SUPPLEMENT TO AUTHORITY TO NEGOTIATE

TRINIDAD EAST BU - ATLAS PROJECT

This document is a supplement to the Atlas megamethanol Authority to Negotiate submission. There are several BPA Group strategic issues that arise from executing Atlas. We have been asked to address those issues within a broader context. The primary objective of this document is to answer the questions in order to fulfill the requirements for Authority to Negotiate. It may well also serve later as a template to formulate a more comprehensive Group strategy for methanol.

Methanol/Atlas AtN Questions

1) What is the future of methanol?

a) Traditional markets?b) Emerging markets? New technologies?

2) What is BPA's methanol strategy in light of the future described above?

a) Should we invest in methanol production?b) Do we have the skills, knowledge, and technologies to compete? c) Do we have a competitive advantage and can it be sustained?d) What would it take to acquire a leadership position?

3) How does an investment in Atlas fit with BPA's methanol strategy/upstream strategy?

a) Is methanol aligned with our core business strategies? b) What are the alignment/coordination issues along the value chain? c) What are the value chain economics for Atlas specifically?

4) Is Atlas a good investment? What are its returns and risks?

a) Why is it project financed?b) Who are our partners? What are their strengths/weaknesses?c) Who is the technology provider? Who will build it?d) Are we sending the right signals to the industry?e) What are our options to exit?f) What are our options to expand? g) What happens if the methanol market falls apart? Does Atlas survive? Does Trinidad as a

methanol producing country survive? h) How does megamethanol compare with LNG?i) How does methanol compare with LNG as a power fuel in conventional turbines?

1. WHAT IS THE FUTURE OF METHANOL?

The methanol industry is in the initial stages of a radical restructuring process. There has been much faster growth in global supply than demand. This trend has been accelerated by projects built to monetise associated or stranded gas. The traditional markets for methanol are oversupplied and will not support all of the capacity that is in place and coming on line in the next few years.

It is possible today to build 5000 ton/day single train megamethanol plants (2 times current world scale) that can profitably produce methanol at about $90 (flat MOD) per ton (using $0.85 (flat MOD) per mmbtu). These types of plants combined with efficient transportation are setting a new cost standard for methanol. Older, smaller plants operating on higher cost gas are not competitive and will fall by the wayside.

The new lower cost structure for methanol is also driving another change in the industry. It is providing the opportunity to open very large new markets.

Several technologies have been developed over the years for converting methanol to higher value chemicals or fuels. Methanol can be used to produce light olefins (ethylene/propylene). It can be used as a feedstock for specialty fuel components (e.g., triptane, poly DMM) in gasoline or diesel. Methanol is also emerging as a candidate for several applications as a fuel cell fuel. Many of these applications have the potential to grow well beyond the size of today’s total methanol business.

The drop in the cost of methanol production is stimulating the interest of new players that have the skills and the size to develop these new markets. Their drivers include gas monetization, clean fuels and possible feedstock or strategic advantage in producing base chemicals. Depending on the relative success and speed of introduction of new markets based on low cost methanol, aggressive new players will create a new structure for the methanol industry in the medium term and become the new leaders.

Capital Costs

World Methanol Plants EPC Cost Comparison(by CMAI/Amoco, 8Sept.98)

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These are the results of a CMAI benchmarking study of methanol construction costs. The Titan plant in Trinidad is nearing completion and is on budget to come in around $275 per ton capacity. The Atlas megamethanol plant (at twice the capacity) has been bid at about $175 per ton capacity.

Cash Costs

The cash cost curve from a recent CMAI study on the global methanol industry illustrates the significant operating cost advantage of the new plants once they are built. These are the cash costs of operating the plant to produce methanol (feedstock, operating costs). The Trinidad plants are shown with circles on the lower part of the curve. Titan is the newest and most advantaged of the Trinidad plants. Once Atlas is built, its cash costs will be slightly lower than Titan. Those plants with a lower cash cost than Atlas/Titan pay less for their gas.

1a) TRADITIONAL MARKETS

Current methanol demand is about 27 MM tons per year and has shown a steady growth rate of 5% since the mid 80s. The overall growth rate of demand in traditional methanol uses is projected to slow to 2.8% through 2003. It may even decline over the next few years depending on MTBE. Slower growth in Asia and decline in MTBE use are two of the major factors contributing to the lower expectations.

The three major existing markets for methanol are formaldehyde, acetic acid and MTBE. Together, they comprise about 70% of today’s market. Formaldehyde is the largest (9.5 MM tons per year) and is growing at about 2-3% per year. Acetic acid requires about 2 MM tons per year. Methanol use for acetic acid is growing at about 5% per year. BP Amoco is one of the two largest players in this application.

MTBE is the most uncertain of the traditional markets. It currently consumes about 7.5 MM tons per year of methanol (3.5 MM tons per year in the U.S.). It has recently been under attack in California for ground water contamination issues. In June, the California government announced their intention to phase out MTBE use in reformulated gasoline by end of 2002. In July, the EPA announced a new MTBE policy. Although there will not be a ban on MTBE, EPA will encourage “prompt and substantial” reduction in the use of MTBE in gasoline and they will work with Congress to change the Clean Air Act to facilitate this reduction. There is uncertainty over how fast this might happen, the eventual loss of US market and what effects this will have on other MTBE markets. Outside the US, the octane value of MTBE is more important than any regulated clean air mandate, so this will tend to support continued use at some price as the cost of methanol falls. However, one likely scenario for MTBE is that the US market will dramatically

shrink over the next three years and the rest of world will be flat or declining. Developments are occurring at such a pace that the range of scenarios and their relative likelihood will become clearer during the next few months as the Atlas project is progressed. However, the potential effects of such a substantial loss of market is one of the risk factors for the Atlas project. This will be addressed clearly in the Atlas marketing strategy and revenue projections.

World Methanol Demand

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MTBE29%

The outlook for the current players in the methanol industry is gloomy. The negative shift in perspective during the last year is reflected in the change of price projections by CMAI shown on the graph below. Slower growth in Asia, potential loss of MTBE market and excess capacity from new low cost plants are all factors that are driving down the floor price and the expected mid-cycle price.

Capacity utilization is projected to sink to the mid 70% range during the next few years. Prices will almost certainly reside in the lower end of the historical range ($100 - $200 per ton) during this period. This will force shutdown of older plants high on the cost curve (a process which has already begun, as the gas supply to many of these plants has alternative uses). Where high cost plants are fed by gas without ready alternative uses, there will be pressure on resource owners to reduce the price of gas.

Even the strongest players are likely to suffer a period of low profitability during this shakeout. The winners will be those that combine a low cost manufacturing position with advantaged logistics and commercial excellence.

Methanol Prices - CMAI

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1b) EMERGING MARKETS/NEW TECHNOLOGIES

METHANOL TO OLEFINS (MTO)

Technology to produce ethylene and propylene from methanol has been developed over the past 20 years. It is claimed that methanol-to-olefins (MTO) becomes economically attractive at methanol prices $100 per ton or below. This hypothesis will probably be tested within the next few years as methanol projects are built that will meet that standard.

If MTO technology is commercialized, it has several attractive characteristics. It allows production of olefins directly from natural gas without necessity for NGL recovery or large associated markets for methane (a problem that may exist in Trinidad). It is possible to swing the ratio of ethylene to propylene over a fairly wide range (allowing flexible response to market conditions or different relative growth rates). From wellhead to product, it produces less CO2 and NOx than current olefin production technology.

We have developed a consensus view on the probable near term future of MTO with the technology groups from both of our Olefins BU’s. Key points from this overall perspective are:

MTO will probably work. It is likely to be commercially proven at some site in the next 3-5 years. Over the ensuing 5-10 years, it will probably capture some increment of global growth of olefins. (Note that one world scale cracker would require feed from about 2 projects the size of Atlas.)

The fraction of growth captured by MTO will probably be more dependent on low cost methanol than on the capital costs of MTO technology, per se. The necessity for low cost methanol, in turn, will increase price competition among stranded gas resource owners.

Based on our current understanding of the technology, greenfield MTO plants will not be competitive in Europe or North America. The markets are already well served from large ideal sites that have established economy of scale, advantaged logistics and access to feedstocks for existing technology.

MTO may be attractive where insufficient quantities of ethane exist or gas is distress priced, as long as the other value drivers are available: (a) “Atlas” type plant economies of scale, both in capital and production costs; (b) effectively zero methanol freight costs, with methanol consumed directly across the fence in a dedicated MTO complex; (c) a co-located world scale olefins complex; and (d) co-located world scale olefins derivatives . The Middle East, Asia, Australia, South America and Africa might provide attractive sites, but further market analysis is necessary. Since the investment across this chain of projects would be multiple billions of dollars, a firm understanding of political risk in the location is also essential.

MTO could pose a threat to Middle East and other remote location ethane-based projects by offering propylene derivative(s) in addition to ethylene derivative(s).

There are a wide range of opinions on the eventual importance of this technology as an advantaged source of petrochemical feedstocks and as a gas-to-markets route. Dialogue across the Group has started to identify and evaluate the portfolio of opportunities from the combined perspectives of gas resources, technology and markets across the whole value chain.

There are two major technologies under development as far as we know.

Exxon is moving toward commercializing their own technology. They are building a demonstration plant in Baytown that is scheduled for startup in August. If this is successful, their current plan is to construct a full size unit (over 2000 tons per day) in Baytown by 2003 (this project was the original motivation for the Atlas megamethanol project). Following the Baytown full-scale project, Exxon/Mobil will be prepared to construct complete gas-to-olefins complexes. They are doing paid engineering studies with at least two leading contractors for methanol production as high as 5 MM tons per year (equivalent to about 1/6 of current world capacity). Their target for a first site is Saudi Arabia.

Recent information is that Exxon is evaluating the possibility of going directly from their demonstration plant to a full scale project in Saudi Arabia (skipping the larger Baytown project). They reportedly will make that decision in the first half of next year based on the results from the demo plant. This would eliminate a primary source of the potential demand for Atlas methanol.

UOP and Norsk Hydro have jointly developed a MTO process that has been available for license since late 1995. It was not commercialized then because methanol prices had just hit all time highs (up to $500 per ton) in the previous year. In the current environment of low cost expectations for methanol, interest has revived, but most of the current players in methanol are not willing to lock in long term contracts for methanol at $100 per ton. Current competitors find it more desirable to shut down plants and wait for improved prices, than to lock in such low prices long term. Commercialization of this technology will require a player (or an alliance) with very low cost methane, and the ability to make methane into olefins and derivatives without concern for “protecting” the historical price of methanol in the traditional chemical markets. In addition to our own investigation of this technology with Norsk Hydro, we are aware of studies ongoing for commercialization of MTO in West Australia (Gorgon), Egypt and Trinidad (associated with the ethylene/PE project being pursued by Nova and Equistar).

Comparative Size of Ethylene and Methanol Markets

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Current global ethylene capacity is about 85 MM tons per year. Growth is projected to be at least 4% per year (about 3.5 MM tons per year). Production of 3.5 MM tons of ethylene (one year’s growth increment) would require 14 MM tons of methanol (which is about half of current world methanol capacity). Obviously, this will not happen within one year. But, if MTO does become an important commercial process and start to capture a substantial fraction of global olefin growth, it could double the volume of the “methanol business” within a few years.

TRANSPORTATION FUELS - “DESIGNER” FUELS

There are at least two active R&D programs in BP Amoco that might lead to specialty fuel components using low cost methanol as a feedstock. Triptane is a highly branched molecule with very high octane that might be used as a premium aviation gas. Poly-DMM is essentially a chain of 4-8 methanol monomer units. Blends of 10-20 wt% poly-DMM into diesel are projected to be a cost effective means to reduce particulates and other diesel emissions. Both of these projects are considering low cost methanol as a strong candidate from which to manufacture the product at reasonable cost.

Although both of these products are in an early phase of R&D with issues to work out on technology/catalysis and product development/acceptance, they are real world examples of the type of new uses that may open up for gas/methanol at the lower cost structure to be demonstrated by the Atlas project. If poly-DMM is successful economically in the high value use to which it is targeted, the size of its relevant markets is more than 10 times larger than today’s methanol market. One of the biggest advantages that these types of fuel products have is that they can be introduced gradually to the market within the existing distribution infrastructure at the rate that product becomes available.

TRANSPORTATION FUELS - FUEL CELLS

Methanol is mentioned often these days as a preferred fuel for fuel cells in transportation uses. The car companies are spending several hundreds of million dollars developing fuel cell cars for introduction in about 5 years. Many of them are currently focusing their near term efforts for introduction of this technology on methanol as the fuel. The primary reason is that it is easier to produce hydrogen from methanol than any of the other commonly available liquid fuels. It is even possible to produce electricity directly from methanol in a fuel cell without having to react it in a separate reformer to produce the hydrogen. The early versions of these so-called “direct methanol fuel cells” will probably be commercialized in small applications in the next few years.

There are several issues that will have to be resolved if methanol is to be used in large scale for transportation fuel cells. The first is the macro issue of whether fuel cell cars ever do actually develop to the point that they can take large market share away from internal combustion technology. If that does occur, then a fueling infrastructure for the chosen fuel will have to develop in parallel with creation of the market for the cars. A fueling infrastructure for methanol would almost certainly be more expensive than for a hydrocarbon more closely related to gasoline (although both would be much less expensive than a hydrogen distribution system). Methanol also has some issues to resolve with regard to flame luminescence, water solubility and toxicity.

The perspective from BP Amoco’s downstream experts is that methanol is currently in the lead in the minds of the car companies, but it is too early to tell whether fuel cell cars will be fueled with methanol or some hydrocarbon similar to a very low sulfur gasoline. It will take a couple more years to prove whether or not it will be possible to produce clean hydrogen from hydrocarbons using an onboard reactor. Unless it is proven that naphtha conversion is not practical, it is considered unlikely that any of the major oils will commit to building a substantial infrastructure to supply methanol.

Fuel cells could obviously be a huge market for methanol if these developments occur. Every 2 million fuel cell cars on the road would use the equivalent of one world scale plant (2500 tons per day). If this does develop in the 5 - 20 year time frame into a major methanol market, it is clear that the companies or alliances with experience in megamethanol technology will have a clear advantage in figuring out how to produce and deliver the fuel into the industry.

2) WHAT IS BPA'S METHANOL STRATEGY IN LIGHT OF THE FUTURE DESCRIBED ABOVE?

At present, there is no formal Group strategy for methanol. Tactically, we are making limited investment to stimulate profitable gas sales and preserve options for expansion into new markets. This approach has allowed us to build knowledge and capability in critical areas of emerging technology with modest investment and commitment. As developments occur over the next several years, we are positioned to either divest or to expand more aggressively into market development or additional manufacturing. In either case, the profitable gas sales contracts from the original projects will remain with us.

This approach is the result of simply aligning our strengths in Trinidad. We are the largest gas supplier at a time when Trinidad is the most advantaged location in the world for production of methanol (in terms of balance of gas price, local government support for industrial development, logistics, etc.) into the US or European markets. Methanol production then becomes an obvious way of commercializing our resources.

These developments have been reviewed periodically between Chemicals and E&P. The traditional markets for methanol have never been attractive from a Chemical stream strategic perspective, so the market development for these plants has been left to external partners already in the traditional methanol business.

If we elect to develop a more active Group strategy for methanol, some of the near term tactical options to be considered are: Develop a more coordinated approach across the BPA Group for creating methanol markets to our own

advantage

Strengthen relationships with the companies that we believe will carry the industry across the transition to low cost production

Define the portfolio of opportunities that exist around the world for methanol to olefins (modeled after our existing portfolio of potential ethane cracker projects.)

Incorporate methanol, MTO and production of other derivatives into the Group Ideal Site model to allow us to develop opportunities for integrated sites and determine the capital and operating cost advantages

2a) SHOULD WE INVEST IN METHANOL PRODUCTION?

Investment in megamethanol production provides us with the following: Profitable gas monetization in a gas surplus area. Understanding of methanol cost structures and low cost technology. A hedge against price spikes for our acetic acid business. Critical knowledge required to create integrated methanol/derivatives complexes (e.g. MTO or

methanol to poly DMM) Part ownership and control of the world’s first megamethanol plant in the event that methanol does

become an important fuel in the emerging hydrogen economy.

Based on the above benefits an investment in methanol production in Trinidad provides not only a gas commercialization route in the short term but also potential options and positioning for the future in MTO and fuels.

2b) DO WE HAVE THE SKILLS, KNOWLEDGE, AND TECHNOLOGIES TO COMPETE?

We currently participate in the methanol business (at the Texas City Sterling facility). Our competitive position is not very strong due to feedstock and scale disadvantage. We do, however, have excellent skills and knowledge of the current technology and the business in the traditional markets. This will be very important to us if we decide to expand our participation into the much larger markets that may develop for low cost methanol.

A primary objective we have for our Titan/Atlas partnership with Saturn is to enhance our skills and knowledge as we create a low cost, advantaged position from which to build future options. Due to our strategy of providing the minimum resources necessary to facilitate the methanol projects, our involvement has been limited to a strong representation on the Boards of the partnerships. If we choose to pursue a more aggressive strategy on methanol, we have the option to place some of our personnel directly into key positions in Atlas. These people could later be moved out to implement ideal site opportunities.

2c) DO WE HAVE A COMPETITIVE ADVANTAGE AND CAN IT BE SUSTAINED?

Compared to current methanol players we have a competitive advantage (as do several other big oil companies). The competitive advantage is our ability to integrate the value chain upstream and downstream of the methanol plant.

Upstream: Gas development and long term project expertise Gas monetization drives

Markets: Knowledge and capabilities in the fuel and petrochemical businesses that represent the new markets for

low cost methanol. Widely based technology and R&D community to apply to new technology routes and products (for

development, evaluation/acquisition and commercialization) We are currently one of the largest purchasers of methanol in the world and we understand the

business

General: Ability to coordinate projects that span the value chain from gas to chemical or fuel products Global presence and credibility Financial strength

Compared to our big oil competitors, we have the opportunity to develop competitive advantage through participation in Atlas and a proactive approach to developing the new markets that Atlas might open up.Areas in which we could develop advantage if we choose to pursue them are:

Superior knowledge of the new markets and how to build a value chain to serve them Faster to identify opportunities Better at capturing synergies More successful negotiation to capture value for BP Amoco More efficient project execution

New country entry based on attractive “integrated offer” for producing chemicals and clean fuels from methane

Know how developed from implementing megamethanol or derivative technologies such as MTO Lower capital costs for subsequent projects Possible patents for enhancements and next generation technology (including use of some of

our own developing technologies such as the KPT/BPA Compact Reformer) More efficient operation of plants (ahead on the “learning curve”)

Better design of integrated complexes incorporating combinations of these technologies (integration synergies, infrastructure and utilities savings, joint operations)

(NOTE: these are also areas in which we could find ourselves at a disadvantage. Exxon is apparently already ahead of us on MTO.)

2d) WHAT WOULD IT TAKE TO ACQUIRE A LEADERSHIP POSITION?

In the traditional markets:

Low cost delivery to the major world markets Gas price Transportation cost Capital cost

In the new markets that could emerge:

Ability to offer packaged energy or feedstock solutions for a country (“integrated offer”), although the size of the in-country market will be critical to the economics

Ability to capture value in building the larger markets Larger, lower cost facilities Long term relationships with partners and customers Logistics for intermediate products can be optimized for dedicated service

Access to low cost methanol production technology Proven technology for conversion of methanol to chemicals or fuels Lower emissions vs conventional processes Develop credibility with host governments, potential customers, regulatory agencies and other crucial

stakeholders

3) HOW DOES AN INVESTMENT IN ATLAS FIT WITH BPA'S METHANOL STRATEGY/UPSTREAM STRATEGY?

As mentioned we have no formal methanol strategy, thus we looked at methanol’s alignment with our core businesses and the potential value chains methanol supports.

3a) IS METHANOL ALIGNED WITH OUR CORE BUSINESS STRATEGIES?

The evolution of the methanol business to a lower cost structure and broader markets can support several of BPA’s strategic imperatives.

Monetizing gas - To the extent we are able to create large new markets for methanol, we have succeeded in providing new routes to take gas to the market. If we are able to direct where these new markets will locate we will have created an important, distinctive advantage.

Clean fuels and new hydrocarbon based fuels and products - Methanol is a simple building block from which it is possible to create high value fuel components with desired attributes. Triptane and poly-DMM are just two examples. The flexibility to design specific molecules for fuel blending will become increasingly important as the constraints on standard fuels are tightened in the future.

Methanol is also a very good candidate for several niche applications as a liquid hydrogen carrier for the early stages of the Hydrogen Economy.

Green agenda - To the extent that methanol facilitates the implementation of more efficient power generation (such as fuel cells) or more selective catalytic processes to produce chemicals, it can be utilized to reduce emissions including CO2. For instance, the MTO process can be a significantly lower CO2 emitter (and much lower NOx) than furnace cracking.

Syngas to chemicals - MTO has the potential to change the competitive dynamic for the petrochemical business in growth areas of the world that require new infrastructure for feedstocks and conversion to chemicals. If methane can be converted to olefins via methanol, there are several new regions in the world that will have a viable feedstock source to support world scale polyolefin complexes (subject to market conditions). Large scale implementation of megamethanol and MTO technology is likely to stimulate catalyst and process development to produce additional chemical products from syngas and/or methanol.

3b) WHAT ARE THE ALIGNMENT/COORDINATION ISSUES ALONG THE VALUE CHAIN?

The value chain from gas field through megamethanol to olefins and derivatives will be very complex to build up and to manage. Each step involves large capital outlays, significant risk (whether exploration / production, technology or commodity market cycles) and differing cultures and business models. Due to the scale of the methanol and chemicals investments required for economic projects, each step will tend be closely coupled to the others for its ability to operate and generate return.

The Atlas value chain is a good specific example of the diversity of interests, economic expectations and strategic drivers. Upstream has established a gas sales project with a very attractive 28% IRR with the primary exposure being default of the Atlas project. Atlas itself is a highly leveraged and complex partnership led by an entrepreneur seeking to establish a new set of rules in the methanol business. Atlas will probably accept nominal cost-of-capital returns across the cycle but will be vulnerable to prolonged negative market conditions or difficulties with a large contract buyer (such as for MTO). This can bring pressure to bear on the gas sales contract. The largest portion of the Atlas output will go to establish a new technology for producing commodity chemicals into very competitive markets. The MTO player (whether Exxon or another) will probably have to set up their project as a “stretch” project that is justified on marginal returns plus option value from establishing the technology. However, once in operation, it will be managed in an organization that is used to optimizing returns partly by balancing feedstock slates and prices at the expense of suppliers.

Consequently, we believe there is significant potential in these projects for miscommunication and strategic alignment problems with the multiple external partners, but also internally. Even in established cross-stream operations which have liquid markets and transparent prices (refinery aromatics to PX to PTA for example), it is sometimes difficult to agree how to optimize the system. This will be even more

complicated in a “change the rules” value chain such as Atlas with new business interfaces, new external partners for various parts of the business and evolving expectations of value of the intermediate products.

We think that one of the potential advantages that a company of our size and breadth can bring to this opportunity is cross stream understanding and optimization of the entire value chain as a system. We propose to use our dialogue on this subject for the Atlas project as a prototype for more general mechanisms that might be used for similar projects.

The first step in this dialogue is understanding the total value creation potential from methane to olefins, without looking at interim prices. This will help us understand the total opportunity that will be divided between the national resource owner, investors/financiers in methanol and olefins, and the BPA Group.

Assuming that there is a strong value opportunity in the entire chain, we then need to understand the potential risk/rewards available for given segments of the chain and the various players in each segment in order to optimize how the Group participates.

For an olefins producer, that risk/reward tradeoff has the following elements:

commercially unproven technology, rationally requiring a premium investment return potential for the technology to unlock a sustainable lower cost feedstock than naphtha or E/P, which

would generate higher returns but also results in a higher sensitivity to feedstock price risk.

Chemicals has been considering how we might participate in off-take from Atlas for a MTO project in Chocolate Bayou (both as a way to support the Atlas project and a means to commercialize the technology in a location where we have expertise and infrastructure to support the development). Early on in that process, we would like to have a discussion with the Upstream about how the other players in the Trinidad value chain (Government of Trinidad, Saturn, Atlas financiers, etc.) might agree to deal with the olefins risk/reward tradeoffs we face (as does Exxon Chemical).

We may or may not be able to make a Chocolate Bayou MTO project work in the Atlas time frame, but this type of dialogue will almost certainly generate new knowledge about the value chain and begin the process to establish the common mental models between the businesses about this set of opportunities.

3c) WHAT ARE THE VALUE CHAIN ECONOMICS FOR ATLAS SPECIFICALLY?

For purposes of evaluating the dynamics and the robustness of the overall value chain specifically for the Atlas project, we have calculated value chain returns from gas through to olefins for two situations - an Exxon case (prototype of Exxon Baytown MTO demo plant) and a Norway case (prototype of Norsk Hydro demo plant). For the Norway case, we have used two sets of price sets for olefins. The high case is based on price expectations from our Olefins group in early summer when negotiations were opened with Norsk Hydro. At the time of these negotiations, this seemed to be in line with the expectations that Norsk Hydro had. They have not indicated a change in their expectations, so we are using that as the base case. Since that time, BP Amoco has lowered expectations for olefins prices in Northwest Europe, so we present that as the low case.

These overall calculations are based on E&P’s direct, specific knowledge of the economics and the capital costs of the upstream and megamethanol links in the value chain added to reasonable assumptions of the economics and capital costs of MTO based on non-confidential information obtained from UOP and Saturn’s initial negotiations with Exxon and Norsk Hydro. The basis of these models as well as access to sensitivity studies can be obtained from the Atlas team.

It should be noted that these cases do not represent the economics of large integrated projects that are being considered for use of this technology in other regions of the world outside the USGC and NWE. Since Atlas would be a first implementation of MTO technology, the Atlas value chain will have the following primary impediments compared to integrated gas-to-olefins/derivatives projects in the future:

- Purification, shipping and receiving costs associated with shipping the methanol to another site

- Lack of site integration between gas processing, raw methanol production and olefin/derivatives plant- Olefins price expectations based on the most efficient and competitive olefin market environments in the world (USGC and NWE)

Upstream Megamethanol MTO TotalIRR (Exxon) 28% 15% 3% 14%capex (Exxon) $191 MM $310 MM $125 MM $626 MMPV10 $85 MM $86 MM -$47 MM $124 MM

IRR (Norway base) 28% 15% 10% 15%Capex (Norway base) $191 MM $310 MM $175 MM $676 MMPV10 $85 MM $86 MM $8 MM $179 MM

IRR (Norway low) 28% 15% 0 12%Capex (Norway low) $191 MM $310 MM $175 MM $676 MMPV10 $85 MM $86 MM -$114 MM $57 MM

(note: economics are run on a methanol sales price to Norway of $110/ton and to Exxon at $105/ton representing the difference in logistics)

Atlas megamethanol to MTO, if it happens, will be a first commercial demonstration of MTO technology and will be partly (if not wholly) justified by the MTO player (Exxon, Norsk Hydro or another) on that basis. Since Atlas is an E&P project, the returns for this specific project have been naturally weighted to high returns in the Upstream. The low (or zero) returns associated with our model of the MTO link in the chain reflect the market price for methanol that the MTO players (Exxon and Norsk Hydro) are negotiating with Saturn (raising the possibility of future price re-negotiation), our relative lack of understanding of the MTO technology and the additional drivers that those players may have for commercializing this technology.

4) IS ATLAS A GOOD INVESTMENT? WHAT ARE ITS RETURNS AND RISKS?

The Atlas project is both an economic venture and a platform for growth consistent with our strategic direction . The upstream economics show an IRR of 28% with $85MM of PV10. The methanol plant economics have a 15% IRR and over $30 MM of PV10 from our 35% interest. On a combined basis the project will have an IRR in the low 20s by virtue of our 100% interest in the upstream. In addition to the financial value, the project provides us an opportunity to participate in the demonstration of two key technologies that support the strategic imperatives discussed earlier. Megamethanol - low capital cost First commercialization of MTO technology (although our ability to capture this in a timely manner is

constrained)

The greatest risk to the project prior to sanctioning is securing the targeted markets. A substantial fraction of the output of the plant must be committed to a MTO facility (Norsk Hydro, Exxon or some alternative) to minimize the impact of the plant on the existing methanol market. In addition, we must get the traditional markets to accept pricing scenarios similar to those outlined in our economics (fixed prices or floor pricing near $110/mt (MOD)). These would be historically low offers for long term contracts for methanol, but closure could be difficult if methanol prices return to the low levels reached in the first quarter of 1999.

Once the project is in place, the primary risk shifts to the possibility of default on take or pay contracts for offtake. The project might be particularly exposed to volume risk from a large contract for MTO that represents more than half of the production from the plant. Although preliminary analysis can be done at this point, this risk can best be defined and ameliorated once the negotiation of these contracts is initiated following approval of the Authority to Negotiate.

4a) WHY IS IT PROJECT FINANCED?

Our current plan is to project finance on a non recourse basis. The project’s original promoter and the majority partner is Saturn Methanol. Saturn has a thin balance sheet and needs non-recourse financing to make the project work for them. Project financing maintains alignment with the majority owner. We have accepted minority ownership to minimize costs and the perceived role we play in the eyes of the Trinidad government. Our size has made us a target of the government for extracting value and by maintaining a lower profile we hope the project will achieve quicker acceptance (similar to Titan).

4b) WHO ARE OUR PARTNERS? WHAT ARE THEIR STRENGTHS/WEAKNESSES?

Our partner is Saturn Methanol Company of Houston, Texas. Saturn was formed in 1994 when Deo Van Wijk, the head of marketing at Methanex, left Methanex to form his own company. Mr. Van Wijk was one of three directors of Methanex who built it to be the world’s leading methanol producer and marketer. Saturn’s management team averages over 15 years experience in the methanol business. Saturn also has experience in Trinidad as Mr. Van Wijk was a prior director of Caribbean Methanol Company in Trinidad during its development and early years of operation.

Saturn’s first project was the Titan Project (in partnership with Amoco and the Beacon Group). Saturn is the sole marketer for Titan and was successful in preselling 80% of the output prior to closing under terms sufficient to cover the 10 year financing period. Saturn’s strengths in methanol are sales and marketing, logistics and strong relationships/knowledge of the business. Saturn also has a small but technically proficient engineering staff. It is a credit to Saturn’s staff and their relationship with Lurgi that the Titan project is 95% complete with no change orders.

Saturn’s weakness is its balance sheet. As a new start-up company, they have little capital. Saturn has used their relationship in the industry to raise capital for Titan and Atlas. The Atlas project is set up with the banks to ensure that sufficient contract security is established to ensure Saturn has the capital for Atlas and that “firewalls” are set up to guarantee its use and to prevent any weaknesses in Saturn’s financial position from affecting the financial position of Atlas.

4c) WHO IS THE TECHNOLOGY PROVIDER? WHO WILL BUILD IT?

Lurgi Ol Gas Chemie, a subsidiary of MG is the technology provider and EPC contractor. Lurgi has built 40% of the world’s capacity in methanol (a total of 34 methanol plants). They are the technology and EPC contractor for the Titan project in Trinidad. Titan is scheduled to start up ahead of schedule, with no change orders to the lump sum price, and has an excellent safety record with no fatalities and only 1 Lost Time Accident for over 3 million man-hours worked. If we can proceed quickly enough Lurgi will keep their Titan management team together for Atlas

Lurgi, also, is a joint technology developer and EPC contractor for our BDO plant in Lima, Ohio.

4d) ARE WE SENDING THE RIGHT SIGNALS TO THE INDUSTRY?

We will send signals to the industry and the world if we proceed with Atlas. The industry is watching to see what we will do following our participation in Titan. Atlas is twice the capacity of Titan and has much lower capital costs per ton of methanol capacity than any plant every built. It is very visible as a step change in capital costs for a product that has received a lot of press as the front running candidate fuel for the next generation of car technology (i.e., fuel cells).

Here are some of the things people might speculate about. (We should be alert and shape our answers and advocacy to fit our strategies).

BP Amoco has decided that methanol is likely to be the fuel of choice for fuel cells. BP Amoco is positioning to take a leadership role for methanol as a fuel cell fuel.

To the extent that Atlas is identified as a base from which MTO will be commercialized, there will be speculation in the petrochemical industry about how the introduction of MTO might change the dynamics in olefin/polyolefins (particularly in Asia, Middle East and South America).

BP Amoco is pushing the new markets for methanol based on gas monetization and nothing more.

4e) WHAT ARE OUR OPTIONS TO EXIT?

We have no barriers to exit at this time. No contractual obligations have been made and we have repeatedly told our partners and others in the value chain that we are seeking management authority to negotiate. They are aware that this level of commitment is not binding until we receive final internal approval after the project is fully developed. (Exxon or Enron are the most likely replacements for us in Atlas if we decline to participate.)

We do not foresee any shareholder restraints on our ability to exit the project at any time after closure. In the Titan project the ECAs placed some restrictions on our ability to exit prior to their approval. It is possible the lenders for Atlas may try to restrain our ability to reduce our interest below a threshold without their approval (not to be unreasonably withheld).

4f) WHAT ARE OUR OPTIONS TO EXPAND?

Expansion of Titan or Atlas via debottlenecking is considered unlikely. Experience indicates Lurgi plants may reach as high as 105% of capacity but there is little over-design to allow for this. It is usually cheaper to build a new train for expansion.

Additional acreage exists at the site (controlled by Saturn), to build another methanol plant. If we were to build an integrated facility (e.g., MTO) on Trinidad, this would most likely be at the Point Lisas Industrial Estate, but we would need to secure additional acreage to what Saturn already can access.

4g) WHAT HAPPENS IF THE METHANOL MARKET FALLS APART? DOES ATLAS SURVIVE? DOES TRINIDAD AS A METHANOL PRODUCING COUNTRY SURVIVE?

Atlas has been designed to be one of the world’s lowest cost producers. The marketing strategy has been developed to mitigate downside price risk (while sacrificing upside potential). Except for a few places where gas prices are considerably cheaper than that expected for Atlas (average gas price floor over 20 years is $1.12/mmbtu) Atlas will be the lowest cost plant on a cash basis. When combined with its capital cost advantage and close proximity to markets, it will be more profitable than others at a fixed methanol price. The graph below indicates if Atlas were to receive an average methanol price of only $100/mt (MOD) delivered for the next 20 years we would still earn a 6% return. Methanol prices have only averaged less than $100/mt for 9 quarters in the last 20 years, and have averaged less than $100/mt for an entire year only once (1986/87).

To protect against this extreme downside we have developed a marketing plan to sell approximately 60% of the plant’s output into a MTO market to minimize the impact on the already saturated traditional markets. Early discussions with MTO developers have indicated they desire a fixed price or a floating price tied to ethylene with price floors and caps . We also expect to sell an additional 10% at fixed prices under long term contracts into the traditional markets at target prices of $116/mt (a 19% discount off the historical average of $143/mt). These fixed price deals or floor price deals leave only about 30% of the output subject to market level pricing, mitigating the downside risk.

We believe Atlas can survive any realistic worst case pricing scenario.

Atlas Methanol IRR%Unleveraged and No Tax Holiday

05

101520253035

0.3 0.31 0.32 0.33 0.34 0.35

Methanol Prices $/Gal.

IRR

%

The other methanol plants in Trinidad are positioned well to survive the long term. They are positioned in the lower ½ of the cost curve. However, there is pressure from the other methanol plants to reduce their gas price. Some of these plants are paying in excess of $1.20/mmbtu. They see that some of their competitors have lower feedstock prices and methanol prices are in a trough. This pressure will continue regardless of whether BP Amoco or some other party supplies the gas to the Atlas project.

Besides gas pricing, there are several opportunities for cost reduction in the Trinidad methanol industry that are being explored. Atlas has proposed a consolidation of shipping and terminal facilities with the other producers in Trinidad. Acceptance of this proposal would save the existing methanol producers $2.40/mt or the equivalent of 7.3 cents/mmbtu on their gas price.

We believe the existing methanol producers in Trinidad will survive, but the pressure for gas price reduction will continue regardless of whether we participate in Atlas.

4h) HOW DOES MEGAMETHANOL COMPARE WITH LNG?

Megamethanol and LNG target distinct and separate markets. A decision on which to pursue should be based on customer needs and profiles. Use of both LNG and megamethanol for gas monetization allows BPA to capture a larger market and spread downstream risk.

To illustrate the comparative economics of megamethanol and LNG we developed cases assuming 100% ownership by BPA, no financing, and identical gas inlet volumes of 425 MMCFD at a price of $0.85/mmbtu (real). Using these assumptions the upstream economics are identical. Thus the comparison isolates the LNG and megamethanol facilities and seeks the methanol price necessary for a megamethanol plant to equal the IRR of a LNG facility. Capital and development costs for LNG were based on Atlantic LNG Train 1 ($700 million) to simulate a greenfield project located in the Atlantic Basin. Costs for megamethanol were based on Atlas costs. Results are for FOB the plant (no shipping to simulate an integrated site). LNG economics assume sales into the Spanish power market similar to Atlantic LNG Train 2. The volumes of LNG and methanol produced were assumed not to affect the markets into which they were sold.

Methanol Vs. LNGMethanol Vs. LNGIRR%IRR%

0

5

10

15

20

60 70 80 90 100 110 120

Methanol Prices $/Ton.

IRR

%

Methanol LNG ($14 Brent) LNG ($16 Brent)

A methanol sales price of slightly less than $80 /mt is needed to compare favorably to LNG in our hypothetical case. Preliminary calculations for a MTO facility performed by our European/Asian olefins team indicate strong economics for methanol delivered to the olefin plant at $80/mt. The economic comparison contained herein, does not reflect improved capital costs that can be expected from either an Atlantic LNG expansion or an Atlas type plant expansion. Additional refinements to the capital costs are needed to capture the synergies from integrating a methanol plant with a MTO plant and polyolefin plants at a single site. The ideal site model appears to be the next step in advancing the comparison.

4i) HOW DOES METHANOL COMPARE WITH LNG AS A POWER FUEL IN CONVENTIONAL TURBINES?

Information from General Electric (GE) using LNG, methanol as a liquid and methanol as a vapor in a General Electric (GE) 109FA Combined Cycle machine illustrates that methanol used as a turbine fuel in both the vapor and liquid phases out perform LNG on an efficiency basis by 4.2% and 7.9% respectively.

The GE information was produced in a methanol-to-power study for Exxon. Engineering contractors and firms such as General Electric and Foster Wheeler have teamed up to promote methanol as a power fuel option. These results are consistent with earlier test results using DME as a power fuel. Oxygenates (methanol and DME) are now considered technically acceptable alternatives to natural gas and liquid fuels in turbines used for electric power generation.

The chart on the left illustrates the relative busbar cost produced for various size power plants using methanol and LNG. The results show that methanol produces a lower busbar cost than LNG where the aggregate demand is less than 800 megawatts, and is cost competitive between 800 and 1400 megawatts, assuming a methanol FOB price of $75/ton, and a LNG FOB price of $2.35/mmbtu. Based on what we have learned from Atlas these methanol prices can be achieved today with gas prices of $0.50/mmbtu.

34363840424446485052

400 800 1200 1600Power Plant Size, Megawatts

Busb

ar C

ost,

$/M

Whr

MeOH

LNG

LNG FOB Price: $2.35/mmbtuMeOH FOB Price: $75/ton

Shell International Gas has also done some work which illustrates the relative cost effectiveness of gas by pipeline, gas via LNG, gas via oxygenates, GTL via syncrude and gas by wire on a volume versus distance basis. As illustrated in the chart to the right, methanol can be cost effective in smaller quantities over a wide range of shipping distances versus LNG. Methanol should not be viewed as a competitor of LNG but as complementary to LNG by bringing a clean fuel to a set of customers not economically reachable with LNG.

2 0

1 0

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0 .2

0 .1

1 00 0 2 00 0 3 00 0 4 00 0 5 00 0

DISTANCE, km

VOLU

ME,

GSm3 /A

nnum

Electricity

Pipeline

LNG

Methanol

SYNCRUDE

Those who have provided input.

Olefins North AmericaDennis SeithJohn BliesznerDan MarshBrian BahrGil Harris Mike Nagle

Olefins Europe/AsiaRob AndersonBarry MaundersChris EcclesChris Astbury

Group Ideal SitePeter NuttallPeter Morris

Chemical Strategy/TechnologyJay KoubaRob PeabodyGeoff ChapmanSteve HardmanSteve Wittrig

Chemical Commercial DevelopmentAda Nielsen

Gas to MarketTheo FleischRichard JonesMike GradassiRon Sills

Gas and Power StreamVan Whitfield

AcetylsRobin DugganPeter GrantBob NeidzielskiPaul TurnerPhil Howard

GTU (poly DMM)Dave Redeker

DownstreamBetty AnthonyBernie BulkinPeter HistonAndrew Armstrong

Atlas TeamNigel PreeceScott CharpentierNorm ChristieDarrell StuckyJanet NussbaumFred CrowderBrad HubbardNagy Iskander

TechnologySteve Souders