Light Naphtha Supply and

Demand –
When Push Comes to Shove

October 30, 2015

Baker & O’Brien, Inc. All rights reserved. CONFIDENTIAL

 Discussion Points

• Light Naphtha – Definitions

• Sources of Light Naphtha

• Driving Forces of Light Naphtha Demand

• Scenarios and Conclusions

CONFIDENTIAL 2
 Overlap of Boiling Point Ranges Contributes to
Terminology Confusion

Condensate
80-600+°F
Pentanes
80-100°F
Natural Gasoline
80-150°F
Light Naphtha
80-180°F
Full-range
Naphtha
80-380°F
Heavy Naphtha
180-380°F

CONFIDENTIAL 3
 Definitions for this Presentation
• Naphtha - generic term for a light volatile petroleum liquid or low octane gasoline
– Light Naphtha (aka Light Straight Run or LSR)
 Composed primarily of C5 (pentanes) and C6 (hexanes)
 Best suited for isomerization or gasoline blending
 RVP between 12 and 20 psi
– Heavy Naphtha - Best suited for reformers, C6 -C7-C8.
– “Full-range” Naphtha: Light Naphtha + Heavy Naphtha

• Pentanes – Mix of iso and normal C5 paraffins

– Can be fractionated to optimize value (uncommon)
– Can be cracked in an olefins unit (better for nC5)
– Can be blended into gasoline (better for iC5)
 65-75 Octane / 15-20 PSI RVP

• Natural Gasoline
– Heaviest liquid stream from a gas fractionation plant, maybe referred to as condensate
– Composed of C5 and heavier

• Condensate - Generic term for light raw petroleum that “condensed” from gas;
ranges in quality from natural gasoline to light crude oil
– Condensate may meet minimum export regulations (distilled) or not (field grade)
– Usually meets pipeline vapor pressure specs of 11-12 psi
CONFIDENTIAL 4
 Light Naphtha Balance: U.S.

Sources
• Produced Natural Gasoline
• Produced Condensate
• Produced Crude Oil
• Imported Crude Oils

Disposition
• U.S. Domestic Gasoline Production
• Ethylene Cracking
• Exports - Western Canada Diluent
• Exports - other
• Ethanol Denaturant

CONFIDENTIAL 5
 Light Naphtha Consumers

Driving forces for Light Naphtha: Gasoline and Olefins

Relative Sizes of Light Naphtha Markets - 2015

Gasoline

Olefins

Diluent Exports to Canada

~ 2 MMB/D
Content of Condensate Exports

Source: PRISM™ and Baker & O’Brien estimates.

CONFIDENTIAL 6
 U.S. Light Naphtha Balance:
Sources of Supply and Disposition Channels

Balance Envelope

Natural Gasoline

U.S.
Condensate Domestic
Gasoline
Crude Oil Production
Gasoline
U.S. Refining
Waterborne Pool
System
Imported Direct/Isom.
Crude Oil Gasoline
Exports
Western
Canadian
Dilbit Diluent Olefins

Exports

CONFIDENTIAL 7
 Light Naphtha Content of Crude Oils Vary Significantly

• Conventional crude oils (non-condensate) typically yield 5-10% light naphtha

• The light naphtha content of condensates are typically 20% or more with a wide range

Source: PRISM assay database; light naphtha distillation range of 85-185 ⁰F.
CONFIDENTIAL 8
Crude /
Condensate
Refining
Introduction
Crude Qualities
Sample Yields from Crude Oils
100%

90%

80%

Light Ends
70%
LSR
Liquid Volume Percent

60% Naphtha
Kerosene
50% Diesel
ATB
40%

30%

20%

10%

0%
Eagle Ford Eagle Ford 44.6 Bakken WTI LLS Brent
Condensate 54.7
Source: PRISMTM
CONFIDENTIAL 9
 U.S. Light Tight Oil Distillation Capacity Growth

• About 600,000 B/D of distillation capacity will come on line by

2017. Of this, about 80,000 B/D is Light Naphtha
900

800
Planned Firm

700
Cumulative Expansions, MB/D

600

500

400

300

200

100

0
2015 2016 2017 2018
Source: Company Announcements, Baker & O’Brien Analysis.
CONFIDENTIAL 10
Quality Issues The Opportunity of Light Ends

Relative Economic Value of Condensate Splitter Intermediate Products

(Jan – Apr 2015 Average)

Lower Relative Values

Source: Baker & O’Brien Analysis and Platts.

CONFIDENTIAL 11
 Light Tight Oil Production

Source: EIA.
CONFIDENTIAL 12
 Light Tight Oil Production
Eagle Ford Condensate Production

CONFIDENTIAL 13
 Light Tight Oil and Light Naphtha Production
12,000

10,000

8,000
Thousands of Barrels

6,000

4,000
Total LTO Production

2,000

Light Naphtha Production

0

Source: EIA.
CONFIDENTIAL 14
 Influences on Light Naphtha Consumption

• First Driver: U.S. Demand

3,200
Record VMT
3,100
Billions of Vehicle Miles Travelled

3,000

2,900

2,800
Trailing 12-Month Total

2,700 Annual Miles Driven

2,600

2,500

2,400

Source: U.S. Federal Highway Administration.

CONFIDENTIAL 15
 Influences on Light Naphtha Consumption

• Second Driver: Finished Gasoline Net Exports

800,000

600,000 Monthly Exports

Annual Average Exports

400,000
Barrels Per Day

200,000

(200,000)

(400,000)

(600,000)

(800,000)

Source: EIA.
CONFIDENTIAL 16
 Influences on Light Naphtha Consumption

• Pentanes Plus Exports to Canada

300,000

Monthly Exports
250,000
Annual Average Exports

200,000
Barrels Per Day

150,000

100,000

50,000

Source: EIA.
CONFIDENTIAL 17
 Influences on Light Naphtha Consumption

• U.S. finished gasoline production jumped by 350,000 B/D in

past year to record levels
10,500,000

Net Production of Finished Motor Gasoline

10,000,000
Annual Average

9,500,000
Barrels Per Day

9,000,000

8,500,000

8,000,000

• Where did all the components come from?

Source: EIA and Baker &O’Brien Analysis.
CONFIDENTIAL 18
 Influences on Light Naphtha Consumption
• About 60,000 B/D of Light Naphtha blended into 350,000 B/D increase.
– Remaining 290,000 B/D made up by higher refinery utilization, imports, and higher operating
costs.
• High refinery utilization, imports, and higher operating costs made up for other
components.
– Record refinery input in July 2015
– Gulf coast blenders have begun importing high octane MTBE again, over 1 million barrels of MTBE
in the first half of 2015 alone. These correspond to high finished gasoline exports to Latin
America.
– Post ethanol blending, naphtha reformers in refineries had been at low operating rates and
severities. Now, increased throughputs and severities providing octane barrels
18,000
Thousands of Barrels Per Day

17,500
17,000
16,500
16,000
15,500
15,000
14,500
14,000 Gross Inputs into Refiners
13,500 Average Refinery Operable Capacity
13,000
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
Source: EIA and Baker &O’Brien Analysis.
CONFIDENTIAL 19
 Heavy Naphtha Demand
3,500 95.0%

3,400

3,300 90.0%

Percentage of Reformer Capacity

Thousands of Barrels Per Day

3,200

3,100 85.0%

3,000

2,900 80.0%

Reformer Throughput
2,800
Reformer Capacity Utilization
2,700 75.0%

2,600

2,500 70.0%

Source: PRISM™.
CONFIDENTIAL 20
 Value of Light Naphtha in Gasoline

100%
Natural Gasoline
90%

80%
Percentage of Gasoline Price

70%

60%

50%

Normal Butane
40%

30%

20%
Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015
Source: Baker & O’Brien Analysis and Platts.

CONFIDENTIAL 21
 Value of Light Naphtha in Gasoline
NATURAL GASOLINE AS A PERCENTAGE OF GASOLINE
(Mont Belvieu Natural Gasoline / Gulf Coast Gasoline )
100% 8.00

95% 7.00

90% 6.00

Octane Value, ¢/Octane Barrel

85% 5.00

80% 4.00

75% 3.00

70% 2.00

65% 1.00

60% 0.00

Source: Baker & O’Brien Analysis and Platts.

CONFIDENTIAL 22
 Alternative Value – Cracker Feedstock

Simplified Steam Cracking Yields from Typical Feeds

• Ethane (C2H6)  Ethylene (C2H4 or C2=) + H2 + CH4

• Propane (C3H6)  Above + Propylene (C3H6 or C3=)
• Butane (C4H8)  Above + Butylenes (C4H8 or C4=)
• Pentane and NaphthaAbove + Pygas (Aromatics)

~1.6 MM B/D

Source: Baker & O’Brien, Dan Lippe, Petral Consulting Company.

CONFIDENTIAL 23
 Alternative Value – Cracker Feedstock
CASH COST OF ETHYLENE FOR DIFFERENT FEEDS
50.00
Natural Gasoline
45.00

40.00

35.00

Propane
Cents Per Pound

30.00
High Cost Feed
25.00 Normal Butane

20.00

15.00
Ethane
10.00

5.00

0.00
2010 2011 2012 2013 2014 Current
(Sep 2015)
Source: Dan Lippe, Petral Consulting Company.
CONFIDENTIAL 24
 Incentives to Store?
100%

90%
87% Natural Gasoline
80%
Percentage of Gasoline Price

72%
70%

60%
Normal Butane
50%

40%

30%
Record
Lows

20%

Source: Baker & O’Brien Analysis and Platts.

CONFIDENTIAL 25
 Low Values

• Both butane and naphtha are at relatively low prices

– Normal butane has historically been the seasonal blend storage
component.
– Refiners can blend as much as 10% additional low cost butane in the
winter than in the summer
– Light naphtha (aka natural gasoline) is now exhibiting similar
seasonal pricing swings

• WILL THIS CORRECT?

– More storage options?
– More high octane, low RVP components?
– More olefins crackers?
– What about exports?

CONFIDENTIAL 26
Naphtha and
Condensate
Markets Global Naphtha Markets

Naphtha Pricing: USGC, Europe, and Asia

140.00
Worldwide naphtha markets
are connected via substitution
120.00
and freight differentials

100.00

80.00
USGC Heavy Naphtha
$/B

USGC Paraffinic Naphtha

60.00
Euro/Rotterdam Naphtha
Singapore Naphtha
40.00
Higher value heavy naphtha is
typically reformer feed; lower
20.00
value paraffinic naphtha is
typically cracker feed
0.00
Oct-2010

Oct-2011

Oct-2012

Oct-2013

Oct-2014
Jul-2011
Jan-2010
Apr-2010
Jul-2010

Jan-2011
Apr-2011

Jan-2012
Apr-2012
Jul-2012

Jan-2013
Apr-2013
Jul-2013

Jan-2014
Apr-2014
Jul-2014

Jan-2015
Apr-2015
Source: Baker & O’Brien Analysis and Platts.

CONFIDENTIAL 27
 Export Markets

• Export markets for Light Naphtha have same alternatives as U.S.

markets – gasoline blending and cracking
• Europe and the Far East are not under-supplied with light
naphtha
– Light naphtha exports can only discount or “push” their way into
foreign markets – limited demand

CONFIDENTIAL 28
 Conclusions

• Production of light domestic crude with light naphtha has created

large discounts of light components

• Refiners have responded by

– Raising octane/severities at higher operating costs
– Running at high utilization to consume low priced crude and naphtha
– Increasing blending with imported MTBE

• Could this lead to capacity increases?

– Olefins units still prefer lighter feeds – No.
– Reformers and alkylation units – Possibly.

• Further declines in LTO production will tend to keep condensate in the

U.S.

CONFIDENTIAL 29
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CONFIDENTIAL 30