U.S. Ethane Crackers and Ethylene Derivative Capacity Additions Part 2 The Economics Behind Monetizing Cost-Advantaged U.S. Ethane Reserves by CLAY JONES, TERREL LAROCHE, and CHERYL GINYARD-JONES www.honfleurllc.com HONFLEUR LLC June 2016 1
U.S. Ethane Crackers and Ethylene Derivative Capacity Additions - Part 2 In Part 1 of Honfleur LLC s continuing series titled U.S. Ethane Crackers and Ethylene Derivative Capacity Additions, we addressed the transformative state of the U.S. shale revolution during the past 10 years. We believe the longterm impacts upon the U.S. oil and gas industry, as well as global hydrocarbon commodity supply and demand patterns will be significant. Global import and export trading patterns and markets have been disrupted and historical views of Americas natural resource reserves supporting energy independence now seem within reach, especially for natural gas and natural gas liquids (NGL s). The oil and gas industry has consistently applied new science and technology in order to find and develop hydrocarbon resources. The combination of 3-D seismic imaging, horizontal drilling, microseismic fracturing mapping and large scale hydraulic fracturing has underpinned the recent oil and gas shale boom. The U.S. upstream oil and gas industry has invested billions of dollars based on the belief that if you can dream it, you can achieve it. The result of this passion has fueled the growth of U.S. oil production by nearly eighty (80%) percent, and the growth of natural gas production volumes by fifty (50%) percent since 2005. This White Paper represents Part 2 of a three-part Series on this topic. Honfleur LLC Managing Partners Clay Jones and Terrel LaRoche, in conjunction with Cheryl Ginyard-Jones, a chemicals subject matter expert, analyze the commercial opportunities and economic drivers underpinning one significant commodity produced from the shale revolution Ethane and its ability as a cost-advantaged, abundant feedstock to produce ethylene. In its own right, ethane production from U.S. natural gas liquids-rich shale resource basins has the ability to disrupt and replace naphtha as a cracker feedstock of choice in the production of ethylene. Additionally it will potentially modify supply / demand trade patterns globally, and will see tens of billions of dollars invested in new greenfield ethane cracker facilities and ethylene derivatives plants during the next six (6) years. At the time of this writing, several dozen new ethane cracker projects, and as many ethylene derivatives plants, are in various stages of development in the U.S., with approximately ninety five (95%) percent of these projects slated for the Texas / Louisiana Gulf Coast. Honfleur s analysis of this market highlights several key elements for success. They include: LNG exports will support and encourage upstream producers to sustain and grow the flow of wet natural gas, which in turn will ensure a steady and growing supply volume of ethane for the petrochemical industry's use. Additionally higher crude oil prices will support more crude oil production, which will contribute to more associated wet natural gas production and therefore more NGL's, including ethane. The increased ethylene supply will force high cost ethylene producers to curtail operations. Further, given the cost curve of delivered ethylene globally, it is likely that some naphtha fed steam crackers may find their ethylene capacity either curtailed or shut down. There is a knowledge gap with any petrochemical company s ability to accurately benchmark the current and proposed ethane steam cracker projects, thus operators must place specific emphasis on project management skills to provide the necessary oversight of the EPC contractor and project in general. The form of contract between project operator and EPC contractor provides no assurance of timely scope achievement, anticipated cost metrics, or operational performance. Honfleur is a global provider of Independent Consulting Services on capital projects. Our involvement allows project operators to secure funding (equity and debt), maximize project execution efficiencies, and increase the likelihood of a capital project s economic success. Honfleur s Managing Partners appreciate the opportunity to bring to you, our Customers, this three-part series. Part 2 U.S. Ethane Crackers and Ethylene Derivative Capacity Additions The Economics Behind Monetizing Cost-Advantaged U.S. Ethane Reserves. www.honfleurllc.com HONFLEUR LLC June 2016 2
Holistic View of Ethane Molecule Flow The shale gas revolution has supplied an abundant supply of hydrocarbons to the U.S. commodity markets. The petrochemicals industry is benefiting from the available supply of hydrocarbons to feed their facilities, specifically individual gases such as ethane, propane, and butane, which come from the complex mixture of hydrocarbons within the natural gas liquid NGL stream. From liquidsrich NGLs to useable commodity chemicals ethane, ethylene and it derivative products the hydrocarbon supply chain begins with upstream drilling and production, midstream natural gas processing, natural gas transmission, NGL fractionation, purity product transmission, and ends in downstream petrochemicals steam cracking. The sourcing of purity ethane, which provides the feedstock for one (1) ethane cracker, is a critical aspect of the hydrocarbon molecule flow. Prior to final investment decision FID - operators must give strategic consideration to the long-term, contractual, physical delivery of ethane feedstock supplies for their respective capital projects. Unless an operator is sourcing interruptible ethane feedstock from the spot market, this analysis entails that strategic planning must be cognizant of the upstream sources of ethane supply. Figure 1 depicts the ethane molecule flow by facility type in order to supply the necessary amount of ethane to produce the necessary quantity of ethylene in support of derivative products. Figure 1: Ethane Molecule Flow As discussed in greater detail in Honfleur s Part 3, U.S. Ethane Crackers and Ethylene Derivative Capacity Additions, a strawman greenfield ethane steam cracker economic model has been developed to reflect the capacity, scope, and capital costs of a prevalent size plant with the following key specifications: Ethane Steam Cracker Ethane feedstock: ~90,000 barrels per day; Ethylene produced: ~1.5 mtpa (million tons per annum); Schedule from design to operations: 48-72 months; and Capital cost: ~$2 billion dollars. Moving one step upstream from the ethane steam cracker, an NGL fractionation facility having the following specifications would produce approximately 20,000 30,000 barrels per day of ethane. To support one (1) ethane cracker with the specifications noted above, a petrochemical operator would need to source the total ethane output of approximately three (3) fractionation facilities. NGL Fractionation Facility NGL feedstock: ~100,000 barrels per day; Ethane produced: ~20,000 30,000 barrels per day; Schedule from design to operations: 24-36 months; and Capital cost: ~$600 million dollars. Continuing to move further upstream, a natural gas processing plant, or cryogenic facility, having the following specifications would produce approximately 12,000 15,000 barrels per day of natural gas liquids - NGLs. To support one (1) NGL fractionation facility with the specifications noted above, a fractionation facility operator would need to source the total NGL output of approximately eight (8) natural gas processing plants. Note, for this analysis the natural gas processing plant is operating in an ethane rejection mode. Natural Gas Processing Plant Wet Natural Gas feedstock: ~150,000 million cubic feet per day; NGLs produced: ~12,000 15,000 barrels per day; Schedule from design to operations: 18-24 months; and Capital cost: ~$150 million dollars. Lastly, arriving at the reservoir, an upstream operator having the following drilling and production program would receive approximately 1 million cubic feet per day of wet natural gas stream per completed well. This production number anticipates year 2 flow rates commiserate with typical decline curves associated with shale reserves, and continued drilling to maintain gas steam volumes. To support one (1) natural gas processing plant with the specifications noted above, a plant operator would need to www.honfleurllc.com HONFLEUR LLC June 2016 3
source the total wet gas output of approximately one hundred fifty (150) natural gas wells. Drilling & Production Wet gas stream produced: ~1 million cubic feet per day; Schedule from spud to production: ~30 days; and Capital cost: ~$5 7 million dollars per well. 35.2 Bcf per day (47%). In contrast to 2005 U.S. oil and gas production totals were at 5.2 million barrels per day and 50 Bcf per day, respectively. Shale basins have contributed the majority of growth in U.S. hydrocarbon production. Figure 3: Resource Basins Figure 2 now depicts the ethane feedstock requirements associated with one (1) 1.5 mtpa ethane steam cracker. Following the ethane molecules from the ethane cracker upstream to the wellhead reflects on a volume basis that 3,600 natural gas wells are required to feed one (1) ethane cracker (150 wells x 8 gas plants x 3 fractionation plants). Additionally, the well development program, natural gas plants, fractionation facilities, and ethane steam cracker all based upon the specifications noted herein constitute a total of approximately $8.6 billion dollars in capital costs. Therefore, the ethane supply chain from wellhead to ethane steam cracker is a complex association of interwoven assets, capital projects, contracts, and relationships that need to be viewed holistically to ensure ethane feedstock supply. Figure 2: Ethane Molecule Flow Conventional fields produce from porous reservoirs that typically use traditional straight hole well completions. These are located in the Appalachian Basin, Michigan/Illinois Basin, Black Warrior Basin, Texas, Louisiana and Mississippi Salt Dome Basin, Gulf Coast Basin, Permian Basin, Arkoma/Anadarko Basins, Denver Julesburg (DJ) Basin, San Juan Basin, Piceance/Uinta Basins, Green River Basin, Powder River Basin, and Williston Basin. Shale oil and gas fields are more recent developments using horizontal drilling and fracing stimulation techniques developed in tandem over the last ten (10) years. Shale basins include Marcellus, Utica, TMS, Haynesville, Fayetteville, Woodford, SCOOP, Barnett, Eagle Ford, Permian, Niobrara, and Bakken Basins. Frequently shale resources are found near or in the conventional field basins. The Hydrocarbon Supply Chain U.S. oil and gas production comes from conventional, shale, and coalbed methane fields concentrated in five main areas: the Gulf Coast, Permian Basin, Mid-Continent, North East, and the Rockies. Figure 3 indicates the location and concentration of producing wells in these resource basins. As of year-end 2015, total U.S. oil production per EIA was over 9.3 million barrels per day, and natural gas production was over 75 Bcf per day (billion cubic feet). Of these totals, shale basins contributed total oil production of 5.16 million barrels per day (55%), and total natural gas production of In addition to the conventional fields and shale oil and gas fields, coalbed methane fields, which typically require the de-watering of the coal beds before dry gas can be produced are located in the Appalachian Basin, Arkoma/Cherokee basins, Gulf Coast region, San Juan Basin, Piceance/Uinta Basins, Green River Basin, Powder River Basin, and Williston Basin. As with the shale oil and gas fields, coalbed methane fields are usually located near or in the conventional field basins. Natural Gas Processing Figure 4 reflects the general location of U.S. gas processing plants and fractionation facilities. According to EIA, there are 551 gas processing www.honfleurllc.com HONFLEUR LLC June 2016 4
plants which are located in the resource basins to process produced wet gas. These plants have a total of 77.3 Bcf per day of available processing capacity, and produce approximately 2.7 million barrels per day of natural gas liquids - NGL s. New construction of gas processing plants through 2018 is expected to add another 12.9 Bcf per day of gas processing plant capacity. Figure 4: Gas Processing Plants and Fractionation Plants the fractionation facilities for further processing. Some of the pipelines might be further specialized to carry E-P mix (ethane-propane), and liquefied petroleum gas (LPG, primarily propane and butane) as partially fractionated product lines. According to EIA, there are 142 operating U.S. refineries, as shown in Figure 6. Refinery locations are oriented to end user and export markets, with nearly fifty (50%) percent of the 17.9 million barrels per day of processing capacity located along the U.S. Gulf Coast. Refineries are also a source of purity ethane supplies from liquid refinery gases that come from the refining processes. Figure 6: Refineries Fractionation Facilities As noted in Figure 4, the fractionation facilities are located near end users, and where there is adequate storage for NGL component products. Per EIA, there are approximately 29 fractionation plants with a physical concentration along the U.S. Gulf Coast, Mid-Continent, and Marcellus/Utica Basins. New construction of fractionation facilities through 2018 is expected to add 2.4 million barrels per day of NGL fractionation facility capacity. Pipelines For NGL pipelines, also known as y-grade pipelines, all roads lead to Mt. Belvieu, Texas. Figure 5: NGL Pipelines Terminals Traditionally, LPG has a long history as an export product from U.S. Gulf Coast ports via LPG ships capable of storing LPG under pressure as a liquid. Per EIA data, there are 31 operating ports in the U.S. that can ship LPG. The creation of viable international ethane trade depends on the construction of specially designed export and receiving infrastructure, including long-haul vessels, storage and loading facilities, and pipelines. There are two (2) ethane export terminals that have recently been developed including Sunoco Logistics Partners 35,000 barrel per day Marcus Hook, Pennsylvania terminal that is backed by the Mariner East pipeline. This terminal began shipping purity ethane in March 2016 for re-delivery to two (2) Ineos petrochemical plants in Norway and Scotland. Additionally, Enterprise Products Partners is developing a 240,000 barrel per day purity ethane export terminal at Morgan s Point, Texas. Figure 5 depicts the major hydrocarbon gas liquids (HGL) pipelines that ship NGL s from the gas processing plants to Built-for-purpose vessels needed to carry the higher pressure purity ethane include South Korea s Samsung Heavy Industries, which plans to construct six (6) ethane www.honfleurllc.com HONFLEUR LLC June 2016 5
carriers for India s Reliance Industries ethane cracker facility at Jamnagar, India. New York-listed shipping company Navigator plans to build a new ethane carrier to enable Borealis to ship ethane from the U.S. to Europe. Additionally, Ineos reportedly has expanded an agreement with Denmark-based gas carrier Evergas for a fleet of multigas vessels capable of shipping ethane. Ethane to Ethylene Process Flow Ethane is sourced from both oil and gas production from the wellhead. Figure 7 reflects a simplified process flow. The resource contains wells that produce crude oil, associated natural gas, and water. The field gas separator receives three-phase flow from the wellhead and divides out water to be disposed, crude oil and condensate barrels that are sold by truck or pipeline to a refineries, and wet gas requiring further processing. The amount of ethane recovered from NGLs or rejected into the residue gas stream is determined by the economics of the gas processing plant. The economics are governed by the gas processing contracts, the offtake contracts for residue gas and NGL s, the location of the gas processing plant relative to residue gas trunk-lines, the location of the y-grade NGL lines and distance from the fractionation facilities. These factors represent the costs to source ethane into the NGL stream and are directly measured against the market price offered for the ethane component. A smaller source of ethane results from the processing of crude oil, lease, and plant condensates by a refinery. The liquefied refinery gases can be fractionated at the refinery or sold to fractionation facilities for further processing. These gases are a secondary source of ethane in the U.S. Figure 8: Ethane Cracker to Ethylene Process Flow Figure 7: Hydrocarbon Flow Ethane Sourcing Wet gas is delivered to the gas processing plant where heavier natural gas liquids - NGL s are removed and a dry residue gas (high in methane-c 1 ) is shipped via a natural gas trunk line to be distributed to end users. The NGL s are shipped via a y-grade pipeline to be received by a fractionation facility that will further separate the NGL s into components. Each component is piped to storage or direct to end users, or can be trucked or shipped by rail. Fractionation facilities are typically found near end users of the fractionated products and near underground storage facilities. This entire line of gas processing to fractionation is the major source of ethane supplies in the U.S. Figure 8 depicts a simplified ethane cracker process flow with three processing stages: the furnace, quenching, and recovery. The process starts with purity ethane that is contacted with heated steam at a temperature of 1450 F to 1600 F in the cracker to crack the ethane into the main product ethylene, and the main by-product - hydrogen. The mixed stream is sent to cooling where water is used as a quenching agent, then to a separator where ethylene is recovered and separated along with hydrogen. The left over ethane not converted into ethylene is recycled back from the separator to the steam cracker to repeat the process. In practice purity ethane will have small amounts of propane, butane and inerts in the ethane stream. This results in olefin by-products, primarily propylene and small amounts of butylene and pyrogenic gasoline. The hydrogen is typically used on the process site as a fuel gas, with excess amounts sold as hydrogen assuming there is a www.honfleurllc.com HONFLEUR LLC June 2016 6
developed hydrogen distribution system available. Refineries that process heavy crude oils require hydrogen for their refinery processing. Ethane is used to make ethylene, which in turn is converted into derivatives as intermediate commodity products, which are then converted into end-use products as shown in Figure 9. The global ethylene market is driven by growth in the use of polyethylene mainly for consumables; ethylene dichloride for polyvinyl chloride (PVC) plastic used in construction and pipe; and ethylene glycol/oxide for polyethylene terephthalate (PET) resins used for PET fiber, bottles and other packaging. Figure 9: Ethylene Derivatives ethylene demand will provide the incentive for additional ethane recovery from the wet gas streams. However, the infrastructure to capitalize on cost-advantaged ethane feedstock is not ready and will take years to design, construct, and put new ethane crackers into operation. Petrochemical operators are methodically moving potential ethane cracker projects, ethylene derivative plants, storage terminals, and export facilities through approval processes to take advantage of the cost-advantaged ethane supply volumes coming from shale gas production. Figure 10 depicts the long lead time for development of a greenfield ethane cracker project. Once an opportunity is identified, a petrochemical operator will assess the commercial viability of the project before proceeding to developing a firm project scope, which in turn will lead to taking a final investment decision - FID. The development time line as shown can take up to seven (7) years from opportunity identification to facility operations. For example, a new greenfield ethane steam cracker along the Texas Gulf Coast that will begin operations in 2017 most likely began the development process in the 2010 2011 timeframe. Figure 10: Ethane Cracker Development Timeline Polyethylene, the largest ethylene derivative, accounts for the majority of global ethylene consumption. Markets for polyethylene include food packaging, film, trash bags, diapers, toys, water pipes, bottles and containers. Ethylene and its derivatives are extensively used in industries including construction, automotive, containers and packaging, electronics, appliances, food and beverages, textiles, detergents, oil, cosmetic and plastic and even in agriculture as a plant hormone to ripen fruits. Ethylene Capacity Additions In contrast to a refinery-supplied light naphtha steam cracker that produces ethylene, new green field projects using NGL-derived ethane as their feedstock have a significant feedstock cost advantage, even in the current low crude oil price environment. Additionally, U.S. From publically available information, sixteen (16) ethane steam cracker projects have been identified and are in various stages of development. Several of the projects are expansions of existing facilities, which tend to be smaller in capacity, but will achieve operations sooner than their greenfield competitor projects. As reflected in Figure 11, these facilities if completed, would produce approximately 13.6 mtpa (million tons per annum) of ethylene, and represent cumulative capital project costs exceeding $20 billion dollars. As noted in Part 1, U.S. Ethane Crackers and Ethylene Derivative Capacity Additions, since the year 2000 only two steam crackers were built in the U.S.: BASF/ATOFINA at Port Arthur, Texas in 2001, and Formosa Plastics at Point Comfort, Texas in 2002. www.honfleurllc.com HONFLEUR LLC June 2016 7
Figure 11: Ethylene Capacity Additions through 2020 Ethylene itself is difficult to ship and store as it is a volatile product. However, conversion by polymerization (HDPE, LLDPE, LDPE, and PE) or to other derivatives makes the ethylene contained products easy to store and export. Figure 13: Ethylene Derivative Additions From publically available information, Figure 12 lists ten (10) potential ethane cracker projects in planning stages, that if developed would become operational before, or after year 2020. The potential projects represent an additional 5 mtpa of ethylene capacity. Figure 12: Ethylene Capacity Additions post 2020 And finally, from publically available information, Figure 13 reflects twenty five (25) companies that are in various stages of developing ethylene derivative projects. Note that some of the projects are joint ventures (JVs), which are formed between an ethylene supplier and a petrochemical producer and/or buyer of ethylene derivatives. Most of the JVs create an international export market for the derivative products, which can be critical to the overall economic success of the entire ethylene to ethylene derivative value chain. www.honfleurllc.com HONFLEUR LLC June 2016 8
Conclusions Next in the Series Commodity Prices and Exports Though not intuitive at first glance, the ethane to ethylene petrochemical industry in the U.S. should be supportive of natural gas exports and higher crude oil prices. Ethane cracker investors will find that LNG exports will support and encourage upstream producers to sustain and grow the flow of wet natural gas, which in turn will ensure a steady and growing supply volume of ethane for the petrochemical industry's use. Doubly so for ethane steam crackers, a contrarian view on crude oil will also support the competitiveness of ethane versus naphtha fed steam crackers, which track crude oil prices. Higher crude oil prices will support more crude oil production, which will contribute to more associated wet natural gas production, and therefore more NGL's, including ethane. Part 3 U.S. Ethane Crackers and Ethylene Derivative Capacity Additions Discussion of U.S. ethane cracker capital costs, economic modeling, sensitivities, and Honfleur s Strawman ethane cracker economics. Competition With the expansion in U.S. ethylene capacity from ethane steam cracker projects in the planning stages or under construction, there will be a need to supply competitively priced ethylene. The increased ethylene supply will force high cost ethylene producers to curtail operations. Further, given the cost curve of delivered ethylene globally, it is likely that some naphtha fed steam crackers may find their ethylene capacity either curtailed or shut down. Project Management As only two ethane steam cracker facilities have been constructed and commissioned in the U.S. since 2002, there is a gap with any petrochemical company s ability to accurately benchmark the current and proposed ethane steam cracker projects. As such, project operators must place specific emphasis on project management skills to provide the necessary oversight of the EPC contractor and project in general. The form of contract between project operator and EPC contractor provides no assurance of timely scope achievement, anticipated cost metrics, or operational performance. Authors Clay Jones is a Managing Partner at Honfleur LLC. Contact him at clay.jones@honfleurllc.com or (832) 282-1164. Terrel LaRoche is a Managing Partner of Honfleur LLC. Contact him at terrel.laroche@honfleurllc.com or (832) 527-9002. Cheryl Ginyard-Jones is a petrochemicals subject matter expert at Honfleur LLC. Contact her at ginyardjones@gmail.com or (703) 576-7847. About Honfleur Honfleur LLC is a global provider of Independent Consulting Services on capital projects. Our involvement allows project operators to secure funding (equity and debt), maximize project execution efficiencies, and increase the likelihood of a capital project s economic success. Visit Honfleur LLC at www.honfleurllc.com www.honfleurllc.com HONFLEUR LLC June 2016 9