SEPTEMBER 2016 ENERGY & FEEDSTOCKS OUTLOOK Global Plastics Summit Mark Eramo, Vice President IHS Chemical +1 281-752-3202 mark.eramo@ihsmarkit.com
Energy & Feedstocks Agenda Chemical Value-Chain & The Impact Of Energy Outlook for Energy & Feedstocks Ethylene & Propylene Outlook Strategic Implications
Petrochemical Demand Underpinned by Macro-economic Growth While Energy Markets Drive Supply Decisions NATURAL RESOURCES Mining, drilling, refining, gas processing Oil Gas Coal Minerals Renewables CHEMICAL INDUSTRY VALUE CHAIN Base Chemicals Olefins (Ethylene, propylene, butylene) Aromatics (benzene, toluene, xylenes) Chlor-akali (chorine, caustic soda) Others (ammonia, phosphorous) Chemical Intermediates Commodities Differentiated commodities Technical specialties Formulated products / performance materials Plastics and engineering resins Extruded films, pipe, profiles, coatings, sheet, foams Blow-molded parts Composites Synthetic fibers Rubber products Paints and coatings Adhesives and sealants Lubricants Water treatment products Cleaning products Industrial chemicals Flame retardants Others CUSTOMERS Automotive / transportation Consumer products Packaging Building / construction Recreation / sport Industrial Medical Pharmaceutical Personal care Textiles Electrical / electronics Aircraft / aerospace Business equipment 3
Gas-to-Crude Ratio Drives Regional Investment Activity In The Chemical Industry Regional Energy Pricing Trends : Low Gas-to-Crude Ratio Favors North America Investments 18.0 120% $ / MM Btu 15.0 12.0 9.0 6.0 100% 80% 60% 40% Gas-to-Crude Ratio 3.0 20% 0.0 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 0% Crude (WTI) Natural Gas Gas-to-Crude Ratio
World Oil Demand To Rise By 1.3 MM b/d In 2016 And 2017 Led By Non-OECD Countries Changes in oil (liquids) demand by region (volume change from previous year in million barrels per day) 0.50 China Global oil demand growth (MMb/d) 0.50 0.00 North America 0.50 0.00 Middle East 0.00 (0.50) 2015 2016 2017 2015 2016 2017 OECD 0.5 0.1 0.1 (0.50) 2015 2016 2017 (0.50) 2015 2016 2017 0.50 India 0.00 Non-OECD 1.2 1.2 1.2 Total World 1.7 1.3 1.3 (0.50) 2015 2016 2017 Notes: Mexico is included in Latin America. Data in table may not add up due to rounding. 5
Non-OPEC Crude Output To Fall In Many Areas As Lack Of Investment Takes Hold; G5 Drives OPEC Higher Annual change in crude oil production for selected non-opec countries, 2015 17 Million barrels per day 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8-1.0 2015 2016 2017 Annual change in crude oil production for OPEC countries, 2015 17 Million barrels per day 2.5 2.0 1.5 1.0 0.5 0.0-0.5 2015 2016 2017 Notes: Estimates for Saudi Arabia and Kuwait include 50% of Neutral Zone production. 6
Global Liquids Demand Is Estimated To Exceed Supply In 2Q 2016 For The First Time Since 2013 World oil (liquids) demand and supply by quarter Million barrels per day 100 98 96 94 92 90 Demand exceeds supply Demand Supply 2016 IHS 7
Ample Global Oil (and Product) Inventories are Beginning To Unwind. Inventory Analysis Shows Overhang Not All Commercial Global oil storage oil storage change 2014 change - 2017 2014-2017 MMbbl 1200 1000 800 600 400 200 0 Jan 2014 - Mar 2016 Note: Oil includes both crude oil and refined products. Source: EIA, IEA, JODI, IHS IHS Energy projects that about 300 million barrels of commercial oil inventories will be drawn down through the end of 2017. Unknown Refined Products Crude Other Global Other Asia Middle East China Europe North America Commercial build Refilling New Operations Strategic build Strategic build Commercial draw Status Type Regional Disposition 2Q2016 - end 2017 8
Substantial North American Gas Supply Available And Competitive At ~$4.00/MM Btu Updated 2016 Resource Assessment For North America 8.00 7.00 6.00 5.00 4.00 3.00 Anadarko Wash Utica Haynesville Montney Marcellus WV Marcellus PA Woodford Cana Woodford Arkoma SCOOP/STACK Barnett Upper Devonian 2.00 Average Break-Even 1.00 0.00-1.00-2.00 Wattenberg 500 1,000 1,500 Anadarko Tcf Pennsylvanian Horn River 2,000-3.00-4.00-5.00-6.00-7.00-8.00-9.00 Bakken Wolfcamp Delaware Eagle Ford Wolfcamp Midland Cotton Valley ~1400 TCF at ~$4.00/MMBtu Requirement: ~1,088 TCF Raw data for 150 sub-plays by quintile Energy, EIA 9
Associated Gas, A Significant Part Of Total Gas Production, Is Concentrated In Eagle Ford, Permian, And Depends On Oil United States Lower-48 Associated Gas Production 30 20 Bcf/d 10 Eagle Ford 0 Cotton Valley Anadarko Penn Anadarko Wash Woodford - Cana Woodford - Ardmore SCOOP Bakken Cotton Valley Eagle Ford Mississippian Lime Permian Conventional Permian Unconventional Wattenberg Niobrara Fracture Play Other - Gassy Oil Other - Oil 10
North American Gas Demand Growth Is Dominated By Power Sector Demand, LNG Exports And Mexico Exports North American Gas Demand Growth Over 2010 Levels Bcf/d 35 30 25 20 15 10 5 0-5 3.1 Bcf/d year-over-year average growth (2015 20) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Vehicles Other MX Exports LNG Exports Power Industrial Commercial Residential Notes: Other = field and plant use and pipeline fuel Energy, EIA and Statistics Canada 2016 IHS 11
US Ethane: Rejected Ethane Is Mostly Eliminated By The End Of The Decade US Ethane Demand 2.5 2.0 Impact of lower crude production Million B/D 1.5 1.0 0.5 0.0 2000 2005 2010 2015 2020 Chem ical Other Exports Rejection 2016 IHS Source: EIA, IHS Energy 12
US Propane: Exports Will Be Required To Balance The Market US Propane Demand 2.5 Million B/D 2.0 1.5 1.0 0.5 0.0 2000 2005 2010 2015 2020 Res/Com Base Chemical-Ethylene Price Sensitive Chemical Chem ical-ref. Propylene Chem ical-pdh Industrial Farm Other Exports 2016 IHS Source: EIA, IHS Energy 13
Crude Prices Recover As Oil Supply/Demand Balances Tighten; Natural Gas Pricing Remains Low And Stable Global Crude Oil vs. USGC Natural Gas $/ MMBtu, Natural Gas 20 15 10 5 0 Crude Oil vs. Natural Gas $43/bbl 0 10 11 12 13 14 15 16 17 18 19 20 21 Natural Gas WTI Brent 120 90 60 30 $/Barrel, Crude Demand growth of 1-1.5 MMb/d from 2016-20 underpins oil market outlook. Oil prices remain low enough to force US crude production lower. OPEC production remains high and surplus capacity available from OPEC falls to extremely low levels. Driven by power and LNG exports, North American gas demand reaches 105 Bcf/d by 2020. N. American gas supply is plentiful and low cost. Rapid demand growth leads to higher natural gas prices, but remain near $4 per MMBtu 14
Agenda Chemical Value-Chain & The Impact Of Energy Ethylene Outlook for Energy & Feedstocks Ethylene & Propylene Outlook Strategic Implications Propylene
Ethylene Propylene PG Where To Invest The Next Wave Beyond 2020?
Energy Assumptions Will Influence Location & Technology For New Chemical Investment Decisions Crude Oil vs Natural Gas & NGLs Constant 2014$ Per MMBtu 25 20 15 10 5 0 2000 2003 2006 2009 2012 2015 2018 2021 2024 Brent Crude Henry Hub Gas USGC Ethane USGC Propane NEA Naphtha China Coal Notes: China Coal is on a 6000kcal/kg basis, Qinhuangdao FOB 2016 IHS USGC chemical feedstocks hold significant advantage attracting additional investment beyond current wave. LPG export terminal capacity is growing to clear projected surpluses. Ethane and propane exports at historical highs for both pipe and water borne. Ethane demand surge reduces rejection and creates spread over fuel value. Prices capped by propane cracking and ethylene derivative export economics. Propane prices rise with crude; maintain higher discount relative to crude due to supply length
Non-conventional Technology Providing Options For Future Investments In Olefins Production Conventional Light Olefins Cash Cost Non-Conventional Light Olefins Cash Cost 1400 1200 2011 2013 2015 1000 800 600 400 200 0 US Ethane US PDH NEA PDH NEA Naphtha WEP Naphtha US GTP US GTO NEA CTO NEA MTO PDH = Propane Dehydro; GTP = Gas to Propylene; GTO = Gas to Olefins; CTO = Coal to Olefins; MTO = Methanol to Olefins
Ethylene Market Key Issues Ethane Ethane Supply: additional 10 million metric tons of lowcost ethane to ethylene beyond 2020. Ethane prices: higher prices versus fuel value reflect higher demand and extraction of higher cost supply. Ethylene derivative exports provide a price ceiling. Ethylene New Ethylene Capacity: delayed start up timing of all first wave US ethylene units. Pushed out and/or removed some additions in China (MTO/CTO) Build-cycle Disruption: under investing in new capacity during 2020-21 period, supporting margin up-cycle. Effective Global Operating Rates: expected to be high over the next 5 years assuming steady economic growth, current new-build profile, unplanned outages. Naphtha crackers: required to balance demand; increasing cash cost combined with need for more naphtha cracking will push ethylene prices higher. 19
Ethylene Capacity Additions on Par with Demand Growth Capacity does not equal supply; effective operating rates are critical Global Ethylene Capacity Additions vs. Demand Million Metric Tons 13.0 11.0 9.0 7.0 5.0 3.0 1.0-1.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 North America Middle East Others West Europe Asia Annual Demand Increase 2016 IHS 20
Global & Regional Ethylene Nameplate Operating Rates 95 Operating Rates Reach 2015 Peak Highest Since Early 2000 s Effective operating rates are even higher are they sustainable? Percent 90 85 80 75 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Global Op Rate NEA Op Rate Global Op Rate (Steam Cracker) WEP Op Rate 2016 IHS 21
Ethylene Prices Move Higher On Tighter Balance & Higher Costs US Discount To Global Market Driven By Need For Derivative Exports Regional Ethylene Price Forecast 2,000 Dollars Per Metric Ton 1,500 1,000 500 0 00 02 04 06 08 10 12 14 16 18 20 US Average Acquisition Price WEP Contract Price SEA CFR Spot Price
Naphtha Cracking Margin Recovery Sustained While Ethane Cracking Margins Remain Steady As Ethane Prices Rise Global Monthly Feedstock Cash Regional Ethylene Cash Margins By Feedstock Cents Per Pound 50 40 30 20 10 0 1,102 882 661 441 220 0 Dollars Per Metric Ton -10 2000 2002 2004 2006 2007 2010 2012 2014 2016 2018 2020 U.S. Ethane WEP Naphtha SEA Naphtha -220 2016 IHS 23
Ethylene Net Equivalent Trade Growth continues in Advantaged Feedstock Regions 5,089 5,726 North America 12,458 West Europe -597-564 -1,759 18,266 19,686 14,041-8,323 Northeast Asia -10,550-14,768 2011 2016 2021 Middle East Southeast Asia South America -390-440 -1,103-2,844-3,060-3,828 Others* -7,356-9,521-10,604 *Others: Africa, Indian Sub., CIS & Baltic, Central Europe 24
Propylene Market Key Issues Propylene Requires On-Purpose Investment: margins for incremental supply will have to support new investments On-Purpose Technology Will Vary: technology dependent on regional feedstock advantage - PDH in U.S., Middle East, and Asia along with coal to olefins in China are likely paths. Chinese PDH units added will be based on propane imports that compete into fuels market. MTP = high cost. Build phase is delayed: investment in North American on-purpose propylene production delayed as questions over energy and the economy persist; GTP under study. Propylene Regional imbalance causes price volatility: overcapacity in propylene will cause major price shifts regionally but balance out over time. US monomer balance is long, derivatives are tighter. Low prices stimulate demand: propylene demand growth is seeing strength due to ample low cost supplies.
Global Propylene New Supply Requires On-Purpose Capacity Transition To On-purpose (Vs Co-product) Production In The Current Decade World: PG/CG Propylene Production By Feedstock Million Metric Tons 150 100 50 Co-Product On Purpose 0 2000 2002 Stm. Crackers 2004 2006 2008 2010 FCC Splitters 2012 2014 2016 2018 Dehydro 2020 Metathesis Olefin Cracking Methanol to Olefins Methanol to Propylene Coal to Olefins Coal to Propylene 2016 IHS 26
Annual Propylene Propylene Capacity Capacity Additions Additions By Region Versus Demand Growth 10.0 Propylene Capacity Additions In China Overwhelm Demand Growth In The Near Term Contributing To Price Declines Million Metric Tons 8.0 6.0 4.0 2.0 0.0-2.0-4.0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 North America Middle East China West Europe Others Annual Demand Increase 2016 IHS 27
Propylene Prices Rebound As Markets Balance And On-Purpose Cash Cost Rise US Transitions To Low Priced Region Long Term PG Propylene Price Forecast By Region 2,000 Dollars Per Metric Ton 1,500 1,000 500 0 00 03 06 09 12 15 18 21 NAM Net Trans. Contract Price WEP Disc. Contract Price SEA CFR Spot Price 2016 IHS
Long Propylene Markets Results In Poor On-purpose Returns Raising Questions Regarding Near Term Operating Rates Comparison Of On-purpose Propylene Cash Margins 900 $US Per Metric Ton 600 300 0-300 -600 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 NAM PDH Margins NEA PDH Margins NEA CTP Margins NEA MTP Margins
Propylene Equivalent Trade Reduction In China Net Imports Result In Global Rebalancing 1,950 1,720 890 North America West Europe 1,142 748-404 3,813 3,681 2,366 Northeast Asia -156-2,262-3,062 Middle East Southeast Asia 2011 South America Others* -305-228 -231 2016 2021-367 -465-701 -1,432-2,413-4,008 *Others: Africa, Indian Sub., CIS & Baltic, Central Europe
Strategic Implications Energy: the world is awash in BTUs of all forms: Oil, Gas and Coal; petroleum balance is improving; enough ethane in North America to support another 10 MM tons of ethylene. Chemicals: uncertainties in energy and economy cause build cycle to pause; M&A continues to accelerate; margins recovery over 5-year outlook. Ethylene: surge in NAM supply will not overwhelm global balance; naphtha cracking needed to close the balance ; effective utilization is a key metric to watch. Propylene: era of on-purpose production creates new market dynamics; private ownership in China could result in different (more western-like) behavior?