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You're the One That I Want - Steam Cracker Feedstock


Selection In Changing Times
Tuesday, 12/27/2016Published by: Housley Carr

The Shale Revolution has had a profound impact on U.S. NGL markets by vastly
increasing production and by lowering NGL prices relative to the prices of crude
oil and natural gas. That has been good news for the nations steam crackers, the
petrochemical plants that have enjoyed low NGL feedstock prices since 2012. But
NGL markets are in for some big changes as new U.S. steam crackers coming
online over the next two years will be competing for supply with export markets,
raising the specter of higher NGL pricesa good thing for NGL producers, but not
so for petrochemical companies. How this plays out will be determined by the
feedstock supply decisions petrochemical producers make as NGL prices respond
to rapidly increasing demand. Today we begin a series on how steam cracker
operators determine day-by-day which feedstocks are the most economic, and on
the factors driving the value of ethylene feedstock prices.

NGL production, the pricing of NGL purity products (ethane, propane, normal
butane, isobutane, and natural gasoline), and steam cracker economics are
frequent topics in the RBN blogosphere. Nearly five years ago, when U.S. NGL
production was just beginning to take off, we ran a series on feedstock economics
(Lets Get Cracking) that provided a primer on ethylene production and
discussed this underlying principal of feedstock acquisition in the steam cracker
industry: The best cracker feedstock is the one that will produce the highest
ethylene margin possible, after deducting byproduct credits. Two years later, in
the midst of the biggest run-up in NGL production in U.S. history, we took an
even deeper dive into the NGL/steam-cracker world with our Whats Crackin
With Steam Crackers Drill Down Report (available to RBN Backstage Pass
members). In that report, we discussed the fact that the margin for producing
ethylene with ethane (the lightest and most prolific NGL) had just hit an all-time
high (~70 cents/lba record that still stands today) due to the combination of a
low ethane price (~24 cents/gal) and a high price for ethylene (76 cents/lb).
Well, a lots changed since then. NGL production volumes remain high and ethane
prices are still on the low end, averaging only 19.5 cents/gal in 2016 (although
just last week ethane prices hit a two-and-a-half-year high of 28 cents/gal).
However, ethylene prices have tumbled (to about 25 cents/lb) and so has the
margin for producing ethylene with ethanethat margin averaged ~19 cents/gal
for 2016, and now stands at only ~15 cents/lb, down nearly 80% from the

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September 2014 pinnacle. Over the past year or so weve posted several blogs
covering the changes affecting the NGL/steam cracker world, including Beyond
Hypothermia (on how the falling price of crude oil and naphthaan oil-based
feedstock alternative, especially overseasslashed worldwide ethylene prices),
and our Drill Down Report on NGL/steam cracker infrastructure, Its Not
Supposed To Be That Way Drill Down/Part 1 and Part 2. In that report, we
discussed our view that the three key assumptions behind the build-out of new
U.S. ethylene production capacity and NGL export terminals1) U.S. NGL
production would continue to grow, 2) U.S. NGL prices would remain low, and 3)
crude oil and naphtha would stay expensivemay no longer hold water. A year
and a half have passed (a lifetime in NGL-market years) and the addition of
new ethylene-production and NGL-export capacity is looming ever closer, so its
high time to take a fresh look at the economics of steam cracker feedstock
selection.

NGL Voyager:
RBNs LPG &
Ethane
Oceangoing
Market
Analysis
RBNs new report
tracks propane,
butane and ethane
exports to overseas
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why those exports are happening, and what is likely to happen next.

Click here to receive a free, pre-release edition of our new


report

Well begin with a brief review of where things stand with NGL and steam
crackers and how we got here. As mentioned above, U.S. NGL production has
increased significantly during the Shale Era, rising from just over 2 MMb/d in
2008 to more than 3.7 MMb/d in 2016 (Figure 1).

The vast majority of NGLs is produced via the processing of raw natural
gasincluding associated gas produced with crude oil and condensateat gas
processing plants (blue bar segments), with most of the small balance (green bar
segments) coming from propane produced at refineries. NGL production from gas
processing plants has been growing quickly the past few years because an
increasing share of gas production has been coming in the form of associated
and wet gas (green layer in Figure 2), both of which typically are laden with
large quantities of NGLs. A significant portion of this wet gas production has been
in the Utica in eastern Ohio and the wet part of the Marcellus in western
Pennsylvania and northern West Virginia. Associated gas production occurs in the
Permian Basin, the Eagle Ford, the Bakken and other major crude-focused plays.

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Figure 2; Source:
RBN

In the Energy
Information
Administrations
(EIA) September
2016 numbers,
gas-plant
production of
ethane averaged
about 1.2 MMb/d,
while propane
production came
in about the same
1.2 MMb/d. (The
balance of the
NGLs, totaling 1.1
MMb/d, are either
normal butane,
isobutane or
natural gasoline.)
Note that only a
portion of the
ethane in the raw
gas stream fed
into processing
plants is separated
out into liquid
ethane for sale to
steam crackersgas producers and processors also have the option of leaving (or
rejecting) at least some ethane into the pipeline-quality gas that emerges from
the back-end (or tailgate) of their gas plants (see You Aint Seen Nethane
Yet). The decision about how much ethane to reject into pipeline gas depends in
part on the need to meet gas pipeline standards (too much ethane, too high a
Btu/MMcf ratio), and in part on the price of natural gas vs. the price of purity
ethane. If ethane is worth more if its removed from the raw gas stream with
other NGLs and fractionated into a purity product (see Talking Bout My F-f-
fractionation), more ethane will be separated out and not be rejected. More on
this laterethane rejection is an important factor in the economics of steam
cracker feedstock selection.

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The Backstage Pass


to RBN Energy: Now
Expanding to VIP
Backstage Pass
Three years ago, we
launched Backstage
Pass, our premium
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provides access to our
Drill-Down reports,
archive access to blogs,
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successful, and weve had a number of requests to expand the program to include
some of our other products and services, which we are doing now. We are also
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But dont panic! If you are currently a subscriber, or even if you sign up before
February 1, 2017 you still will pay only the low-low price of $75.00 per month. So, no
price increase for existing subscribers or anyone who takes advantage of our 2016
grandfathered pricing. But starting in February, the price will be going up to $90.00
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There are some other big advantages of this grandfathered deal.

First, you get access to all 35 of the Drill Down reports that weve done over
the past 3 years, instantly, and the new ones to be published during your
subscription. Most are as relevant today as they were when originally
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Second, you get access to daily blog archive going back to our very first
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Third, there are discounts available. If you subscribe for a year, you get a 15%
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supply/demand balances, infrastructure developments and our outlook for


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To make sure you have access to our grandfathered pricing and services, just go to
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About half of U.S. NGL production is used as feedstock for steam crackers. That
includes virtually all of the ethane that is not rejected into natural gas, as well as
about one-quarter of total propane supply, 15% of normal butane and 10% of
natural gasoline. (Isobutane, the other NGL, is used primarily in a refinery
process called alkylation to make a high-octane, low-vapor-pressure motor
gasoline blend component called alkylate. Its also used in various specialty
markets such as propellant for spray products and as a refrigerant, but in the
U.S., is almost never used as a steam cracker feedstock.) As you can see in
Figure 3, there has been a noteworthy shift the past few years in the mix of
feedstocks used in U.S. ethylene plants, some of which are configured to crack
only specific feedstocks and others of which are more flexible. Until the start of
the Shale Era in 2008-09, naphtha and gas oil (heavier feedstocks produced at
refineries; purple and aqua bar segments, respectively, at the top of the bars in
Figure 3) together accounted for 30% or more of total feedstock volumes. Over
the past eight years, however, their combined share has fallen sharply, and they
have been largely replaced by lighter (and generally less-expensive) NGLs,
especially ethane (blue bar segments) but also propane (red bar segments) and
normal butane (green bar segments). Very small volumes of natural gasoline
(whose characteristics are similar to naphtha) are used as well and are included
in the purple segment along with naphtha.

Figure 3; Source:
RBN, Jacobs
Consultancy
Hodson Report

As of 2016,
ethane accounted
for ~61% of total
feedstock volumes
in U.S. steam
crackers (up from
~41% in 2005),
while propane accounted for ~24%, normal butane ~8%, naphtha/natural
gasoline ~6% and gas oil ~1%. Because each of these feedstocks has a different

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chemical structure, the amount of ethylene produced from, say, 1,000 barrels of
ethane is considerably different than the amount of ethylene produced from a
similar volume of propane or butane, etc. Each feedstock also produces different
amounts of steam-cracking byproducts such as propylene, butadiene, benzene,
fuel gas and hydrogen, each of which has a value of its own. The steam cracker
feedstock selection model we will be discussing in this blog seriesand testing
against current prices and prospective price scenarioswill factor in not only the
price of the various feedstocks, but the value of the ethylene and byproducts mix
that each feedstock produces. Only by considering all these factors (the cost of
the feedstock going in, and the value of products coming out) can we determine
which feedstock (or combination of feedstocks) would yield the highest margin at
any specific point in time.

Taking a fresh look at feedstock selection makes sense as 2017 begins because
more than a dozen U.S. steam cracker projects that together would add more
than 20 billion lb/year of new ethylene production capacity are either under
construction or will be soon. As a group, these projects (most of them along the
Gulf Coast in either Texas or Louisiana) could increase ethane demand by about
600 Mb/d by the early 2020s. Factor in the possibility of only modest growth in
ethane production, continuing ethane takeaway constraints and rising ethane
exports (overseas and to Canada) and, well, this could get very interesting.

In upcoming episodes in this series, we will discuss the feedstock selection


model; the timing of incremental steam cracker demand for ethane, propane and
other feedstocks; and the role of ethane and propane exports. Then well assess
what all that means for ethane and propane demand and prices, and use our
model to consider what the highest-margin feedstocks of 2018, 2020 and 2022
might be.

Each business day, RBN Energy posts a Blog or Markets


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