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Kevin Allen

Managing Editor

Americas Petrochemicals and Biofuels - Platts

May 15, 2013

Houston, Texas

The changing dynamics & new challenges facing the North American petrochemical industry

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2

Agenda

• The benefits and detriments of the shale gas revolution

• Feedstock advantage spurs investment in new cracker builds and expansions

• New polyethylene capacities and exports to Latin America

• Lighter feed slates and the negative impact on heavier products, disconnect in ethylene/propylene production.

• Most significant in propylene as constraints impact pricing and facilitate volatility. Spillover effect for derivative products.

• Pending supply increases. Will it be enough?

• The shale boom and its impact on aromatics

• Lighter feed slates at crackers curbs aromatics output, negatively impact downstream products such as styrene, PTA, and PET

• Increased crude from shale plays and impact on crude import/export balance

• Northeast refineries shift to lighter crudes, trend likely to continue going forward.

• Conclusion

• What does this mean for the US petrochemical landscape going forward?

• How will this impact/alter global petrochemical trade flows?

Crude to gas ratio and the feedstock advantage

3

NGLs and the impact at the steam cracker

4

• Traditional light naphtha fed steam crackers produce significantly less ethylene however have a higher yield of propylene and C4s. For instance, light naphtha would give an ethylene yield of near 35% but would give a propylene yield of near 16% while offering up a C4 and butadiene yield of 9 and 5%, respectively.

• Pygas output cut significantly with ethane, propane and E/P mix feeds, down from 19% with naphtha to 2-7% depending on mix.

• Switching to NGLs, specifically ethane and propane, increases ethylene output to between 66-78% but cuts propylene and C4 output virtually in half.

Robust margins spur investment in new capacities

5

New builds

Company Location MM mt/yr ETA Aither Chemical/RMG TBD/USNE 0.20-0.30 2016

ExxonMobil Chemical Texas 1.5 2016 Formosa Plastics CUSA Texas 0.8 2016

ChevronPhillips Chemical Texas 1.5 2017 Dow Chemical Texas 1.5 2017 Sasol Louisiana 1.5 2017

Occidental/Mexichem Texas 0.55 2017 Shell Chemical Pennsylvania 1-1.50 2017

Expansions

Company Location MM mt/yr ETA BASF-Total Texas 0.06 2012

Dow Chemical (restart) Louisiana 0.40 2012 Westlake Chemical Louisiana 0.11 2013 Williams Louisiana 0.23 2013

Ineos Texas 0.12 2013 Westlake Chemical Kentucky 0.08 2014

BASF-Total Texas 0.10 2014 Westlake Chemical Louisiana 0.11 2015

LyondellBasell Texas (3) 0.83 2014-16 Dow Chemical TX/LA (2) 0.40 2014-16

New ethylene capacities likely to be polymerized

Company Location MM mt/yr ETA

Formosa Plastics USA Texas (1) 0.3 (LDPE) 2016

ExxonMobil Chemical Texas (2) 1.3 (TBD) 2017

ChevronPhillips Chemical Texas (2) 1.0 (TBD) 2017

NOVA Chemicals Joffre, Canada 1.0 (LLDPE) 2017

NOVA Chemicals Sarnia, Canada World scale 2017

Dow Chemical USG TBD 2017

Shell Chemical Pennsylvania 1.0 (TBD) 2017

New polyethylene projects announced:

• At least 5.5 million metric tons of new PE capacity announced as a result of lower production costs.

• Latin America is likely the target destination for US PE producers given higher prices and shorter delivery time. The region boasts a population of near 600 million people with a bourgeoning middle class in places like Mexico and Brazil.

• Additionally Latin America has seen strong economic growth with countries such as Panama, Peru and Chile posting GDP growth in 2012 of 10.5, 6.2 and 5.5% respectively.

• Growth expected to continue as the United Nations' Economic Commission for Latin America and the Caribbean (ECLAC) predicts the region's economy will expand by 4% in 2013.

Not all that glitters is gold…

7

So the US has a feedstock advantage, new ethylene and ethylene derivative capacities and an outlet for this material in Latin America. What is the problem?

• US producers would have to alter their current strategy.

• Margins destined to shrink over time as new

steam crackers increase ethane demand and push prices higher.

• US ethylene and PE prices yet to see benefit of cheap ethane.

• Producers must consider the 6.5 million metric

tons of additional capacities in Asia and the Middle East slated to come online by 2015.

• Protectionism. Brazil increased its import tariff

on US PE from 14% to 20% in 2012. Additionally Braskem is aggressively working to expand its market share with projects in Mexico, Venezuela, and Peru.

And then there is China…

• Finally there is China. If the country’s economic growth continues to lag at slightly under 8%, buy interest will wane and we could see re-exports targeting places like Peru and Chile

• As well, there have been a number of coal to olefins announcements in China. If all are realized and run at full rates, we could see an additional 12.5 million metric tons of olefins capacity come online

8

*Nexant

9

Agenda

• The benefits and detriments of the shale gas revolution

• Feedstock advantage spurs investment in new cracker builds and expansions

• New polyethylene capacities and exports to Latin America

• Lighter feed slates and the negative impact on heavier products, disconnect in

ethylene/propylene production.

• Propylene and heavy products hit hard

• Production constraints due to NGL shift impact propylene pricing and facilitate volatility.

Spillover effect for derivative products.

• Pending propylene supply increases. Will it be enough?

US propylene output: refinery versus cracker

10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20002001

20022003

20042005

20062007

20082009

20102011

Refinery

Cracker

• Between the years of 2000 and 2011, the percentage of propylene coming off the steam cracker fell by roughly 40%. In 2011, propylene yields off steam crackers were roughly 34%.

• During that same period, the percent of propylene off of refineries grew by over 30% and accounted for near 65% of propylene production in 2011. Source: Chemical Market Resources

Overview of steam cracker production at the end of 2012

• The preference for lighter feed slates weighed heavy to close out 2012 .

• Propylene output from steam crackers in

December shrank 7.3% from the previous month, to 28.53 million lbs/day while the P/E (propylene/ethylene) ratio sank to 19.62%.

• The B/E (butadiene/ethylene) ratio has also seen

sharp declines in recent years, falling from near 8.25% in 2005 to close out 2012 at 5.50%, a decrease of approximately 35%.

• Output of propylene and butadiene from steam crackers seems unlikely to improve going forward as the use of naphtha as a feed continued to decline, estimated at 6.5% in December, down from 13% in 2011 and 23.8% in 2008.

Source: Hodson Report

US propylene production in billions/lbs

If these estimates are indeed accurate, then total US propylene supply from ethylene crackers in 2012 would be just under 4.4 million mt.

15.2

14.7

12.8

10.8

11.4

10.8

9.7

6.00

8.00

10.00

12.00

14.00

16.00

18.00

2006 2007 2008 2009 2010 2011 2012

Tight supply supports high PGP prices, fosters volatility

Volatility spills downstream to spot polypropylene

US PP export prices not competitive globally

US polypropylene exports in metric tons: 2006-2012

16

1,564,342

1,998,633

1,530,651 1,600,054

1,231,368 1,195,139

1,083,800

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2006 2007 2008 2009 2010 2011 2012

Source: ITC

Higher PP prices open the door for HDPE substitutions

17

Anticipated additional propylene from cracker projects

77,936 91,831

165,402 169,481

252,492

392,577

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2012 2013 2014 2015 2016 2017

*based on 100% ethane feedstock when applicable

Metric Tons

Company Location Capacity (mt/year) ETA

Dow Chemical Freeport, TX 750,000 2015

Enterprise Mont Belvieu, TX 750,000 Q3, 2015

C3 Petrochemicals Alvin, TX 1,200,000 H2, 2015

Formosa Point Comfort, TX 600,000 2016

Williams Redwater, Alberta 500,000 2016

*Dow Chemical TBD TBD 2018

*Enterprise Mont Belvieu, TX TBD TBD

*Under Study

PDH units to provide lion’s share of new supply

• PDH announcements continue to increase with several companies announcing new capacities with at least two projects under study. Total increase in production expected at 3.8 million mt/year by 2016, assuming all projects a realized.

Anticipated North American PP consumption

7,758,000

7,940,000

8,133,000

8,338,000

8,553,000

7,200,000

7,700,000

8,200,000

8,700,000

2011 2012 2013 2014 2015

Source: Townsend Solutions

Metric Tons

21

• Total propylene output from steam crackers in the US in 2012 was just under 4.4 million mt.

• Additional output from new steam cracker projects expected to be about 392,500 mt.

• If all on purpose PDH units, not currently under study but including Williams Alberta unit, come to fruition, propylene supply in the US will increase 3.8 million mt.

4,400,000 + 392,500 + 3,800,000 -------------- 8,592,500 mt

Expected capacity increase from crackers and PDH units

• This raises the question: Is 8.592 million mt of new propylene capacity enough?

22

• To meet anticipated polypropylene demand in the North America in 2015, monomer supplies would need to be just under 8.725 million mt.

• Factor in continued growth in PP consumption at 2.5% per year and North American demand for propylene in 2016 would be 8,942,161 mt.

• In 2017, presuming consumption

levels in the region hold steady, total propylene demand needed for PP would be just under 9.165 million mt.

C3 from crackers will not meet expected PP demand

(Total US production - 2017) 8,592,500 – (PP demand in 2017) 9,165,720 -------------- (573,220)

23

Agenda

• The benefits and detriments of the shale gas revolution

• Feedstock advantage spurs investment in new cracker builds and expansions

• New polyethylene capacities and exports to Latin America

• Lighter feed slates and the negative impact on heavier products, disconnect in ethylene/propylene production.

• Propylene and heavy products hit hard

• Production constraints due to NGL shift impact propylene pricing and facilitate volatility. Spillover effect for derivative products.

• Pending propylene supply increases. Will it be enough?

• The shale boom and its impact on aromatics

• Lighter feed slates at crackers curbs aromatics output, negatively impact downstream products such as styrene, PTA, and PET

• Increased crude from shale plays and impact on crude import/export balance

• Northeast refineries shift to lighter crudes, trend likely to continue going forward.

The shale boom and it’s impact on aromatics

24

The shift to lighter feed slates by US steam cracker operators has negatively impacted aromatics output at the cracker. From 2011-2012 we can see a sharp reduction in benzene production from steam crackers in where volumes declined by over 17.5%.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

2011 2012 2013 2014 2015 2016 2017

Metric Tons

112,405

125,584

99,376

128,385

99,450

141,212

130,619

145,038

109,478

149,697

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

160,000

170,000

Aug2011

Sep2011

Oct2011

Nov2011

Dec2011

Jan2012

Feb2012

Mar2012

Apr2012

May2012

Jun2012

Jul2012

Sep2012

Nov2012

Oct2012

Dec2012

Jan2013

Feb2013

Mar2013

Benzene exports from South Korea (in metric tons)

Benzene prices strong, prone to volatility

26

Toluene and MX from crackers to experience similar fate

Blue = Anticipated toluene output

Red = Anticipated MX output

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2011 2012 2013 2014 2015 2016 2017

This is bad news for aromatic derivatives

28

• Tighter supply has led to higher mixed xylene

prices which means higher paraxylene prices.

• Paraxylene is a feedstock for PTA, which then is a feedstock for PET. The end use for PET in North America is from bottled beverages though PET fiber constitutes a larger chunk of demand in Asia.

• Higher mixed and paraxylene prices also make US

exports less attractive to buyers in Asia, which is significant as demand for xylenes in the region is expected to be strong amid a surge of new PTA production.

• China alone is expected to see 10.9 million mt of capacity come online by the first half of this year. Asian PTA capacity is expected to increase by near 19 million mt by 2015.

US mixed xylene and toluene blend values

29

Impact from shale not confined strictly to gas

• Aromatics production in the US has been constrained, not only by the shift to lighter feeds at the cracker, but also at the refinery due to increased production of unconventional tight oil.

• Crude from the Eagle Ford play is set to surge in the coming years with production slated to increase more than three-fold between 2012-2020.

• Prior to the shale boom, refiners were utilizing crude which had an estimated 40% naphthene and aromatic cut. The naphthene and aromatic cut from unconventional tight oil is estimated at near 35%.

• The reduction of aromatics as a result of shale plays is difficult to quantify though as many US refiners cannot run straight Eagle Ford crude and are most likely to blend with heavier crudes.

• Trend shows that refiners in the Northeast and Gulf Coast are utilizing lighter crudes with a higher API.

30

US crude production versus imports

MBPD

0.00

2.00

4.00

6.00

8.00

10.00

12.00

US Production

US Imports

MBPD

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Average API of crude input GC/NE refineries

32

Since 2007-08, we can see a shift toward lighter crudes with higher APIs. Of particular interest here is the input into refineries in the Northeast, which have seen a shift from medium crudes in 2008 to lighter crudes in 2012. Similar movement can be seen in the US Gulf inputs below, though not as pronounced.

27.83

29.7

30.95

32.93

22

24

26

28

30

32

34

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Conclusion

• Vast reserves of shale gas have revived the US petrochemical industry and prompted investment in new projects.

• Brownfield projects most likely to benefit from cost advantage while those who come late to the game will see margins crunched as demand for ethane pushes costs higher.

• New ethylene capacities likely to be polymerized and global trade flows will shift as US demand will not keep pace. US sellers will likely target Latin America, the Caribbean and to a lesser extent Europe and Africa however increased PE capacities globally, shrinking prices/margins due to increased PE supply, and protectionism in Latin America could prove to be problematic.

• Propylene and derivatives will continue to take a beating as a result of the shift to lighter feed slates at the cracker. Even with new production from planned PDH units, propylene supply from crackers will be insufficient to meet PP demand.

• US aromatics production negatively impacted by shale gas and crudes with benzene likely to be hardest hit.

• Processing unconventional tight oil likely to continue as companies such as Phillips 66, FHR and Marathon invest in Eagle Ford projects and look to increase capacity to process Eagle Ford crude.

33

Thank you

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Kevin Allen Managing Editor – Americas Petrochemicals kevin_allen@platts.com