Stirred or Shaken?

Wet or Dry:

Jon Laughner June 7, 2012

jblaughner@psu.edu

Shell’s Generic Timeline

Mono-ethylene glycol (MEG) Derived from ethylene.

End uses for MEG fall broadly into three categories:

1. fibres (polyester, fleece fabric, upholstery, carpets, etc.),

2. polyethylene terephthalate - PET (plastic drink and food containers, bags, etc.)

3. Automotive products (engine coolants and anti-freeze).

Cracker Operation • the cracking process involves breaking up the

carbon and hydrogen molecules and rearranging them. This is accomplished by heating the ethane to very high temperatures, greater than 800°C (1500°F), in one of the cracker’s furnaces.

Shell’s other cracker facilities • Shell already owns and operates four

petrochemical manufacturing facilities in the US, located in Mobile (Alabama), Norco (Louisiana), Geismar (Louisiana), and Deer Park (Texas).

Propylene • Co-product of the steam cracking process

used to make ethylene. • The materials that are derived from propylene

include: polypropylene; acrylonitrile (which is converted to acrylic fibres and coatings); propylene oxide (which then goes into polyurethane resins and other chemicals); oxo alcohols (which are used in PVC plasticisers and coatings); cumene (which is ultimately used to make epoxy resins and polycarbonate); and isopropyl alcohol (which is used as a solvent).

Shell – June 7, 2012 • Shell's final decision on whether to build the

ethane cracker proposed in Beaver County may be 18 to 24 months away, a Shell executive said Thursday.

• Shell has been moving forward with environmental and other evaluations

Economics • Ethane costs $.44/gallon

• Production cost of ethylene = $0.18/lb.

• Ethylene market was = $0.70/lb. – Now closer to 47 cents/lb.

9

Shale Drilling Rigs

Baker Hughes 6-1-12

Pennsylvania County Rig

Count

Baker Hughes 6-1-12

12

Marcellus and More

Rhinestreet

Genesee

Burkett

Marcellus

Utica

Point Pleasant

13

-

500

1,000

1,500

2,000

2,500

-

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

700,000,000

July 1, 2009 - June 30, 2010 July 1 - Dec. 31, 2010 Jan. 1 - June 30, 2011 July 1 - Dec. 31, 2011

# of

Wel

ls

Tota

l Gas

MCF

Reporting Period

Pennsylvania Marcellus Shale Growth in Total Gas MCF & # Wells By Reporting Period July 2009 - Dec. 2011

Total Gas MCF # Wells

Source: Pennsylvania Department of Environmental Protection Powell Shale Digest, April 14, 2012

2009

2010

2011

, 1st

6 m

ths.

2011

, 2nd

6 m

ths.

EIA Natural Gas Production Projection

U.S. Natural Gas Prices

April 19, 2012 thru June 1, 2012

January 2000 through January 2011

EIA Natural Gas Price Projection

Marcellus Wet/Dry

Natural Gas Divide

Utica Shale 20

Dry Gas:

Methane (natural gas)

$$$$$$$$ ~ 1000-1050 BTU

Pipeline Quality

Wet Gas: > 1050 BTU

Methane (natural gas)

$$$$$$$

Propane

Butane

Ethane

Iso- butane

$$

$$

$$

$$

Range Resources sets its sights on the 'super rich'

Pittsburgh Post Gazette, Feb. 23, 2012

Range estimated 2012 projected drilling returns in each of its core areas, which demonstrated that at current strip prices that the 2012 capital program is expected to generate projected drilling returns ranging between 27% (northeastern PA, dry gas) to 99% (southwestern PA, liquids-rich).

23

Relative Profitability of Shale Plays

Houston, PA Fractionation Plant

Wet Gas Well

Fractionator/Processing Ethane, Propane, Butane,

Methane separated

Methane (natural gas) Cracker

Petrochemicals produced: Ethylene, Ethylene Oxide,

Ethylene Glycol, Polyethylene Industrial and

Consumer Products Manufacturers

Pipeline to customer

What are Natural Gas Liquids (NGL)? • Liquid at depth due to underground pressure

• Such as: – Ethane

– Propane

– Natural gasoline

• Now a glut: – 40% production increase from January 2009 to Feb.

2012

– Good for Dow Chemical and Royal Dutch Shell!

1. Build a liquefied natural gas (LNG) in Kitimat, BC

– Transport to Asian markets.

2. Gas-to-Liquids (GTL) plant

– Transport fuel production

3. Petrochemical feedstock production

- ethane

Shell’s Strategies

Historic Options to produce ethylene:

Raw material (natural gas) = Ethane = Ethylene

Alternative

Raw material (crude oil) = Naphtha = Ethylene

What is ethane?

• At standard temperature and pressure, ethane is: – Colorless

– Odorless

– Gas

– 1%-6% by volume

– Separated from methane by a cryogenic process at the fractionator plant

Historical Ethane Undersupply

“Cracking” – Method of Separation • Heated and pressurized ethane and

propane

–Cracks the hydrocarbon chains into smaller ones

• Produces ethylene (collectively classed as an olefin)

• “Primary” petrochemicals

Ethylene The chemical starting point for:

»Plastics

»Pharmaceuticals

»Electronic materials

»Fertilizers

»Adhesives

»Tires

A “cracker” is an anchor that brings to the northeast a low-cost

feedstock, maybe some of the lowest-cost ethane-related

feedstock in the world outside of the Persian Gulf.

Yes Virginia, there is ethane!

“Cheap natural gas and ethane from shale drilling have fueled the growing interest and can support five new U.S. plants.”

Mark Lashier, Executive VP, Chevron Phillips

Each will cost $5 billion to $6 billion and take more than a

decade to build.

Ethane, Ethane Everywhere • Where’s it all going go? 1. Mariner West - Sarnia, Ontario – 50,000

bbl/day

2. ATEX - Gulf Coast – 125,000 bbl/day

3. Mariner East - - ?

4. Regional crackers – 65,000-85,000 bbl/day/plant

• Est. Marcellus Ethane Supply = 270,000 bbl/day

Utica Ethane Supply???

ATEX Ethane Pipeline

Ethane Markets Transportation

Costs: Sarnia – 12-15 cents/gal. Gulf Coast – 15-25 cents/gal. Local – 2 cents/gal.

“It’s the first pitch of a nine-inning game.”

PA Governor Tom Corbett, March 12, 2012

Deer Park, TX Ethane Plant

Beaver County Plant

Location

Beaver County, Monaca, PA • Population: 6286

• Thiel College founded here

in 1866.

• Bit of a chemical town: – It is host to a Nova complex

that makes polystyrene resins for foams and expandable polystyrene.

• The Shell facility will be the first ethane cracker built in the country since 2000.

• Steam cracking technology

Horsehead Site, Potter Township, Pa.

Shell Press Release “The next steps for this project include:

1. additional environmental analysis of the preferred Pennsylvania site

2. further engineering design studies

3. assessment of the local ethane supply

4. continued evaluation of the economic viability of the project.”

Rich production issues: Lack of processing facilities

Lack of fractionation facilities

Lack of NGL pipeline

Lack of local industrial market

-> Great opportunities as a result!

Some Beaver County Needs. . . . .

Construction • Similar to a gasoline refinery

– Miles of piping

– Storage tanks

– Plumbing

– Several hundred acres

• Environmental permits – 2 years

• Construction – 3 - 4 years

• Skilled trades – 10,000 construction jobs

• Investment = $4 Billion

• 17,000 jobs in PA’s chemical industry

• 400-500 directly employed

• Infrastructure presently inadequate to handle the growth of NGL’s

• Ex: MarkWest

– $500 million to upgrade two gas-processing plants in Butler County

And to the “local” economy

What is the Connection to the Local Economy?

• Activity may be very visible. But connection to the local economy if…

–Outside businesses?

–Outside workers (PA and non-PA)?

–Outside purchases (e.g. steel, welding supplies, food, specialized equipment, etc)

Former Secretary of Defense Donald Rumsfeld was talking about the Iraq War when he famously said,

"There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — there are things we do not know we don't know."

Shell Ethane Cracker Plant

• Will feature an ethylene cracker and downstream polyethylene and ethylene glycol plants.

• A partner of some kind on the polyethylene unit.

• If no partner then they’ll probably produce commodity grades of polyethylene, example; – high-density polyethylene for extrusion blow

molding—used to make milk jugs.

Ethylene Chain

Plastic Bags

Bottles

Containers

Boxes

Bill Adams, Adams Manufacturing, Butler County

• Ingredient for; – household and

industrial cleaners

– personal care items such as cosmetics and shampoos

– heat transfer liquids

– polyurethanes and plasticizers

– ointments and pharmaceutical preparations.

Further processed ethylene =

Ethylene Oxide and dirivatives

Widely used in hospitals in the sterilization of:

medical supplies

devices

healthcare products bandages.

A Ethylene Oxide Derivative • Ethylene Glycol

– polyester fiber for clothes, upholstery, carpet, and pillows

– blending of automotive engine antifreeze

– fiberglass used in products such as jet skis, bathtubs, and bowling balls

– production of polyethylene terephthalate (PET) resin, a recyclable plastic, for packaging film and bottles.

Benefit to other industries? • Transportation

• Reliable, secure source

• Faster

• Pennies matter in plastics!

• Extrusion screws

Construction

Transportation

Supplier

Manufacturer

Chemicals

Plastics

Fertilizer

Pharma

What are your plans?

What’s your fit in this puzzle?

Thank You. . .

66

Natural Gas $ Returns: Wet vs. Dry

Value-Added…..“Value”

68

Source: Range Resources

$2.60 $4.42 $6.35 $6.82