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Matthew [email protected]
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?