strategy and corporate development roles at Better Place, an electric vehicle infrastructure provider. Ethan has a B.S. in management science and engineering from Stanford University. Kenneth M. Bogden Director Freight Markets Kenneth M. Bogden is responsible for PIRA s monthly Freight Market Outlook and its associated service. Prior to joining PIRA in 2005, Ken worked for ExxonMobil for 27 years, primarily in its oil supply and trading and planning functions, and also served as Coordinator of Transportation Planning. Ken has a B.S. in chemical engineering from Lafayette College and an M.B.A. from Columbia University. Yolanta K. Zawada Senior Analyst Yolanta K. Zawada focuses on the U.S. and West European NGL markets, international fuel quality and ethylene cracker capacity, and refinery turnarounds. Prior to joining PIRA in 2000, she worked at Poten & Partners on industry studies Naphtha Prognosis and Condensate in World Commerce. She holds an M.B.A. in international business and marketing from Pace University. Cihan Ergül Senior Analyst Cihan Ergül is responsible for PIRA s World Refinery Data Portal, as well as the forecasting of ethylene cracker capacity and the fundamentals analysis of downstream energy markets. Prior to joining PIRA, Cihan worked as a quantitative analyst at National Grid, a global utilities firm, and Keyspan Energy Corporation. Cihan holds an MBA from Hofstra University and a BA in economics from Istanbul Bilgi University/University of Portsmouth. Evan Pickover Junior Analyst Global Oil Evan Pickover is responsible for gathering and analyzing data on global oil markets. He also maintains databases on international oil terminals and crude assays. Previously, as an intern in PIRA s Global Biofuels group, he maintained databases for international production of bioethanol and biodiesel and assisted in authoring the Global Biofuels Monthly Forecast. Evan has a B.A. in economics and criminal justice from Indiana University. 3 Park Avenue, 26 th Floor, New York, NY tel fax seminar@pira.com 9

10 ACCEPTANCE FORM We wish to subscribe to the industry The Global Impact of NGL Supply Growth: PIRA s Comprehensive Outlook to 2035 for (number of) users. We agree that the fees are as follows: CATEGORY OF STUDY BUYER STANDARD FEE Non-Client - 3 Users $23,000 Each Add'l User $2,300 PIRA Client - 3 Users $17,000 PIRA NGL Client - 3 Users $11,000 Each Add'l User $1,100 * New York City-based companies, please add 8.875% sales tax; all other New York State companies, please add the county-appropriate sales tax. Name/Title: Company: Address: Phone: Total Fee: Signature: Please Mail or fax to PIRA ENERGY GROUP Attn. Sales 3 Park Avenue, 26th Floor New York, NY tel ext. 315 fax sales@pira.com 3 Park Avenue, 26 th Floor, New York, NY tel fax seminar@pira.com 10