Developing the Iraqi Petrochemical Industry Critical Success Factors Iraq Energy Forum 2017, Baghdad Iraq Energy Institute Research

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1 Developing the Iraqi Petrochemical Industry Critical Success Factors Iraq Energy Forum 2017, Baghdad Iraq Energy Institute Research Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat Sun Tzu

2 Critical Success Factors for Developing a Petrochemical Facility Investor Perspective The following are critical success factors that potential investors seek to confirm in deciding to invest in a world scale petrochemical complex: Feedstock volumes to support a world scale facility Reliable supply of feedstock Competitively priced feedstock Facility integration for efficient capital and OPEX Infrastructure: Utilities, Roads, Rail, Ports Global Market Access Fiscal / Tax Incentives As the largest component of production cash costs, it is not surprising that feedstock related factors dominate Critical Success Factors.

3 Critical Success Factors Feedstock Related Feedstock type: Ethane Why? Processing ethane produces ethylene with no byproducts (except fuel gas) to process and manage. This results in the lowest capital cost to construct a world scale facility and minimizes the complexity of the logistics / distribution requirements. An especially critical factor in early petrochemical industrial development in a country like Iraq. As the industry and corresponding infrastructure develops, subsequent ethylene projects can utilize propane and heavier NGL s. Feedstock: Volume, Reliability and Term Volume: Sufficient supply of feedstock to establish a world scale ethylene facility. Currently, world scale range is in the range of 1.0 to 1.5 million tons of ethylene production. A 1.0 million ton per year ethylene facility would require a supply of roughly 1.3 million tons per year of ethane. Reliability: An investor would want to ensure that the supply of feedstock is reliable and sustainable (more on this topic later); on-stream factor is a critical variable for economic viability (a world class ethylene plant should run from 4 5 years without any planned downtime for maintenance; in addition, frequent unplanned shutdowns result in equipment failures (e.g thermal cycling) and shortened catalyst life resulting in increased operating expense Term: An investor would want to secure a feedstock supply contract volume commitment for a minimum of 20 years and more likely in the year range Feedstock: Price The Government of Iraq should to establish a simple, clear and transparent formula for feedstock price. Given the complexity, risk and lack of infrastructure development, the prices should be competitive with other low cost global regions (i.e. Saudi Arabia & U.S. Gulf Coast). An initial fixed feedstock price period (e.g years from operational start-up) should be contractually established with agreed upon escalation formula thereafter. Further note that establishing a clear, competitive contractual price would greatly enhance the ability for the investor to secure third party (commercial) financing.

4 Critical Success Factors Global Market Access: Facility Location Cost efficient access to global markets is a critical success factor for a petrochemical facility. With ultimate product production (likely polyethylene plastic) over one million tons per annum for a single world scale plant, Iraq does not have a local market to support a world scale facility and export to global markets is required. Polyethylene markets are highly fragmented with different products (film, containers, packaging, pipe, etc.) requiring different grades and technical specifications further complicating the local demand requirement and necessitating the need for export capability. Therefore, a facility needs to located nears the Um Qasr / Khor al-zubayr ports in Basra. Infrastructure: Utilities, Roads/Rail, Port Facilities Utilities: Reliable source of utilities (electricity, cooling water, potable water, nitrogen, etc.) Utilities can be supplied within the petrochemical complex, however, drives up capital costs and not an efficient utilization of capital. Road/Rail: A integrated world scale ethylene facility focused on polyethylene production would ship finished product in 20 or 40 ton containers and require an average of truck shipments per day. A dedicated rail line from plant site to the port would greatly enhance efficiency (lower cash cost) and security. Port: The port facilities need to be modern and efficient to handle a steady stream of container shipments. One world scale ethylene-polyethylene facility would generate 50 75, ton containers annually. Facility Integration The Government of Iraq can further enable development by allocating land near the Um Qasr / KAZ ports dedicated to industrial development (believe this has already been completed). Fiscal / Tax Incentives The Iraqi Investment Law (2006) already provides for a 10 year income tax holiday (as well as other investment incentives); it would be beneficial if this tax holiday was clearly extended to mid-stream (gas fractionation) operations supporting the development of the petrochemical industry. Such an incentive would incentivize required investment in the midstream sector, a critical condition precedent for petrochemical industry development

5 Simple Model Development of the Iraqi Hydrocarbon Chain is Stalled in the Upstream (Crude Oil) LUKOIL Proposal Condition Precedent for petrochemical industry development: Establishing an integrated Master Gas System (midstream) with the objective of providing secure, stable feedstock supply to the petrochemical industry (This must happen first!) Labor Intensive Focus on midstream to enable petrochemical development SECONDARY INDUSTRIES Domestic Market Local Manufacture of Consumer Goods Crude Oil & Associated Gas NATURAL GAS NATURAL GAS LIQUIDS (Fractionation Plants) PRIMARY INDUSTRIES (i.e. Petrochemicals) Export to Global Markets Capital Intensive 5

6 Future Development Domestic Demand Unlocking the Iraqi Hydrocarbon Value Chain Job Creation, Knowledge Transfer & Economic Diversification Industrial Lubricants Oil, Gas & Mining Packaging Paint & Coatings Personal Care & Cosmetics Pharmaceuticals Pipe Plastic Consumer Products Solar Panels Textiles Agricultural Appliances Automotive Building & Construction Chemical Manufacturing Dry Cleaning Electronics Healthcare Household Imaging & Photography Derivative / Specialty Industry Can be located throughout Iraq Fabrication Shops Hazardous Waste Disposal Warehousing Spare Parts Supply Maintenance Contractors Secondary Industry support of Primary Industry (Petrochemicals, Refining, Basic Chemicals) Best if located near Industrial Complex Ethane extracted when sufficient volume reached via development of an integrated Master Gas System (BGC, Independent Midstream JV #2) Integrated Petrochemical Complex Export to Global Markets Excess Lean Fuel Gas returned to Iraqi system Raw Associated Gas Gas Processing Independent JV LPG & Condensate Exports

7 Fully Integrated Midstream / Petrochemical Complex Initial phase designed to process associated gas currently being flared & outside BGC scope (e.g. WQ 2, Majnoon, Halfaya, Nahr Umr) To maximize ethane recovery & accelerate petrochemical development, oil producers should supply gas processors full range associated gas and utilize lean fuel (95% methane supplied by gas processors) for internal operational needs Fully integrated gas processing & petrochemical facility (co-located) would provide opportunity for significant capital and operating cost savings and provide a solid platform for a sustainable, globally competitive facility Separating oil production from downstream (gas processing & petrochemicals as Independent Joint Venture companies) allows IOCs to focus on their attention and capital on core competencies and primary interest (oil production) Developing downstream as independent, private sector industry will attract direct foreign investment and reduce the capital burden on the Iraqi budget Deep Gas Processing Integrated with World-Scale Petrochemical Facility AG from southern oil fields Fuel Gas (95% C1) to IOCs & Iraqi fuel gas grid Fuel Gas C3 HDPE Gas Preparation Gas Preparation De-ethanizer Residual C3 Extraction LPG C5+ Export via pipeline Ethane 1.3 million tons/year Olefins Cracker 1.O million tons/year Ethylene LLDPE LDPE Export to Local & Global Markets De-methanizer Current Flared Volume Future oil Production De-butanizer 7

8 Example of the Impact of Successful Midstream Development Saudi Aramco Master Gas System Development of Saudi s Petrochemical Industry Saudi established the basis for one of the largest and most competitive global petrochemical industrial sector by first establishing a Master Gas System to capture associated gas from oil production in the Eastern province then separating (fractionating) and distributing petrochemical feedstock to the Jubail Industrial City The first plants were based on ethane which remains the dominant source of feed for ethylene production in the Kingdom today Later, as infrastructure and secondary industries developed, the Kingdom diversified its feed supply to include propane, butane and natural gasoline (naphtha) Multiple gas fractionation plants and interconnecting pipeline networks coupled with the aggregation of industrial plants in a single location (Jubail) provide the basis for sustainable and reliable feedstock supply Initially (1980 s), ethane price was established at a fixed $0.50/MMBTU, thereby attracting first wave of direct foreign investment. Later (year 2000), the price was increased to $0.75/MMBTU and today stands at a fixed $1.75/MMBTU, delivered plant boundary Note: Delivered price, plant battery limit

9 Jubail Industrial City A Model for Iraq Jubail Industrial City was developed in phases with the objectives of eliminate flaring (Eastern Province), diversify the Saudi economy job creation and knowledge transfer Jubail Industrial City includes, in addition to significant petrochemical capacity, a refineries, steel plant, fertilizers and methanol A secondary support industry as well as derivative production developed an continues to grow Proximity to the King Fahd Industrial Port (and Jubail Commercial Port) enables access to global markets. Petrochemical products produced in Jubail compete worldwide Lessons learned from Jubail Industrial City an be applied to the development of a industrial complex in southern Iraq. Location Jubail 1 Jubail Industrial City (1 & 2) King Fahd Industrial Port Project (1016 km 2 ) Saudi Arabia's Ethylene Facilities Ethylene Capacity Feedstock Estimated Ethane consumption (MMSCFD) Yanbu Yanpet I 875 Ethane 85 Yanbu Yanpet II 780 Ethane/Propane 40 Yanbu Yanpet III 600 Ethane/Propane 30 Yanbu Yansab 1,300 Ethane/Propane 85 Rabigh Petro-Rabigh 1,300 Ethane Jubail Sharq 1,300 Ethane/Propane 60 Jubail Kemya 810 Ethane/Propane 45 Jubail Petrokemya 850 Ethane Propane/Pentanes Ethane/Propane 40 Jubail SADAF 1,090 Ethane 105 Jubail Jubail United 1,300 Ethane 125 Jubail Saudi Ethylene & Polyethylene 1,000 Ethane/Propane 50 Jubail Jubail Chevron Phillips 225 Pentanes 0 Jubail Kayan 1,325 Ethane/Butane 45 Jubail Saudi Polymer Company (SPCo) 1,200 E/P 60 Jubail Sadara 1,200 Ethane / C5+ 80 Total 16, ,020

10 Summary Establishing a effective, integrated midstream sector will eliminate flaring and unlock the Iraqi hydrocarbon value chain Iraq can become a globally competitive petrochemical industrial center to the benefit of the Iraqi community, project shareholders and the environment