Can the US Remain Competitive in Chemicals? · first value chain node with reasonable logistic costs and product market liquidity Net exporter Net importer 2026 World Monoethylene

Confidential. © 2018 IHS MarkitTM. All Rights Reserved .1Confidential. © 2018 IHS MarkitTM. All Rights Reserved.

18 May 2018

Rice University | Houston, TX, US

Can the US Remain Competitive in

Chemicals?Rice Global E&C Forum

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

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


Expansions did not happen as anticipated in 2014, but…

0

5

10

15

20

25

30

35

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Additions 2014 Additions 2018

US Basic Chemicals Capacity Additions

Source: IHS Markit © 2018 IHS Markit

Millio

n M

T

Total additions 2014 to 2024

currently 84% of pervious

forecast

0

5

10

15

20

25

30

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Spend 2014 Spend 2018

US Spending on Capital Additions


$ B

illio

n

Total Spending 2014 to 2024

currently 98% of pervious

forecast


Shale Update

Factors Impacting where new capacity

gets built

Updated Global and US outlook

Ethylene Example

Agenda

4


North American Shale


0

30

60

90

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

Q32016

Q42016

Q12017

Q22017

Q32017

Bakken Shale Bone Spring Eagle Ford Shale Wolfcamp Delaware Wolfcamp Midland

Median break-even prices for five key US oil plays, 2014–17

© 2018 IHS Markit

Bre

ak-e

ven p

rice in term

s

of

WT

I (U

S$/b

bl)

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

Innovation found tight oil, now ingenuity is lowering cost per barrel

Picture source: LA Tribune


Productivity improvements provide launch pad for new supply wave

History Outlook

8.8

9.4

8.9

9.3

10.4

11.2

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

12.0

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Monthly US crude oil production

Source: IHS Markit, EIA

Mill

ion

ba

rre

ls p

er

da

y

Markers show annual average production

© 2018 IHS Markit


Long term Brent price environment now expected to average around $70 per barrel

(in constant dollars)

0

20

40

60

80

100

120

140

160

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)

Crude Oil Dated Brent pricing (1Q2018 vs 4Q2017)

© 2018 IHS Markit

Do

llars

per

barr

el

Source: IHS Markit


Chemical Demand’s Linkage to Economic Activity

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

202

2

Annual C

hange

Basic Chemicals

Demand GDP

-3

-2

-1

0

1

2

3

4

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

202

2

Elasticity

Elasticity Linear (Elasticity)

Confidential. © 2018 IHS MarkitTM. All Rights Reserved .10Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

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

Photo courtesy of Braskem IDESA


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…

74%

DEMAND


…But petroleum supply is concentrated elsewhere

67%

SUPPLY

74%

DEMAND


Ethylene

Propylene

Methanol

Paraxylene

Benzene

Chlorine

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


3119

340

503 9626

1234

To NE AsiaFrom N. America

29602960

290

2384933

1386

600

347

43

Volumes greater than 5,000 metric tons noted; intra-regional trade excluded.

20

1101

164

27462

11

190

81

451

251

Trade from advantaged hydrocarbon regions fills the demand gap – typically at the

first value chain node with reasonable logistic costs and product market liquidity

Net exporter

Net importer

2026 World Monoethylene Glycol Trade Flows, Kilotons

7614

1046

Illustrative

14


0

2

4

6

8

10

Ethylene Propylene(PG/CG)

Methanol Chlorine Benzene Paraxylene

Avg. 2012 - 2016 2017 Avg. 2018 - 2022

Global capacity growth and 2017 total estimates


Mill

ion M

etr

ic T

ons

All base chemical value-chains are actively adding new capacity on a global basis

170 125

114 89

63 48

Global capacity estimate for 2017


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

-10

0

10

20

30

40

2000 2005 2010 2015 2020

China Asia Less China (With India)North America Middle EastWest Europe South AmericaOthers

World base chemical annual capacity growth by location


Mill

ion

Me

tric

To

n

-10

0

10

20

30

40

2000 2005 2010 2015 2020

Ethylene Propylene (PG/CG)

Paraxylene Methanol

Benzene Chlorine

World base chemical annual capacity growth by market


Mill

ion

Me

tric

To

n


By all measures, ethylene / propylene / chlor-alkali , will be supply-constrained

70

80

90

100

2000 2005 2010 2015 2020

Ethylene (Steam Cracker) Propylene (PG/CG) Chlorine

World capacity utilization


Pe

rce

nt o

f n

am

ep

late

-10

0

10

20

30

40

2000 2005 2010 2015 2020

Ethylene Propylene (PG/CG) Chlorine

World surplus capacity as % of total demand


Pe

rce

nt o

f to

tal d

em

an

d


Capacity additions are moving to take advantage of feedstock availability

-

20

40

60

80

100

120

140

2008 2010 2012 2014 2016 2018 2020 2022

Africa Central Europe CIS & Baltic Indian Sub. Middle East N America NE Asia S America

Global Additions


Millio

n M

T

- 100 200 300 400 500

Africa

Central Europe

CIS & Baltic

Indian Sub.

Middle East

N America

NE Asia

S America

SE Asia

West Europe

2008-2015 2016-2022

Capacity Additions


Million MT

North America

North East Asia - China


Global Capacity Additions Spending

0

20

40

60

80

100

120

140

Spend ($ B) Additions (MM MT)

Global Basic Chemicals Capacity Additions and Spending


0

20

40

60

80

100

120

140

160

180

200

$ B

illio

n

Spend ($ B) OPEX

Global Basic Chemicals CAPEX & OPEX Spending


CAPEX OPEX


US Competitive Advantage Improves as Oil Prices Rise

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0.0 10.0 20.0 30.0 40.0 50.0 60.0

World Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPEWorld Cost Curve: Polyethylene - HDPE

Source: IHS Markit

Cumulative Production - Million Metric Tons

$/M

etr

ic T

on

2014

20182022

US Plants

0

100

200

300

400

500

600

0.0 20.0 40.0 60.0 80.0 100.0

World Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: MethanolWorld Cost Curve: Methanol

Source: IHS Markit

Cumulative Production - Million Metric Tons

$/M

etr

ic T

on

2014 2018 2022

US Plants 7 plants added

with 8.4 million

MT of capacity

9 plants added with

4.3 million MT of

capacity


US Capacity Additions and Spending

0

2

4

6

8

10

12

14

16

18

Spend ($ B) Additions (MM MT)

US Basic Chemicals Capacity Additions and Spending


0

5

10

15

20

25

30

$ B

illio

n

Spend ($ B) OPEX

US Basic Chemicals Capacity CAPEX & OPEX Spending


CAPEX OPEX


US Activity has peaked and remains high through 2020

22

-

2

4

6

8

10

12

14

16

2009 2011 2013 2015 2017 2019 2021 2023

Mill

ion

MT

Other

ID

ND

WA

WY

IL

PA

OK

IN

IA

LA

TX

US Planned Capaciity Additions


0 5 10 15

AMMONIA

METHANOL

UREA

AMMONIUM NITRATE

ETHYLENE

LLDPE

HDPE

MEG

EDC

ETHYLENE OXIDE

ALPHA OLEFINS

LDPE

PROPYLENE

CAUSTIC SODA

CHLORINE

MDI

PVC

VCM

2008-2017

2017-2030

US Capacity Additions by Product

Source: IHS Markit © 2018 IHS MarkitMillion MT

Ethylene – Ethane40%

Ammonia and Methanol – Natural

Gas37%

Chlorine – Electricity7%

Louisiana – 28%

Texas - 33%



Combination of high crude prices and stable gas is attractive for those North

America investments based on natural gas and natural gas liquids

0

3

7

10

13

17

20

23

0

20

40

60

80

100

120

140

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

Natural Gas

Brent Crude

Global crude oil vs. USGC natural gas (2017 Constant $)


$/ B

arr

el, C

rud

e

$/ M

M B

TU

,N

atu

ralG

as


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

PE

Logis

tics

Marg

in

Gra

de

Pre

miu

m

Marg

in

PE

Logis

tics

Cra

cker/

PE

OP

EX

Fra

c

Spre

ad

Cra

cke

r/P

O

OP

EX

PL

Costs

Fuel V

alu

e

Naphth

a V

alu

e

Ethane Cracking Naphtha Cracking

Pri

ce, C

ost

or

Marg

in

Component

Commodity PE Selling Price

Ethane Price

Price MakersPrice Takers


Increase in China’s local content is driving costs down

50%

55%

60%

65%

70%

75%

80%

85%

90%

2010 2011 2012 2013 2014 2015 2016 2017 2018

China Location Factor (CAPEX & OPEX)


Perc

en

t U

S C

ost

100

105

110

115

2010 2011 2012 2013 2014 2015 2016 2017 2018

USGC Asia

Downstream Capital Cost Escalations



Plenty of value creation available for US investment, but high execution risk as

delays and overruns destroy value

© 2017 IHS MarkitTM. All Rights Reserved.

1,000

1,500

2,000

2,500

3,000

At target CAPEX 10% overrun

NP

V,

Mill

ions $

Impact of Project Underperformance on Base US Ethane Cracking NPV

On Schedule 6 Months Delay

-12%

-14%

27

-26%


Exports of Propane to China to Produce Propylene is Expanding Rapidly

4

8

11

1215

16

1718

18

0

1

2

3

4

5

6

7

8

9

10

2014 2015 2016 2017 2018 2019 2020 2021 2022

China Propylene from Imported LPG


Millio

n M

T

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

$/M

T

On-Purpose

Steam Cracking

CTO

Refinery

Propylene Production Costs - China



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

Option Cash Cost Capital Market Risk

Export ethane, build

cracking in China

Build US methanol,

export to MTO in China

Build ethane cracker in

US, export product

Highest Lowest Lowest

Moderate MediumLowest

Highest HighestModerate


North

America

South

America

Africa

EuropeNorth

America

South

America

Africa

EuropeNorth

America

South

America

Africa

Europe

12/20/2016 – 3/10/2017

North

America

South

America

Asia

Logistics costs are significant part of cost of imported ethane feedstock in Asia –

roughly half of delivered cost to India

0

50

100

150

200

250

300

350

400

MP-Suez-India

MP-Suez-China

MH-Suez-China

MH-Panama-China

Eth

an

e c

osts

, $

/to

n

Source E price Terminal Fee Freight Canal Fee

Ethane delivered cost build up



Operating Zone

0

30

60

90

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Eth

an

e te

rmin

al, fre

igh

t a

nd

du

ty, co

sts

Location factor - China vs USGC

Equivalent NPV: China vs USGC Ethane CrackingEthane Differential vs Location Factor

Low-cost Chinese and high US capital costs means Chinese investment beats US

returns even after accounting for high feedstock shipping costs

Location

Factor Range

Green line is

Breakeven NPV. Below

line China NPV >USGC

Cents/Gallon

SHIPPING COST RANGE

34


The US still wins on a delivered to customer cash cost basis (and has to or it won’t

be able to clear ethane)

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$/TonHigh Density Polyethylene Delivered Cost to China

US Producer - Ethane Basis China Producer - Naphtha Basis

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?

0

200

400

600

800

1000

1200

1400

0 50 100 150 200 250 300 350 400 450 500 550 600 650 700

Eth

yle

ne

Ca

sh

Co

st,

$/T

on

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

Equivalence Graph - Cash Cost For EthyleneAsian Ethylene

vs Brent

Ethylene

vs Ethane

Forecast Ethane

Delivered China

$500/ton =

$10/MMBTU =

67 cpg

Ethane

($/Ton)

Brent

($/Bbl)

Current Ethane

Price Range




0.0

0.5

1.0

1.5

2.0

2.5

3.0

2005 2010 2015 2020 2025

Rejection

Exports

Miscellaneous Fuel

Price Sensitive

Base Chemical

US ethane demand and rejection

Mill

ion

ba

rre

ls p

er

da

y

1st Wave 2nd Wave


Exports of NGL Feedstocks to China is Already a Reality


US ethane exports

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


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.

Documents

Can the US Remain Competitive in Chemicals? · first value chain node with reasonable logistic costs and product market liquidity Net exporter Net importer 2026 World Monoethylene