Gas Chemicals Study

report prepared for

Research Council of Norway

1
Introduction

2
Background

The Research Council of Norway is a key participant in the national GASSMAKS program
Maximising Value Creation in the Natural Gas Chain. This initiative aims to maximise value
creation for society through the industrial processing of natural gas by enhancing knowledge
development, promoting commercial development, and strengthening international
competitiveness.

GASSMAKS is intended to provide a foundation for the industrial processing of natural gas in
Norway, which has been estimated to have a value creation potential of over NOK 10 billion
annually. The program, started in 2007, is scheduled to last for 10 years.

In order to further its understanding of gas based chemicals markets, the Research Council has
retained Jacobs Consultancy to provide an overview of the natural gas-based chemicals
production value chain. This report presents our assessment of the markets for the key chemical
derivatives which can be produced from natural gas within the context of global and regional
market trends for each product group.

3
Natural Gas Value Chain
N2

Ammonia
Urea
Synthesis

Formaldehyde

Natural Methanol
Reforming
Gas Synthesis MTBE

Acetic Acid

Oxo- Olefins
Alcohols

4
The gas chemicals market is dominated by
fertilisers applications

Oxo- Oxo-
Alcohols Methanol Alcohols
3% 19% 5% Methanol
32%

Ammonia
Ammonia
63%
78%

Global Demand European Demand

195 mmtpa 23 mmtpa

5
The Reforming Process

The first stage in the production of gas-based chemicals involves the so-called steam reforming process whereby
natural gas is converted to a mixture of CO2 and hydrogen. In this process natural gas, which comprises mainly
methane, is converted to synthesis gas, a mixture of carbon monoxide, carbon dioxide and hydrogen according to
the following equations:

CH4 +H2O 3H2 + CO

CO + H2O H2 + CO2

The process takes place at high temperatures over a nickel-based catalyst. In industrial units, reformer outlet
conditions are typically in the region of 850-880C and 10-20 bar pressure. An excess of steam encourages more
conversion and a level of around 3 times the theoretical steam requirement is normally used.

The production of natural gas derivatives such as ammonia, methanol and oxo-alcohols involves the further
reaction of the synthesis gas (sometimes referred to as syngas) derived from the steam reforming process.

While this report focuses on the production of chemicals from natural gas, it should be noted that synthesis gas
can be derived from other hydrocarbon feedstocks such as naphtha, fuel oil or even coal. Natural gas is,
however, by far the most widely used raw material for the production of these chemicals.

6
Ammonia / Urea

7
Ammonia Market Overview

Ammonia is the basic building block of the worlds nitrogen fertiliser industry, and fertiliser uses account for around 85% of its
demand globally. It is also used as a reagent in a wide variety of industrial end uses, including ammonium nitrate for explosives, the
production of hexamethylenediamine for nylon, acrylonitrile for fibres and plastics, caprolactam for nylon, isocyanates for
polyurethanes, and hydrazine. It is also used as a catalyst in phenol-formaldehyde condensation and in urea-formaldehyde
condensation to make synthetic resins. Other applications include as a refrigerant, a cleaning and bleaching agent, and a
household cleaner. It is also used as a preharvest cotton defoliant and in metal treating operations.

Anhydrous ammonia can be applied directly to the soil; however, it is more commonly converted to other products for agricultural
use, including ammonium phosphates, ammonium nitrate, urea, and urea-ammonium nitrate solution (UAN) . Urea plants are often
integrated with ammonia production as they require the carbon dioxide by-product from ammonia units.

There is a considerable difference in the fertiliser product mix used in different regions of the world. Urea, the fastest growing
nitrogen fertiliser, is particularly popular in warmer climates. Urea ammonium nitrate (UAN) is mainly used in North America and
Europe while nitrates are mainly applied in Europe. In the US, the direct application of ammonia to the soil accounts for up to 25% of
the nitrogen fertilizer market.

Asia is by far the largest consuming region of ammonia and has been the major force behind the increase in world ammonia
consumption in recent years, mainly for the downstream production of nitrogen fertilizers to help meet the increasing food
requirements of the fast growing populations in the region, China and India in particular. Future growth in Asian ammonia
consumption is expected to slow down as the reduction and/or removal of subsidiestriggered by the desire of countries within the
region to gain membership to the WTOincreases the cost of domestic nitrogen fertilizer production.

The growth in biofuels is also having an impact on nitrogen fertiliser demand. The International Grain Council estimates that nearly
17% of global corn (maize) production is now for industrial use, with growth particularly strong in the US. In Brazil around 50% of the
sugar cane crop is used for ethanol manufacture.

8
Urea Market Overview

Urea is a popular solid nitrogen fertilizer because of its high nitrogen content (46%), with nearly 90% of output going into this
application. Most world output is in a solid form, either prills or granules, or crystalline for specialised small-volume uses. In a
number of industrialised countries, a growing volume of liquid product is consumed in the production of nitrogen solution fertilizers,
and in liquid cattle feeds.

Urea is used in the developing regions of the world and is widely traded on international fertilizer markets due to its relatively low
transport costs. While many markets prefer other nitrogen fertilizers for better agronomic properties, urea is the commodity
reference product with an important influence on most other nitrogen fertilizer prices.

There are two main hubs in urea trade the Black Sea and Arab Gulf. These flows are said to determine the global prices. The
Black Sea normally supplies Europe and Latin America while the Arab Gulf supplies North America and Asia/Oceania. All other
trade flows tend to be more regional but can be important when they affect the need for Black Sea or Arab Gulf material.

Industrial applications for urea include the manufacture of urea-formaldehyde (UF) resins produced by the condensation reaction
between urea and formaldehyde. These resins find outlets in adhesives for paper, board, plywood, surface coatings moulding resins
and textile processing. They are also used to coat textiles, paper and leather.

Another outlet is in the synthesis of melamine employed for the production of melamine-formaldehyde resins. These are used in
adhesives and paints, and for laminates, moulding compounds, impregnating paper and textiles.

Urea is also a constituent of cattle feeds, and is a useful viscosity modifier for casein or starch-based paper coatings. It is used in
the reduction of NOx emissions and is an active ingredient for diesel engine exhaust treatment. Small quantities are used as an
intermediate in the manufacture of polyurethanes, pharmaceuticals, toothpaste, cosmetics, flame-proofing agents, sulphamic acid
and fabric softeners.

9
Ammonia Market Trends

Ammonia AAGR
mmtpa 2000 2007 2015 2000-07 2007-15
Demand
W Europe 15.6 14.2 14.1 -1.3% -0.1%
N America 22.6 19.5 19.8 -2.1% 0.2%
Asia 60.0 74.1 84.5 3.1% 1.7%
Rest of World 33.0 43.5 53.3 4.0% 2.6%
Demand Total 131.2 151.3 171.7 2.1% 1.6%

Capacity
W Europe 13.9 12.4 12.0
N America 23.0 16.0 16.1
Asia 70.8 87.1 97.4
Rest of World 55.2 67.1 81.9
Capacity Total 162.9 182.6 207.4

10
Urea Market Trends

Urea AAGR
mmtpa 2000 2007 2015 2000-07 2007-15
Demand
W Europe 8.5 8.4 10.0 -0.2% 2.2%
N America 10.9 12.4 12.5 1.9% 0.1%
Asia 67.6 90.2 109.9 4.2% 2.5%
Rest of World 16.8 21.8 25.9 3.8% 2.2%
Demand Total 103.8 132.8 158.3 3.6% 2.2%

Capacity
W Europe 5.7 4.8 4.8
N America 11.9 9.6 9.7
Asia 78 100.1 111.7
Rest of World 34.2 46.7 60.5
Capacity Total 129.8 161.2 186.7

11
Ammonia Technology

The heart of ammonia manufacture, the Haber process where nitrogen and hydrogen are reacted together under high pressure
and temperature, goes back to before World War I. Hydrogen is usually produced by the steam reforming of hydrocarbons, with
natural gas the dominant feedstock. It can also be produced by the partial oxidation of naphtha or residual oil using air or oxygen
and from coal gasification. Nitrogen can be obtained by the liquefaction of air or from producer gas.

The purified hydrogen-nitrogen mixture is compressed to 150-350 bar, mixed with recycle feed and fed into a tubular or multi-bed
reactor. The reaction takes place at 450-600 C over a catalyst. The ammonia is condensed out by refrigeration and unreacted
gases are compressed and recycled.

Most process improvements have been made through better catalyst systems, improved reformer and converter designs, and
integration of energy needs and heat recovery. New ammonia synthesis catalysts include a ruthenium-based system which has
an activity 20 times higher than the traditional iron-based catalyst. There is a trend towards larger single train plants, for example,
Krupp Uhde, in association with Synetix, has developed a flowsheet for a plant that produces over 1m tonne/year.

Designs have been developed integrating ammonia and methanol production, and the first grassroots plant to coproduce
methanol with ammonia using Haldor Topsoe technology was started up in 1999 for Petronas Fertilizer in Malaysia. A number of
existing units have also been converted to coproduce methanol including for BASF and Terra.

The production of one ton of ammonia requires approximately 9.0 GCal of natural gas. Many of the new plants currently in the
engineering / construction stages have a scale of between 600 ktpa and 700 ktpa. However, a number of companies are studying
the feasibility of much larger projects.

12
Urea Technology

Urea is produced commercially from ammonia and carbon dioxide. Its manufacture is based on a two step process in which the
ammonia and carbon dioxide react initially to form ammonium carbamate which is then dehydrated to urea.

Ammonia and carbon dioxide are first fed to a synthesis reactor which operates at around 180-210oC and 150 bar pressure. The
reaction mixture containing ammonia, ammonium carbamate and urea is first stripped of the ammonia; the remaining solution is
passed through a number of decomposers operating at progressively reduced pressures. Here the unconverted carbamate is
decomposed back to ammonia and carbon dioxide and recycled to the reactor.

Urea can be supplied as prills, granules, flakes, pellets, crystals and solutions. The urea solution is first concentrated by evaporation
or crystallisation; the crystals can then be melted to yield pure urea in the form of prills or granules. Prills are manufactured by
spraying molten urea from the top of a high tower through a counter current air stream. Granular urea is formed by spraying molten
urea into a mixture of dried urea particles and fines in a rotating drum.

Urea processes fall into two categories: external solution recycle systems; and internal solution stripping systems. In the former,
energy is saved by high carbon dioxide conversion rates while the latter reduces net energy requirements by optimising heat
recovery.

The production of one ton of urea typically requires around 0.58 tons of ammonia and 0.74 tons of carbon dioxide.

New urea plants are generally built to a very large scale, with several units in engineering / construction with capacities in excess of
one million tons per annum. The existing capacity base comprises a mix including much smaller units the European industry, for
example, includes a number of plants with capacities of between 200ktpa and 400 ktpa.

13
Ammonia Lead Producers

The ammonia industry is relatively fragmented,

with no producer owning more than 3% of
Yara
global capacity.
Koch
2.2% PCS
Nitrogen
Nitrogen
Delta
1.8% Lead producers include Egypts Delta and
2.1%
2.6% Trinidads PCS Nitrogen, both of which have
Togliatti Azot
1.7%
access to large gas reserves and to regional
markets - the European market in the case of
Delta, while PCS Nitrogen has good access to
the US market.

Norways Yara is the largest supplier in Europe

and operates plants throughout Europe and in
Trinidad.
Others
89.6%
Koch operates eight plants across North
America, and is the regions largest supplier
since its acquisition of ammonia production
assets formerly owned by Farmland Industries.

Togliatti Azot is the dominant producer in a

strong Russian industry.

14
Urea Lead Producers

The technology for urea production is

Pupuk Kalimantan readily available and production
SABIC Timur plants are relatively low cost, giving
1.9% 1.8% few entry barriers. The industry base
IFFCO NFL is therefore fragmented as might be
Qafco expected.
2.2% 1.9%
1.7%

The largest producers are those

based in the major consuming region
of Asia, or export oriented facilities in
the Middle East such as the joint
ventures established by SABIC and
the Qafco plant in Qatar.
Others
90.4%
The European market in small by
comparison, though Norways Yara
has established a strong position
there with around 2.3 million tons per
annum of capacity.

15
Methanol and Derivatives

16
Methanol Market Overview

Methanol is a colourless liquid, produced primarily from natural gas. Demand for methanol in 2007 was around 39.2 million tons
worldwide, of which approximately 80% was used in the production of derivative chemicals and the remainder for fuel additives, in
particular MTBE and other ethers for gasoline blending.

The principal chemical intermediates produced from methanol are formaldehyde and acetic acid. Smaller uses include methyl
methacrylate, methylamines, chloromethane and dimethyl terephthalate (DMT), as well as other more minor chemical and solvent
uses.

It is worth noting that in general there is a very significant difference in plant scale between the methanol producers and methanol
consumers for chemicals uses. The one exception is acetic acid where plants are now being built at a large-scale, so that a 500 000
tons per year acid plant might require approaching 300 000 tons per year of methanol. However, for smaller acetic acid plants and
certainly for formaldehyde producers as well as the other derivatives listed below, consumption to support a single derivative unit will
only represent a fraction of the output of the methanol plant. For this reason, and because methanol is an easy material to freight,
few chemicals consumers are back-integrated to methanol.

Methanols fortunes have been very much tied to that of MTBE, formerly its largest market after its use was mandated in a number
of states in the US. However, its use there has now effectively been phased out. This and other market trends are discussed in the
following sections.

Methanol is also used in the production of biofuels and to a lesser extent as a direct fuel for motor vehicles these and other fuel
related uses are discussed overleaf.

17
Alternative Fuel Uses for Methanol

As discussed later, methanol has found significant demand as a feedstock for gasoline ethers for use as fuel additives. However, its
value in these applications has centred on the ability of MTBE to increase the octane value of the fuel and to reduce air pollution. On
the basis of its energy content alone, methanol has not been able to compete with hydrocarbon fuels. However, with the increasing
migration of methanol production to remote gas locations, its cost of supply is becoming increasingly dissociated from global energy
markets and in an environment with continuing high oil prices, there is potential for the increased usage of methanol in fuel related
applications in future.

These fuel related uses for methanol include:

Intermediate in the production of dimethyl ether (DME) as an LPG substitute

Intermediate in the production of biodiesel

Fuel for fuel cells

Turbine fuel (especially in microturbines)

Displacing traditional hydrocarbons fuels (in buses for example) either neat or as a blend with gasoline such as M85 or with
diesel.

The major barrier to methanols adoption in fuel uses has been its high cost, on an energy equivalence basis, relative to
hydrocarbon fuels. In a high oil price environment, however, methanol is likely to become much more competitive. Despite this, we
believe that economic considerations will still limit the widespread use of methanol as a fuel. A key issue relates to the cyclicality of
methanol pricing, which implies that it can only compete directly with hydrocarbon fuels at certain periods during the cycle thus
large scale fuel users would either require their own integrated production (as, for example, a large DME production plant would only
be viable in most instances if fully back-integrated to natural gas, and thus would not participate directly in the methanol market), or
would require a secondary infrastructure such that either methanol or a hydrocarbon fuel could be used as the relative pricing levels
dictated.
18
Alternative Fuel Uses for Methanol (cont)

However, there is potential for growth in demand in certain fuel applications, in particular where methanols clean burning
properties confer an advantage, or where legislation and governmental financial incentives can support its use. At present,
the areas where methanol appears to offer the most immediate commercial opportunities are as a feedstock for biodiesel and
in the production of DME.

Biodiesel is manufactured by reacting methanol with a vegetable oil, most commonly rapeseed oil in Europe, soybean oil in
the US and palm or palm kernel oil in Asia, to produce a mixture of methyl esters and byproduct glycerine. Around 0.1 kt of
methanol is required to manufacture 1.0 kt of biodiesel. Apart from biodiesels advantages as a renewable fuel, it also
provides improved lubricity to diesel fuels, a property that has been degraded by the need to meet the new ultra-low sulphur
diesel specifications.

Biodiesel consumption in Europe has increased from around 300 kt in 1998 to an estimated 2.6 million tons currently. EU
legislation targets an increase in biodiesel use to 5.75% (by energy content) of the diesel pool by 2010. We consider it
unlikely that this will be achieved within this time frame and have assumed that demand will grow to around 7 million tons by
2010, equivalent to 4% of the market, with pressure on land use likely to restrict demand to around 7% of the diesel pool over
the longer term. Biodiesel is, however, not cost competitive with gasoil, and economic incentives in the EU countries have
been necessary to drive the rapid growth in consumption in the region. Biodiesel thus remains of most interest in the
European market, which accounts for an estimated 81% of world demand. The 2005 energy bill in the US introduced tax
incentives for producers of biodiesel, and with an increasing drive to reduce dependence on oil imports, further growth is
anticipated there also, though from a rather lower base.

19
Alternative Fuel Uses for Methanol (cont)

The use of dimethyl ether (DME) as an LPG replacement has also attracted increased interest in recent years, driven by
the high price of LPG compared to natural gas. DME can be used as an extender for LPG, with levels of up to around
15% leaving the burning characteristics similar to those of LPG, and thus allowing its use in conventional LPG burning
appliances. DME is currently produced in small scale plants for use as an aerosol propellant. Its use in fuel applications
would require production on a much larger scale, which to be competitive would be integrated with methanol production.
One such plant, with a capacity of 800 ktpa (methanol demand 1.1 million tpa) is currently planned for Iran and several
coal to DME plants are slated for China, where the development of DME as a fuel substitute has the public support of
the Chinese government. Any new projects targeting DME for fuel use are likely to be integrated complexes producing
DME directly from synthesis gas made from coal or natural gas rather than from methanol, and thus will not participate
directly in the methanol supply / demand balance.

Methanol is also used as a blendstock in gasoline, in particular in China. However, gasoline specifications in Europe
and the US limit its use in these regions and we do not anticipate significant growth in demand in future for methanol for
direct blending into gasoline.

Over the longer term, fuel cells are an area where enormous levels of methanol demand are projected by some
proponents. Methanol based fuel cells have a higher efficiency (70-75%) than hydrocarbon based designs (typically 45-
55%); however, this does not take into account the fact that the conversion of methane to methanol is only 62-68%
thermally efficient. Adjusting for this the overall efficiencies are much closer. The key issue, however is whether fuel
cells themselves will succeed. At present fuel cell cost per kW of power is far higher than that of internal combustion
engines, though there are emission benefits. Whether or not fuel cell demand for methanol ultimately grows to be
significant, we believe that this development is unlikely to significantly impact methanol demand over the medium term.

20
Methanol Demand by End-Use

HCHO
Other
35.4%
39.1%

MTBE Acetic Acid

10.9% 14.6%

Global demand (2007)

39.2 million tons

21
Methanol Market Trends

Methanol AAGR
2000 2007 2015 2000-07 2007-15
Demand
W Europe 6.2 7.5 9.2 2.7% 2.6%
N America 8.8 6.9 7.7 -3.4% 1.4%
Asia 8.9 15.8 24.1 8.6% 5.4%
Rest of World 6.0 9.0 12.1 5.9% 3.7%
Demand Total 30.0 39.2 53.1 3.9% 3.8%

Capacity
W Europe 4.0 2.6 2.6
N America 7.9 0.6 0.3
Asia 6.0 10.9 16.7
Rest of World 27.2 30.5 39.7
Capacity Total 45.0 44.6 59.3

22
Methanol Lead Producers

Methanex remains the worlds largest methanol

producer by a significant margin despite closing
around 2.5 million tons of capacity in Canada
and New Zealand in recent years. The
companys remaining facilities are in Chile and
Trinidad, and a joint venture is planned for
Methanex
Egypt.
12.8%
MHTL
8.9% Methanol Holdings (Trinidad) Limited (MHTL)
was formed in 1999 to consolidate the Trinidad
and Tobago Methanol Company, the Caribbean
NPC Methanol Company and the Methanol IV
Others 7.6% Company. Together with the new M5000 plant
61.8% SABIC which is directly owned by MHTL, the plants
6.5% have the combined capacity to produce over 4
Oman Methanol million tons of methanol per year. All of the
2.4% facilities are located in Point Lisas, Trinidad.

Irans NPC operates three methanol plants with

a combined capacity of 3.4 million tpa, and has
plans for two further large scale facilities, one of
which should start up later this year.

Sabic has shares in three joint venture methanol

manufacturing companies located in Saudi and
Bahrain.
23
Methanol Technology

The earliest processes for the production of methanol were based on the distillation of wood to make 'wood alcohol. However, this
inefficient method of methanol production was replaced in the 1920s by large scale processes based on the conversion of syngas
produced by the reforming process.

Synthesis gas, a mixture of carbon monoxide, carbon dioxide and hydrogen, is first produced in a reformer, where a mixture of
hydrocarbon feedstock and steam is passed through a heated tubular furnace. The ratio of hydrogen and carbon in the syngas can
be adjusted by purging excess hydrogen or by adding carbon dioxide. Developments include the use of autothermal reforming,
either alone or in combination with a primary reformer, in which oxygen is mixed with the steam.

The syngas is cooled and compressed before being fed to the methanol converter. The methanol synthesis takes place in the
presence of copper-based catalysts at 250-260oC. The crude methanol is purified by distillation.

A simplified flow diagram showing the methanol production process as licensed by Johnson Matthey / Davy Process Technology is
shown overleaf.

The production of one ton of methanol typically requires around 8.5 GCal of natural gas.

Plant designers are developing very large capacity plants in the 5000-10,000 tonnes/day range (equivalent to around 1.6 to 3.3
million tpa) that could produce low-cost methanol for fuel uses and light olefins production when based on inexpensive natural gas.
However, most new projects are somewhat smaller than this, with capacities of 0.5 million tpa to 1.0 million tpa being more typical. A
number of smaller coal-based plants are planned for China.

24
Methanol Production Process

25
MTBE Market Overview

Demand for methanol grew strongly in the first half of the 1990s, largely as a result of a surge in MTBE demand
in the US. This followed the passing of the Clean Air Act, which mandated the use of oxygenated gasoline in
areas of CO and ozone non-compliance. MTBE became the preferred oxygenate, and US demand for MTBE
grew from just 4.0 million tons in 1990 to 12.8 million tons by 1997. However, by the late 1990s, resistance to
MTBE had started to grow as it became apparent that gasoline containing MTBE had leaked into groundwater
and was contaminating drinking water reservoirs. In 2005, the US federal government passed the Energy Policy
Act. While this Act does not provide for a federal ban on the use of MTBE in gasoline, it does waive the federal
oxygenate standard for gasoline effective May 2006. Demand for MTBE in the US has already fallen to just under
5 million tons in 2005, and we forecast that this decline will continue, with essentially no fuel use of MTBE in the
US by the end of the decade.

In Europe and Asia, the use of MTBE in gasoline is likely to continue. The European Union issued a final risk
assessment report on MTBE in 2002 that permitted its continued use. However, European Union targets to
promote biofuels through legislation and tax policy are putting competitive pressures on the use of MTBE in
gasoline, with several European MTBE production facilities having been converted to ethyl tertiary butyl ether
(ETBE) to take advantage of tax incentives. Elsewhere in the world, MTBE continues to be used as a source of
octane, and is likely to see increased demand in order to address pollution in some world cities, particularly in
Asia.

26
MTBE Market Summary

MTBE AAGR
2000 2007 2015 2000-07 2007-15
Demand
W Europe 3.2 2.7 2.2 -2.4% -2.5%
N America 12.3 2.9 1.1 -18.7% -11.4%
Asia 3.0 3.9 4.9 3.8% 2.9%
Rest of World 2.1 2.7 3.3 3.7% 2.5%
Demand Total 20.6 12.2 11.5 -7.2% -0.7%

Capacity
W Europe 3.6 3.1 2.8
N America 9.8 4.2 1.4
Asia 3.1 4.5 4.7
Rest of World 6.4 6.5 6.5
Capacity Total 22.9 18.3 15.4

Note: Several MTBE plants in Europe have been converted to ETBE since 2004 when subsidies to produce
ethanol were introduced. Many of these plants can operate in swing mode and are able to produce either ETBE
or MTBE as the market situation demands, though this ability is constrained in some cases by the terms of
supply contracts for ethanol. This makes reporting of MTBE capacity somewhat problematical; in the table above
ca 1.1 million tons of the West European capacity shown can produce either MTBE or ETBE.

27
MTBE Technology

MTBE is produced by reacting isobutene with methanol over a catalyst bed. The reaction takes place in either a liquid phase or
mixed gas-liquid phase reactor containing an acidic ion exchange resin. An alternative catalyst is sulphuric acid. The reaction takes
place at a temperature of 50-90oC and a pressure of 20 bar. The reaction mixture is distilled to produce high purity MTBE.

The isobutene feed may be part of a mixed C4 stream as the other C4s present are inert to methanol. Suitable feedstocks include:
The C4 stream from a steam cracker with the butadiene removed this is a mixture of isobutene and 1- and 2-butenes and is known as
raffinate-1
The off-gases from a catalytic cracker
N-butane (from LPG) which is isomerised to isobutane and then dehydrogenated to isobutene.

MTBE is also produced as a byproduct of one of the commercial manufacturing routes to propylene oxide, in which the isobutene is
formed by the dehydration of t-butyl alcohol. Lyondell and Huntsman use similar versions of this process.

Raffinate-1 is the most widely used feedstock for the production of MTBE. The production of 1 ton of MTBE typically requires around
1.54 tons of raffinate-1 and 0.36 tons of methanol. The process produces around 0.9 tons of a by-product C4s stream, known as
raffinate-2, which mainly comprises the 1- and 2-butene species present in the feedstock. This stream is often converted to alkylate,
a high octane gasoline blending component.

With the future of MTBE as a gasoline additive under threat, a number of processes have been developed to convert existing MTBE
units to produce other gasoline additives. Snamprogetti and Kellogg Brown & Root, in association with Finland's Fortum Oil and Gas
both offer processes for producing iso-octane from existing MTBE facilities. UOP has developed a technology route that can be
used to revamp MTBE plants to produce alkylate.

28
MTBE Lead Producers

The market is dominated by Saudi Arabias

SABIC via its three joint ventures: Ibn Zahr,
Sadaf and Ibn Sina.

Lyondell and Huntsman produce MTBE as a

SABIC
17.5% by-product at their propylene oxide plants. The
Lyondell process produces around 2.2 to 2.6 tons of
7.6% MTBE per ton of PO; thus MTBE capacity
tends to be high. Lyondells two European
Huntsman plants now have the capability to produce
Others 4.6%
either MTBE or ETBE.
62.9% Qafac
3.9%
Super Octanos Of the on-purpose capacity, apart from one or
3.4% two large plants in the Middle East which can
produce up to 700 ktpa of MTBE, most of the
market comprises much smaller units. In
Europe or Asia a plant with a scale of around
200 ktpa would be considered a top quartile
producer.

29
Formaldehyde Market Overview

Formaldehyde accounts for around a third of global methanol demand. It is used primarily in the production of thermosetting
resins - urea-formaldehyde (UF) resins represent the largest volume of demand, followed by phenol-formaldehyde (PF) and
melamine formaldehyde (MF) resins. Other more minor uses include acetyl resin production (around 8% of global
formaldehyde demand) and as a reagent in an old process for 1,4-butanediol manufacture.

Formaldehyde based resins are used as binders in a variety of industrial uses. The main application for UF resins is in the
production of non-structural woodboard, including particle board, MDF, OSB (oriented strand board) and plywood; these
resins are also used in the manufacture of mouldings and in fertiliser applications. PF resins are higher cost than UF resins,
and are used in structural wood products and where water resistance is required, particularly for external uses, and in a
variety of other applications which include brake linings, mineral fibre insulation and foundry sand binders amongst others.
PF resins are dark in colour which limits their use in certain applications; where decorative finishes are required, particularly
as the facings for woodboard, MF resins are typically used. Mixed resin types (MUF and PUF) are also used to provide a
balance between enhanced technical performance compared to standard UF resins and the higher cost of PF and MF
resins.

MDI production is a small but rapidly growing end-use. MDI is a polyurethane intermediate used in the production of rigid
foams predominantly for appliance and building insulation. MDI also competes with formaldehyde based resins as a binder
for woodboard.

The markets for formaldehyde based resins are mature and generally low growth with a strong linkage to construction
activity. MDI has seen more rapid growth as rising energy costs and environmental demands have increased the demand for
more and better insulation products; this trend is expected to continue.

30
Formaldehyde Market Trends

Formaldehyde AAGR
mmtpa 37% 2000 2007 2015 2000-07 2007-15
Demand
W Europe 6.6 8.0 9.8 2.8% 2.5%
N America 5.2 6.3 7.5 2.7% 2.3%
Asia 8.4 13.1 20.6 6.6% 5.8%
Rest of World 4.5 6.6 9.5 5.6% 4.7%
Demand Total 24.7 34.0 47.4 4.7% 4.2%

Capacity
W Europe 7.1 7.8 9.0
N America 6.6 6.6 6.8
Asia 11.5 15.0 18.2
Rest of World 5.7 7.4 9.2
Capacity Total 30.9 36.8 43.2

31
Formaldehyde Technology

Formaldehyde is produced from methanol by oxidation with air over a catalyst. Two main routes are used for the commercial
production of formaldehyde:
Oxidation-dehydrogenation using a silver catalyst involving either the complete or incomplete conversion of methanol
Direct oxidation of methanol to formaldehyde over a metal oxide catalyst

In the silver catalysed route, methanol is vaporised and passed with air and steam over a thin bed of silver-crystal catalyst at about
650oC. Formaldehyde is formed by the dehydrogenation of methanol. The heat required for the endothermic reaction is obtained by
burning hydrogen contained in the off-gas produced from the dehydrogenation reaction.

The metal oxide route involves the oxidation of methanol over a catalyst of molybdenum and iron oxide. A mixture of air and
methanol is vaporised and passed through catalyst-packed reactor tubes. The reaction takes place at 350oC and generates heat to
provide steam for turbines and process heating.

Yields from both processes are around 90% to 92% but the oxidation route has a lower reaction temperature and the metal oxide
catalyst is cheaper than silver. However, the partial oxidation-dehydrogenation route is still widely used in existing plants.

Formaldehyde is produced as a 37% to 55% solution in water. It is not entirely storage stable, particularly at higher concentrations,
and a small amount of unreacted methanol, typically up to 1%, is often left in the product as an inhibitor.

The high water content in the product makes formaldehyde high cost to freight. Further, the plant has a relatively low capital cost
making any economies of scale from larger production units less significant than for most other chemical products. As a result,
formaldehyde production is generally located close to its point of use; it is estimated that around 80% of production world-wide is
integrated with downstream units.

32
Formaldehyde Technology (cont)

As noted in the previous slide, formaldehyde plants are generally integrated with downstream production units
and it is this that determines the scale of the plant. Perstorp, the worlds largest licensor of metal oxide
technology, offers standardised plant sizes up to 149 ktpa; however, most new capacity is at a smaller scale than
this.

A flow diagram for Perstorps process is shown overleaf.

Methanol consumption is around 0.42 tons per ton of 37% formaldehyde; for a 75ktpa plant, this would equate to
a methanol demand of around 32 ktpa. There is no other feedstock requirement.

33
Formaldehyde Production Process

34
Formaldehyde Lead Producers

Apollo Management acquired Borden

Dynea
Chemical, the largest producer of
2.8% formaldehyde with 35% of US capacity at
Perstorp the time, in August 2004. The following
2.6% year, Apollo created a new entity, Hexion
Hexion Georgia-Pacific Specialty Chemicals, by combining
8.4% 3.2% Borden with its earlier acquisitions -
Arclin Resolution Performance Products,
1.8% Resolution Specialty Materials, and
Bakelite.

Koch Industries acquired Georgia-Pacific

Others Corporation in early 2006. Georgia-Pacific
81.2% Resins continues to operate under its
previous name.

Arclin was founded in 2007 when

Teachers Private Capital purchased
Dynea North America from Finlands
Dynea Chemicals.

35
Acetic Acid Market Overview

In 2007, approximately 15% of all methanol produced annually was used in the production of acetic acid. Acetic acid is a chemical
intermediate used principally in the production of downstream products which are themselves consumed in a wide variety of
products including adhesives, paper, paints, plastics, resins, solvents, pharmaceuticals and textiles.

Vinyl acetate monomer (VAM) a raw material used in the production of binders for the paints and adhesives industries, is the major
consumer of acetic acid; the two most important groupings being polyvinyl acetate and vinyl acetate copolymers. Demand for VAM
has benefited from increased consumption of water-based products, such as those produced with VAM, as a result of environmental
concerns associated with emissions of volatile organic compounds from other types of solvents. VAM based binders compete with a
variety of other products, of which the more important are acrylates. A recent move to redesignate the toxicity rating of VAM from
T3 to T2 may lead to some reformulation towards the more expensive styrene acrylic and pure acrylic lattices, though this would
be likely to be a fairly marginal effect.

Other important uses for acetic acid include acetic anhydride (for acetate fibres, and pharmaceuticals amongst other uses), as a
solvent in the oxidation of paraxylene to pure terephthalic acid (PTA) (there is a 0.04-0.05 t/t make up as some acetic acid is also
oxidised), in acetate ester production (butyl acetate, ethyl acetate, glycol ether acetates etc. for solvents) and in chloroacetic acid
production (used to produce carboxymethylcellulose, a thickener in foods and drilling muds).

Other uses for acetic acid include acetate fibre, used in cigarette tow and apparel, for which demand is flat, and anhydride for which
demand is projected to grow slowly. PTA demand has seen very rapid growth, in line with demand throughout the polyester chain,
and this is forecast to continue though at a lower rate than that seen historically, with 6-8% p.a. growth rates forecast. Other uses of
acetic acid are also slow growing (GDP growth rates or less).

36
Acetic Acid Lead Producers

The acetic acid market is dominated by BP

and Celanese, which together own over
43% of global production capacity. This has
in part been due to limited access to
technology, with the preferred methanol
Celanese
22.0% carbonylation route being restricted to the
major players.
Others
44.4%
Celanese dominates the market in the US
where most of its capacity is based it also
operates plants in Singapore and China.
BP
21.2%
BP operates capacity in all major world
Daicel Eastman Lyondell
regions with plants in Europe (0.6 mmtpa),
3.8% 4.2% 4.5%
the US (0.5 mmtpa) and Asia (1.5 mmtpa)

Other larger players, such as Lyondell,

Eastman and Daicel, typically operate single
facilities with one or two competitively sized
plants. Lyondell and Eastmans facilities are
based in the US and Daicel in Japan.

37
 Acetic Acid Technology
Methanol is converted to acetic acid by carbonylation with carbon monoxide over a rhodium phosphine complex with iodine co-catalyst.
This is the process discovered and commercialised by Monsanto. Variants on the Monsanto process developed by Eastman and others
have allowed the direct production of acetic anhydride (the acetic reacting with additional methanol to produce methyl acetate which is
further carbonylated to acetic anhydride). Other technological developments have included a low water process using rhodium catalysts
and new catalyst systems using lithium (Celanese) or iridium (BP). Fundamentally however, the chemistry of these processes remains
that developed by Monsanto.

The introduction of the Monsanto process resulted in the gradual decline of alternative older technology from ethylene oxidation (via
acetaldehyde) as well as other more minor routes including naphtha or LPG (liquid petroleum gas) oxidation and fermentation
technology. The main advantage of the Monsanto process is the low cost of the raw materials (methanol and carbon monoxide) relative
to ethylene, which has resulted in this process and variants of it replacing the older routes.

In the early years following Monsantos commercialisation of its technology, it licensed the process widely. However, in the early 1980s
BP acquired the rights to the process from Monsanto and stopped the commercial licensing of the process. This blocked the
proliferation of the technology and allowed BP (and effectively the other Monsanto licensees) to manage the market such that the high
cost ethylene based production remained as the marginal price setting production.

The expiry of the key Monsanto patents in 1998 freed the Monsanto licensees (including Celanese, Millennium and Acetex) to develop
new projects, while UOP, a technology provider, also began to offer a rhodium-based process to the market. Celanese, now the worlds
leading producer, and BP had both developed new catalyst processes and each built a massive world scale plant of 500ktpa capacity in
S. E. Asia in 1999/2000 using their respective new technologies, Celanese in Singapore where it had a vinyl acetate (VAM) plant and
BP in Malaysia. This addition of 1 million tons of capacity to a market of less than 7 million tons of demand finally forced the closure of
much of the worlds remaining ethylene based production.

38
 Acetic Acid Technology (cont)

SABIC is currently developing its own process to acetic acid via ethane oxidation. The low cost of ethane in Saudi Arabia means
that this process could potentially be highly economic if high selectivity can be achieved. SABIC has built a 30 000 ton
demonstration plant and is contemplating a larger plant, although with decreasing availability of ethane in the Kingdom it is not
clear when this will occur.

The production of one ton of acetic acid via the methanol carbonylation route typically requires around 0.54 tons of methanol and
0.53 tons of carbon dioxide.

Most of the new acetic acid plants currently being planned have capacities of between 200 ktpa and 500 ktpa; almost all of those
under consideration are to be located in Asia or the Middle East.

39
Methanol to Olefins

A number of projects are planned whereby methanol would be used as a feedstock for the manufacture of olefins. The technology
has yet to be commercially proven, but several projects are planned with more under evaluation. In China in particular, the prospects
of using coal as a feedstock for methanol which could then be converted to olefins has drawn significant interest in recent years. The
government is anxious to reduce dependence on imported hydrocarbon feedstocks, while the low cost of coal affords some
advantage. Several such projects are planned, with the Shenhua Group, Chinas largest coal producer, progressing three methanol
to olefins projects with the first expected on line next year. Once the technology is commercially proven, more such units are likely to
follow.

Two technologies are offered for license, a fluidised bed process from UOP/Norsk Hydro, which produces both ethylene and
propylene, and a fixed bed process from Lurgi, which produces only propylene.

The UOP/Hydro process has been offered for license since 1996 but to date no commercial plant has been built, although UOP and
Total are nearing completion of an integrated MTO demonstration unit in Feluy, Belgium, that will feed a semi-commercial polyolefin
plant. The first commercial-scale use of the technology will be in Nigeria for Eurochem subsidiary Viva Methanol. The plant, in
Lagos, will produce 1.3m tonnes/year of ethylene and propylene from methanol derived from natural gas. Start-up is expected in
2012.

Lurgi likewise has in operation only a demonstration MTP plant, based at Statoil's methanol facility in Norway. As propylene is
projected to be in short supply in the future, however, there has been renewed interest in the process. Basic engineering work has
started for Fanavaran Petrochemicals MTP unit in Iran which would produce 120 000 tonne/year of propylene and Indias Gail has
expressed an interest in establishing a 60 ktpa demonstration plant to allow it to evaluate the technology. The company has sold two
licenses for full scale coal based MTP production units in China.

40
Steam Cracking Process

The most widely used commercial process for the production of olefins is via the steam cracking of a
hydrocarbon feedstock. Olefins, in particular propylene, are also recovered from refinery streams, and there is
increasing interest in adopting newer technologies that can increase the volumes of byproduct olefins
produced from this source.

In the steam cracking process, a hydrocarbon feedstock is pre-heated and mixed with steam before being
passed through a multi-tubular furnace. The outlet stream is quenched by direct contact with oil to cool it and
stop further reaction taking place. Subsequent processing stages carry out a series of separation and
purification processes to recover the olefins and byproduct streams, of which the most important are benzene,
pyrolysis gasoline, butadiene, butylenes and fuel oil.

A wide range of hydrocarbon feedstocks can be used for the production of olefins. In Europe and Asia, liquid
feeds are mainly used, of which naphtha is by far the most important. In the Middle East and North America,
cracking of ethane and propane predominates. Cracking of these feedstocks has the advantage of producing
far higher yields of the desirable olefins products. This reduces plant size and complexity for the production of
a particular volume of olefins, with implications for both capital and operating costs.

Norways Noretyl cracker, recently acquired by INEOS, processes primarily ethane and propane feedstocks. It
is supplied with these feedstocks under long-term agreements with the oil and gas major Statoil and
understood to be somewhat feedstock advantaged, but is relatively isolated from downstream markets.

41
Oxo Alcohols

42
Oxo Alcohols Market Overview

Oxo-alcohols are chemical intermediates produced by the reaction of olefins with syngas. The most important oxo-alcohols in
terms of market size are 2-ethyl hexanol (2-EH) and butanols (normal and iso). Producers mainly have some flexibility to vary
output mix depending on the market situation.

The worlds 2-ethylhexanol market currently stands at around 2.9 million tons per annum. Roughly 79% of the worlds demand is
in the manufacture of plasticisers, of which about 87% is for di-octyl phthalate (DOP). The only other significant use is in the
production of 2-ethylhexyl acrylate, which is used by the paints and the coatings industry and represents around 12% of total
demand. All other uses total only 9% of demand, and include 2 ethylhexyl nitrate, a diesel additive for improving the base cetane,
lube additives, solvents and surfactants.

Over the last decade, di-octyl phthalate (DOP), 2-EH's largest end use, has come under a great deal of pressure from
environmentalists. Although no conclusive evidence is available of health hazards associated with the usage of DOP, many
consumers in Western Europe have switched to other plasticisers both as a result of public pressure and to the impact of
regulations restricting the use of DOP in childcare articles. This has resulted in a steep decline in the demand for DOP in
Western Europe. However, demand remains strong in Asia, Africa and the Middle East primarily owing to the large markets for
flexible PVC and also due to the relative cost position of DOP versus alternates.

This decline in 2-EH demand for DOP has been offset to some extent by the rapid growth in demand for 2-ethylhexyl acrylate. 2-
ethylhexyl acrylate is used in the manufacture of emulsion polymers for pressure-sensitive adhesives and in latex surface
coatings, enamels and lacquers surface coatings. It is typically co-polymerised with shorter-chain, less costly acrylates or vinyl
acetate. The consumption of these coatings is heavily dependent on construction and maintenance activities and is thus
sensitive to the economic cycle. Future demand is projected to perform slightly better than GDP growth.

43
Oxo Alcohols Market Overview (cont)

N-butanol is used in the coatings and adhesives industries either as a precursor to other chemicals or as a solvent.

Its major application is in the production of butyl-acrylate and methacrylate esters, which account for about 40% of output.
The drivers for both of these are emulsified and solution polymers used in latex architectural paints, enamels and lacquers,
whose demand is strongly linked to the construction industry.

Around 10% of n-butanol demand is as a direct solvent; however its use has been moderated by trends toward higher solids
content and waterborne coatings and powder coatings. This application area is continuing to decline.

In amino resins, n-butanol acts as an alkylating agent to reduce inherent brittleness. The alkylated resins are used in
coatings for automobiles, appliances, coil, machinery and metal furniture. Here again, these coating formulations are losing
market share to water-based and powder coatings.

Other uses for n-butanol include textile manufacture, impact modifiers for rigid PVC, plasticisers, amino resins and
butylamines.

44
Oxo Alcohols Market Trends

Oxo-Alcohols AAGR
2000 2007 2015 2000-07 2007-15
Demand
W Europe 1.3 1.1 1.2 -2.6% 1.4%
N America 0.7 1.3 1.6 8.3% 2.4%
Asia 1.9 2.5 3.4 4.1% 3.9%
Rest of World 0.4 0.5 0.6 1.8% 2.1%
Demand Total 4.4 5.4 6.8 3.1% 2.9%

Capacity
W Europe 1.8 1.0 1.2
N America 1.6 1.5 1.7
Asia 1.7 2.7 3.8
Rest of World 0.8 0.8 0.9
Capacity Total 5.9 6.0 7.6

45
Oxo Alcohols Lead Producers

BASF leads the market for oxo-alcohols, with

six plants producing 2-EH and butanols
based in Europe, the US and Asia.

BASF Dow is the second largest producer, but its

11.9%
Dow assets are primarily in butanols it operates
9.6% only one small 2-EH plant in the US, but has
two much larger butanols facilities, also in the
US, and is the largest global producer of n-
Oxea butanol.
Others 7.5%
59.3% Eastman
Qilu 6.2% Oxea is based at a single site in Oberhausen
5.5%
in Germany where it produces both 2-EH and
n-butanols.

Qilu operates production facilities for 2-EH

and butanols at a production site in Zibo in
China.

46
 Oxo Alcohols Technology
2-ethyhexanol is manufactured primarily via one route the hydroformylation of propylene to butyraldehyde, followed by aldol
condensation to 2-ethylhexanol, and subsequent hydrogenation. The original technology used a cobalt catalyst and was operated
at high pressure. This has now largely been replaced by a more efficient rhodium catalysed process which operates at low
pressure. was developed as a replacement for inefficient high pressure cobalt catalysed processes, and since then, it has
undergone continual improvement and refinement to reduce operating and capital costs.

The most widely adopted low pressure technology is that developed by Davy Process technology in conjunction with Dow
Chemicals. In this process, normal and iso-butyraldehydes are produced by reacting propylene with synthesis gas (a mixture of
carbon monoxide and hydrogen) in the presence of a homogeneous modified rhodium catalyst. The reactions are carried out at
moderate temperature and pressure (less than 100 deg C and less than 20 bar g). Different technology variants are available to
achieve the desired selectivity of conversion to butyraldehyde, depending on the need for the usually less desirable iso-
butyraldehyde, which cannot be used to produce 2-ethylhexanol. A schematic of the Davy process is shown overleaf.

BASF and Mitsubishi offer similar processes though BASF only appears to offer its technology in joint venture projects. The older,
less efficient, cobalt-based process is still used in East Europe, most notably Russia.

The production of one ton of 2-EH via the rhodium catalysed route typically requires around 0.78 tons of propylene and 850 nm3 of
synthesis gas at a 1:1 CO2:H2 ratio.

Most commercial production of n-butanol involves the hydrogenation of n-butyraldehyde made through the oxo process, in which
syngas is reacted with propylene. Sasol uses a Ziegler process which dimerises ethylene, followed by oxidation and hydrolysis.

The production of one ton of n-butanol via the rhodium catalysed route typically requires around 0.66 tons of propylene and
700nm3 of synthesis gas at a 1:1 CO2:H2 ratio; around 0.1 tons of i-butanol byproduct are produced for each ton of n-butanol.

New oxo alcohols plants vary significantly in scale dependent on the market requirement, but the larger units being planned for
Asia can be up to around 250 ktpa in capacity.

47
Oxo Alcohols Technology

48
Summary and Conclusions

49
Summary & Conclusions:
Methanol and Ammonia / Urea
In volume terms, natural gas consumption for chemicals is dominated by ammonia for the fertilisers market and by methanol. These
products are bulk commodity chemicals which offer producers little opportunity to differentiate themselves, though the additional
security of supply offered by those producers with more than one plant or who operate in more than one region may be of value to
some consumers.

Access to technology is straightforward, with a number of technology licensors offering competing packages. Further, the plants are
typically of a lower cost per ton of output than is typical of the chemical industry. Overall, therefore, there are few entry barriers and
these industries operate on a highly cost competitive basis.

It follows that competitive advantage in the ammonia and methanol industries derives almost entirely from having a cost effective
supply position. This has driven two particular trends, which have been particularly evident in the methanol industry but also to a
lesser extent in the production of ammonia:
There has been a dramatic increase in plant scale, with producers looking to reduce both the unit capital cost per ton of new capacity and
the fixed costs of operation.
The industry has progressively moved to regions where natural gas is available at low cost typically where there is limited infrastructure
to enable it to be used as a fuel for industrial or domestic purposes.

Companies establishing gas based commodity chemicals production facilities in areas with large gas reserves but without a
sufficiently developed local market to consume it as fuel have typically been able to negotiate extremely attractive deals with regards
to gas feedstock pricing. These prices are normally invariant with oil price so while gas prices in the developed world have
increased in line with other fuels, these producers have had access to feedstock at a fraction of the price payable by consumers in
Western Europe.

It follows that the key to developing a competitive large scale gas-based ammonia or methanol production unit in Norway would lie
almost exclusively in the pricing level applied to the gas feedstock. In practice it would be extremely difficult to make such a facility
viable unless some form of discounting vis--vis the market price for gas were established.

50
Summary & Conclusions:
Methanol Derivatives and Oxo-Alcohols
Assuming that methanol could be manufactured on a cost-effective basis there are a variety of downstream chemicals which
could be produced using it as feedstock:
Formaldehyde is a major consumer of methanol, and is normally integrated with downstream resins production. Such a
facility would have strong synergies in a region where wood products to supply the European market are manufactured.
Methanol is used in the production of bio-diesel, a rapidly growing market in Western Europe. The volumes consumed
will ultimately be limited by the limitations to the availability of agricultural land which can be made available for fuels
production in the region, however.
Acetic acid and olefins production could also offer potential. Propylene demand in particular is growing strongly and there
is a need for new capacity in Western Europe to balance growth in demand.

Of the options discussed above, only an olefins production unit would afford a sufficiently large demand for methanol to justify
the development of a world scale plant. However, it could well be possible to develop a cluster of chemicals facilities which
together would provide a sufficient market to justify the building of such a facility. It is also worth noting that with sustained
higher oil prices, methanol is likely to become more attractive in various fuel related applications. These could provide a base
loading for a large scale methanol plant, allowing the benefits of economies of scale to be attained even should methanol
demand for chemicals derivatives not be sufficient to support a world scale facility.

Oxo-alcohols would also offer some potential. Market demand for n-butanol is showing reasonable growth rates, and with the
market in Western Europe approximately balanced at present and no new capacity planned for the region, it is likely that a net
import demand will develop over the medium term. Although the volumes involved even for a world scale plant are relatively
small, the product prices are much higher than are typical of the other products discussed here and thus would afford a
reasonable potential to add value to a natural gas resource.

51