Shifting Influences on North America Olefins Production

:
Is Energy the Entire Answer?
Vikki Medley Chemical Market Associates, Inc. Director, Olefins Economics and Feedstocks (281) 752-3219 VMedley@CMAIGlobal.com

Houston

London

Singapore

Dubai

The Industrial Energy Technology Conference

Strategic Issues Facing North America Olefins Producers
Economic Recovery Energy Market Impact
• Natural gas to crude oil ratio • Natural gas to crude oil ratio

Net Trade Position On Major Derivatives Increasing Non-Durable Goods Imports\Exports Middle East & Asia Ethylene Capacity Build-Up
* While an issue for ethylene markets…..it could be an opportunity for * While an issue for ethylene markets…..it could be an opportunity for propylene markets propylene markets
Houston London Singapore Dubai

The Industrial Energy Technology Conference

Above average growth seen in 90'.1% Forecast Annual average growth rate from 1990 through 1999 is equal to 4. Ethylene & Economic Growth Comparison Annual Change 10.3%. -9.7% 6.0% -2.0% -10.0% -6.8% 8.0% 4.0% -8.0% 90 91 92 93 94 95 96 97 98 99 GDP Growth Houston London Singapore Dubai 7.0% 0.0% 00 01 02 03 04 05 06 07 08 Ethylene Demand Growth The Industrial Energy Technology Conference .0% 6.S.3% 7.0% 6. 96' and 99' may be hard to repeat under current market conditions.0% -4.0% 2. 94'.U.

0% -4.7% 6.3% 7.0% 2.0% 6.0% -8. Ethylene & Economic Growth Comparison Annual Change 10.0% 6.S.0% 0.0% 00 01 02 03 04 05 06 07 08 Ethylene Demand Growth The Industrial Energy Technology Conference .0% -10. ethylene demand has contracted or was flat during three of the last four years indicating a fundamental shift in market dynamics -9.0% 4.0% -2.S.U.0% -6.8% 8.1% Forecast U.0% 90 91 92 93 94 95 96 97 98 99 GDP Growth Houston London Singapore Dubai 7.

% The Industrial Energy Technology Conference .S. Likely A Permanent Change % Operating Rate Billion Pounds 17 16 15 14 13 12 11 10 9 8 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Total Demand Houston London Singapore Dubai 100 95 90 85 80 75 Forecast 70 65 60 55 Nameplate Operating Rate. Ethylene Demand Has New Trendline….U.

From the “Wellhead to Walmart”… The Supply Chain is Changing Base Energy Ethylene Cracker PE Pellets Consumers Houston London Singapore Dubai NonDurables The Industrial Energy Technology Conference .

What About Global Competition? To play the game successfully in commodity petrochemicals and plastics… • It is not all about who has the biggest plant • It is not all about who has the best technology there first • It is not all about who traded • It is all about cost…and competitive cost positions have developed into a battle between natural gas versus crude oil London Singapore Dubai …as 60% of integrated PE production costs is hydrocarbon related! Houston The Industrial Energy Technology Conference .

The Industrial Energy Technology Conference .North America Energy Price Trends $ / MM Btu 7 6 5 4 3 2 1 0 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Natural Gas Houston London Singapore Dubai Crude/Gas Ratio 7 6 5 4 3 2 1 0 Crude (WTI) Crude / Gas Ratio The “playing field” has been leveled between North America and other global producers.

8 Million Metric Tons Houston London Singapore Dubai 28.2003 Ethylene Production By Feedstock World Ethane 28% Others 1% Gas Oil 6% Naphtha 54% Propane 8% Butane 3% Others 1% Gas Oil 4% North America Ethane 55% Naphtha 23% Propane Butane 13% 4% 96.7 Million Metric Tons The Industrial Energy Technology Conference .

Natural Gas Is Key Ethylene Capacity by Country (Million Tons) Ethylene Capacity by Country (Million Tons) 45 45 40 40 35 35 30 30 25 25 20 20 15 15 10 10 90 91 92 93 94 95 96 97 98 99 00 01 02 90 91 92 93 94 95 96 97 98 99 00 01 02 United States United States Houston London Singapore Canada Canada Dubai Mexico Mexico • A decade of olefins and derivative investments were driven by an assumption of readily available low cost natural gas – Ethylene capacity grew at a rate of 1.0 MM tons per year – North America was a primary supplier of ethylene derivatives to the global market The Industrial Energy Technology Conference .

00/MM Btu USGC Natural Gas = $5.World Ethylene Cash Costs .Regional Averages Dollars per Ton 650 550 450 350 250 150 50 2003 Energy Prices USGC Natural Gas = $5.5 MM tons 0 London Singapore 20 Dubai 40 60 80 Cumulative Capacity (Million Tons) 100 120 Houston The Industrial Energy Technology Conference .00/MM Btu Brent Crude = $28/BBL Brent Crude = $28/BBL North America North America South America South America Wt'd Avg = $420/ton Wt'd Avg = $420/ton Wt'd Avg = $380/ton Wt'd Avg = $380/ton Northeast Asia Northeast Asia Wt'd Avg = $310/ton Wt'd Avg = $310/ton West Europe West Europe Wt'd Avg = $315/ton Wt'd Avg = $315/ton Southeast Asia Southeast Asia Wt'd Avg = $270/ton Wt'd Avg = $270/ton Middle East Middle East Wt'd Avg = $140/ton Wt'd Avg = $140/ton 2003 total demand forecast to reach about 98.

S.Cents Per Pound 35 30 25 20 15 10 5 U.5 quarters of the year! Dollars Per Metric Ton 550 Light Naphtha 440 330 Purity Ethane 220 110 Ethane Favored Naphtha Favored Parity Ethane Favored 0 Jan 2 Houston London Feb 7 Mar 17 Apr 22 May 28 Jul 2 Singapore Dubai 0 Aug 7 Sep 12 Oct 17 Nov 21 The Industrial Energy Technology Conference . Daily Ethylene Cash Costs 2003 New ‘era’ in Natural Gas…… But ethane was still favored for 2.

Natural Gas Is Key • High natural gas prices relative to crude impacts regional competitive position – International trade is no longer a major source of demand growth for North America – Growing imports of nondurable goods threaten future demand growth Houston London Singapore Dubai The Industrial Energy Technology Conference .

0 1.0 0 -1.Million Tons 5.0 2.0 Net Imports North America Share of Global Ethylene Derivative Trade all but Disappears… 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Ethylene Glycol Houston London Singapore Dubai Vinyls Others Styrenics Net Trade Polyethylene The Industrial Energy Technology Conference .0 3.0 Net Exports 4.

0 Net Exports 4.0 Net Imports North America Share of Global Ethylene Derivative Trade all but Disappears… Historically 50% of world net equivalent ethylene trade and 15% of North America capacity 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Ethylene Glycol Houston London Singapore Dubai Vinyls Others Styrenics Net Trade Polyethylene The Industrial Energy Technology Conference .0 3.0 2.0 0 -1.Million Tons 5.0 1.

isn’t vulnerable – won’t logistics protect the market? Houston London Singapore Dubai The Industrial Energy Technology Conference .S.How much Polyethylene did the United States Import in 2003? Surely the U.

67 Billion pounds of PE Resin Disguised as Polyethylene Bags… 96 London 97 Singapore 98 Dubai 99 00 01 02 03 (Using 10# per 1000) The Industrial Energy Technology Conference .Imported Polyethylene Billions of Bags 160 140 120 100 80 60 40 20 0 Houston 1.

Imported Polyethylene Billions of Bags 160 140 120 100 80 60 40 20 0 Houston 1.67 Billion pounds of PE Resin Disguised as Polyethylene Bags… Continued Growth in Non-durable Goods Imports Will Have a Negative Impact on U.S. Ethylene Demand Growth 96 London 97 Singapore 98 Dubai 99 00 01 02 03 (Using 10# per 1000) The Industrial Energy Technology Conference .

It’s More than Just A Natural Gas Issue • Significant build-up of ethylene capacity in the Middle East • Increased ethylene integration in Asia Houston London Singapore Dubai The Industrial Energy Technology Conference .

1st Wave. timing may not impact the forecast for the next peak in global plastics and base chemicals Iran Dubai Qatar Kuwait United Arab Emirates Turkey Israel Iraq The Industrial Energy Technology Conference .A Third Wave of Middle East Ethylene Capacity Will Impact Market Starting in 2006/07 (Million Metric Tons) 30 25 20 15 10 5 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Saudi Arabia Houston London Singapore Middle East ethylene capacity is hitting the global market in waves. 2006+ Therefore. By the end of the 3rd wave. Mid-to-late 90s 2nd Wave. 2000 – 2005 3rd Wave. Middle East regional capacity will likely rank among the top four regions globally.

5 -1.0 -2.Million Tons 1.5 Net Imports Southeast Asia Has Become Less Dependent on Ethylene Derivative Imports Ethylene Net Equivalent Trade 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Ethylene Glycol Houston London Singapore Dubai Vinyls Others Styrenics Net Trade Polyethylene The Industrial Energy Technology Conference .0 Net Exports 0.5 -2.5 0 -0.0 -1.

World Ethylene & Derivatives Trade Million Tons 20 Net Exports 15 10 5 0 -5 -10 -15 -20 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Net Imports North America Indian Sub. Houston London Singapore Dubai South America Northeast Asia West Europe Southeast Asia Middle East Others The Industrial Energy Technology Conference .

Restraint on new investments (or additional closures) will lead to higher utilization.It’s Not All Bad News For North America Olefins Producers ! Primary supplier to the largest consuming region of olefins derivatives. Dominant position in global trade of propylene will be maintained. Houston London Singapore Dubai The Industrial Energy Technology Conference . Feedstock flexibility will secure regional competitive position.

0 3. C2 Capacity (Bars) New Asia C2 Demand (Area) New Asia C3 Demand (Area) New M. C3 Capacity (Bars) 2000 2005 New Asia C3 Demand New M.E.0 2. C3 Capacity 2010 The Industrial Energy Technology Conference .0 0.0 3.0 1990 1995 New Asia C2 Demand New M.E.E.0 1.0 1.E. C2 Capacity Houston London Singapore Dubai New M.Middle East / Asia Inter-Dependence Million Metric Tons 4.0 2.

E. C3 Capacity (Bars) 2000 2005 New Asia C3 Demand New M.0 1990 1995 New Asia C2 Demand New M.Middle East / Asia Inter-Dependence Million Metric Tons 4.0 3.0 3.0 1.0 1. Little Propylene New Asia C3 Demand (Area) New M.E.E.0 2. C3 Capacity 2010 The Industrial Energy Technology Conference .E.0 0. C2 Capacity (Bars) New Asia C2 Demand (Area) Middle East is Big Ethylene. C2 Capacity Houston London Singapore Dubai New M.0 2.

World Propylene & Derivatives Trade Thousand Tons 6000 Net Exports 5000 4000 3000 2000 1000 0 -1000 -2000 -3000 -4000 -5000 -6000 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 North America Northeast Asia Houston London Singapore Dubai Net Imports West Europe Southeast Asia Middle East Others The Industrial Energy Technology Conference .

remains key supplier of propylene to the rest of the world. investments continue in low cost regions Regional competitive positions will shift with crude and natural gas price volatility U. Asia remains critically short of propylene Houston London Singapore Dubai The Industrial Energy Technology Conference .Olefins Market Conclusions Recovery continues.S. supported by renewed economic and manufacturing sector growth Global shift in “supply chain” has changed regional growth scenarios Restraint on new investments and focus on closures and feedstock flexibility in high cost regions.