US shale gas, the project boom and impact on global petrochemicals

Joseph Chang, Global Editor

ICIS Chemical Business

May 27, 2014

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ICIS

Prices

NewsAnalysis

Market intelligence for the energy, chemical and fertilizer industries

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Agenda

• Macro outlook

• US cost advantage vs Europe, Asia

• US projects update – ethane crackers, PE, PDH, methanol

• Engineering & construction (E&C) challenge

• Capital spending (CAPX) cycles

• Global reaction and impact

• Conclusions

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Macro outlook 2014

• Macros were largely lining up for a positive 2014 – US economy picking up momentum, Europe swinging to growth, China holding up.

• BUT concerns… some of the legs of the bull market are shaky!

• Leg 1: China. HSBC China Manufacturing PMI has been under 50 for 4 straight months, indicating contraction.

• Leg 2: Emerging markets GDP growth has slowed - Brazil, Thailand, India, Indonesia, Turkey. Many have raised interest rates to defend currencies/fight inflation. Also political unrest. That’s hitting near-term growth.

• Leg 3: Shift away from easy monetary policy – US Fed taper, interest rate hikes in emerging markets, China to curb credit in its shadow banking sector. Yet ECB is poised to loosen.

• Positives remain – US and Europe leading the recovery.

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Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12Jan-13Jul-13Jan-14

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Eurozone

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Manufacturing PMI

Data to April 2014Source: Institute for Supply Management, Markit, HSBC

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US shale boom and petrochemical cost advantage

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Main steam cracker feedstocks

• Naphtha derived from crude oil

ethylene, propylene, aromatics, C4s

for butadiene (Europe, Asia)

• Ethane derived from natural gas

ethylene only (Middle East, North

America)

• LPGs (propane, butane) derived from

natural gas mainly ethylene and

propylene

Ethane60%

LPG22%

Naphtha12%

Other6%

Chart Title

North America steam cracker feedstock breakdown based on ethylene demand, 2012

Source: ICIS supply and demand database

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US ethane advantage vs naphtha

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US contract ethylene margins at record highs

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US global ethylene cost advantage

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US polyethylene cost advantage

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LyondellBasell – US vs international 2013

“The US natural gas liquids advantage continues to evolve in a very positive way, and we are executing our growth projects rapidly to take advantage of these

market opportunities. We believe olefins in North America will continue to benefit from strong margins created by cost-advantaged NGLs.”

– LyondellBasell CEO Jim Gallogly

O&P Americas O&P Europe, Asia, Intl

Record EBITDA of $3.57bn EBITDA of $839m

Sales of $13.09bn Sales of $14.69bn

EBITDA margin = 27.3%Q1 2014 = 21.8%

EBITDA margin = 5.7%Q1 2014 = 9.4%

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US chemical prices track oil – NOT natural gas

R2 US IPEX, natgas = 2.9%R2 US IPEX, crude oil = 85.9%

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US petrochemical project update

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New US ethane crackers based on shale gasCompany Capacity Downstream Location Start-up Status

Chevron Phillips 1.5m tonnes HDPE, LLDPE Cedar Bayou, Texas

Mid-late 2017 Under construction

ExxonMobil 1.5m tonnes PE Baytown, Texas Late 2016 Permits complete

Dow 1.5m tonnesLDPE, other PE,

EPDM, elastomers, LAO (JV)

Freeport, Texas 2017Permitting,

construction expected Q3 2014

Sasol 1.5m tonnes LDPE, LLDPE, EO, MEG, det alcohols

Lake Charles, Louisiana 2017 Permitting; FID to

come in 2014

Formosa Plastics 1.0m tonnes LDPE, MEG Point Comfort, Texas Q1 2017 Permitting

Formosa Plastics 1.2m tonnes NA Louisiana NA Feasibility stage

OxyChem/Mexichem

544,000 tonnes EDC, VCM Ingleside, Texas 2017 Permits complete;

construction mid-2014

Axiall/Lotte 1.0m tonnes MEG Louisiana 2018 Permitting

Shell World-scale PE, MEG Monaca, Pennsylvania

2019-2020* Feasibility stage

Odebrecht World-scale PE Wood County, West Virginia NA Feasibility stage

Shintech 500,000 tonnes

NA US Gulf Coast NA Feasibility, permit ting

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More upcoming ethylene expansions

Company Capacity Location Start-up

INEOS 115,000 tonnesChocolate Bayou,

Texas2014

Williams 273,000 tonnes Geismar, Louisiana Jun 2014

LyondellBasell 363,000 tonnes La Porte, Texas Summer 2014

Chevron Phillips Chemical

91,000 tonnes Sweeny. Texas Fall 2014

Westlake Chemical 113,000 tonnesLake Charles,

LouisianaLate 2015, early 2016

LyondellBasell 113,000 tonnes Channelview, Texas Early 2015

LyondellBasell 363,000 tonnes Corpus Christi, Texas End 2015

Huntsman 19,300 tonnes Port Neches, Texas NA

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US polyethylene (PE) expansions

Company Project Capacity Grades Location Start-up

LyondellBasell Debottleneck 100,000 tonnes Unspec US Q1 2014

Sasol/INEOS New unit 470,000 tonnes HDPE US End 2015

Sasol New unit 450,000 tonnes LLDPELake Charles,

Louisiana2016

Sasol New unit 420,000 tonnes LDPELake Charles,

LouisianaNA

ExxonMobil New units (2) 1.3m tonnes PE (premium)Mont Belvieu,

TexasLate 2016

LyondellBasell New unit 454,000 tonnes Unspec US Late 2016

Chevron Phillips

New units (2) 1m tonnesHDPE, LLDPE,

otherSweeny, Texas 2017

Dow Chemical New units NAPE (high-

value), LDPEFreeport, Texas 2017

Formosa Plastics

New unit 300,000 tonnes LDPEPoint Comfort,

Texas2016

Shell New units NA UnspecMonaca,

Pennsylvania2019-2020*

Odebrecht New units (3) NA Unspec West Virginia NA

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US ethylene capacity could expand by 51%!

• 11 new crackers = 12.5m tonnes/year

9 on US Gulf Coast, 2 in Northeast US

• Plus 8 expansions at existing facilities = 1.4m tonnes

• TOTAL of 13.9m tonnes of new capacity, or 51% of existing capacity base, to 41.3m tonnes/year

• Even if only 7 US Gulf Coast crackers where capacities have been announced are built, plus expansions = 37% capacity increase

• US PE capacity could rise by 7.1m tonnes, or 47%, to 22.4m tonnes/year

• But question of… by WHEN?

Assumption: world-scale cracker at 1.25m tonnes/year

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2014 2015 2016 2017 2018 2019 20200

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7000

8000

Addi

tiona

l Cap

acity

, ‘00

0s to

nnes

/yea

rTiming of announced US ethylene expansions

Assumptions: ExxonMobil by 2017 rather than late 2016 as stated, Shell by 2019, Shintech by 2019, Odebrecht and Formosa 2 by 2020

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Planned US capacity expansion vs past cycles

Ethylene capacity, % increase

Note: 1997-2002 excludes NOVA’s cracker in Joffre, Alberta, Canada

%

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Engineering & construction (E&C) challenge

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Strain on E&C resources

• “What we found at the completion of our analysis was construction cost capital cost had gone up very, very dramatically since the time that we built our [PDH] plant… The cost of building a new plant, that very same plant as we had designed, was well in excess of $1bn (vs 640m for first plant).” – PetroLogistics exec chairman Nathan Ticach, Apr 2014

• “I think we’re going to be in a very difficult environment for new-build projects.” – Methanex CEO John Floren, noting potential US labor shortage of 30% in skilled trades, Jan 2014

• “It is clearly taxing the resource base to support that type of growth, whether it is looking for skilled workforce or the capacity of engineering companies, the capacity of critical equipment suppliers… Work is taking longer to progress. We're certainly seeing significant inflation in project costs.” – NOVA Chemicals CEO Randy Woelfel, Dec 2013

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US E&C cost cycle and peak craft labor demand

Peak Craft Labor Demand

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Downstream Construction Index, y/y chg.

-5%

-4%-3%

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0%1%

2%3%

4%5%

6%7%

8%9%

10%11%

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-95

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Source: Stifel Nicolaus

Heavy crude refinery upgrade cycle

Ethylene and LNG cycleHeavy crude refinery upgrade cycle

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But not just new crackers in the US…

• 8 new PDH plants, BASF’s new MTP plant (methane-to-propylene) – largest single-plant investment ever

• 10 new methanol plants in the US

• 8 major new fertilizer (ammonia, urea) plants

• 1 new major GTL (gas-to-liquids) facility by Sasol – massive $15bn investment

• 5 LNG export projects (non-FTA)

• Also natgas for power generation, new process for steel production, locomotive engines, municipal bus fleets, garbage trucks, some consumer vehicles (Ford F-150)

• ALL will be major consumers of natural gas

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On-purpose propylene plants – mostly PDH

Company Capacity Location Start-up

Enterprise (PDH) 750,000 Texas, US Q3 2015

Ascend Performance Materials (PDH)

1,000,000+Chocolate Bayou,

TexasQ4 2015

Dow Chemical (PDH) 750,000 Freeport, Texas, US 2015

Williams (PDH) 500,000 Alberta, Canada Q2 2016

Formosa Plastics (PDH)

658,000Point Comfort,

Texas, US2016

REXtac (PDH) 300,000 Odessa, Texas Mid-2016

Dow Chemical (PDH) New plant US 2018

PetroLogistics (PDH)Expansion

(marginal gain)Houston, Texas Jan 2015

Enterprise (PDH) New plant Texas, US NA

BASF (MTP) New plant US Gulf Coast 2019

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BASF methane-to-propylene (MTP) in the US

• BASF’s largest single-plant investment

• US Gulf Coast location, worldscale at ‘000s kt/year

• Conversion of Port Arthur JV cracker in 2014 to use more

ethane feed vs naphtha results in less propylene

• New MTP plant would fulfill much, if not all, of BASF’s

propylene needs in North America

• Under study but start-up targeted for 2019

1st of its kind based on ‘new technology’

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US MTP vs PDH economics

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Planned US methanol projects

Company Capacity Location Start-up

Methanex 1m tonnes Geismar, Louisiana End 2014

Celanese, Mitsui 1.4m tonnes Clear Lake, Texas Q3 2015

Methanex 1m tonnes Geismar, Louisiana Early 2016

OCI North America 1.75m tonnes Beaumont, Texas 2016

Valero 1.6m tonnesSt Charles Refinery,

Norco, Louisiana2016

South Louisiana Methanol

1.8m tonnesPort of South

LouisianaJan 2017

Northwest Innovation Works (BP, China)

1.6m tonnesColumbia River,

Clatskanie, OregonQ1 2018

Northwest Innovation Works (BP, China)

1.6m tonnesColumbia River,

Kalama, WashingtonQ1 2018

Lake Charles Clean Energy

1m tonnesLake Charles,

LouisianaNA

G2X Energy NALake Charles,

LouisianaQ1 2017

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New MLP structure for US petrochemical assets

• IRS ruling allows for olefins, methanol assets to be put into

Master Limited Partnerships (MLPs)

• Tax-free distributions to unitholders can make this asset

class more valuable

• Westlake Chemical Partners LP files for IPO – 1st of what

could be many chemical MLPs

• Includes 3 crackers, ethylene pipeline

• Westlake stock price up 20% in a week after filing

Makes these plants even more attractive to build

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US ethane export terminals – emerging threat

• Enterprise Products to build up to 240,000 bbl/day ethane export

facility on US Gulf Coast by Q3 2016.

• Signing supply contracts – INEOS confirmed

• Dwarfs Sunoco Logistics’ planned ethane export facility in Marcus

Hook, Pennsylvania of estimated 20-30,000 bbl/day – start-up 2015

• Enterprise ethane export capacity = 3 world-scale crackers

• Enterprise expects US ethane surplus to grow from 300,000 bbl/day

now to 700,000 bbl/day by 2020, even after new crackers

• Confirms US long position in ethane… but don’t take comfort in that!

Global petrochemical players to draw on US NGLs

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Capital spending cycles

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US chemical industry CAPX

$0

$10

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$bn

Shale gas boom

Source: American Chemistry Council

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CAPX vs depreciation

-100%

-80%

-60%

-40%

-20%

0%

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Dow DuPont Eastman LyondellBasell/Lyondell

NOTE: Above 0 = % CAPX higher than depr, below 0 = % CAPX below depr, Bars shown are capped at +100% and -100%

Downcycle and aftermath

Recovery

Financial crisis

Recovery

Strong spending post 1994-95 peak

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Global reaction and impact

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US shale gas ripple effect

• China - Sinopec halts Qingdao LPG cracker project, 2 other naphtha cracker projects reportedly at risk (3-4m tonnes/year of capacity)

• China to import US propane for PDH plants, and US methanol for MTO (methanol-to-olefins)

• Closures accelerate in Europe – crackers, PE plants

• Europe to import US ethane for some crackers – INEOS in Rafnes, Norway and Grangemouth, UK; others considering

• Latin America projects on hold, questionable if they will ever get built – Braskem’s Comperj in Brazil, Ecopetrol’s Cartagena cracker project in Colombia

Closures, delays, adapting feedstock strategy

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Europe cracker closures

Company Location Capacity Shutdown

Total Antwerp, Belgium (NC1) 250,000 tonnes 2013

Versalis Priolo, Italy (1 of 2 lines) 470,000 tonnes Aug-Sep 2013

INEOS Grangemouth, UK (G4) 320,000 tonnes Q1 2014

Total Carling, France 320,000 tonnes H2 2015

Repsol Puertollano, Spain 155,000 tonnes (reduction) 2015

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Europe polyethylene (PE) plant closures

Company Grade Location Capacity Shutdown

Versalis LLDPE Priolo, Italy 150,000 tonnes Sept 2013

LyondellBasell HDPE Wesseling, Germany

100,000 tonnes Q3 2013

Eni LDPE Gela, Italy 150,000 tonnes End 2013*

Total HDPE Antwerp, Belgium 70,000 tonnes End 2014

Borealis HDPE Burghausen, Germany

175,000 tonnes End 2014

Repsol HDPE Puertollano, Spain 90,000 tonnes 2015

* No formal confirmation from company

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Preparing for the flood of US imports

• Brenntag builds storage hubs at key European locations

• “We expect substantially bigger flows of products to arrive from the US by the end of 2015 and into 2016 when their projects come onstream. By then the US will play an even bigger role.” – Brenntag Europe CEO Karsten Beckmann, Dec 2013

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Asia perspective from APIC (May 2014)

• New world order: The global energy and feedstock map

has changed with the advantage in the US and Middle East

• Asia players want a piece of the US shale gas advantage

• Imports of US ethane for petrochemical production

• Building crackers and downstream in the US

• Acquisitions of advantaged US assets

• What can compete with US and Middle East gas? China

coal-to-olefins (CTO)… possibly

‘Transformation, a map redrawn’

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Where does CTO and MTO fit on the cost curve?

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Conclusions

• US footprint in global petrochemicals and derivatives to grow substantially. Up to 11 new crackers, 10 methanol plants, 9 on-purpose propylene facilities, plus downstream. Already 177 projects and $112bn in investment planned (ACC).

• Much of new production targeted for export

• Europe and Asia in particular will adapt investment models

• BUT huge challenges in US E&C resources and capital costs

• AND increasing demand draws on US natural gas (including from Europe and Asia) – don’t count on low prices forever

• Risk of overcapacity – US build-out is the ‘stuff cycles are made of’. Another risk is a big decline in crude oil prices.

Dramatic changes ahead!

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Thank you!

ICIS Chemical BusinessJoseph Chang, Global Editorjoseph.chang@icis.comwww.icis-subs.com+1 212 791 4224

ICIS ConsultingKarl Bartholomew (Americas)karl.bartholomew@icis.com+1 713 525 2605

Mike Perkins (Europe, Middle East, Africa)Mike.perkins@icis.com+44 (0)20 8652 8125

Ee Foong Ewe (Asia)Eefoong.ewe@icis.com+65 6780 4322

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