“Fast Evolving Trends in Petrochemical Feedstock Building Blocks Availability, Pricing and Transportation – Coal, Methanol and Natural Gas – a year is a long time in the energy world!”

Noor Jivraj Group Manager, Petroleum, Chemicals & Energy

Jacobs Consultancy Limited, London noor.jivraj@jacobs.com

APIC 2014

15-16 May 2014 Pattaya, Thailand

Agenda

• Changing drivers for alternative feed stocks – where to for China, India, and JKT (Japan-Korea-Taiwan)?

• Trends in “emerging” feedstocks–coal, natural gas (LNG, shale)

• Coal Chemicals – methanol to olefins via synthesis gas (and CTO-CTP using MTO/MTP processes)

• Coal Chemicals – Coal to Mono-Ethylene Glycol – CT-MEG

• Coal Chemicals - Acetylene Based Chemicals - VCM for PVC – C-VCM - competitive economics and prospects

• Shale gas, LNG and Natural Gas Pricing

• Summarizing..

Ever-Changing Drivers for Alternative Feed Stocks

Drivers that are changing the feedstock horizon

• Crude oil demand “growing” much slower than petrochemicals demand – naphtha alone will not propel chemical complexes

• Faster growth in demand for lighter feed stocks C2,C3,C4 than aromatics – benzene demand slows further, PX demand matures

• Middle East associated gas C2 and C3 allocation has peaked

• Emerging economic powers have limited crude oil and gas reserves but large coal reserves (China, India)

• China keep innovating in coal chemicals and ups investments

• Shale gas and shale oil seeing huge investments and are seen as game changers – however its not all a one sided picture – e.g. extraction costs not fully transparent and environmental challenges not yet resolved

Oil meeting less and less of the world’s energy demands

• As oil plateaus and eventually declines in contribution to world fuel usage, naphtha also follows oil trend (may decline faster as heavy crudes will dominate)

• Oil versus Coal – a case of Back to the Future?

• Coal and Natural Gas increasingly meeting a greater share of world’s energy demand

China, India and JKT countries and petrochemical feedstocks

• China and India have abundant coal but limited gas and petroleum

• JKT relies on energy imports more and more after Fukushima

• So where to with feedstocks?

• Coal Chemicals in China is not new – more than 65-70% of its ammonia/urea and methanol capacity is coal based. 90% of its VCM capacity is carbide-acetylene route

• India has lagged behind China in coal gasification and thus limited coal chemicals opportunities to date

• China now has “in house” options for C-MTO/MTP (Dalian, Sinopec) and C-MEG

• Despite environmental challenges, China has increased coal focus on Coal-to-Liquids as well

Coal Chemicals – The Chemistry of yesteryears for the petrochemicals of today and tomorrow?

Coal Chemistries – the old, the relatively old, and the relatively new

Coal Chemicals – Where China and India stand

China’s coal reserves are to the North and West thus coal pricing governed by logistics also

• High quality bituminous coals reserves are concentrated in Xinjiang and Inner Mongolia provinces

• Lower quality (low carbon, high volatiles) thermal coal is mainly used for power plants but gasification requires high carbon bituminous coals

India’s Coal situation remains difficult

• KG Basin Gas resources have been subject to wide variation, but the gas remains substantial. Gas is quite dry

• Short term a number of refinery revamps and upgrades will improve availability of propylene and aromatics

• The National Oil companies are now investing seriously in petrochemicals (BPCL, IOCL)

• Coal in India has logistics challenges (Adani plans to source coal from Indonesia) as well as inter-state political issues. Coal has been subject of a number of scandals

With very limited gasification in place, India will retain a refinery/naphtha focus for a few years to come

Coal Chemicals – Coal to Olefins (CTO/CTP) via synthesis gas and methanol – MTO/MTP processes - competitive economics and investments prospects

China’s Coal-To-Olefins (CTO) has taken wing

• More than 2.5 Million tons MTOs now in China

• Coal Chemicals location in China are mostly in the North West

• China has licensed UOP and Lummus Technologies for MTO and MTP

• China now has “in-house” technology options (e.g. Dalian’s MTO technologies, Sinopec and SCRIPT’s DMTO processes )

• Local technology emphasis is on the P than the E

Surge could come in Coal based Ethylene capacities

Almost a third of China’s ethylene production could soon be coal based if integrated process technology challenges are overcome

Growth in On-purpose Propylene capacities

• Over 14% of China’s propylene production could be coal based by 2016

• Interest in PDH investments is growing rapidly as technology scale increases

• Chinese coal technology emphasis on propylene can change the picture

Cost competitiveness - Coal based Ethylene

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Cash Cost of Ethylene Production

Fixed Costs

Utilities

Net Feedstock

Coal based MTO process is more competitive than naphtha cracker, but less competitive in comparison with gas crackers in N. America / M. East

Brent Crude @ $ 100/bbl Thermal Coal @ $120/ton HH $5/MMBTU KSA $0.75 MMBTU

Coal Chemicals – Mono-Ethylene Glycol – CT-MEG - competitive economics and prospects

MEG via DMO is commercial in China, new methanol route Eastman-Davy process available for licensing

• China is supposed to have commissioned around 1 Million tons Coal MEG – some conflicting information on actual rates

• Chinese C-MEG process goes through and oxalate intermediate (DMO)

• Eastman/Davy technology is a two-step, single-line process based on synthesis gas (syngas) and methanol – technology available for licensing

Success of CT-MEG product quality wise could change the industry dynamics

• Current Chinese MEG capacity is modest compared to Olefins • Coal based processes are likely to be a major source of MEG supply in China. • Around 700-800 kta CT-DMO-MEG capacity was online by end of 2013. • At least 2.7 Million tons CT-MEG projects on the books

Cost competitiveness – Coal based MEG

Coal based MEG processes are more competitive than naphtha cracker. DMO process is less competitive than MTO process.

Brent Crude @ $ 100/bbl Thermal Coal @ $120/ton HH $5/MMBTU KSA $0.75 MMBTU

Coal Chemicals - Acetylene Based Chemicals - VCM for PVC –competitive economics and prospects

Carbide Chemistry route to PVC

• The chlorinated mercury catalyst is embedded in a carbon carrier

• The catalyst is reported to have a relatively short lifetime, is highly toxic and recovery of the mercury is subject to mercury losses

• Xianjiang Tianye (has more than 1.1 million tons PVC), together with Tsinghua and Nankai universities appear to be close to successful demonstration scale non-mercury catalyst

Acetylene VCM technology has mercury disposal, as well as acetylene safety issues

• Currently for one ton PVC produced in China, 1.2 kg of HgCl 2 catalyst consumed on average (at 11% of HgCl 2 content)

• For 5.8 million tons of PVC produced in 2009, around 7000 tons of mercury catalyst used, comprising 770 tons of HgCl 2 and 570 tons of mercury were used

• Carbide-based PVC production consumes around 60％ of China’s total annual mercury use

• A new catalyst (gold dispersed on activated carbon) is now being commercialized as an alternative to mercury

Coal VCM plants tend to be relatively small and very numerous in China

• Acetylene VCM was the feedstock of choice in the early fifties – high energy costs and EHS issues lead to ethylene route becoming dominant

• Acetylene based VCM now accounts for just over 20% of the worlds total VCM demand – with China accounting for almost all of this

• More than 90% of VCM plants in China are acetylene based, but contribute to less than 70% of the total PVC produced - The average size of the Acetylene based VCM is around 110 kta versus 650 kta that today’s world scale via EDC route

• More than 80% of the acetylene based VCM capacity in China has been added since 2002

Coking coal prices have almost halved in the past two years

• Coal has shown much volatility in pricing in the last 2 years currently leading to increased competitiveness petrochemicals for coal chemical producers

• Asian Slowdown and slow down in the steel industry etc has affected prices

Coking Coal price determines Acetylene VCM competitiveness

• Competitiveness of Acetylene VCM versus Chlor-Alkali integrated and balanced Oxy-EDC VCM is very dependent on the price of coking coal

• Coking coal price of $120/ton makes Acetylene VCM competitive

• Raw materials dominates Cash Cost of Production of Acetylene VCM even more than ethylene based VCM

Production Cash CostCoal Carbide

Acetylene VCM Coking Coal @

$240/ton

Coal Carbide Acetylene VCM Coking Coal @

$120/ton

Balanced Oxy-EDC Chlor-Alkali

Integrated VCM Crude Oil =$100/bbl

Location China Capacity: 150 kta Capacity 150 kta Capacity 600 kta

Raw Materials 883 732 756

Utilities 59 59 79

Fixed Costs 28 28 46

Total ($/ton) 970 819 881

Shale Gas and Oil – so where are we today and some food for thought

2009/2014 - Shale Gas technology leads to optimistic predictions for a new dawn

• The boom …..Optimism abound – high rates of drilling, abundant gas supply, high production drives gas prices in the US from $7-8/MMBTU to close to $2/MMBTU

• “Saudi America” projections take hold - crackers, methanol, urea plants announced – grassroots, greenfield and relocated

• Major announcements of investments in grassroots and brownfield crackers, methanol and urea capacities

• New Dawn in US petrochemicals forecast as gas prices remain low. Cold winter of 2013/14 drives up gas price

• In parallel, shale oil takes off driven by high oil prices and the light nature of the shale oils, especially in Dakota

With slow shifts to coal and gas based olefins, the dynamics of coal versus shale gas an important perspective to understand

US gas based petrochemicals competitiveness – a check against natural gas price evolution

• The 2008/2009 slowdown coincided with demand drop as well as shale gas “explosion”

• The current gas price range of $4-5/MMBTU restores some competitiveness and enables at least some return to profitability for E&P

• It restores the ethane based margins to pre-2003 levels

• US wet gas based petrochemicals ruled the day until the 2003 slowdown – about the time KSA gas began to shake up the industry

• Subsequently the US gas prices remained at a high riding on economic boom

NGL prices still significantly higher energy-wise

• NGL prices had equivalency with Crude but since 2012 has decreased but still extremely lucrative

• NGLs drive wet shale gas production

• US NGLs hovering around $10/MMBTU

• Global Propane price equivalence (crude/energy) no longer in place and thus LPG export opportunity for the US

Post 2008 growth in US NGLs

• Ethane production from natural gas has stagnated

• Propane and butanes the real growth story since 2009

Ethane-Ethylene Production has steadily risen since 2008

• Projections are that ethane will remain long in the US

• Ineos setting up infrastructure for Ethane exports to European plants

Like everywhere, the days of crude sourced chemical feedstocks has peaked

• Refineries based NGLs continue to decline in the US

But some caution is still advised….

• Security and Exchange Commission’s 2009 17 CFR Parts 210, 211 et al., “Modernization of Oil and Gas Reporting” relaxed a number of reporting and reserves estimation rules, including:

no requirement of independent/third party verifications – how sure can we be about the reserves projections?

• Uncertainties around reserves, actual production costs, and limited data on well depletion rates

• Recently some companies have got their hands burnt – Chesapeake, Shell, BP

• Jury is out on how many of announced petrochemicals and fertilizers projects (and also LNG export terminals) will actually see the light of the dollar

• LNG exports, demand from new projects will push up gas prices in the US

North American Shale Oil and Gas – Key Fields and Basins

Critical for shale gas is the gas well depletion rate

• Shale gas well depletion rates are significantly faster that conventional gas wells and offshore reserves

• To maintain the exploitation rates, more and more wells need to be drilled and sweet spots may begin to decline

So where’s the hot activity??

• As expected, shale oil has taken off as large margins for a very light crude, especially in Dakota. No sign yet of “peak-oil”

• Shale gas now largely a Marcellus play - some fields showing signs of post-peak activity

Questions on the way ahead……

• Is there enough certainty that shale gas plays alone can be banked upon to supply low cost gas for world scale petrochemicals and fertilizer complexes for at least 30 years?

• To what extent will the announced LNG exports, petrochemicals and fertilizers project materialize, and what effect will this have on the HH gas price in the medium term?

• Should shale gas be seen any differently from “tight” gas, offshore gas, deep water and sub-sea gas – isn't it just gas with a different extraction profile, depletion profile, and cost structure?

Oxford Energy Institute’s estimates of shale gas and shale oil cost curves USA

• Quality of gas and oil affects returns and profitability

• Shale Oil production costs mostly lower than tar sands and shale in Canada, and profitable at current oil prices

• It’s all about oil price allowing profitable exploitation

• Even at HH price of $5/MBTU, many fields rely on NGLs for returns

• With Ethane price now at gas price, C3+ is king

LNG Developments and Natural Gas pricing

“Clean” energy demand post Fukushima has driven LNG demand and investment

• JKT (Japan, Korea, Taiwan) lack natural energy resources and cleaner fuels also forces India and China towards LNG to serve gas demand for all needs

• Demand for LNG services has resulted in massive escalation in construction costs

• Historically LNG Pricing based on quite simple Crude Oil based formulae

• Advent of shale gas in the US with low gas prices drives discussions towards Henry Hub based gas pricing formulae

• With very high investment costs, investors expect a solid long term return so a hedge formula between Crude based and HH based more likely the solution

Delivered Gas Pricing mechanisms vary by geography and availability and proximity of gas reserves

• Gas prices can be tied to Henry Hub based formula. LNG historically tied on a long term (>5 years) Crude based formula

• Huge LNG capex ( $10 Billion per 5 MMTPA line) means investors look at long term pricing guarantees rather than short term flexible sales

“Anomalies” in Global Gas pricing now creating waves in some countries • India’s gas demand relies on a combination of imported LNG, domestic inland

gas, and deep water gas. The government regulates prices and subsidies. Gas to the power and fertilizers industries is subsidized in India

• India’s domestic-to-imports production is around 65%-35% with importations to outstrip local supplies

• This results in quite diverse ways gas being priced:

LNG short term imports from Qatar are around $15-16/MMBTU for $100/bbl oil formula

KG fields (offshore, deep water) originally priced at $2.4MMBTU, then more recently at $4.2/MMBTU

Other gas fields are priced up to $5.7/MMBTU

Government is considering various “pooled” pricing options at around $8.4/MMBTU.

In Summary ….

In Summary ……

• High oil prices and abundance of alternative feed stocks is driving industry to diversifying from conventional feed stocks for petrochemicals

• MTO and MTP processes, integrated into natural gas or coal are now a serious commercial proposition

• Coal based MEG has the potential to significantly change the source of supply for this product, still lagging MTO in capacity

• Shale Gas has a potential to be a game changer but a lot of unanswered questions remain about competitiveness and projections of reserves remain questionable. NGLs are currently driving profitability of shale gas ventures.

• Cleaner fuels will mean greater reliance on LNG – high shipment costs of LNG will mean petrochemicals, fertilizers and synfuels will be produced at gas source

• Dry or Wet Gas – as natural gas extraction is ramped up, so will the usage in the petrochemical value chains

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