Splitting the Profit – Condensate Splitters Under Pressure
As I noted in the Condensate Economics Explained this summer, condensate splitters will not be a sustainable solution to the condensate flood in the US by itself. The recent article by RBN indirectly supports this claim. RBN expects very high natural gas liquids (NGL) production. The problem child in NGL is ethane. Ethane, because of its unique property relative to propane, butane, and pentanes plus, requires much more effort to liquefy. Therefore, often ethane is left in the gas stream (rejected) versus extracting and supplying it to the petchem industry. However, only so much ethane can be left in the dry gas stream before it would fail to meet pipeline specifications.
With ethane falling to the lowest level ratio in decades to natural gas, there is a large incentive to go ahead and leave as much as one can in the dry gas stream. As also noted by RBN, there is just so much NGL that ethane will easily exceed the current demand levels leaving prices to likely free fall in certain regions. This will result in petchem plant demand which brings us back to Condensate splitters. The yield of condensate splitters is mainly Naphtha. Naphtha is used by many petchem plants. There exist many chemical plants which can take multiple feedstocks to produce the same product. The driving products of the petchem industry are known as Olefins (CnH2n) – a hydrocarbon with one double bond carbon and single bonds elsewhere – aka Alkenes (sorry about being so nerdy, but sometimes you just have to be technical to really understand it all – I also need to use my Chemical Engineering Degree every now and then). These Olefins include the more recognized names of ethylene, propylene, and butylene. The process of taking the feedstock and converting the product is typically called cracking. The reason for this is because you are breaking the molecular bonds and producing a new combination which constitutes your product.
Historically speaking Naphtha is the dominant feedstock for world production of olefins. For ethylene production Naphtha represents almost 50% of the primary feedstock. However the use of ethane to make ethylene is rapidly growing. Hopefully by now you are starting to see the convergence of Condensate Splitter and Ethane. Even if a petchem plant is designed for a certain feedstock – all it takes is some capital to be able to process other feedstock. Those who built US condensate splitter hopefully did their economics based on significant market competition with ethane.
Petchem plants are essentially a simplified refinery. Compared to trying to model refineries, petchem modeling is much simpler. The feedstock is typically already cleaned out and the process can be placed in one block versus multiple conversion equipment in refining – see Figure below.
Cracking a certain feedstock will result in varying yields of product – similar to processing crude oil in refineries. There is a value point where one feedstock will be more profitable than another. A complete gross margin can be computed for the varying types of crackers. Gross Margin at a Petchem plant = Product Prices x Yields – Variable Cost – Cash Cost – Fixed Cost. Similar to a refinery each of these components will be different depending on your feedstock.
Potentially All Energy Consulting will release another product Chemical Market Analysis (CMA) where, on a daily basis, a computed value of the various cracking modes (ethane, propane, butane, natural gasoline, and Naphtha) is computed based on future markets. We are close on our Oil Market Analysis (OMA) product release. Both these platforms will enable the user to input their own future expectations of price and a computed value will be calculated. We have the models and the platform and are just looking to finalize our data provider. Please email me if you are interested in either of these products. If you have your own forecast data, we can deliver this to you right now.
Your Split in Many Ways Energy Analyst,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
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“Pull a thread here and you’ll find it’s attached to the rest of the world.”
? Nadeem Aslam, The Wasted Vigil
What are the risk factors for AEP, CPN, D, SO, EXC, NEE, DUK, NRG, TVC, ETR, and more this winter?
Going into the winter, the key variables that drive the profitability of a generation portfolio will be the price of Henry Hub, Basis, and Weather. Our Winter Power Outlook dispatches the entire N. America power system. Every asset is modeled. We have pulled together the top 10 generating portfolios under our 50+ cases to show you the impact of those variables. The information is not perfect in the sense that we do not know exactly what they have hedged or not hedge – nor do we adjust for any potential bi-lateral deal. However, the output represents the free market performance which will indicate key risk factors in how their portfolio will perform. If you have a particular set of assets or just one unit you are interested in, we can pull that information for you.
Expectations on Henry Hub are narrowed around $4/mmbtu. However, last winter, we saw Henry Hub climb to over $6/mmbtu in the winter. Running over 28 simulations of Henry Hub, the redacted (sign up to receive the Winter Power Outlook to get all the data behind each figure) figure below shows the impact of the 10 generation portfolios.
The most sensitive to the price of Henry Hub is NRG followed by AEP. NRG could potentially see an upside of almost 100% if Henry Hub prices move to our higher end range. The least impacted by changing Henry Hub are NextEra and Calpine fleet. The Calpine slope is interesting as it seems somewhat counterintuitive. Examining Calpine fleet shows that they have the lowest gas heat rate (efficiency of plant – low HR= highest efficiency) fleet ~7.8 mmbtu/MW. In addition, their fleet is 90+% gas compared to the next highest at 60%. The combination does not help them if gas prices were to stay low. Their units do generate more as the gas prices go down, but this does not lead to greater profitability – see figure below. The good news for the generating assets is the slope of profitability is asymmetrical – more upside than downside. This logic has supported some lack of action to hedge power. However, there is always a point where some hedging would be logical particularly for regulated assets and those trying to manage earnings expectations. AEC can help identify those points.
Reviewing the basis impact shows the risk reward as being much more symmetrical. The redacted figure below shows Dominion generating portfolio seeing the most impact if basis were going to change followed by Entergy. This makes sense for both given their exposure to the east basis. The least impacted by basis change are TVA and Exelon. Given this knowledge, Dominion and Entergy should be trading/hedging themselves for basis risk.
In terms of weather risk, we ran the last 12 years weather pattern in our models and compared it to the 10 year average. The following redacted figure was produced. In terms of weather risk, it is also very asymmetrical as in Henry Hub. In general, there is more upside on a cold winter than downside on a warm winter. However, in AEP’s case, that difference is very narrow given the historical weather pattern. They almost have as much to lose on a warm winter as they can gain on a cold winter. Calpine can produce the greatest gain if weather were to duplicate last year’s pattern. The fleet with the smallest standard deviation from the 10 year average weather pattern was Southern. This makes sense given the geographical location.
Subscribing to the Winter Power Outlook can get you all this analysis. All this analysis is available to you for only $3000. We will also supply a free 1 month access to PMA-NT. Plus if you are the first five customers you can get a custom scenario based on the permutations already used. You can create your very own extreme case (e.g. Basis up 30%, 2013-2014 Weather, Plus Henry at $5.5/mmbtu, double forced outage rates). There is no other place to get so much information for so little. The report will be even larger and more comprehensive than the Summer Outlook we produced this year. If you take the time to review and understand the report, you will be fully prepared to understand the risk and key variables driving the power markets this winter.
The above analysis can be customized for you. If you want to understand how a generation portfolio may be impacted by weather, price, load, environmental policy, hydro generation, nuclear outages, etc…we can process it through our PMA models to get you your portfolio outcome. Output can range from profitability, fuel consumption, generation by month. The time period can be as little as one month to as long as 20 years.
Please call or email to sign up for the Winter Power Outlook, PMA-NT , PMA-LT or a custom run. [email protected] or 614-356-0484.
Your Grateful Energy Consultant,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
Winter Power Fuels Consumption Sensitivities (Gas & Coal)
As noted in my previous write up, we could see a record amount of natural gas demand in the power sector if certain stars align. One of the major drivers is the price of natural gas. The two price components for natural gas is the benchmark location of Henry Hub price and the basis (price differential to Henry Hub). In this Winter Power Outlook report, we ran over 50 cases. Our gas price sensitivities included changing Henry Hub (28 sensitivities) and then just changing basis prices (10 sensitivities). The below figure is a redacted output from the report.
For this winter, the correlation with Henry Hub price and power natural gas demand is very linear. With the purchase of this report for only $3000, you will get the data and the associated linear equation. This will give you grounds to estimate the power markets natural gas demand as a function of your expectations of Henry Hub.
Changing the price of Henry Hub also altered the coal demand. The redacted figure below shows the relationship of coal demand and Henry Hub. As in the natural gas demand figure, the coal demand outlook is very linear with the changing Henry Hub price.
Changing basis by a set percentage from 50% to 150% did not significantly alter the gas demand. The basis impact altered gas demand by +/-2%. However, power prices did significantly change. In the Nepool region, the basis sensitivities produced nearly a +/-30% swing in on-peak power prices – see below figure. The winter report will contain price output for all major power hubs in N. America with the associated simulations.
A common mechanism used in the industry to estimate natural gas demand is the usage of a relationship with Heating Degree Day (HDD). However, in the power sector, that relationship is very fragile as location and price relationships can cause a non-linear relationship. The figure below demonstrates this with simulations of each weather year between 2003 and 2013.
For only $3000, our Winter Power Outlook report will have enough information for you so there will be no guessing to what the power markets will do for gas and coal consumption under various scenarios, whether it be price, weather, or unit performance. The first 5 subscribers will also be able to create their own custom outlook run. You can select and combine various weather years, change henry, and/or change basis price. We will run your custom case and give you all the output from that case. In addition, to the report you will get access to PMA-NT for one month. PMA-NT updates daily, therefore you will always have an updated third-party view of the near term market (2-3 years). PMA-NT can be used for hedging or trading as demonstrated in our previous articles – Effective Power Hedging and Excellent Returns.
A new product is coming. PMA-LT will be released soon. PMA LT is a monthly forecast out to 2035 produced quarterly. Given the long-term outlook, a fundamental gas view point was developed in coordination with RBAC the makers of the GPCM® Natural Gas Market Model. The quarterly outlook will present monthly prices for all major N. American power hubs. In addition, a report will be included to support the outlook. Description of retirement and expected new builds will be detailed in the report. PMA LT subscribers can get access to gas pricing and a report supporting the gas fundamental outlook. Customization of long-term outlook (e.g. Carbon policy) is also available to subscribers.
Please call or email to sign up for the Winter Power Outlook Report or PMA-NT or PMA-LT [email protected] or 614-356-0484.
Your Grateful Energy Consultant,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
Sign Up to AEC Free Energy Market Insights Newsletter
2014-2015 Winter Natural Gas Demand Expectations
Given the current forward markets and expected shift in generation resources this winter, natural gas demand in the power sector will likely come back down from the highs generated last year given 10 year average winter. However in our high gas demand case where weather is colder than normal and gas-coal spreads move in by 50 cents we can see record winter power gas consumption of 22.5 bcf/d (Dec-Mar) – see figure below.
Figure from Downloadable Excel File for Subscribers of Power Market Analysis (PMA)
The new revolutionary product by All Energy Consulting’s (AEC), Power Market Analysis (PMA), is also designed to help those better understand the natural gas demand picture (Click for example of Power Trading and Hedging). Natural gas delivered to the ultimate end customer is made out of the following categories: Residential, Commercial, Industrial, Vehicles, and Power. The figure below displays the breakout by category by volume over time.
In a short time, gas usage has changed quite drastically with Power now being the largest demand portion for natural gas – see figure below.
Unlike residential & commercial markets, the ability to forecast industrial and power gas demands go beyond the simple understanding of weather and the economy. The industrial picture is a data mining process of keeping track of plant closing and starts. The power demand is much more complex as there are significant inter-dependencies in the power market space. Gas demand in power is not just about price if that was the case demand would not have gone up over 4% a year from 2002 to 2008 while gas prices rose 15% a year. The reason for this rise had to do with required balancing of the market and the past market decisions – more discussed in our long-term gas outlook. The power market has a policy fundamental piece which causes certain technology to be retired (e.g. coal) and others to be built (e.g. renewable). In addition, the competing fuel price can cause significant demand swings (coal-gas switching).
PMA is going to take the guess-work out for you in understanding the potential gas demand in the power sector. Our model is based on 20+ years of industry experience and took thousands of man-hours and hundreds of runs to develop and perfect. The underlying dispatch model used in PMA is AuroraXMP by EPIS. We can help those looking to implement AuroraXMP. The following results are historical runs with the actual loads and actual natural gas and coal prices depicted in the model. All other nuances, from outage and bidding logic, are the same as presented in the current PMA forecast models. The deviation from 2010-2012 averaged less than 4%.
Gas Consumption Power Sector Validation:
PMA will produce 5 cases of 2 year monthly projections incorporating all the risk in gas demand in the power sector from weather, economy, policy, and inter-fuel dynamics (coal-gas switching). Our model will run daily, incorporating the latest viewpoints from the forward gas and coal markets. The base model will also use AEC’s proprietary load forecasting model to project normal weather conditions. There are two gas sensitivities that will be generated along with the base case – high gas and low gas demand cases. The high gas demand uses historical weather on a monthly basis that drives the highest gas demand, plus it reduces the Henry Hub forwards will by 50 cents per MMbtu. The low case is the inverse of the high case with Henry hub forward adding 50 cents. These three cases will give you a good perspective on the high and low expectations of natural gas demand in the power sector. In addition, these cases can be customized to present even a broader range by incorporating nuclear outages to hydro capabilities.
PMA’s output is daily. Online visual displays are available. In addition, the gas consumptions are presented by month by state in an excel file which is in similar design to that published by the EIA. This format can be feed into leading natural gas analytical models such as GCPM by RBAC.
Texas Natural Gas Demand for Electric Power Excel Based View
Please email me at [email protected] or call me (614-356-0484) if you’re interested in learning more about our new PMA service or would like to discuss a consulting project. Interested parties will receive a free sample output file along with documentation supporting the validation of our modeling efforts.
Your Energy Consultant,
David
David K. Bellman
All Energy Consulting LLC- “Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
@AECDKB
blog: http://allenergyconsulting.com/blog/category/market-insights/
5 bcf/d Drop in Gas Demand from Power Sector in August Due to Weather
10 year average weather for August would produce gas demand near 30 bcf/d for the electric power sector. However, given the weather, gas demand is closer to our Power Market Analsyis (PMA) low gas demand case around 25 bcf/d. This is having a significant impact on storage causing weakness in gas prices. The storage levels are tracking closer to our low gas demand case as described in our previous article on extreme weather. This case had gas prices falling to $3.5/mmbtu. The models would indicate there is a greater chance for $3.5/mmbtu gas than $4.5/mmbtu gas assuming an ending inventory target in October of 3.4-3.5 tcf.
PMA now offers state by state gas demand in the format supplied by the EIA. One can use the data to feed into your gas pipeline model to calculate basis – such as the Gas Pipeline Competition Model (GCPM) by RBAC. A free sample file is available for download. This file is routinely produced and can be customized to your own sensitivities. Below are two graphs which can be generated from the file.
We will be coming out with a winter outlook report in the coming weeks. Please consider signing up to PMA to get the winter outlook. We have a 30 day trial for only $1000 which will give you full access.
Your Energy Consultant,
David
David K. Bellman
Founder & Principal
All Energy Consulting LLC
“Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
blog: http://allenergyconsulting.com/blog/category/market-insights/
Adding insights to PMA
Power Market Analysis (PMA) is now even more insightful with the addition of two more additional runs to the base case. PMA understands the future holds much uncertainty. The value of PMA is to understand that uncertainty. PMA is a tool to help those in the Gas and Power markets. Already PMA tries to formulate the maximum and minimum power price across the country. The power cases allow for one to compute the risk of a trade decision, plus using these cases can also help identify winning trades as previously discussed. Even if you are not trading, but in a role to make decisions on energy procurement, PMA can help you understand your decisions. Adding our expertise with PMA, we can help end-users develop a comprehensive hedging strategy.
Now PMA is producing a maximum and minimum gas demand case. Using the 10 year weather analysis done previously, a constructed maximum and minimum gas demand was developed. In addition, the forward curve is adjusted downward by 50 cents for the high gas demand case and upward by 50 cents for the low gas demand case. These cases will help those trying to understand the gas markets. They can be used to help give you a good sense of when the market is at the bottom or top in terms of power demand.
In summary, PMA has added two new scenarios within their daily produced runs. All 5 scenarios are now part of the trade screener, thereby giving more certainty for the recommend trades being produced by PMA. Don’t be caught off guard by potential changes in the market, sign up now for PMA.
Please call or email to schedule an online demo of the latest most advance way to analyze the power markets – [email protected] – 614-356-0484.
Your Ever Improving Energy Analyst,
David
David K. Bellman
Founder & Principal
All Energy Consulting LLC
“Independent analysis and opinions without a bias.”
614-356-0484
[email protected]
blog: http://allenergyconsulting.com/blog/category/market-insights/
