July-August 1 CERI Commodity Report Natural Gas Ethane Availability for Proposed Western Canadian LNG Facilities Dinara Millington In the Canadian context, the main sources of petrochemical feedstock include natural gas liquids (NGLs) from processing plants and off-gas plants as a feedstock for olefins or ethylene crackers in Alberta and Ontario. Crude bitumen, crude oil, and condensates processed at refineries are another feedstock, which yield liquid petroleum gases (LPGs), as well as refinery naphtha and gas oils for steam crackers. This article looks at ethane in particular, presenting the potential availability of C if more natural gas is developed for LNG facilities in Western Canada. More results on NGLs feedstock can be found in the forthcoming CERI study Competitive Analysis of the Canadian Petrochemical Sector. To forecast the supply of ethane, CERI modeled the availability of raw gas produced in the Western Canadian Sedimentary Basin (WCSB) from through 3 and the results are shown in Figure 1. Figure 1: Raw Natural Gas Production in the WCSB ( 3) This projection assumes that British Columbia will see 5.3 billion cubic feet per day (Bcf/d) of natural gas produced for LNG facilities by. The WCSB sees reduced production of natural gas from 15 through 19 as reduced drilling due to low natural gas prices works with high decline rates to lower production. Without the LNG, production flattens at around 17 Bcf/d by 3. Ethane is the smallest-chain NGL that is separated from a natural gas stream. It can be used to produce ethylene, which has a large variety of possible derivatives, including ethylbenzene, polyethylene, ethanol, acetaldehyde and ethylene oxide, which can all further be processed into plastics, rubbers, solvents and polyesters. During the 19s and 199s some ethane volumes were also used for enhanced oil recovery (EOR). Figure shows the volume of ethane recovered from the natural gas stream in the WCSB between 1 and 3. The figure illustrates that there might be excess ethane beyond the derivative capacity in Alberta and British Columbia if gas is extracted to meet LNG demand. In other words, if this excess ethane is not recovered, it might be rejected (i.e., left in the gas stream). Figure : Recovered Ethane: 1-3 Source: CERI, AER, BCOGC Source: CERI, AER, BCOGC CERI Commodity Report Natural Gas Editorial Committee: Paul Kralovic, Dinara Millington, Megan Murphy, Allan Fogwill About CERI The Canadian Energy Research Institute is an independent, not-for-profit research establishment created through a partnership of industry, academia, and government in 1975. Our mission is to provide relevant, independent, objective economic research in energy and related environmental issues. For more information about CERI, please visit our website at www.ceri.ca or contact us at info@ceri.ca. As with methane, volumes of produced ethane will drop from 15 through 19. A rise in ethane volumes will be seen after 19 as drilling rates start to overcome the high decline rates that the natural gas wells see. By 3, approximately 3, bbls/day of ethane will be supplied, including imports on the Vantage pipeline, in the absence of new LNG projects in BC. Including
Page additional ethane available from natural gas additions for proposed LNG plants, approximately, bbls/day of ethane will be available by 3. This leaves an additional,-1, bbls/day of ethane to be either recovered or rejected. Ethane is a by-product of oil and gas production and is produced alongside other NGLs like propane, butane and natural gasoline. While some ethane is recovered from oil production at refineries, most ethane is extracted at gas processing plants in the field. Ethane is different from other NGLs in that it can be blended into natural gas relatively easy. With this in mind, most major processing plants are set up with two options of how to handle their ethane volumes. The first option is to recover ethane to be eventually fractionated into purity ethane. It s important to note that recovered ethane has one use, as a feedstock in a cracker to produce ethylene and other co-products in the petrochemical sector. The second option a processing plant has is to reject the ethane and leave it in the gas stream. This second option makes ethane one of the easier NGLs to dispose of, and with NGL markets vastly oversupplied, the ethane "rejection" option has become a crucial balancing item for the NGL market. Basic ethane rejection economics are simple to calculate. They revolve around the value of these two ethane options for a producer at a processing plant. In general, if a producer gets a better netback (market price less transport and fractionation costs) for selling ethane into a market than it gets selling ethane as natural gas, then a producer ought to elect to recover the ethane. If the ethane s value in the gas stream is greater, then the producer ought to reject the ethane. Realistically, processing plants and processing contracts are not created equal, and there are no market clearing prices for ethane in Western Canada. The relationship between ethane and natural gas prices still generally drives ethane rejection economics. NGL production has faced the compounding effect of growing gas production in the US reaching processing plants as well as increasingly rich gas streams. As oily and liquids-rich plays have displaced dryer producing areas, NGL production has boomed. The ethane recovered in some markets like the Bakken and Marcellus/Utica from where transportation costs to Gulf Coast markets are the highest, is shipped to Canada. The Vantage Pipeline in North Dakota and the Mariner West Pipeline in the Northeast were both designed to connect ethane supply in the US to Canadian ethylene crackers. At the same time, ethane demand growth has not kept up. Building a world-scale ethylene cracker is a costly and timeconsuming venture, and while ethane supply growth has justified the investment, demand growth has been slow in coming. As this gap between ethane supply and demand has grown, ethane rejection has come to the rescue to balance the ethane market. Ethane demand comes primarily from olefin crackers in Alberta. However, historically, ethane has moved from Alberta to Ontario to satisfy demand in the Sarnia market. Some ethylene has also moved from Alberta to Ontario, thus reflecting the ethylene capacity surplus position in Alberta. Ethane and ethylene transfers stopped around the 7- timeframe as the Cochin pipeline was forced to stop deliveries. This in turn led to the closure of Dow Chemicals derivative plants in Ontario. Additionally, the closure of some ethylene derivative facilities in Alberta by Dow Chemicals around the same time decreased the overall ethylene derivative capacity in the province and subsequently overall ethylene cracking demand levels. An interesting set of questions going forward include: To what extent will ethane be left in the sales gas stream which is expected to feed BC s LNG projects? Alternatively, to what extent can that ethane be economically extracted in western Canada for sale in the Alberta petrochemical market? 1 Will those volumes in fact be needed in Alberta? CERI believes that the answers to these questions will depend on a complex interplay of gas composition and flows, technical/heating value specifications of LNG from buyers, and more importantly, LNG/NGL pricing dynamics. Endnote In regards to large integrated majors considering LNG projects in BC such as Chevron, Shell, or Exxon, the question could be one of leaving the ethane in the LNG versus extracting enough ethane to possibly feed their own ethane crackers.
Jul- Jan- Differential Jul-9 Jan-11 Henry Hub Jan-1 AECO-C Jul- Jan- Differential Jul-9 Jan-11 Henry Hub Jul-1 Jan-1 Rockies Beginning of Next Month Spot Price (US$/MMBtu) SOURCE: CERI, Platts Gas Daily Price Guide. -1 Jan-5 1 3 5 7 9 11 13 15 Jul-1 Henry Hub/Rockies SOURCE: CERI, Platts Gas Daily Price Guide. - Jan-5 1 1 1 Henry Hub/AECO-C Beginning of Next Month Spot Price (US$/MMBtu) Jul-15 Jul-15 Jul- Jan- Differential Jul-9 Jan-11 Henry Hub Jan-1 Jul- Jan- Differential Jul-9 Jan-11 Henry Hub Jul-1 Jul-15 Jan-1 Jul-15 Southern California Beginning of Next Month Spot Price (US$/MMBtu) SOURCE: CERI, Platts Gas Daily Price Guide. Jan-5-1 1 3 5 7 9 11 13 15 Jul-1 Chicago Henry Hub/Southern California Chart Title SOURCE: CERI, Platts Gas Daily Price Guide. -7 Jan-5-5 -3-1 1 3 5 7 9 11 13 15 Henry Hub/Chicago Beginning of Next Month Spot Price (US$/MMBtu) Page 3
SOURCE: Canadian Gas Association. SOURCE: CERI, Canadian Gas Association, Statistics Canada. Page 7 5 3 1 9 7 5 3 1 Canadian Heating Degree Days 5-Year Avg. 15 1 US Heating Degree Days 5-Year Avg. 15 1 SOURCE: NOAA. SOURCE: CERI, NOAA, EIA. Canadian Heating Degree Days vs Residential and Commercial Consumption Degree Days BCFPD 1, 7 Degree Days Consumption 1, 5 3 1 Jan-9 Jan-1 Jan-11 Jan-1 Jan-13 Jan-1 Jan-15 Jan-1 US Heating Degree Days vs Residential and Commercial Consumption Degree Days BCFPD 1, Degree Days Consumption 1, 5 3 1 Jan-9 Jan-1 Jan-11 Jan-1 Jan-13 Jan-1 Jan-15 Jan-1 CERI Commodity Report - Natural Gas
SOURCE: NOAA. SOURCE: Environment Canada. SOURCE: NOAA. SOURCE: Environment Canada. Page 5
CERI Commodity Report - Natural Gas SOURCE: Environment Canada. SOURCE: NOAA. SOURCE: NOAA. Page
NOTE: As of January 1, StatsCan changed the content and methodology of Canadian natural gas consumption. Users should use caution comparing current data with historical data SOURCE: Statistics Canada. SOURCE: Statistics Canada, NEB. SOURCE: EIA. SOURCE: EIA. Page 7 Canadian Consumption By Sector (Bcfpd) 1 Industrial & Power Commercial Residential 1 1 1 Jan-9 Jan-1 Jan-11 Jan-1 Jan-13 Jan-1 Jan-15 Jan-1 US Consumption By Sector (Bcfpd) 1 Industrial Electric Power Commercial Residential 1 1 Jan-9 Jan-1 Jan-11 Jan-1 Jan-13 Jan-1 Jan-15 Jan-1 Canadian Marketable Production By Province/Region (Bcfpd) BC, Yukon, NWT AB SK E. Coast 1 1 1 1 1 Jan-9 Jan-1 Jan-11 Jan-1 Jan-13 Jan-1 Jan-15 Jan-1 US Marketable Production (Bcfpd) 9 US Total Louisiana GOM Federal Waters Texas 7 5 3 1 Jan-9 Jan-1 Jan-11 Jan-1 Jan-13 Jan-1 Jan-15 Jan-1
Page BC, Yukon, NWT Marketable Production (Bcfpd) 5. 1 15 1. 3.. 1.. Saskatchewan Marketable Production (Bcfpd) 1. 1 15 1.5. 1 1 1 1.5.5. Alberta Marketable Production (Bcfpd) 1 15 1 East Coast Marketable Production (Bcfpd) 1 15 1 SOURCE: Statistics Canada, NEB. SOURCE: Statistics Canada, NEB. SOURCE: Statistics Canada, NEB. SOURCE: Statistics Canada, NEB. CERI Commodity Report - Natural Gas
Page 9 1 1 1 1 9 7 5 3 1 System Field Receipts TransCanada + Westcoast; Monthly Average (Bcfpd) 1 15 1 Canadian Gas Exports to the US By Export Point - West (Bcfpd) Kingsgate Monchy Elmore Huntingdon Jul-15 Sep-15 Nov-15 Jan-1 Mar-1 May-1 Jul-1 1 1 1 Alberta System Deliveries (Bcfpd) Empress McNeill AB-BC Alliance Aug-15 Oct-15 Dec-15 Feb-1 Apr-1 Jun-1 Aug-1 Canadian Gas Exports to the US By Export Point - East (Bcfpd) Emerson Iroquois Others Niagara 3 1 Jul-15 Sep-15 Nov-15 Jan-1 Mar-1 May-1 Jul-1 SOURCE: CERI, TCPL, Westcoast Energy. SOURCE: NEB. SOURCE: NEB. Note: Alliance deliveries were not available between Dec. 1/15 and Jan. 1/1. SOURCE: CERI, TCPL, Alliance Pipeline.
SOURCE: NEB. SOURCE: NEB. SOURCE: NEB, EIA. SOURCE: NEB. Page 1 US Imports of Canadian Gas By US Region (Bcfpd) 1 West Midwest East 1 Jul-15 Sep-15 Nov-15 Jan-1 Mar-1 May-1 Jul-1 Total US Pipeline Gas Imports (Bcfpd) 1 Canada Mexico 1 Jul-15 Sep-15 Nov-15 Jan-1 Mar-1 May-1 3 1 Average Canadian Export Price By US Region (C$/GJ) West Midwest East Jul-15 Sep-15 Nov-15 Jan-1 Mar-1 May-1 Jul-1 Canadian Gas Imports By Import Point (Bcfpd) Courtright Sarnia St. Clair Other Jul-15 Sep-15 Nov-15 Jan-1 Mar-1 May-1 Jul-1 CERI Commodity Report - Natural Gas
Page 11 Eastern US LNG Imports By Facility (Bcf) US GoM LNG Imports By Facility (Bcf) 1 Cove Point Elba Island Everett NE Gateway Neptune Freeport Lake Charles Sabine Pass Cameron Golden Pass Gulf LNG 1 1 1 Jul-1 Oct-1 Jan-15 Apr-15 Jul-15 Oct-15 Jan-1 Apr-1 Jul-1 Jul-1 Oct-1 Jan-15 Apr-15 Jul-15 Oct-15 Jan-1 Apr-1 Jul-1 SOURCE: US. DOE. SOURCE: US DOE. US LNG Imports By Origin (Bcf) Volume-Weighted Average LNG Price (US$/MMBtu) 1 1 15 1 Nigeria Trinidad Norway Yemen 1 15 1 1 1 1 5 Jul-1 Oct-1 Jan-15 Apr-15 Jul-15 Oct-15 Jan-1 Apr-1 Jul-1 SOURCE: US DOE. Note: There were no LNG imports for the month of November 1. SOURCE: US DOE.
Page 1 SOURCE: US DOE, NEB. SOURCE: US DOE. 1 1 1 1 Chart Title US LNG Exports by Destination (Bcf) China Jordan Spain Chile Kuwait 7 5 US LNG Re-Exports By Destination (Bcf) Turkey Brazil Egypt India 1 Argentina Portugal UAE India Brazil Taiwan Japan 3 1 Jul-1 Oct-1 Jan-15 Apr-15 Jul-15 Oct-15 Jan-1 Apr-1 Jul-1 Jul-1 Oct-1 Jan-15 Apr-15 Jul-15 Oct-15 Jan-1 Apr-1 Jul-1 SOURCE: EIA, US DOE. SOURCE: US DOE. CERI Commodity Report - Natural Gas
Page 13 North American Active Rigs Canadian Rig Fleet Utilization Weekly Average Active Rigs 3,,5 US WCSB 1, 9 Active Rigs Total Rig Drilling Fleet, 1,5 7 5 1, 3 5 1 Jan- Jul-7 Jan-9 Jul-1 Jan-1 Jul-13 Jan-15 Jul-1 Jan- Jul-7 Jan-9 Jul-1 Jan-1 Jul-13 Jan-15 Jul-1 SOURCE: CERI, CAODC, Baker Hughes. SOURCE: CERI, CAODC. WCSB Active Rigs by Province Weekly Average Western Canada Active Rigs Weekly Average 7 SK AB BC 5-Year Avg. 15 1 7 5 5 3 3 1 Jan-9 Jan-1 Jan-11 Jan-1 Jan-13 Jan-1 Jan-15 Jan-1 1-1 5 9 13 17 1 5 9 33 37 1 5 9 Week Number SOURCE: CERI, CAODC. SOURCE: CERI, CAODC.
Page 1 US Total Oil- and Gas-directed Active Rigs US Total Active Rigs,, Oil-directed Gas-directed Gas-directed %, 1, 1, 1, 1, 1, Jan- Jul-7 Jan-9 Jul-1 Jan-1 Jul-13 Jan-15 Jul-1 1% 9% % 7% % 5% % 3% % 1% %,5 Total Oil-directed GoM Gas-directed Onshore Gas-directed, 1,5 1, 5 Jan- Jul-7 Jan-9 Jul-1 Jan-1 Jul-13 Jan-15 Jul-1 SOURCE: CERI, Baker Hughes. SOURCE: CERI, Baker Hughes. US Gulf of Mexico Active Rigs 1 Oil-directed Gas-directed 1 Jan- Jul-7 Jan-9 Jul-1 Jan-1 Jul-13 Jan-15 Jul-1 SOURCE: CERI, Baker Hughes. CERI Commodity Report - Natural Gas
Page 15 1, 9 7 5 3 1 5,,5, 3,5 3,,5, 1,5 1, 5 Canadian Working Gas Storage 5-Year Avg. 15 1 US Lower- Working Gas Storage 5-Year Avg. 15 1 Canadian Storage by Region 9 West East 7 5 3 1 Aug-15 Oct-15 Dec-15 Feb-1 Apr-1 Jun-1 Aug-1 US Storage by Region,5 East Midwest Mountain Pacific South Central, 3,5 3,,5, 1,5 1, 5 Aug-15 Oct-15 Dec-15 Feb-1 Apr-1 Jun-1 Aug-1 SOURCE: CERI, Platt s Gas Daily. SOURCE: CERI, Platt s Gas Daily. SOURCE: CERI, Platt s Gas Daily. SOURCE: CERI, Platt s Gas Daily.
Page 1 WC_IJ_WD Western Canadian Storage Injections/Withdrawals 1 5-Year Avg. 15 1 - - -1-1 Canadian Storage Injections/Withdrawals 15 5-Year Avg. 15 1 1 5-5 -1-15 - Eastern Canadian Storage Injections/Withdrawals 5-Year Avg. 15 1 - - - - -1 SOURCE: CERI, Platt s Gas Daily. SOURCE: CERI, Platt s Gas Daily. SOURCE: CERI, Platt s Gas Daily. CERI Commodity Report - Natural Gas
Page 17 15 1 5-5 -1-15 - -5 3 1-1 - -3 - US East Storage Injections/Withdrawals 5-Year Avg. 15 1 US Mountain Region Storage Injections/Withdrawals 5-Year Avg. 15 1 US Midwest Region Storage Injections/Withdrawals 3 5-Year Avg. 15 1 1-1 - -3 US Pacific Region Storage Injections/Withdrawals 5-Year Avg. 15 1 - - - - SOURCE: CERI, EIA. SOURCE: CERI, EIA. SOURCE: CERI, EIA. SOURCE: CERI, EIA.
Page 1 3 1-1 - -3 US South Central Region Storage Injections/Withdrawals 5-Year Avg. 15 1 - - - - -1 US Storage Injections/Withdrawals 5-Year Avg. 15 1 SOURCE: CERI, EIA. SOURCE: CERI, EIA. CERI Commodity Report - Natural Gas