SHALE-ADVANTAGED CHEMICAL INDUSTRY INVESTMENT

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1 9 April 2013 SHALE-ADVANTAGED CHEMICAL INDUSTRY INVESTMENT Martha Gilchrist Moore Sr. Director, Policy Analysis and Economics

2 Shale Gas Shale gas is possibly the most important energy development in the past 50 years. Shale gas now accounts for 30% of production. Abundant supplies of natural gas liquids are changing the economics of global petrochemical production patterns. Lower natural gas costs are improving the competitiveness of not only chemical producers, but other gas-intensive manufacturers

3 Chemical Industry Energy Requirements Trillion BTUs 2,000 1,800 1,600 Total energy consumption: 5.5 quad btus 1,400 1,200 1, Natural Gas Natural Gas Liquids Heavy Liquids & Other Petroleum Electricity Coal & Coke Other Fuel and Power Feedstock

4 Petrochemical Feedstocks HYDROCARBON RESOURCES PETROCHEMICAL FEEDSTOCKS Natural Gas Methanol Natural Gas Liquids (NGLs) (i.e., Ethane, Propane, Butane) Petroleum OLEFINS: Ethylene Propylene Butadiene Naphtha and Other Heavy Liquids AROMATICS: Benzene Toluene Xylenes

5

6 Global Natural Gas Costs: 2012 ($US per million BTUs) Canada: $2.19 USA: $2.74 UK: $9.48 Belgium: $11.47 Germany: $11.86 Ukraine: $11.57 Russia: $2.81 Iran: $2.98 China: $9.05 Korea: $15.37 Japan: $15.59 Mexico: $2.69 Saudi Arabia: $0.75 India: $8.56 Brazil: $9.46 Note: Prices generally reflect domestic wellhead/hub prices or imported prices via pipeline. Some nations (e.g., Japan and Korea) import LNG. Thus, the higher prices. Other nations import LNG if it s a minor share of demand but these prices aren t generally reflected in the above.

7 Global Natural Gas Price Trends $ per million BTUs $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $ United States Belgium Germany Japan Brazil China India Source: EIA, Petrobas, IMF, World Bank, various national statistical agencies

8 Oil and Natural Gas Prices (oil equivalent) $/Barrel Oil (WTI) Oil (Brent) Natural Gas (Henry Hub) Source: Energy Information Administration

9 Oil-to-Gas Ratio: A Proxy for US Gulf Coast Competitiveness Ratio of the price of oil (WTI) to the price of natural gas (Henry

10 Production Costs ($/pound) Global Ethylene Supply Curve (Petrochemical Production Costs by Country/Region) $0.80 $0.70 $0.60 Western Europe $0.50 $0.40 $0.30 $0.20 Middle East China Other Northeast Asia United States 2005 $0.10 $ Global Supply (Cumulative in billions of pounds)

11 Production Costs ($/pound) Global Ethylene Supply Curve (Petrochemical Production Costs by Country/Region) $1.20 $1.00 Other Northeast Asia $0.80 China Western Europe $0.60 $0.40 Middle East China Western Europe Other Northeast Asia United States $0.20 Middle East United States $ Global Supply (Cumulative in billions of pounds)

12 North American Thermoplastics Exports and Oil-to-Gas Ratio are Correlated Ratio: Oil-to-Gas Exports (Millions of Pounds 3MMA) ,500 1,250 1, Oil to Gas Ratio Exports (right) Note: Thermoplastics includes LDPE, LLDPE, HDPE, PP, and PVC

13 Exports Gaining as a Share of North American Thermoplastics Production Exports as % of Total Production

14 Petrochemical Competitiveness Then USGC petrochemicals competitively disadvantaged Near top of global cost curve Major capacity build in the Middle East with stranded ethane from that region Now By 2011, USGC cost position had improved that region follows Middle East Ethane supplies tightening in Middle East; era of lowcost feedstocks may be over - some producing nations may ride up the cost curve

15 Outlook for Chemicals (excluding Pharmaceuticals) Production Volume Index (Where 2007 = 100) Consensus forecast does not account for supply shocks, i.e., shale gas. With production from announced investments is accounted for, production growth is substantially higher. Growth shifts from an average of 3.0% per year in the baseline to 7.8% per year with output from new investments. % change Y/Y % Change in Volume from New Production (right) % Change in Volume (right) Production Volume (left) Production Volume including New Production (left) Sources: Federal Reserve, American Chemistry Council

16 Incremental Shale-Advantaged Chemical Industry Investment ( ) Billions of 2012 Dollars $16 $14 $12 $10 $8 $6 $4 $2 $ Low Case High Case The $72-82 billion total investment is spread over 10 years. The peak year for investment spending is

17 Shale Advantage Driving Capacity Expansion Across Many Products Ethylene capacity expected to grow by half Ethlyene cracker co-products - propylene, butadiene Derivatives PE, vinyls, MEG, alpha-olefins, etc. Co-products chlor-alkali Methanol Nitrogeneous fertilizers ammonia, urea and derivatives (AN, UAN)

18 Olefin Yields by Feedstock 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Ethane Naphthas LPG Mix (80/20) Other Aromatics C-4 Propylene Ethylene

19 Geography of Petrochemical Investment A flood of announced investments by more than a dozen companies to capitalize on new cost advantage Much of the petrochemical investment will occur along the US Gulf Coast However, there will be significant investment in new regions, i.e., Appalachia, Midwest

20 Announced Chemical Industry Investment, Ohio Valley 13% Midwest 8% Other 1% Gulf Coast 78%

21 Concluding Remarks Shale gas changes everything. Renewed US competitiveness from shale gas is already lifting chemical exports and production and will grow as new capacity comes online. Strong investment growth in chemicals already materializing. Investments by other customer industries will create additional opportunities. Further gains in plastic and chemical exports, employment, and capital spending. Challenges: skilled labor, environmental permitting, etc.

22 Thank you (202)

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