Selling the Alberta Advantage: Comparative Petrochemical

Matthew SchoenhardtMschoenh@telus.net

P.Eng, MBA, PMP, RMP

Selling the Alberta Advantage: Comparative Petrochemical Plant Economics in the North

Introduction

Project funded by

• Original data Dec 2012• Key variables updated Nov 2014

Agenda1. Motivation2. Model Approach3. Results4. Impacts5. Risk Analysis6. Competitive Actions

Why are international Investors afraid of Alberta?

1 Motivation

Capital Investment In Canada$450

$400

$350

$300

$250

$200

$150

$100

$50

$-

Billi

ons

Rest of Canada Canada Housing (Ex-Alberta Alberta Oil & Gas Alberta

Perceptions of AlbertaNot Capital Cost Effective• Oil Sands over runs 61% to 107%

• Theory predicts oil sands over runs!

• Not true for all Alberta Projects• Dow Chemical LHC-1 Project 15% under

Project Planning prior to

Sanction 60-85%

Ownership

New Technology

Complexity

Escalation

Regulatory Regimes

Feed Stock

Site & Project Specific

Is the perception valid?

2 Model Approach

Approach

• Life cycle cost of petrochemical plant (methanol)

• Apples to apples comparison• Locations: AIH, USGC, RMWB• Verifiable & objective• Economic model for investors

Why Methanol?

• Globally traded• Many uses:

• Fuel/biofuel/diluent• Feedstock• Plastics/fibres

• World-class sized plant• Proven technology• Reference plants

Plant Description

• Methanol Plant• ~ US$1B

• 3-year build• Capacity 300 MMg/year

• Natural gas feedstock• “Clean and level site”

2CH4 + 3H2O => 2CH3OH + 2H2 + H2O

Assumptions

1. Revenue: Tide-water world market prices1. US$1.42/gal2. Supply has no impact on price3. Unit train rail distribution to Vancouver

4. Economic model ~100 variables1. “Real” model2. $0.88 Cdn/USA3.WACC 8.9% 4. D/E 1.635. Terminal values profit in perpetuity

3. Class V Capital Cost4. Market price natural gas feedstock5. Standard Government tax treatment

Capital Cost EstimateInside Battery Limits (ISBL)

USGCStandard

Factor

USGC US$ MM

AIH US$ MM

RMWB US$ MM Notes

Owner's Costs

7% $29 $29 $29 Independent of location (same owner)

Equipment 20% $81 $82 $83 Equipment purchased globally

Materials 19% $77 $78 $79 Materials and bulks sourced globally

Engineering 16% $67 $67 $67 Globally sourced for ISBL (local for OSBL)

Construction 37% $176 $254 $400 Construction is local & stick-built

ISBL Total $430 $509 $657

Total $819 $937 $1,156 OSBL+ISBL+ Working Capital + Other Soft

%USGC 100% 115% 142%

Overheated Market Consideration

Hot market• Rates go up

and• Productivity goes down

“Market heat scale”= Unemployment Job Vacancies

Market Heat Productivity Impact

7 = Cold Market, 20% bonus

3 = Neutral(Compass Intl Standard)

1= Hot Market, 25% penalty

So does Alberta stack up?

3 Results

Cumulative NPV

($1,200)

($800)

($1,000)

($600)

($400)

($200)

$800

$600

$400

$200

$0- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

NPV

(US$

MM

)

Execution Year

Aberta Industrial Heartland

Gulf Coast

RMWB

Operating Income

$60

$80

$100

$120

$180

$160

$140

NPV

(US$

MM

)

$40

$20

$0- 2 4 6 8 10 12 14 16 18 20 22 24

Execution Year

Aberta Industrial Heartland

Gulf Coast

RMWB

NPV Life-cycle Comparison

$100

$0

$200

$300

$700

$600

$500

$400

$800

NaturalG

as

ISBL

Distribution

Costs

Corporate Tax

Payable

OSBL

Other ProjectExpenses

Capital Renew

alOSBL

Maintenance

Capital Renew

alISBL

NPV

Cos

t (U$

Mill

ions

)

Gulf Coast AIH

RMWB

DifferencesNPV Differential

Gulf Coast minus Alberta Industrial Heart Land

($250.0) ($200.0) ($150.0) ($100.0) ($50.0) $50.0 $100.0 $200.0

Corporate Tax

Distribution Costs

Natural Gas

ISBL

OSBL

Power (14.9 MW service)

Capital Renewal OSBL

Power (Purchased)

Maintenance

Operations Labour

Capital Renewal ISBL

Favors AIH NPV Swing$0.0

Favors GC$150.0

SensitivityGC - AIH Net Present Value

$86.7

($78.0)

$77.4

($71.5)

$44.7

($24.3)

$21.5

$15.2

($14.3)

($60) ($40) ($20) $0 $20 $40 $60

AIH_NominalWACC

GC_NG

AIH_NG

GC_NominalWACC

UStoCdnExchangeRate

GC_CorporateTax

AIH_WinterProductivity

AIH Distribution

AIH_OperatingRate

Impact of Variable change +/-10% on GC-AH NPVFavours AIH

($100) ($80)Favours GC

$80 $100

Varia

ble

Nam

e in

Mod

el

What are the key differences?1. Tax2. Distribution3. Natural Gas Price4. Construction5. Sensitivities

4 Impacts

Alberta 25%• Stable, surplus

governments• $ 18-50MM annually• $222MM NPV impact

Louisiana 43%• Ability to negotiate• Massive deficit

governments

1 Tax Rates

• Unit train to tide water• $24MM annually• $150MM NPV Impact

AIH USCG• Free!

2 Distribution Costs

3 Natural Gas Price

$2

$4

$6

$8

$10

$12

$02004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024+

NYMEX Henry Hub Alberta Plant Gate Spread USD/MMBTU

$0.71 /MMBTU differential$20MM annually$122MM NPV

AIH Penalty Productivity 26%Winter 35% for 1/3rd of build = 12% Hot Market 24% absolute = 9% Remote Factor = 0%Exchange rate = (6%)= 45% construction cost penalty15% Capital cost penalty$126 MM$95MM NPV

4 Construction Costs

1. WACC – higher favours USGC2. Gas price volatility – favours AIH3. Falling C$ - favours AIH4. Interest rates – higher favours USGC5. Market heat – favours AIH

5 Sensitivities

Market Heat

USGC AIH

2012 2.4 0.62014 1.8 1.1

What about other factors?

5 Risk Analysis

Risk = probability * impact

RBS• Political• Economic• Social• Technical• Legal &

Regulatory• Environmental

Risk Assessment Matrix

Effe

ct o

n Sc

ope,

Sch

edul

e,Bu

dget

Catastrophic

Incr

easin

gIm

pact

Major

Significant

Limited

Negligible

Increasing Probability of Occurrence

Rem

ote Un

likel

y Poss

ibl

e

Likel

y

Alm

ost

Cer

tain

Likelihood of Occurrence

Qualitative screen favours AIHRisk Description USGC AIH

P1 Political Instability

P2 Profit Repatriation

Ec4 Availability of other Process Inputs

Ec6 Currency Fluctuation

T1 Site Availability

S1 Social License

L2 Legal

Ev2 Environmental Sensitivity

Ev1 Serve weather

Ec5 Access to Market

L1 Regulatory efficiency and effectiveness

Ec3 Workforce Availability

Ec2 Feedstock

Ec1 Capital Cost and Schedule Variance

So what do we do?

6 Competitive Actions

Competitive Actions

• Local consumption• Fuel• Diluent• Chemical production

• Winter construction• Modularization

• Tailored planning• Understanding & adapting to local conditions• Focus on profit• Political support

Summary

AIH Lower taxes Feedstock price Feedstock

availability Declining Cdn$

Winter construction Market Access

USGC Lower Capital Cost Tidewater

Extreme weatherEnvironmental sensitivity Social LicenseFeedstock competition

Alberta Is Competitive With USGCAlberta:

Higher Cost Higher Profit

Questions?