Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
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).
1
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
Demand Task Group
Chair
Kenneth L. Yeasting
Government Cochair
James M. Kendell
Assistant Chair
James A. Osten
Assistant Government Cochair
Raymond J. Braitsch
Secretary
John H. Guy, IV
Members
Industrial Subgroup Chair
Kenneth S. Bromfield
Industrial Subgroup Assistant
Chair
Scott Engstrom
Power Subgroup Chair
Kurtis J. Haeger
Senior Director, Global
Gas and North American
Gas
IHS Cambridge Energy
Research Associates, Inc.
Director, Office of Oil,
Gas and Coal Supply
Statistics, Energy
Information
Administration
U.S. Department of
Energy
Director, North American
Natural Gas
IHS Global Insight
General Engineer, Office
of Planning and
Environmental Analysis
U.S. Department of
Energy
Deputy Executive
Director
National Petroleum
Council
U.S. Commercial
Director, Energy Business
Dow Hydrocarbons and
Resources LLC
Director, Global Energy
Sourcing
International Paper
Company
Managing Director,
Wholesale Planning
Xcel Energy
Power Subgroup Assistant Chair
Jeanette Pablo
Director of Federal
Affairs and Senior
Climate Advisor
2
PNM Resources, Inc.
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
Residential/Commercial Subgroup Chair
Thomas J. Massaro, Jr.
Vice President, Marketing
& Business Intelligence
Residential/Commercial Subgroup Assistant Chair
Richard D. Murphy
Senior Vice President,
Energy Solution Services
Transportation Subgroup Chair
William C. Lawson
Director of Finance
At-Large Members
James Edward Burns
John P. DeGeeter
Leslie J. Deman
John Hull
Jose Alberto Torres Lima
Robert L. Perez
Clean Energy &
Innovation
Senior Counsel –
Antitrust
President
Managing Director,
Fundamentals
Vice President, LNG, Gas
Monetization, and Wind
Energy
Vice President, Mexico
Ventures
3
New Jersey Natural Gas
Company
National Grid
The Williams Companies,
Inc.
Shell Upstream Americas
ConocoPhillips
Les Deman Energy
Consulting
Iberdrola Renewables
Shell Upstream Americas
Tennessee Gas Pipeline
Company
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
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.
4
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
2005
2000
Transportation
Industrial
2009$/BBL
140
120
100
80
60
40
20
0
1995
14
12
10
8
6
4
2
0
1990
MMBD
Figure 1: U.S. Liquid Fuels Demand by Sector vs. Oil Price History
Res & Comm
Electric Generation
AEO'11 Oil Price
File: F igure73_data A EO2009.xls
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
5
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
20
Figure 2: 2010 U.S. Liquids Demand by Sector & Fuel 11%
MMBD
15
19%
Pet Chem F eed
Fuel O il
Distillate
10
46%
5
0
Other*
11%
33%
31%
2010
2010
Residential & Industrial
Commercial
2010
Powergen
2010
Total
Non-­‐
Transport
2010
Transport
Kerosene/Jet
Gasoline
LPG
2010
Total
Demand
AEO 2011
* Includes petroleum coke, asphalt, road oil, lubricants, still gas, and miscellaneous petroleum products.
File: AEO2011 vs AEO2010 NGL production & consumption.xls 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).
6
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
Figure 3: U.S. Non-­‐Transport Liquids Demand with CAGRs by Segment vs GDP C AGR; History & AEO'11 Forecast
12
4.0%
-­‐5.79%
0.04%
3
3.0%
2.0%
1.0%
0
1990
-­‐2.69%
-­‐0.47%
-­‐0.49%
-­‐1.13%
2009
2035
GDP Growth Rate
2.7%
2.5%
0.37%
6
PowerGen
Industrial
Commercial
Residential
GDP
0.0%
File: A EO2011 y earbyyear.xls
Figure 4: U.S. Non-­‐Transport Natural Gas Demand with CAGRs by Segment; History & AEO'11 Forecast
25
0.47%
20
Quad
Quad
9
0.76%
4.83%
15
-­‐1.12%
10
5
0
1990
PowerGen
0.74%
Commercial
0.78%
0.77%
0.40%
0.02%
2009
2035
7
Industrial
Residential
File: A EO2011 y earbyyear.xls
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
Figure 5: U.S. Non-­‐Transport Energy Demand with CAGRs by Segment; History & AEO'11 Forecast
100
Quad
80
0.71%
1.30%
60
40
Industrial
1.09%
-­‐0.67%
20
0
1990
PowerGen
1.23%
0.65%
1.01%
0.19%
2009
2035
Commercial
Residential
File: A EO2011 y earbyyear.xls
EIA AEO 2011 REFERENCE CASE OUTLOOK TO 2035
Figure 6: U.S. Liquid Fuels Demand by Sector vs. AEO'11's Oil & Gas Price Forecast $150
10
$100
5
$50
0
$0
Industrial
2009$/BOE
15
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
MMBD
Transportation
Res & Comm
Electric Generation
AEO'11 Oil Price
AEO'11 Henry Hub
File: F igure73_data A EO2009.xls
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.
8
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
•
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 pricesensitive – and petrochemical feed (naphtha) both rise about 250 mbd, while LPG
demand rises only 70 mbd.
6
Figure 7: Non-­‐Transport Liquids Demand by Fuel in 2010 and 2035
Other*
Pet Chem Feed
Fuel Oil
Distillate
Kerosene/Jet
Gasoline
LPG
MMBD
5
4
2.06
3
0.73
2
1
0
0.50
1.61
2.31
0.97
0.49
2010
2010
Industrial
Residential &
Commercial
2010
Powergen
1.68
2035
2035
Industrial
Residential &
Commercial
2035
Powergen
AEO 2011
* Includes petroleum coke, asphalt, road oil, lubricants, still gas, and miscellaneous petroleum products.
File: AEO2011 vs AEO2010 NGL production & consumption.xls 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.
9
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
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.
Figure 8: AEO'11 LPG, Distillate, Crude, and Natural Gas Pricing To Industry
$30
$/MMBTU
$25
$20
LPG
$15
Distillate F uel Oil
$10
Crude Oil
$5
Natural G as
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
$0
File: A EO2011 y earbyyear
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.
10
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
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
Figure 9 US Liquids Production
AEO 2011 vs AEO 2010
12
Other
MMBD
10
Ethanol
8
6
1.96
1.74
1.83
2.63
2.90
Refinery G ain
NGLs
4
Alaska
2
Lower 48 Onshore
0
Lower 48 Offshore
2010
AEO'10 AEO'11 2025 2025
AEO'10 AEO'11 2035 2035
.
File: U S O il Prod & Imports & Total S upply PET_SU M_SN D_D_N U S_MBBLPD_A_cur.xls
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.
11
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
•
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.
12
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
Figure 11: U.S. Crude, LPG, & Natural Gas Pricing History
800
700
Naphtha
500
Spot Normal B utane
400
Spot Propane
300
Crude Oil
200
Spot Ethane
100
Henry H ub
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
$/tonne
600
File: A EO2011 v s A EO2010 NGL production & consumption.xls
•
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). 13
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
Figure 12:U.S. NGL Production Forecasts
AEO 2011 vs Industry+Consultant Views
3.5
3
2.5
2
1.5
1
0.5
0
Ind+Con High
1.96
2010
2.2
1.7
2.0
2.3
2015 2015 2015 2015
2.7
2.0
2.3
2.9
Ind+Con Median
Ind+Con Low
AEO'11
2030 2030 2030 2030
AEO2011 v s A EO2010 NGL production & consumption.xls
•
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”.
14
MMBD
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Figure 13: US and NA NGL Production
WEO 2010 vs AEO 2011 vs AEO 2010
0.37 2.9
0.64
1.91
Mexico NGLs
2.6
2.4
Canada NGLs
2.90
2.63
US NGLs
1.83
1.74
NA NGLs per IEA
.
File: U S O il Prod & Imports & Total S upply PET_SU M_SN D_D_N U S_MBBLPD_A_cur.xls
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%).
15
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
Figure 14: US Liquids Demand
[NARD DTG Liquid Demand 3-28-2011]
50
45
Quads
40
35
Transport
30
Power
25
Industrial
20
Commercial
Residential
15
10
5
0
Reference
Reference High Macro Low Macro
2010
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.
16
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
Figure 15: US Industrial Liquids Demand
[NARD DTG Liquid Demand 3-28-2011]
12
10
Quads
8
Liquefied Petroleum Gases
Other Petroleum
6
Petrochemical Feedstocks
Residual Fuel Oil
4
Distillate Fuel Oil
2
Motor Gasoline
0
Reference
Reference High Macro Low Macro
2010
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.
17
Working Document of the NPC North American Resource Development Study
Made Available September 15, 2011
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.
18