11th Iran Petrochemical ForumJune 7-8, 2014

Tehran

Shahrin IsmaiyatimChief Content Officer

Advent of Shale Gas – Impact on Global Downstream Polymers

Agenda:

• US shale gas impact on…• WTI & Natural Gas prices• US ethane price

• What fundamental changes can we expect to see in…• US ethylene• US polyethylene

• Is the market facing a polyethylene surplus…• …or not?• What role is the Middle East, Iran going to play?

US shale impact on WTI & natural gas

Crude to Nat Gas ratio

Jan-08 13 : 1

Jul-08 11 : 1

Jan-09 8 : 1

Jul-09 18 : 1

Jan-10 14 : 1

Jul-10 15 : 1

Jan-11 20 : 1

Jul-11 26 : 1

Jan-12 33 : 1

Jul-12 30 : 1

Jan-13 28 : 1

Jul-13 29 : 1

Jan-14 22 : 1

May-14 22 : 1

Shale gas impact on US ethane price

Source: Petrochemwire

 NYMEX WTI

($/bbl)NYMEX Nat Gas

($/mmbtu)Ethane ($/gal)

Ethane ($/mt)

Ethane to Crude ratio

Ethane to Nat Gas ratio

Jan-08 $99.62 $7.75 $1.15 $856 86 : 1 7 : 1

Jul-08 $145.25 $13.58 $1.43 $1,063 101 : 1 9 : 1

Jan-09 $46.34 $5.83 $0.40 $297 116 : 1 15 : 1

Jul-09 $66.73 $3.62 $0.48 $354 140 : 1 8 : 1

Jan-10 $82.75 $5.75 $0.81 $597 103 : 1 7 : 1

Jul-10 $72.14 $4.69 $0.46 $338 159 : 1 10 : 1

Jan-11 $88.03 $4.42 $0.61 $451 145 : 1 7 : 1

Jul-11 $111.72 $4.31 $0.78 $579 143 : 1 6 : 1

Jan-12 $101.56 $3.06 $0.76 $562 134 : 1 4 : 1

Jul-12 $84.45 $2.78 $0.29 $215 291 : 1 10 : 1

Jan-13 $93.09 $3.29 $0.23 $170 407 : 1 14 : 1

Jul-13 $103.22 $3.62 $0.24 $179 428 : 1 15 : 1

Jan-14 $93.96 $4.30 $0.28 $208 336 : 1 15 : 1

Shale gas impact on US ethylene price

Source: Petrochemwire

Ethane Ethane Ethane to ethylene Ethylene Ethylene

($/gal) ($/mt) ratio (cents/lb) ($/mt)Jan-08 1.15 856 2.2 : 1 52 1146Jul-08 1.43 1,063 2.0 : 1 71 1565Jan-09 0.40 297 2.0 : 1 20.25 446Jul-09 0.48 354 2.2 : 1 22 485Jan-10 0.81 597 2.1 : 1 39 860Jul-10 0.46 338 1.3 : 1 34.5 760Jan-11 0.61 451 1.4 : 1 44 970Jul-11 0.78 579 1.4 : 1 55.5 1223Jan-12 0.76 562 1.3 : 1 56.75 1251Jul-12 0.29 215 0.7 : 1 42.375 934Jan-13 0.23 170 0.4 : 1 59.5 1311Jul-13 0.24 179 0.4 : 1 57 1256Jan-14 0.28 208 0.5 : 1 58.375 1287May-14 0.29 213 0.5 : 1 54.893 1210

US ethylene plant projects to add over 12 million mt capacity

Source: TPS/Petrochemwire

What fundamental changes can we expect in ethylene?

• However, not all projects will be built on time, or will be built at all

• We should expect an addition of 7-8 million mt of new ethylene capacity by 2018-2020

Source: Shell

What fundamental changes can we expect in polyethylene?

• With new ethylene plants being built, so will new PE production.

• US alone could add about 6 million mt of new PE capacity by 2018-2020, but doubt remains of full capacity addition

• Canada and Mexico to add 1.4 million mt

Who How much ('000 mt) WhenBraskem/Group Idesa Coatzacoalcos Mexico 1,050 2015

Nova Joffre Canada 454 2015Sasol/Ineos Lake Charles US 470 2016

LyondellBasell Corpus Christi US 454 2016Sasol Lake Charles US 420 2016

Appalachian Resins W Virginia US 227 2016CP Chem Old Ocean US 1,000 2017

ExxonMobil Baytown US 1,300 2017Sasol Lake Charles US 450 2018

Formosa Point Comfort US 300 2018Shell Appalachia US Under study NA

Odebrecht/Braskem W Virginia US Under study NA

Where

Will the world be able to absorb the PE “surplus”?• Global polyethylene market to remain in marginal surplus.

• Don’t expect any PE tsunami from the US.

Source: PCW, TPS, Industry

What fundamental changes can we expect in ethylene?

• Shale-based natural gas (and NGLs) have created record margins for the past 3 years for US ethylene producers.

• US ethylene capacity at 26 million mt/year in 2013

• By 2018-2020 period, we could expect another 11-12 million mt of new ethylene capacity

• …that is if all greenfield and brownfield projects are realized, bringing a total of 37-38 million mt.

Middle East feedstock disadvantage?

• Middle East feedstock advantage is clear, despite the “threat” to its natgas supplies.

• GPCA study showed Middle East gas shortage could rise from 32 Bcm in 2012 to up to 51 Bcm in 2015 on high economic growth

Source: BP

• Proven natgas reserves at the end of 2012 sufficient to meet 147 years of Middle East production.

• In 2002, proven reserves were sufficient to meet 290 years of production.

• The almost 50% fall indicates how fast region’s proven gas reserves are declining.

Middle East to remain dominant supplier despite threat

• Middle East new ethylene capacity could top 15.5 million mt from 2014 to 2022, while new PE capacity could reach 12-13 million mt by 2022.

• About 50%, or more of ME PE will be exported.

Source: TPS, PCW, Industry figures

• Iran to produce around 5 million mt of new ethylene capacity by 2022.

• New PE capacity to amount to 4.6 million by 2022.

A quick view on naphtha – still the viable petrochemical feedstock

• Middle East ethane – average $180/mt

• US ethane – $300/mt

• Europe naphtha – 2013 average $920/mt

• Asia naphtha – 2013 average $920/mt

• FACT: nearly 100 million of ethylene capacity fed by naphtha, accounting for more than 60% of global production, still.

• FACT: Naphtha yields superior steamcracker co-products versus other feedstocks.

• FACT: US naphtha have headed to the East, and likely to continue.

• FACT: Middle East naphtha supplies grow inline with new refineries, not short of petchems feedstock to mitigate gas reductions.

• FACT: Asia will continue to be the main consumer of naphtha to feed majority of its steamcrackers

Conclusion

• US advantage is clear – the question is whether US can capitalize fully

• New ethylene and PE production in the US so far has only been seen in expansions, but new plants have not come online yet.

• Middle East to remain as the dominant supplier of surplus PE; Asia the main consumer.

• Naphtha continues to play a dominant role in the petrochemical industry.

• Some questions:• What can be done to capture benefits while the PE market

waits for its turn?• Can China’s Methanol-To-Olefins alternatives put the brakes

on shale developments?

About The Petrochemical Standard (TPS)

• Formed by small group of commodity pricing industry veterans with one goal in mind: to address the growing needs of the global Petrochemical market for reliable real-time pricing information by tying price assessments with market fundamentals.

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• Currently, TPS publishes daily Asian aromatics price assessments for benzene, toluene, PX, MX, SM and methanol. Olefins and polymers assessments to be introduced in Q3, while future partnership in the US will connect US aromatics, polymers and olefins market information with Asia.

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11th Iran Petrochemical ForumJune 7-8, 2014

Tehran

Shahrin IsmaiyatimChief Content Officer

shahrin@petchemstandard.com

Thank You