lsu natural gas conference presented by: bob purgason vp gulfcoast region williams companies
TRANSCRIPT
LSU Natural Gas Conference
Presented by:
Bob Purgason
VP Gulfcoast Region
Williams Companies
Introduction
Structural shift in natural gas pricing The crude to gas ratio: A critical
relationship for NGL processing Implications of a sustained shift in gas,
crude, and NGL pricing relationships– Implications for ethane– Implications for heavier NGL’s
Well
Gas PlantY-Grade Pipelines
Purity Storage
Caverns
Y-GradeStorageCaverns Purity
Product Pipelines
Refineries
Chemical Plants
Agricultural/Residential
IndustrialFuels
Fractionator
Production Gas Processing
Transportation
Storage
Liquids Processing
Marketing
“Residue Gas”to
Interstate Pipelines
Storage Tanks
Distribution
Hydrocarbon Value Chain
Production
Gathering
Gas Processing
Cont.4%
Methane68%
Natural Gasoline
2%Butanes
4%
Propane9%
Ethane13%
TYPICAL UNPROCESSED GAS
Phase I : The Abundant Commodity
Phase II : The Tenuous Balance
Phase III :
The Supply Squeeze
Source: Platts
Evolution of Gas Pricing in North America
SupplyPerspective
•“Just Another Commodity”
•Manufacturing Strategies
•Declines in Traditional Basins•Select “Growth Regions”•Advent of the Deepwater•Growing Imports
•The Supply Treadmill•Prospect Shortfall•Unprecedented Volatility•Growth of Frontiers
Henry Hub Natural Gas Price
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
$ p
er M
MB
Tu
The relationship between natural gas and crude has varied widely over time
The Crude to Gas Relationship
Gulf Coast Natural Gas Price vs. NYMEX Crude
1.002.003.004.005.006.007.008.009.00
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
$/M
MB
tu
10.00
14.00
18.00
22.00
26.00
30.00
34.00
$/B
arre
l
Gulf Coast Natural Gas NYMEX Crude Oil
The Crude to Gas Relationship
Historical Crude to Gas Ratio
3
6
9
12
15
18
21
24
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
Cru
de/
Gas
The crude to gas ratio (crude divided by gas) has trended down as gas has strengthened relative to crude oil
The crude to gas ratio correlates highly with historical NGL processing spreads
Crude to Gas Ratio versus Gulf Coast Frac Spread
369
1215182124
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
Cru
de/
Gas
-16-80816243240
cen
ts p
er g
allo
n
Crude to Gas Ratio Gulf Coast Frac Spread
The Crude to Gas Relationship
Historically, low points in the crude to gas ratio have meant hard times for gas processors
The Crude to Gas Relationship
Crude to Gas Ratio versus Gulf Coast Frac Spread
369
1215182124
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
Cru
de/
Gas
-16-80816243240
cen
ts p
er g
allo
n
Crude to Gas Ratio Gulf Coast Frac Spread
The Crude to Gas Relationship
Crude to Gas Ratio versus Gulf Coast Frac Spread
369
1215182124
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
Cru
de/
Gas
-16-80816243240
cen
ts p
er g
allo
n
Crude to Gas Ratio Gulf Coast Frac Spread
Historically, low points in the crude to gas ratio have meant hard times for gas processors
Gulf Coast NGL Frac Spread
-10-505
1015202530
J-99
M-9
9
S-9
9
J-00
M-0
0
S-0
0
J-01
M-0
1
S-0
1
J-02
M-0
2
S-0
2
J-03
M-0
3
cent
s pe
r ga
llon
Nat. gas - $2.66
Crude - $29.30
Ratio - 11
Ethylene - $.27/lb
Strong Economy
Nat. gas - $8.69
Crude - $28.40
Ratio – 3.3
Ethylene - $.27/lb
Recession begins
Nat. gas - $2.19
Crude - $25.93
Ratio – 11.8
Ethylene - $.17/lb
Weak Economy
Nat. gas - $5.76
Crude - $28.07
Ratio – 4.9
Ethylene - $.19/lb
Weak Economy
Analysis of recent frac spreads – the economy also plays a role…
The Crude to Gas Relationship
Current NYMEX price strips suggest a continuation of low crude to gas ratios
Natural Crude Crude/GasGas Oil Ratio
Oct-03 4.430 29.10 6.6Nov-03 4.830 28.82 6.0Dec-03 5.082 28.35 5.6Jan-04 5.262 27.94 5.3Feb-04 5.212 27.65 5.3Mar-04 5.107 27.33 5.4Apr-04 4.802 27.03 5.6
May-04 4.709 26.81 5.7Jun-04 4.719 26.61 5.6Jul-04 4.724 26.41 5.6
Aug-04 4.724 26.25 5.6Sep-04 4.721 26.10 5.5Oct-04 4.729 25.96 5.5Nov-04 4.861 25.84 5.3Dec-04 5.004 25.72 5.1Jan-05 5.091 25.62 5.0Feb-05 5.036 25.53 5.1Mar-05 4.881 25.43 5.2Apr-05 4.561 25.34 5.6
May-05 4.456 25.27 5.7Jun-05 4.456 25.22 5.7Jul-05 4.463 25.19 5.6
Aug-05 4.463 25.18 5.6Sep-05 4.463 25.17 5.6Oct-05 4.488 25.17 5.6Nov-05 4.668 25.17 5.4Dec-05 4.843 25.18 5.2
Note: As of 9/30/2003
Historical & NYMEX Futures Crude to Gas Ratio
3.06.09.0
12.015.018.021.024.0
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05C
rud
e/G
as
Crude to Gas Ratio NYMEX Futures
The Crude to Gas Relationship
Implications of the Pricing Trends
Unprecedented NGL rejection has occurred during periods of low ratios/low frac spreads
US NGL Production vs. Gulf Coast Frac Spread
1300
1500
1700
1900
2100
96 97 98 99 00 01 02 03
MB
PD
-16-80816243240
cen
ts p
er g
allo
n
Total US Gas Plant NGL Production Gulf Coast Frac Spread
During January of 2001 1/3 of total NGL production – lost to rejection 650 MBPD 2.2 BCFD natural gas
Between May and August of 2003 200 MBPD of ethane and 80 MBPD of propane remained
in natural gas stream 0.85 BCFD
The US has seen some degree of continual ethane rejection for the last year
Implications of the Pricing Trends
Because it is the most readily rejected NGL, ethane is the most responsive NGL to changes in gas price
Implications - Ethane
Mont Belvieu Ethane vs. Gulf Coast Natural Gas
1.002.003.004.005.006.007.008.009.00
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
$/M
MB
tu
102030405060
cen
ts p
er
gal
lon
Gulf Coast Natural Gas MB Ethane
High gas prices relative to crude oil places ethane at a competitive disadvantage to heavier petrochemical feedstocks
While ethane production suffers, demand for ethane has been equally weak
Despite weak production, ethane inventories are near the 5-year-average
Implications - Ethane
Implications - Heavier NGL’s
Propane & Heavier NGL's vs. NYMEX Crude
5
10
15
20
25
30
35
40
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
$/B
arr
el
NYMEX Crude Oil C3 IC4 NC4 C5
The heavier NGL’s are highly correlated to crude oil…
Well
Gas PlantY-Grade Pipelines
Purity Storage
Caverns
Y-GradeStorageCaverns Purity
Product Pipelines
Refineries
Chemical Plants
Agricultural/Residential
IndustrialFuels
Fractionator
Production Gas Processing
Transportation
Storage
Liquids Processing
Marketing
“Residue Gas”to
Interstate Pipelines
Storage Tanks
Distribution
Hydrocarbon Value Chain
Production
Gathering
Gas Processing
…meaning that their processing margins are hardest hit when crude to gas ratios are low
Implications - Heavier NGL’s
NGL Gulf Coast Frac Spreads by Product
-30-20-10
0102030405060
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
ce
nts
pe
r g
allo
n
C2 C3 IC4 NC4 C5
Implications - Heavier NGL’s
Weak processing margins do result in some lost production of heavier NGL’s
Propane & Heavier NGL's Production vs. Gulf Coast Frac Spread
75%
80%85%
90%95%
100%
96 97 98 99 00 01 02 03
% o
f m
ax
pro
du
ctio
n
-10-5051015202530
cen
ts p
er g
allo
n
C3+ Production C3+ Gulf Coast Frac Spread
However, heavy waterborne imports supplement propane and butane supplies…
Implications - Heavier NGL’s
Net US Waterborne LPG Imports1
-10
0
10
20
30
1997 1998 1999 2000 2001 2002 2003
Mil
lio
ns
of
Bar
rels
1 Includes both propane and butane imports
YTD 9/03
Keeping inventories closer to five-year averages
Implications - Heavier NGL’s
w/outCurrent Five-Year % Over/ Waterborne8/31/03 Average Under Imports
Ethane 21.8 22.1 -1.2% -1.2%Propane 63.0 65.9 -4.4% -33.3%N. Butane 33.4 40.9 -18.3% -30.5%I. Butane 7.5 8.2 -7.5% -32.0%N. Gasoline 9.1 9.2 -0.5% -0.5%
Total NGL's 135.0 146.3 -7.8% -25.5%
API US NGL Inventory Levels (Millions of Bbls)
The heavy rejection of NGL’s in recent years has caused significant operational problems for natural gas pipelines
In response, natural gas pipeline companies have begun issuing “merchantability” notices
These notices enforce the requirement that some NGL’s be removed to meet pipeline specs before entering the system
Merchantability
Conclusions
Strengthening natural gas prices relative to crude oil have significantly reduced the production of NGL’s in the US
Waterborne imports will continue to play a critical role in balancing the heavier NGL’s
The weakened feedstock desirability of ethane, combined with a struggling economy, have reduced demand and kept ethane supplies in balance
Conclusions
The growing gap between NT and spot - an indication of an inactive spot market
CMAI NT Ethylene vs. Spot Ethylene
10
15
20
25
30
35
J-98
M-9
8S-9
8J-
99M
-99S-9
9J-
00M
-00
S-00
J-01
M-0
1S-0
1J-
02M
-02S-0
2J-
03M
-03
cen
ts p
er lb
eth
ylen
e
CMAI NT Ethylene Spot Ethylene
CMAI NT Ethylene vs. Spot Ethylene vs. Mont Belvieu Ethane
101520253035
J-98
M-9
8S-9
8J-
99M
-99S-9
9J-
00M
-00S-0
0J-
01M
-01S-0
1J-
02M
-02S-0
2J-
03M
-03
cen
ts p
er l
b
eth
ylen
e
102030405060
cen
ts p
er
gal
lon
et
han
e
CMAI NT Ethylene Spot Ethylene MB Ethane
Conclusions
Conclusions
High natural gas prices will result in high feedstock costs for ethane
Ethane pricing quickly responds to pricing changes in natural gas– Reasonable price transparency
Probable margin squeeze within ethylene chain– Improving economy
– Minimal ethylene price transparency
LSU Natural Gas Conference
Presented by:
Bob PurgasonVP Gulfcoast Region
Williams Companies
Structural Shift – Supply Side
Many traditional North American supply basins are in decline
Western Canadian production, the marginal supply of the last decade, is prominent among the declining basins
LNG and Arctic gas represent the marginal supply of the new era, but it will take years to develop the infrastructure
Source: Cambridge Energy Research Associates.Data: Energy Information Administration.30402-2
400200
Productionper Well
(Mcf perDay)
NumberofWells(thousands)
180
160
140
120
100
80
60
40
20
0
350
300
250
200
150
100
50
01990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Productionper Well
Numberof Wells
Structural Shift – Supply Side
More wells have not meant more production
Incremental Gas Demand for Power Generation(Growth over 2002)
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2003 2004 2005 2006 2007 2008 2009 2010
Bc
f p
er
Da
yStructural Shift – Demand Side
Expected increases in future natural gas demand for power generation…
50,000
52,000
54,000
56,000
58,000
60,000
62,000
64,000
66,000
68,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
MM
cf p
er d
ay
US Production US Consumption
Note: Consumption excludes pipeline, lease and plant fuel. Production excludes imports, storage and balancing adjustments.
Structural Shift - Supply Gap