© 2013 Platts, McGraw Hill Financial. All rights reserved.

Shale gas, naphtha & the petchems conundrum

Shahrin Ismaiyatim Editorial Director, Petrochemical Analysis September 2013

Agenda

• Petchems market in review

– Fundamental changes

– US feedstock advantage

• Naphtha trade flows

– Where are the demand & supply centers

– Growth of US shale oil gives rise to LPG, naphtha exports to Asia

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Agenda

• Petchems market in review

– Fundamental changes

– US feedstock advantage

• Naphtha trade flows

• Where are the demand & supply centers

• Growth of US shale oil gives rise to LPG, naphtha exports to Asia

3

Platts Mumbai conference Aug 2012 recap

4

• Shale gas to flood global markets with ethylene, ethylene derivatives while dramatically cutting certain co-products

• Can lead to naphtha crackers becoming more competitive due to higher co-product credits

• Falling ethane prices could lead to ethane rejection, leading to more oil exploration

• New oil discoveries could narrow crude-natural gas delta, improving naphtha’s profitability as a petrochemical feedstock

• India’s naphtha surplus positions its petrochemical industry to take advantage of a dramatic shift to ethane cracker

Shale gas puts US back on petchems map

Source: Platts Petrochemical Analytics

Strong ethane margins promotes US projects

Source: Platts

US ethylene output to rise 30% in 10 years

With six new worldscale crackers: • Ethylene surplus to hit

2.1 million mt in 2018 • Climb as high as 2.9

million mt in 2019 and 2020.

With 10 new worldscale crackers: • Ethylene surplus to top 7

million mt through 2021 • Falling slightly in 2022

and 2023.

Source: Platts Petrochemical Analytics

Asia sees better cracking margins in 2013

8

Source: Platts

Europe’s margins recover but lags US

9

Source: Platts

Agenda

• Petchems market in review

• Fundamental changes

• US feedstock advantage

• Naphtha trade flows

– Where are the demand & supply centers

– Growth of US shale oil gives rise to LPG, naphtha exports to Asia

10

Naphtha trade flows, old & new

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Why US is exporting naphtha? • Flat gasoline

demand • Cheap natgas

feedstock

US ethylene output by feedstock forecast

12

BASE CASE Ethane Propane Butane Naphtha

Full-range

Naphtha Gas Oil

Total

Ethylene

Produced Capacity Run Rate

2011 15826 4862 777 1955 1150 607 25177 26194 0.96

2012 15848 5549 823 1895 1168 575 25858 26226 0.99

2013 15612 5626 650 1849 1125 534 25396 27720 0.92

2014 17184 4493 715 1833 1022 502 25749 28105 0.92

2015 18005 4399 840 1800 926 466 26436 28219 0.94

2016 18316 4411 842 1714 896 433 26612 28219 0.94

2017 21099 4399 840 1604 863 417 29222 33208 0.88

2018 24402 4399 840 1594 845 406 32486 38493 0.84

2019 25315 4399 840 1562 863 395 33374 38493 0.87

2020 25384 4411 842 1518 869 381 33405 38493 0.87

2021 25314 4399 840 1469 826 363 33210 38493 0.86

2022 25313 4399 840 1385 791 331 33058 38493 0.86

2023 25313 4399 840 1377 763 342 33033 38493 0.86

• Ethane to account for 77% of all US ethylene produced in 2023, up from 61.5% in 2013

• Use of naphtha as petchems feedstock in the US to decline as a result

Source: Platts Petrochemical Analytics

Asia naphtha premium attracts US cargoes

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Source: Platts

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Price Reporting

Breaking News

Assessments

Market Reports

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000Top 10 naphtha suppliers to Japan 2012

Source: Japan Customs

Japan’s naphtha trading partners

Korea’s naphtha trading partners

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Price Reporting

Breaking News

Assessments

Market Reports

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

Top 10 naphtha suppliers to Korea 2012

Source: Korea Customs

Taiwan’s naphtha trading partners

16

Price Reporting

Breaking News

Assessments

Market Reports 0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Top naphtha suppliers to Taiwan 2012

Source: Taiwan Customs

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India naphtha production volumes

Price Reporting

Breaking News

Assessments

Market Reports

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

02-'03 03-'04 04-'05 05-'06 06-'07 07-'08 08-'09 09-'10 10-'11 11-'12

‘000 mt

Source: Petroleum Planning & Analysis Cell, fiscal year April 1-March 31

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Price Reporting

Breaking News

Assessments

Market Reports

0

2,000

4,000

6,000

8,000

10,000

12,000

02-'03 03-'04 04-'05 05-'06 06-'07 07-'08 08-'09 09-'10 10-'11 11-'12

'000 mt

Source: Petroleum Planning & Analysis Cell, fiscal year April 1-March 31

India naphtha export volumes

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Strong US NGL output leads to high stocks, exports

NGLs production poised to grow by 1.5 million b/d in the next 6 years

Spurt in ethane, propane output causes supply glut, stocks overhang

Prices at historical lows toward end of 2012

US NGLs forecast

Source: Bentek, a unit of Platts

Naphtha exports from US may increase too

• Eagle Ford shale production to hit nearly 1 million b/d in 2013

• Of that, 30-50% of crude expected to be condensate

• Naphtha production expected to outpace US domestic demand

• More condensate splitters in the US = more naphtha

• US domestic naphtha likely to be exported to world markets

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US to become largest oil producer by 2020

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Alberta Saskatchewan

Alaska Bakken

Utica Anadarko

Rockies California

Permian

Eagle Ford

Asia dumping ground for naphtha

• Asia traditionally short of 500,000-700,000 mt/month of naphtha

• Have been able to absorb more than 1 million mt from NWE, the Med and US

• Exact monthly volume of US naphtha to Asia on regularly remains hazy, restricted by long journey times

• Naphtha needs to compete with LPG as petchems feedstock

• NE Asian petrochemical producers regularly replaced naphtha with LPG when LPG price is less than 95% of naphtha

• In Q2, Asia LPG prices around 90% of naphtha price

• Similar situation in Europe – Dow Chemicals, BASF, Borealis and SABIC have all been regular importers of propane to use as feedstock

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Co-products output via ethane forecast

23 Source: Platts Petrochemical Analytics

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Ethane Demand (MT/year) 19,437,459 19,658,292 20,890,497 22,312,795 22,567,827 23,074,784 26,985,856 33,907,080 35,021,562 35,359,404 34,948,837 35,551,901 35,001,656

ETHYLENE PRODUCED 15,079,487 15,250,809 16,206,747 17,310,159 17,508,012 17,901,307 20,935,498 26,304,950 27,169,560 27,431,656 27,113,139 27,580,994 27,154,116

PROPYLENE PRODUCED 542,862 549,029 583,443 623,166 630,288 644,447 753,678 946,978 978,104 987,540 976,073 992,916 977,548

CRUDE C4 PRODUCED 542,862 549,029 583,443 623,166 630,288 644,447 753,678 946,978 978,104 987,540 976,073 992,916 977,548

BUTADIENE PRODUCED 376,987 381,270 405,169 432,754 437,700 447,533 523,387 657,624 679,239 685,791 677,828 689,525 678,853

RAFFINATE-1 PRODUCED 165,874 167,759 178,274 190,412 192,588 196,914 230,290 289,354 298,865 301,748 298,245 303,391 298,695

PYGAS PRODUCED 331,749 335,518 356,548 380,823 385,176 393,829 460,581 578,709 597,730 603,496 596,489 606,782 597,391

BENZENE PRODUCED 165,874 167,759 178,274 190,412 192,588 196,914 230,290 289,354 298,865 301,748 298,245 303,391 298,695

TOLUENE PRODUCED 30,159 30,502 32,413 34,620 35,016 35,803 41,871 52,610 54,339 54,863 54,226 55,162 54,308

XYLENE PRODUCED - - - - - - - - - - - - -

OTHER AROMATICS PRODUCED 135,715 137,257 145,861 155,791 157,572 161,112 188,419 236,745 244,526 246,885 244,018 248,229 244,387

GAS OIL PRODUCED - - - - - - - - - - - - -

HYDROGEN/FUEL PRODUCED 2,940,500 2,973,908 3,160,316 3,375,481 3,414,062 3,490,755 4,082,422 5,129,465 5,298,064 5,349,173 5,287,062 5,378,294 5,295,053

CRACKER CO-PRODUCT PRODUCTION FROM ETHANE

With Pygas production accounting only 5% of the output, this will adversely impact US aromatics production

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Natural gasoline Demand (MT/year) 9,179,312.70 6,316,011.57 6,876,230.01 7,067,731.46 6,861,241.87 6,844,338.45 6,876,804.75 6,850,040.95 6,882,687.97 6,850,685.27 6,878,359.18 6,855,592.48 6,875,582.02

ETHYLENE PRODUCED 3,176,232.77 2,185,471.13 2,379,318.34 2,445,581.82 2,374,132.14 2,368,283.20 2,379,517.22 2,370,256.38 2,381,552.93 2,370,479.33 2,380,055.08 2,372,177.33 2,379,094.12

PROPYLENE PRODUCED 1,467,419.54 1,009,687.66 1,099,245.07 1,129,858.80 1,096,849.05 1,094,146.84 1,099,336.95 1,095,058.45 1,100,277.45 1,095,161.45 1,099,585.45 1,095,945.93 1,099,141.49

CRUDE C4 PRODUCED 828,996.75 570,407.97 621,002.09 638,296.85 619,648.49 618,121.92 621,053.99 618,636.92 621,585.31 618,695.11 621,194.38 619,138.28 620,943.57

BUTADIENE PRODUCED 431,967.66 297,224.07 323,587.29 332,599.13 322,881.97 322,086.52 323,614.34 322,354.87 323,891.20 322,385.19 323,687.49 322,616.12 323,556.80

RAFFINATE-1 PRODUCED 397,029.10 273,183.89 297,414.79 305,697.73 296,766.52 296,035.40 297,439.65 296,282.05 297,694.12 296,309.92 297,506.88 296,522.17 297,386.77

PYGAS PRODUCED 1,756,456.72 1,208,565.54 1,315,763.04 1,352,406.75 1,312,895.07 1,309,660.61 1,315,873.02 1,310,751.78 1,316,998.77 1,310,875.07 1,316,170.46 1,311,814.06 1,315,639.05

BENZENE PRODUCED 635,246.55 437,094.23 475,863.67 489,116.36 474,826.43 473,656.64 475,903.44 474,051.28 476,310.59 474,095.87 476,011.02 474,435.47 475,818.82

TOLUENE PRODUCED 314,447.04 216,361.64 235,552.52 242,112.60 235,039.08 234,460.04 235,572.20 234,655.38 235,773.74 234,677.45 235,625.45 234,845.56 235,530.32

XYLENE PRODUCED 165,164.10 113,644.50 123,724.55 127,170.25 123,454.87 123,150.73 123,734.90 123,253.33 123,840.75 123,264.93 123,762.86 123,353.22 123,712.89

OTHER AROMATICS PRODUCED 641,599.02 441,465.17 480,622.31 494,007.53 479,574.69 478,393.21 480,662.48 478,791.79 481,073.69 478,836.82 480,771.13 479,179.82 480,577.01

GAS OIL PRODUCED 177,869.04 122,386.38 133,241.83 136,952.58 132,951.40 132,623.86 133,252.96 132,734.36 133,366.96 132,746.84 133,283.08 132,841.93 133,229.27

HYDROGEN/FUEL PRODUCED 1,772,337.89 1,219,492.89 1,327,659.63 1,364,634.66 1,324,765.73 1,321,502.03 1,327,770.61 1,322,603.06 1,328,906.54 1,322,727.47 1,328,070.73 1,323,674.95 1,327,534.52

CRACKER CO-PRODUCT PRODUCTION FROM NAPHTHA and NATURAL GASOLINE

Co-products output via naphtha forecast

24 Source: Platts Petrochemical Analytics

By comparison, aromatics output from naphtha trumps ethane

Conclusion

• Naphtha remains a very viable alternative for petchem producers in Asia

• Co-products like aromatics more yield from naphtha

• US naphtha exports to rise on poor domestic demand, high stocks

• NE Asian petrochemical producers have more cracking choices depending on price of naphtha versus LPGs

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Thank you

Shahrin Ismaiyatim Editorial Director, Petrochemical Analysis Tel: +44-207 176 6264 Email: shahrin@platts.com