3-7 liquids demand - npc€¦ · working document of the npc north american resource development...

Working Document of the NPC North American Resource Development Study Made Available September 15, 2011

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Paper #3-7 LIQUIDS DEMAND

Prepared for the Demand Task Group

On September 15, 2011, The National Petroleum Council (NPC) in approving its report, Prudent Development: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources, also approved the making available of certain materials used in the study process, including detailed, specific subject matter papers prepared or used by the study’s Task Groups and/or Subgroups. These Topic and White Papers were working documents that were part of the analyses that led to development of the summary results presented in the report’s Executive Summary and Chapters. These Topic and White Papers represent the views and conclusions of the authors. The National Petroleum Council has not endorsed or approved the statements and conclusions contained in these documents, but approved the publication of these materials as part of the study process. The NPC believes that these papers will be of interest to the readers of the report and will help them better understand the results. These materials are being made available in the interest of transparency. The attached paper is one of 57 such working documents used in the study analyses. Also included is a roster of the Subgroup that developed or submitted this paper. Appendix C of the final NPC report provides a complete list of the 57 Topic and White Papers and an abstract for each. The full papers can be viewed and downloaded from the report section of the NPC website (www.npc.org).


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Demand Task Group Chair Kenneth L. Yeasting Senior Director, Global

Gas and North American Gas

IHS Cambridge Energy Research Associates, Inc.

Government Cochair James M. Kendell Director, Office of Oil,

Gas and Coal Supply Statistics, Energy Information Administration

U.S. Department of Energy

Assistant Chair James A. Osten Director, North American

Natural Gas IHS Global Insight

Assistant Government Cochair Raymond J. Braitsch General Engineer, Office

of Planning and Environmental Analysis

U.S. Department of Energy

Secretary John H. Guy, IV Deputy Executive

Director National Petroleum Council

Members Industrial Subgroup Chair Kenneth S. Bromfield U.S. Commercial

Director, Energy Business Dow Hydrocarbons and Resources LLC

Industrial Subgroup Assistant Chair

Scott Engstrom Director, Global Energy Sourcing

International Paper Company

Power Subgroup Chair Kurtis J. Haeger Managing Director,

Wholesale Planning Xcel Energy

Power Subgroup Assistant Chair Jeanette Pablo Director of Federal

Affairs and Senior Climate Advisor

PNM Resources, Inc.


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Residential/Commercial Subgroup Chair Thomas J. Massaro, Jr. Vice President, Marketing

& Business Intelligence New Jersey Natural Gas Company

Residential/Commercial Subgroup Assistant Chair Richard D. Murphy Senior Vice President,

Energy Solution Services National Grid

Transportation Subgroup Chair William C. Lawson Director of Finance The Williams Companies,

Inc. At-Large Members James Edward Burns Clean Energy &

Innovation Shell Upstream Americas

John P. DeGeeter Senior Counsel – Antitrust

ConocoPhillips

Leslie J. Deman President Les Deman Energy Consulting

John Hull Managing Director, Fundamentals

Iberdrola Renewables

Jose Alberto Torres Lima Vice President, LNG, Gas Monetization, and Wind Energy

Shell Upstream Americas

Robert L. Perez Vice President, Mexico Ventures

Tennessee Gas Pipeline Company


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US NON-TRANSPORT LIQUIDS DEMAND – DRAFT 4-18-2011

OVERVIEW

LPGs account for about one-third of Non-Transport US Liquids demand – which account for

only 29% to Total US Liquids demand currently. Breaking down Non-Transport US Liquids

demand: the Industrial sector accounts for about 80%, while the Residential and Commercial

sectors together account for about 15%. Most of the Residential and Commercial demand is

from distillate and LPGs for home heating.

As for the future, per EIA’s preliminary 2011 Annual Energy Outlook Reference Case (AEO

2011 Reference Case), the Industrial sector will account for over 95% Non Transport US Liquids

demand growth. Within the Industrial sector, AEO 2011 Reference Case expects nearly 40% of

the liquids demand growth to come from LPGs.

CONTEXT AND HISTORY

U.S. LIQUIDS DEMAND IN ALL SECTORS INCLUDING TRANSPORTATION

As can be seen in the Figure 1 below from the AEO 2011 Reference Case, the Transportation

sector’s liquids demand has dwarfed demand in the other sectors, and this spread has mostly

widened over the last 10 years as rising oil prices (among other things1) have affected liquids

demand more in the Non-Transport (Residential, Commercial, Industrial, and Electric Power

Generation) sectors than in the Transportation sector.

1 E.g., GHG considerations/policies, energy security issues, electrification, and efficiency improvements.


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Breaking down 2010 Total Demand for liquids by fuel, as seen in the far right column of Figure 2

below, shows gasoline demand dominant at 46%, followed by distillate (diesel, home heating

fuel, etc.) at 19%, other miscellaneous products – including petroleum coke, asphalt, road oil,

lubricants, still gas, and miscellaneous petroleum products – at 11%, and LPG2 at 11%.

U.S. demand for liquids in the Non-Transport sectors in 2010 was 6.3 mmbd, just 29% of liquids

Total Demand of 19.7 mmbd. The bulk of the Non-Transport demand is from LPG and the other

miscellaneous products (see Figure 2). The fact that LPG (derived from processing NGL3 and

distilling crude oil) make up about one-third of price-sensitive Industrial liquids demand means

that changes to their price relative to competing fuels (e.g., natural gas) could have a

discernable effect on Industrial demand.

2 LPG – Liquefied Petroleum Gases: Ethane, Propane, and Butane gases which are liquefied through pressurization. EIA and IEA both count these as liquids in their analysis. 3 NGL – Natural Gas Liquids: comprised of LPG, pentanes plus, and lease condensate

020406080100120140

02468

101214

1990

1995

2000

2005

2009

$/BB

L

MMBD

Figure 1: U.S. Liquid Fuels Demand by Sector vs. Oil Price History

Transportation

Industrial

Res & Comm

Electric Generation

AEO'11 Oil Price

File: Figure73_data AEO2009.xls


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U.S. LIQUIDS DEMAND IN ALL SECTORS EXCEPT TRANSPORTATION

Liquids demand in the four Non-Transport sectors fell in the 19 years between 1990 and 2009 at

a compound annual growth rate (CAGR) of a negative 0.36%, while GDP CAGR was 2.5% on

average (see Figure 3). But these declines in liquids demand were more than offset by the

growth of natural gas demand in three (Residential, Commercial, and Power Generation) of the

four sectors between 1990 and 2009 (see Figure 4). Figure 5 shows overall energy demand

growth averaged 2.1%/year in those three sectors between 1990 and 2009, but a decline in

Industrial energy demand as a result of energy conservation, exporting of manufacturing, etc.

Projecting out from 2009 to 2035, the AEO 2011 Reference Case sees a continuation of the

modest declines in Non-Transport liquids demand (down 0.1% annually versus expected GDP

growth of 2.7%/year; see Figure 3), but growth across all sectors in natural gas demand (up

0.5% annually; see Figure 4) and total energy demand up 0.8%/year on average (see figure 5).

31% 33% 11%

46%

19%

11%

0

5

10

15

20

2010Residential &Commercial

2010Industrial

2010Powergen

2010TotalNon-‐

Transport

2010Transport

2010Total

Demand

MMBD

Figure 2: 2010 U.S. Liquids Demand by Sector & Fuel

Other*

Pet Chem Feed

Fuel Oil

Distillate

Kerosene/Jet

Gasoline

LPG

AEO 2011* Includes petroleum coke, asphalt, road oil, lubricants, still gas, and miscellaneous petroleum products.

File: AEO2011 vs AEO2010 NGL production & consumption.xls


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-‐0.47% -‐1.13%-‐2.69% -‐0.49%

0.37% 0.04%

-‐5.79% 0.76%

2.5% 2.7%

0.0%

1.0%

2.0%

3.0%

4.0%

0

3

6

9

12

1990 2009 2035

GDP Grow

th Rate

Quad

Figure 3: U.S. Non-‐Transport Liquids Demand with CAGRs by Segment vs GDP CAGR; History & AEO'11

Forecast

PowerGen

Industrial

Commercial

Residential

GDP

File: AEO2011 yearbyyear.xls

0.40% 0.02%

0.78% 0.77%

-‐1.12%0.74%

4.83%0.47%

0

5

10

15

20

25

1990 2009 2035

Quad

Figure 4: U.S. Non-‐Transport Natural Gas Demand with CAGRs by Segment; History &

AEO'11 Forecast

PowerGen

Industrial

Commercial

Residential



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EIA AEO 2011 REFERENCE CASE OUTLOOK TO 2035

As Figure 6 above shows, the EIA expects oil (and product) prices to rise more than U.S.

natural gas prices through 2035, and, consequently, recent liquids demand trends to continue;

i.e.

• Transport demand rises slowly from 2009 recession-driven lows reaching 16 mmbd and

a 75% share of total liquids demand by 2035.

0.65% 0.19%1.23% 1.01%

-‐0.67%1.09%

1.30%

0.71%

0

20

40

60

80

100

1990 2009 2035

Quad

Figure 5: U.S. Non-‐Transport Energy Demand with CAGRs by Segment; History & AEO'11

Forecast

PowerGen

Industrial

Commercial

Residential


$0

$50

$100

$150

0

5

10

15

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2009

$/BO

E

MMBD

Figure 6: U.S. Liquid Fuels Demand by Sector vs. AEO'11's Oil & Gas Price

Forecast TransportationIndustrialRes & CommElectric GenerationAEO'11 Oil PriceAEO'11 Henry Hub

File: Figure73_data AEO2009.xls


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• Industrial liquids demand flattens at about 6 mmbd after rebounding a bit from the recent

recession.

• Residential, Commercial and Power Generation liquids demand remain de minimis.

When all AEO 2011 Reference Case Non-Transport Liquids demand is examined by fuel in

2010 and 2035, as seen in Figure 7 below:

• Residential and Commercial demand declines 140 mbd (mostly distillate).

• Power generation demand is flat4.

• Industrial demand for miscellaneous other5 fuels – which is not particularly price-

sensitive – and petrochemical feed (naphtha) both rise about 250 mbd, while LPG

demand rises only 70 mbd.

As a way of explaining this phenomenon, AEO 2011 Reference Case says: “Industrial natural

gas demand grows sharply in the near term…This growth reverses the recent downward trend,

4 Oil-fired Electric Power Generation exists only in places where the cost of supplying coal or natural gas is prohibitive (e.g., Hawaii), and even these cases have declined by half since 1998. 5 Includes petroleum coke, asphalt, road oil, lubricants, still gas, and miscellaneous petroleum products.

0.501.61

0.491.68

0.73 0.97

2.062.31

0123456

2010Residential &Commercial

2010Industrial 2010

Powergen2035

Residential &Commercial

2035Industrial 2035

Powergen

MMBD

Figure 7: Non-‐Transport Liquids Demand by Fuel in 2010 and 2035

Other*Pet Chem FeedFuel OilDistillateKerosene/JetGasolineLPG

AEO 2011* Includes petroleum coke, asphalt, road oil, lubricants, still gas, and miscellaneous petroleum products.



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as a result of a strong recovery in near-term industrial production… and relatively low natural

gas prices.”

Figure 8 below shows the widening spread in AEO 2011 Reference Case Outlook between

natural gas prices to Industry and those for LPG and distillate that EIA expects to follow crude

prices up. Clearly, higher liquid prices motivate energy efficiency investments / conservation,

and substitution of natural gas for LPG where possible, all of which dampen Non-Transport

liquids demand growth.

But, AEO 2011 Reference Case also forecasts U.S. NGL production by 2035 to be up about half

– almost 1.00 mmbd to 2.90 mmbd from 1.96 mmbd in 2010 (see Figure 9).

• This AEO 2011 Reference Case is much higher than their AEO 2010 Reference Case:

0.9 mmbd greater by 2025 and 1.1 mmbd greater by 2035.

• It appears that EIA has “gotten on the shale gas bandwagon,” and believes the U.S.

shale gas producers who are saying that they will preferentially produce from “wet”

zones.

$0$5$10$15$20$25$30

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

$/MMBTU

Figure 8: AEO'11 LPG, Distillate, Crude, and Natural Gas Pricing To

Industry

LPG

Distillate Fuel Oil

Crude Oil

Natural Gas

File: AEO2011 yearbyyear


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Given this very bullish NGL production outlook, it is hard to see how EIA LPG prices will be as

strong as expected, and, consequently, how Industrial demand for LPG will not rise at least

somewhat more than the AEO 2011 Reference Case.6

OTHER POSSIBLE FUTURES

To think the AEO 2011 Reference Case Non-Transport liquids demand forecast is mistaken, a

person could instead believe any one, or perhaps even a combination of, the following:

• That oil and product prices will not rise as swiftly as in the AEO 2011 Reference

Case. For instance, in IEA’s World Energy Outlook “New Policies” Scenario oil

prices are at least $10/b below the AEO 2011 Reference Case post-2020 (see

Figure 10). Other forecasts are even less bullish. Assuming demand is elastic,

lower prices would argue for higher liquids demand across the board.

6 On the other hand, it is difficult to envision a significant penetration of LPG into the Residential/Commercial and Industrial sectors as those connect to a natural gas system will most likely not revert to LPG storage, especially given low natural gas prices.

1.96 1.74 2.63 1.83 2.90

0

2

4

6

8

10

12

2010 AEO'10 2025

AEO'11 2025

AEO'10 2035

AEO'11 2035

MMBD

Figure 9 US Liquids ProductionAEO 2011 vs AEO 2010

Other

Ethanol

Refinery Gain

NGLs

Alaska

Lower 48 Onshore

Lower 48 Offshore

.

File: US Oil Prod & Imports & Total Supply PET_SUM_SND_D_NUS_MBBLPD_A_cur.xls


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• But, much bigger factors affecting Non-Transport liquids demand could be:

• The spread between oil (and product including LPG) prices and natural

gas prices doesn’t expand as much as the AEO 2011 Reference Case

differential – which widens to over $80/boe. An example is IEA’s “New

Policies” Scenario which maintains about a $50/boe differential between

oil and U.S. gas prices (see Figure 10 above).

• LPG (especially ethane) prices lag behind any upward move in

oil/product prices. As Figure 11 below shows, U.S. spot ethane prices

have spread apart from butane and propane prices over the last decade,

and have occasionally dropped below natural gas.


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• Regardless of how it might come about, a narrower price spread between ethane

and natural gas would lead to less natural gas substitution at the margin, and,

therefore, higher Industrial liquids demand. And, clearly if EIA is right in

forecasting a 50% increase in U.S. NGL production, there will be plenty of ethane

around to satisfy any demand. But, it is problematic whether its price will be low

enough to allow U.S. ethylene plants to expand significantly.

• Even a somewhat less bullish U.S. NGL production case also could lead to

additional Non-Transport demand for liquids (i.e., LPG). For instance, the

aggregated Industry and Consultant median U.S. NGL production forecast –

obtained from surveys sent out to companies by the NPC – is upbeat too (2.3

mmbd in 2030 versus 2.7 mmbd in AEO 2011 Reference Case), and their high

case is even more robust at 2.9 mmbd in 2030 (see Figure 12).

0

100

200

300

400

500

600

700

80019

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

10

$/tonn

e

Figure 11: U.S. Crude, LPG, & Natural Gas Pricing History

Naphtha

Spot Normal Butane

Spot Propane

Crude Oil

Spot Ethane

Henry Hub



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• On the other hand, the IEA forecasts declines in North American NGL production

through 2035 in their 2010 World Energy Outlook “New Policies” Scenario as

Figure 13 below shows. While WEO’10 doesn’t publish country breakouts, it

hard not to think that their U.S. NGL production forecast declines in tandem with

their North American decline. Consequently, it looks like their U.S. forecast

would be compatible with AEO 2010 Reference Case – EIA’s outlook before it

“got on the shale gas bandwagon”.

1.96 2.22.7

1.7 2.02.0 2.32.32.9

00.51

1.52

2.53

3.5

2010 2015 2015 2015 2015 2030 2030 2030 2030

Figure 12:U.S. NGL Production ForecastsAEO 2011 vs Industry+Consultant Views

Ind+Con High

Ind+Con Median

Ind+Con Low

AEO'11

AEO2011 vs AEO2010 NGL production & consumption.xls


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If IEA’s case were to come about, the likelihood of little growth in Non-Transport Liquids

demand through 2035 would increase significantly because there would not be

additional NGLs to place in the market, and consequently, LPG prices could easily move

in tandem with their expectation of rising oil prices.

ECONOMIC GROWTH AS A DRIVER OF US LIQUID DEMAND

Historically, one of the most important long-term drivers of energy demand is the rate of

economic growth. This has also applied to the demand for US liquids. The impact of economic

growth on US liquids demand can be seen by comparing the AEO 2010 Reference Case with

AEO 2010 High Macro and Low Macro sensitivities which had real GDP growth rates of 2.4%,

3.0% and 1.8%, respectively. The AEO 2010 Reference Case had US Total Liquid Demand

growing from 21 quads in 2010 (9 MMBD) to 47 quads in 2035 (22 MMBD) (see Figure 14). For

the High and Low Macro Cases, 2035 Total Demand was 47 quads (22 MMBD) and 37 quads

(18 MMBD), respectively. Most of the range in 2035 Total Demand occurs in the Transportation

sector (about 70%) and the Industrial sector (about 29%).

1.91 1.742.63

1.832.90

0.640.37 2.9 2.6 2.4

0.00.51.01.52.02.53.03.5

MMBD

Figure 13: US and NA NGL ProductionWEO 2010 vs AEO 2011 vs AEO 2010

Mexico NGLs

Canada NGLs

US NGLs

NA NGLs per IEA

.

File: US Oil Prod & Imports & Total Supply PET_SUM_SND_D_NUS_MBBLPD_A_cur.xls


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For the Industrial sector, LPG demand accounts for about 37% of the total range between high

and low forecasts in industrial liquids demand (see Figure 15). Other petroleum (includes

petroleum coke, asphalt, road oil, lubricants, still gas, and miscellaneous petroleum products)

accounts for about 36% of the total range in industrial liquids demand.

0

5

10

15

20

25

30

35

40

45

50

Reference Reference High Macro Low Macro

Qua

ds

Figure 14: US Liquids Demand [NARD DTG Liquid Demand 3-28-2011]

Transport

Power

Industrial

Commercial

Residential

2010


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IN THE FINAL ANALYSIS

How Non-Transport Liquids demand grows probably will depend on how much North American

NGLs are produced, and what the prices are for natural gas, LPG and more specifically, ethane,

which comprises half of all NGL production.

As mentioned earlier, substitution of ethane and other LPG for natural gas in Industrial

applications depends heavily on their relative prices. If the relative value of sending

unprocessed wet natural gas to a consumer exceeds the value of extracting ethane, then in

some cases a gas processing plant may not be built or may not be run. If some ethane cannot

be sold to chemical plants (that convert it to the chemical ethylene), it will have to compete with

natural gas in heating applications. However, there are strict limits in quality provisions of

pipeline tariffs on how much ethane can be left in the natural gas stream.

0

2

4

6

8

10

12

Reference Reference High Macro Low Macro

Qua

ds

Figure 15: US Industrial Liquids Demand [NARD DTG Liquid Demand 3-28-2011]

Liquefied Petroleum Gases

Other Petroleum

Petrochemical Feedstocks

Residual Fuel Oil

Distillate Fuel Oil

Motor Gasoline

2010


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Low ethane prices relative to natural gas, and/or any inadequacy of NGL gathering and

processing infrastructure in liquids-rich shale plays will tend to physically limit shale’s

development pace thereby curbing NGL production – which will feed back to NGL prices and

demand.

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