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The title of this presentation is NGLs versus LPGs , or Gas Plants vs. Refineries. We talk a lot about NGLs from gas plants and what is happening to those volumes, but usually the refinery side is a footnote. Given how rapidly gas plant production is expected to increase, and the fact that most of the refinery material competes directly with gas plant NGLs, it seems like it is a topic worth some attention.

This is a very simplified diagram of the issue. Both gas plants and refineries produce C3s and C4s. About 75% of the production is from gas plants, the other 25% is from refineries. In the summer it is more like one-third from refineries. For the most part the products go into common markets, with propane into heating and petchems, and butanes into mogas and petchems. This flowchart ignores imports and exports, and here are some other cats and dogs in the supply demand chain, but this is the basic concept.

And that concept is that molecules of refinery propane compete heads up with molecules of gas plant propane – and the same for butane.

In a world of flat supply and relatively consistent demand that we had for years, that competition was no big deal. But today supply is growing and demand is shrinking. The question then is –does this competition matter?

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This graphic will help put some scale to the numbers. It shows total EIA production numbers for propane/propylene and butane/butylene from both gas plants and refineries over the Jan 2011 –Jan 2012.

So, total production is about 1.6 MMB/d. Of which 18% is olefinic material from the refineries –propylene and butylenes. We need to show them here because when EIA shows their inventory numbers, the propylenes and buylenes are in the numbers.

That leaves 82% or 1.3 MMb/d of C3 & C4 production. As I mentioned previously, 75% of the propane and butanes are from gas plants, 25% from refineries. But in the summer, the refinery percentage increases up to 33%.

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This graph tells the story of what has been happening for the past few years. Gas plant production is on the left axis, refinery production is on the right axis. Units are the same.

No surprise with gas plant production of C3s & C4s, up and to the right particularly for the past two years where volumes have increased by more than 15% in just the past two years.

Exactly the opposite for refinery LPG production, down 16% since 2008.

Refinery utilization is down, and some refineries – particularly on the east coast – have shut down. So in effect, refineries have – to some extent – made room for increasing natural gas plant production of propane and butanes.

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But not enough room. Even with the decline in refinery production, total output is increasing. That, combined with high crude prices and a number of other factors has resulted in falling imports and increasing exports. Propane crossed over to a next export position last year. Butane numbers are a lot smaller, but it looks like that butanes are headed in the same direction. We certainly don’t need imports and we are making more than we can use.

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One more point about the current situation that is apparent from looking at the inventory patterns for propane and butanes. Both are highly seasonal products. Propane builds inventories in the summer and draws down for winter heating demand. At least that is what is supposed to happen. Since there wasn’t much of a winter this year, there wasn’t much of a drawdown this year, as you can see in the red circle.

On the butane side, refineries surplus in the summer and then use normal butane for mogasblending in the winter when regulations permit higher vapor pressure fuels.

So for both products the are huge surpluses in the summer, a big upsurge in demand in the winter and consequently a big need for storage to balance out the seasonal swings.

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Growth in the crude oil rig count is off the scale, up from 200 in mid-2009 to 1,300 today

At the same time, the natural gas rig count is falling like a rock, now back to 670

A good portion of the gas wells still drilling are going after wet gas, which is keeping the NGLs coming.

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The ratio between natural gas and crude oil. This is simply the price of crude oil which today is about $100/bbl divided by the price of gas at about $2/mmbtu.

There was an old 6X BTU based rule of thumb that went out the window decades ago. A five year average number has ranged between the low to mid-teens. Last year the ratio ranged between 20X and 35X. So far this year, it has just been ridiculous, with crude above $100 and gas languishing in the low $2.00/Mmbtu range. A couple of weeks ago it moved above 50X for the first time. The obvious implication is that liquid hydrocarbons are worth a lot more than hydrocarbons in a gas state.

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What does all this additional crude oil mean for NGL production? The answer is that it depends. First of all let’s look at the NGL makeup of three representative crudes – Domestic Light –basically WTI, Maya – Mexican heavy crude and Western Canadian Select a heavy crude blend. If you look at the typical yield of NGLs from these crudes through the crude unit, the propane yield is small – a fraction of a percent and doesn’t change much. The normal butane and isobutane fraction is much higher, but for domestic light and WCS the numbers are pretty close. And that is for two vastly different crudes. If that’s all we looked at, the shift to lighter shale crudes might not make that much difference.

In fact, when you look at the source of NGLs from refineries – most don’t come from the crude unit in the first place. For propane the big producer is the Fluid Catalytic Cracker or FCC, for butanes it’s the FCC, hydrocracker and other processes. There are a few changes in refinery configurations that will increase NGL production, but they are minor.

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We are primarily interested in propanes and butanes, so this slide shows the trajectory for those products. Propane production will increase 30% by 2016, Butane by 25% over the same timeframe. And most of the growth is from gas plant production.

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What does all this mean for propane?

Propane production will increase about 200 Mb/d from now until 2016. Most of the change is from gas plant production, but refinery production will also be up slightly.

Residential/commercial demand for propane will decline due to price competition with natural gas – and cheaper electricity due to declining fuel prices.

Propane use for ethylene production will decline, slightly offset by propane dehydrogenation

And the balance will move offshore, both to the western and eastern hemispheres.

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And that is what you see here. Net exports have already flipped, and it will show up as an annual net export number this year, increasing to over 200 Mb/d in 2016. This is what keeps the price of propane from falling like a rock. And as long as crude prices stay high there should be a ready overseas market for these barrels.

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Where is all this propane going. Mostly into Mexico and Latin America. Those markets were traditionally received supplies from the Middle East and West Africa. Now that US production can meet the needs of those markets – and it is much closer – the propane production from the Middle East and West Africa needs a new home, and fortunately there is a growing market in the Far East. So in effect, US NGLs are getting to the Far East by displacement.

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• Growth in high BTU natural gas and associated gas production will increase U.S. NGL supplies +950 Mb/d (40%) by 2016

• U.S. crude oil production will increase by 2.2 MMb/d by 2016; mostly light crude and condensates with higher NGL content

• Natural gas plant production of propane and butanes (NGLs) will compete for market share with refinery LPGs and condensates

• Consequently C3/C4 prices will weaken relative to crude, particularly in the summer

• Waterborne exports and/or storage necessary to keep the market balanced

• All NGLs & LPGs are local – must look at regional balances to understand markets

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