Can the US Remain Competitive in

Chemicals?
Rice Global E&C Forum

18 May 2018
Rice University | Houston, TX, US

Confidential. © 2018 IHS MarkitTM. All Rights Reserved.

Reserved .1
Summary
• Shale is the resource that just keeps giving.
• Capacity additions globally are down from their peak but expected to remain strong through 2022
• US project costs remain a concern as previous projects were more expensive than expected.
• Current differential between US and China on costs may result in feedstocks instead of products
being exported

Confidential. © 2018 IHS MarkitTM. All Rights Reserved .2

Expansions did not happen as anticipated in 2014, but…
US Basic Chemicals Capacity Additions US Spending on Capital Additions
35 30

Total additions 2014 to 2024 Total Spending 2014 to 2024

30
currently 84% of pervious 25
currently 98% of pervious
forecast forecast
25
20
Million MT

$ Billion
20
15
15

10
10

5
5

0 0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Additions 2014 Additions 2018 Spend 2014 Spend 2018
Source: IHS Markit © 2018 IHS Markit Source: IHS Markit © 2018 IHS Markit

Confidential. © 2018 IHS MarkitTM. All Rights Reserved .3

4

Agenda

Shale Update

Factors Impacting where new capacity

gets built

Updated Global and US outlook

Ethylene Example

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 North American Shale

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Innovation found tight oil, now ingenuity is lowering cost per barrel
Median break-even prices for five key US oil plays, 2014–17

90
Break-even price in terms
of WTI (US$/bbl)

60

30

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017
Bakken Shale Bone Spring Eagle Ford Shale Wolfcamp Delaware Wolfcamp Midland
Notes: The break-even price is the WTI crude oil price required for the project to cover all of its estimated well capital and operating costs and generate a 10% rate of return. Data are through 3Q 2017.
Source: IHS Markit Performance Evaluator © 2018 IHS Markit

Confidential. © 2018 IHS MarkitTM. All Rights Reserved .6

Picture source: LA Tribune
Productivity improvements provide launch pad for new supply wave

Monthly US crude oil production

12.0
11.5 11.2

11.0
Million barrels per day

10.4
10.5
10.0
History 9.4 Outlook
9.3
9.5
8.8 8.9
9.0
8.5
Markers show annual average production
8.0
7.5
7.0
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Source: IHS Markit, EIA © 2018 IHS Markit

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Long term Brent price environment now expected to average around $70 per barrel
(in constant dollars)
Crude Oil Dated Brent pricing (1Q2018 vs 4Q2017)
160

140

120
Dollars per barrel

100

80

60

40

20

0
2005 2010 2015 2020 2025 2030 2035 2040

Brent (constant 2017 dollar) Brent (constant 2017 dollar) (Previous Quarter)
Brent (nominal dollar) Brent (nominal dollar) (Previous Quarter)
Source: IHS Markit © 2018 IHS Markit

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 Annual Change

0%
2%
4%
6%
8%

-6%
-4%
-2%
10%
12%
1990
1991
1992
1993
1994
1995
1996
1997

Confidential. © 2018 IHS MarkitTM. All Rights Reserved

1998
1999
2000
2001
2002
2003

Demand
2004
2005
2006
2007
2008
Basic Chemicals

GDP
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
0
3
4

1
2

-3
-2
-1

1990
1991
1992
1993
Chemical Demand’s Linkage to Economic Activity

1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Elasticity

2004
2005
2006
2007
Elasticity

2008
2009
2010
2011
2012
Linear (Elasticity)

2013
2014
2015
2016
2017
2018
2019
2020
2021
.9

2022
Capital investments seek to maximize
returns – preferably with a sustainable
competitive advantage

Investment “Drivers”
✓Secure an energy & feedstock advantage
✓Leverage current technology and build world-
scale for maximum capital efficiency
✓Invest with proximity to local markets and/or
access to trade routes
✓Build to leverage an upstream and/or
downstream integrated position
2018 IHS MarkitTM. All Rights Reserved.
Confidential. © 2017 Reserved Photo courtesy of Braskem IDESA
.10
Chemicals are illustrative of the energy supply chain. Global chemical demand is
concentrated in developing world with more than 50% of demand growth in China…

DEMAND

74%

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 SUPPLY
…But petroleum supply is concentrated elsewhere

67%

DEMAND

74%

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Base chemicals produced 492 million tons from 610 million tons of capacity in 2017

Ethylene
Propylene
Methanol
Paraxylene
Benzene
Chlorine

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14

Trade from advantaged hydrocarbon regions fills the demand gap – typically at the
first value chain node with reasonable logistic costs and product market liquidity
2026 World Monoethylene Glycol Trade Flows, Kilotons
Illustrative

451
81 251
2960 20
3119 503 9626 2960
To NE Asia 190
600 From N. America
4933
238
7614 347 1386 62
290 11 274
1234

340 1101 1046

43 164

Net exporter
Net importer
Volumes greater than 5,000 metric tons noted; intra-regional trade excluded.
Confidential. © 2018 IHS MarkitTM. All Rights Reserved .14
All base chemical value-chains are actively adding new capacity on a global basis
Global capacity growth and 2017 total estimates
10 170 125

114 89
Million Metric Tons

6
63 48
4

0
Ethylene Propylene Methanol Chlorine Benzene Paraxylene
(PG/CG)
Avg. 2012 - 2016 2017 Avg. 2018 - 2022 Global capacity estimate for 2017
Source: IHS Markit © 2018 IHS Markit

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Global base chemical capacity will increase by 118+ million tons, 2018 – 2022
Asia-Pacific (led by China) will add 60%; N. America – 20%; Middle East – 10%
World base chemical annual capacity growth by location World base chemical annual capacity growth by market
40 40

30 30

Million Metric Ton

Million Metric Ton

20 20

10 10

0 0

-10 -10
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020
China Asia Less China (With India) Ethylene Propylene (PG/CG)
North America Middle East
West Europe South America Paraxylene Methanol
Others Benzene Chlorine
Source: IHS Markit © 2018 IHS Markit Source: IHS Markit © 2018 IHS Markit

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By all measures, ethylene / propylene / chlor-alkali , will be supply-constrained
World capacity utilization World surplus capacity as % of total demand

100 40

Percent of total demand

30
Percent of nameplate

90
20

10
80
0

70 -10
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020

Ethylene (Steam Cracker) Propylene (PG/CG) Chlorine Ethylene Propylene (PG/CG) Chlorine
Source: IHS Markit © 2018 IHS Markit Source: IHS Markit © 2018 IHS Markit

Confidential. © 2018 IHS MarkitTM. All Rights Reserved .17

Capacity additions are moving to take advantage of feedstock availability
Global Additions Capacity Additions
140
West Europe

120 SE Asia

S America
100
Million MT

NE Asia
80
N America

60 Middle East
North East Asia - China
Indian Sub.
40
North America
CIS & Baltic
20
Central Europe

- Africa
2008 2010 2012 2014 2016 2018 2020 2022
- 100 200 300 400 500
Africa Central Europe CIS & Baltic Indian Sub. Million MT
Middle East N America NE Asia S America 2008-2015 2016-2022
Source: IHS Markit © 2018 IHS Markit Source: IHS Markit © 2018 IHS Markit

Confidential. © 2018 IHS MarkitTM. All Rights Reserved .18

Global Capacity Additions Spending
Global Basic Chemicals Capacity Additions and Spending Global Basic Chemicals CAPEX & OPEX Spending

140 200

180
120
160

100 140

120
80

$ Billion
100
60
80

40 60

40
20
20

0 0

Spend ($ B) Additions (MM MT) CAPEX

Spend ($ B) OPEX
OPEX
Source: IHS Markit © 2018 IHS Markit Source: IHS Markit © 2018 IHS Markit

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US Competitive Advantage Improves as Oil Prices Rise
World Cost Curve: Polyethylene - HDPE World Cost Curve: Methanol
2000 600

1800

2014 500 2014 2018 2022

1600

2018
1400 2022 400
$/Metric Ton

$/Metric Ton
1200

1000 300

800
200
600
US Plants 9 plants added with
400 US Plants 7 plants added
4.3 million MT of 100
capacity with 8.4 million
200 MT of capacity
0 0
0.0 10.0 20.0 30.0 40.0 50.0 60.0 0.0 20.0 40.0 60.0 80.0 100.0
Cumulative Production - Million Metric Tons
Cumulative Production - Million Metric Tons
Source: IHS Markit Source: IHS Markit

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US Capacity Additions and Spending
US Basic Chemicals Capacity Additions and Spending US Basic Chemicals Capacity CAPEX & OPEX Spending

18 30

16
25
14

12 20

10

$ Billion
15
8

6 10

4
5
2

0 0

Spend ($ B) Additions (MM MT)

CAPEX($ B)
Spend OPEX
OPEX
Source: IHS Markit © 2018 IHS Markit Source: IHS Markit © 2018 IHS Markit

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22

US Activity has peaked and remains high through 2020

US16Planned Capaciity Additions US Capacity Additions by Product
VCM
14 PVC 2008-2017
MDI 2017-2030 Chlorine – Electricity
12 Other CHLORINE 7%
ID CAUSTIC SODA

ND PROPYLENE
10
WA LDPE
Louisiana – 28%
Million MT

WY ALPHA OLEFINS
8 ETHYLENE OXIDE
IL Ethylene – Ethane
Texas - 33% PA
EDC 40%
6 MEG
OK
HDPE
IN
LLDPE
4 IA
ETHYLENE
LA
AMMONIUM NITRATE Ammonia and
2 TX
UREA Methanol – Natural
METHANOL Gas
37%
- AMMONIA
2009 2011 2013 2015 2017 2019 2021 2023
0 5 10 15
Source: IHS Markit © 2018 IHS Markit Source: IHS Markit Million MT © 2018 IHS Markit

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Confidential. © 2018 IHS MarkitTM. All Rights Reserved .23
Combination of high crude prices and stable gas is attractive for those North
America investments based on natural gas and natural gas liquids
Global crude oil vs. USGC natural gas (2017 Constant $)
140 23
Natural Gas
120 20
Brent Crude

$/ MM BTU, Natural Gas

100 17
$/ Barrel, Crude

80 13

60 10

40 7

20 3

0 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040
Source: IHS Markit © 2017 IHS Markit

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Example of value creation hydrocarbon to polyethylene: a host of market and
cost drivers influence ultimate margin realization and value creation
Cost and Value Drivers for Polyethylene
Ethane Cracking Naphtha Cracking
Price Takers Price Makers
Price, Cost or Margin

Commodity PE Selling Price

Naphtha Value
Premium
Grade

Margin

PE Logistics
PE Logistics
Fuel Value

Margin

Cracker/PE
Ethane Price

OPEX
Cracker/PO
OPEX
Spread
Frac
Costs
PL

Component
Confidential. © 2018 IHS MarkitTM. All Rights Reserved .25
Increase in China’s local content is driving costs down
Downstream Capital Cost Escalations China Location Factor (CAPEX & OPEX)
115 90%

85%

80%

110
75%

Percent US Cost
70%

65%
105

60%

55%

100 50%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: IHS Markit USGC Asia © 2018 IHS Markit Source: IHS Markit © 2018 IHS Markit

Confidential. © 2018 IHS MarkitTM. All Rights Reserved .26

 27

Plenty of value creation available for US investment, but high execution risk as
delays and overruns destroy value

Impact of Project Underperformance on Base US Ethane Cracking NPV

3,000
NPV, Millions $

2,500 -26%
-12%

2,000 -14%

1,500

1,000
At target CAPEX 10% overrun
On Schedule 6 Months Delay © 2017 IHS MarkitTM. All Rights Reserved.

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Exports of Propane to China to Produce Propylene is Expanding Rapidly
China Propylene from Imported LPG Propylene Production Costs - China
10 1,400
18
9 18 1,300 On-Purpose
17
Steam Cracking
8 1,200
CTO
7 16 1,100 Refinery
Million MT

6 15 1,000
12

$/MT
5 900
11
4 800
8
3 700

2 600
4
1 500

0 400
2014 2015 2016 2017 2018 2019 2020 2021 2022 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: IHS Markit © 2018 IHS Markit Source: IHS Markit © 2018 IHS Markit

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Case study - Multiple models for investment exist to satisfy Chinese demand growth

Option Cash Cost Capital Market Risk

Export ethane, build Highest Lowest Lowest

cracking in China

Build US methanol,
Lowest Moderate Medium
export to MTO in China

Build ethane cracker in

US, export product Moderate Highest Highest

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 Logistics costs are significant part of cost of imported ethane feedstock in Asia –
roughly half of delivered cost to India
Ethane delivered cost build up
Asia EuropeEurope
NorthNorth North 400

Ethane costs, $/ton

America
America America 350
300
250
200
Africa Africa 150
100

South South South 50

America
America America 0
MP-Suez- MP-Suez- MH-Suez- MH-Panama-
India China China China
Source E price Terminal Fee Freight Canal Fee

12/20/2016 – 3/10/2017 Source: IHS Markit © 2018 IHS Markit

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 34

Low-cost Chinese and high US capital costs means Chinese investment beats US
returns even after accounting for high feedstock shipping costs

Cents/Gallon
90 Equivalent NPV: China vs USGC Ethane Cracking
Ethane Differential vs Location Factor
Ethane terminal, freight and duty, costs

60 Green line is
Breakeven NPV. Below
line China NPV >USGC

30 SHIPPING COST RANGE Operating Zone

Location
Factor Range
0
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
Location factor - China vs USGC
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 35

The US still wins on a delivered to customer cash cost basis (and has to or it won’t
be able to clear ethane)
$/Ton
High Density Polyethylene Delivered Cost to China
$2,000
$1,800
$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0

US Producer - Ethane Basis China Producer - Naphtha Basis

Confidential. © 2018 IHS MarkitTM. All Rights Reserved .35
At expected ethane prices, cash costs favor naphtha at crude prices below $60/Bbl.
Will crude to ethane spreads be low enough for Chinese ethane to beat naphtha?

1400 Equivalence Graph - Cash Cost For Ethylene

Asian Ethylene
1200 vs Brent
Ethylene Cash Cost, $/Ton

1000

800
Ethylene
vs Ethane
600
Forecast Ethane
400 Delivered China
Current Ethane $500/ton =
200 $10/MMBTU =
Price Range
67 cpg
0
0 50 100 150 200 250 300 350 400 450 500 550 600 650 700

Brent Ethane Brent ($/Bbl) OR Ethane ($/Ton)

($/Bbl) ($/Ton)
Confidential. © 2018 IHS MarkitTM. All Rights Reserved .36
Confidential. © 2018 IHS MarkitTM. All Rights Reserved .37
Confidential. © 2018 IHS MarkitTM. All Rights Reserved .38
Exports of NGL Feedstocks to China is Already a Reality

US ethane demand and rejection

3.0

Rejection 1st Wave 2nd Wave

2.5
Exports
Million barrels per day

Miscellaneous Fuel
2.0
Price Sensitive

Base Chemical
1.5

1.0

0.5

0.0
2005 2010 2015 2020 2025

Source: IHS Markit © 2018 IHS Markit

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 Volume and pace of ethane exports depends on terminal capacity and cracker timing
US ethane exports

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Conclusions

• Demand growth concentrated in developing

world and dislocated from hydrocarbon supply
• Shale has unlocked huge amounts of
competitive supply supporting investment
growth in Energy and Chemicals
• Poor US project performance is eroding
feedstock advantages
• Future expansion of industry in the US may be
at risk.

Confidential. © 2018 IHS MarkitTM. All Rights Reserved .42