ECONOMIC IMPACTS AND MARKET CHALLENGES

FOR THE METHANE TO DERIVATIVES PETROCHEMICAL SUB-SECTOR

Canadian Energy Research InstituteOverviewFounded in 1975, the Canadian Energy Research Institute (CERI) is an independent, registered charitable organization specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors.

Our mission is to provide relevant, independent, and objective economic research of energy and environmental issues to benefit business, government, academia and the public.

CERI publications include:

• Market specific studies

• Geopolitical analyses

• Commodity reports (crude oil, electricity and natural gas)

In addition, CERI hosts an annual Petrochemicals Conference, and Energy Forum.

Canadian Energy Research Institute

Core Funders:

In-kind Support:

Donors:

Presentation Outline

NATURAL GAS MARKET OUTLOOK

PETROCHEMICAL INDUSTRY

METHANE-DERIVED PRODUCTS

ECONOMIC AND ENVIRONMENTAL ANALYSIS

ECONOMIC IMPACTS

CONCLUSIONS

Natural Gas supply and demand forecasts

Canadian natural gas production forecast

Industrial use, oil sands, power generation, LNG, chemicals and petrochemicals production

0

5000

10000

15000

20000

25000

2005 2010 2015 2020 2025 2030 2035

mm

cfd

Pipeline Exports LNG Exports Supply Demand

Global Petrochemical OutlookPetrochemicals markets and emerging trends

Source: IHS Chemical 2016

North America Petrochemical OutlookLow cost feedstock advantage leading to investments in chemicals and derivatives

Methanol OutlookMethanol demand is forecast to grow at 4% globally compound annual growth rate (CAGR)

Source: Argus 2017

METHANE DERIVATIVES & EMERGING TECHNOLOGIES

Synthesis Gas (Syngas)

Hydrogen (H2)

AmmoniaNatural Gas (N.G)

Urea

Formaldehyde

Acetic Acid

Methyl tert-butyl ether (MTBE)

Dimethyl ether (DME)

Methylamine

Methanol to Olefins (MTO)

Methanol to Propylene (MTP)

Methanol to Gasoline (MTG)

METHYL METHACRYLATE (MMA)

Fischer-Tropsch Process

Methanol (MeOH)

Liquified Petroleum Gas

(LPG)

Methane (CH4)

CO2

Natural gas liquids(NGLs)

Economic Assessment1. Assessment of 9 technologies:

Methanol, Hydrogen, MTP & MTO, Ammonia, Urea, Formaldehyde, Fischer Tropsch Gasoline,

2. Key Assumptions

3. Life Cycle Costs (LCC): NPV of CAPEX (ISBL- inside battery limits and OSBL – Outside Battery Limits), Natural Gas costs, taxes, etc.

4. Jurisdictional competitiveness comparison: AB, ON, USGC

5. Discounted NPV and Internal Rate of Return (IRR)

6. Direct and indirect economic impacts: GDP, Employment

7. Scenarios:

Tax policy incentives

Output-Based allocation

Provincial CO2 Tax Assumptions

Alberta: Increase by 2% + inflation after 2018 (Climate Leadership Plan)Ontario: Mid-range CO2 Price Forecast (ICF Study for Ontario Energy Board)Canada ($/t-CO2): 10 (2018), 20 (2019), 30 (2020), 40 (2021), 50 (2022->)

Price Assumptions

Derivative prices are kept constant

Where available 2016 are assumed

Otherwise, available prices are used $- $500 $1,000 $1,500

HydrogenMTOMTP

TIGASFTS Gasoline

AmmoniaFormaldehyde

MethanolUrea

Price US$/tonne

Natural Gas Price Assumption USGC AIH Sarnia Average 2016 Prices

Natural Gas (US$/ MMBTU) 2.34 1.56 2.38 Henry, AECO and DawnHubs Prices

Results: IRR for 9 Methane Derivatives

Only methanol and Hydrogen meet the 10% expected rate of return

However, the economics is sensitive to natural gas and product prices

-5%

0%

5%

10%

15%

20%

25%

IRR

USGC AIH Sarnia

Methanol NPV Jurisdictional Comparison

Hydrogen NPV Jurisdictional Comparison

MTO NPV Jurisdictional Comparison

Carbon Tax Scenarios: Methanol

0%

2%

4%

6%

8%

10%

12%

14%

USG

C

AIH

Sarn

ia

USG

C

AIH

Sarn

ia

USG

C

AIH

Sarn

ia

Scenario 0 Scenario I Scenario II

IRR%

Better economics with current provincial tax policies than federal tax policy.

OBA has the best economic prospects.

For OBA scenario, plants assessed are considered best-in-class; thus, CO2 tax does not apply

Corporate Tax Rebates Scenarios: Methanol

Provincial Tax RebateCould Increase IRR by:

1% in AB0.7% in ON

Corporate Tax RebateCould Increase IRR by:

2.2% in AB1.7% in ON

Assumes that a certain percentage of corporate tax is provided as rebate, for example towards capital recovery

10%

11%

12%

13%

14%

15%

16%

17%

0% 20%

40%

60%

80%

100% 0% 20

%

40%

60%

80%

100%

Scenario III Scenario IV

IRR%

AIH Sarnia

Economic ImpactsInput-Output Modeling Results for A Methanol Plant in AB and ON

Direct and indirect impacts on GDP at provincial and federal levels

Significant economic impacts at provincial and national levels compared to the total capital invested (TCI)

-2000

-1000

0

1000

2000

3000

4000

5000

TCI Corp tax(NPV)

CO2 tax(NPV)

Cum NPV GDP(AB/ON)

GDP (CA)

C$ M

ill

MeOH

AB ON

Concluding Remarks

• New capacity for ethylene, propylene and methanol followed energy and demand growth dynamics

• Results show that some opportunities exists for methane derivatives sub-sector in Alberta. This is driven principally by 10-15% low feedstock prices, OPEX and corporate taxes.

• CO2 tax can significantly impact the economics of Canadian jurisdictions. However, the Output-Based Allocation CO2 Tax Scenarios seems to sustain economic competitiveness against the USGC.

Thank You for Your Time

WWW.CERI.CA

CANADIAN ENERGY RESEARCH INSITUTE

@CERI_CANADA

Allan Fogwill | President & CEO

403.220.2367

afogwill@ceri.ca