Theme: Executive Panel Discussion, Thursday Dec 14, 2017 Executive Panel Discussion Moderator: Dave Witte - IHS Markit Panelists: Walter Pinto - Lyondellbasell Tony Jones - Valero Ron Corn - CPChem Mike McAtee - BASF 49 Year: Date: Location: 2017 Dec 12-15 Boca Raton, FL
Addressing strategic challenges with interconnected capabilities Brought together to form the most Comprehensive sources of data, analytics and insight for the Energy Upstream, Oil Markets, Midstream, Downstream & Chemical Markets Confidential. 2017 IHS Markit TM. All Rights Reserved. 2017 IHS Markit. All Rights Reserved.
Agenda The opportunity - outlook for shale oil, gas and petchems The threat analyzing capital build options through the supply chain The challenge panelists ideas to offset threats and capture opportunities Confidential.
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 DEMAND 74%
But petroleum supply is concentrated elsewhere SUPPLY 67% DEMAND 74%
Trade from advantaged hydrocarbon regions fills the demand gap typically at the first value chain node with reasonable logistic costs and product market liquidity 2026 World Monoethylene Glycol Trade Flows, Kilotons Illustrative 2960 To NE Asia 3119 290 238 20 11 451 81 251 503 9626 190 600 4933 7614 347 274 1234 1386 62 2960 From N. America 340 1101 1046 43 164 Net exporter Net importer Volumes greater than 5,000 metric tons noted; intra-regional trade excluded.
Capital investments seek to maximize returns preferably with a sustainable competitive advantage Braskem-Idesa Ethylene/PE Plant Nanchital, Veracruz, Mexico Start-Up: June 2016 Investment Drivers Secure an energy & feedstock advantage Leverage current technology and build worldscale 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 Confidential. 2017 IHS Markit 2017 TM. IHS All Rights Markit TM Reserved.. All Rights Reserved. Photo courtesy of Braskem IDESA
$/ Barrel, Crude $/ MM BTU, Natural Gas Combination of high crude prices and stable gas is attractive for those North America investments based on natural gas and natural gas liquids Global crude oil vs. USGC natural gas (2017 Constant $) 140 120 Natural Gas Brent Crude 23 20 100 17 80 13 60 10 40 7 20 3 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 0 Source: IHS Markit 2017 IHS Markit
MMb/d Global crude and condensate production requires ~20 MMb/d new supply by 2022 Global crude oil and and condensate supply outlook in 2022 balance in 2040 100 90 80 Unconventional, 3 Unconventional, 7 Unsanctioned, 5 70 Conventional, 10 Sanctioned, 7 60 82 88 50 69 69 40 Total crude and condensate production in 2016 Base declines to 2022 New capacity additions to 2022 Total crude and condensate production in 2022 Source: IHS Markit 2017 IHS Markit
Average Break-even cost at Henry Hub Nearly 1,300 Tcf North American gas supply at Henry Hub <$4/MMBtu Breakeven price at Henry Hub ($/MMBtu) for natural gas resources (Tcf) $15 $13 $11 $9 $7 $5 $3 $1 $(1) $(3) $(5) $(7) $(9) $(11) $(13) $(15) 150 Tcf @~ $0.00 555 Tcf @$2.50 Demand 2017-25: ~333 Tcf 1267 Tcf @$4.00 Demand 2017-40: ~1,018 Tcf 0 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000 Source: IHS Markit 2017 IHS Markit
Million barrels per day Trillion Cubic Feet Lots of feedstock unlocked by shale suggest another wave of US-based investment but where? US Ethane Demand and Rejection US Proven Gas Reserves 3.0 2.5 1st wave 450 400 350 2.0 300 1.5 1.0 0.5 2nd wave 250 200 150 100 0.0 2005 2010 2015 2020 2025 Base Chemical Miscellaneous Fuel Exports Rejection Source: IHS Markit 50 0
Millions of Tons Billion (2014) $ For chemicals, plant builds either aligned with demand or hydrocarbon supply; lately total capital investment has trended down - except in the US. Will it continue? Capital Spending in the Chemical Industry 90,000 75,000 $120,000 $100,000 60,000 45,000 30,000 15,000 - $80,000 $60,000 $40,000 $20,000 $0 ROW Americas Spend 2017 IHS Markit
NPV, Millions $ Plenty of value creation available for US investment, but high execution risk as delays and overruns destroy value Impact of Project Underperformance on Base US Ethane Cracking NPV 3,000 2,500-12% 2,000-14% 1,500 1,000 At target CAPEX On Schedule 6 Months Delay 10% overrun
Case study - Multiple models for investment exist to satisfy Chinese demand growth Option Cash Cost Capital Market Risk Export ethane, build cracking in China Highest Lowest Lowest Build US methanol, export to MTO in China Lowest Moderate Medium Build ethane cracker in US, export product Moderate Highest Highest
Ethane terminal, freight and duty, costs Low-cost Chinese and high US capital costs means Chinese investment beats US returns even after accounting for high feedstock shipping costs Cents/Gallon 90 Equivalent NPV: China vs USGC Ethane Cracking Ethane Differential vs Location Factor 60 30 Green line is Breakeven NPV. Below line China NPV >USGC SHIPPING COST RANGE Operating Zone Location Factor Range 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 Location factor - China vs USGC
Ethylene Cash Cost, $/Ton 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? 1400 1200 Asian Ethylene vs Brent Equivalence Graph - Cash Cost For Ethylene 1000 800 600 400 200 0 Forecast Ethane Delivered China $500/ton = $10/MMBTU = 67 cpg Ethylene vs Ethane 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 Brent ($/Bbl) Ethane ($/Ton) Brent ($/Bbl) OR Ethane ($/Ton)
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 (relative) EPC performance eroding feedstock advantages New approaches to improve US EPC productivity are needed, or risk a shift of building to overseas
Our distinguished panel Walter Pinto Senior Director, Global Projects and Engineering Mike McAtee Senior Vice President, Strategic Projects Ron Corn Senior Vice President, Petrochemicals Tony Jones Senior Vice President, Project Execution