ShaleGas:changingtheUSchemicalsindustry

TomGellrich

TopLineAnaly2cs

©2015TopLineAnaly2cs.Allrightsreserved.

October11th,2016U2caSummitIV–CantonOhio

ShaleGas:changingglobalindustries

TomGellrich

TopLineAnaly2cs

©2015TopLineAnaly2cs.Allrightsreserved.

October11th,2016U2caSummitIV–CantonOhio

1973EnergyShock

SourceEIA

3.2xIncrease

1979EnergyShock

SourceEIA

2.0xIncrease

Manufacturing

30%-

ShaleShock

MarcellusMillionscuPperdaynaturalgas

Source:EIA

2008–2012ShaleShock

3.8xDecrease

SourceEIANaturalGas

Manufacturing

30%+

NorthAmericanAdvantage

Source:WorldbankPinkSheetAveragenaturalgasprices$/MBtu

20162Q

$2.1 $4.1

$6.1$3.0

2008

$10.3 $11.4

$14.4$1.3

MENaturalGasSqueeze

MiddleEastnaturalgasinternalconsump2onrises–  Rapidlygrowingpopula2ons–  Subsidizedelectricity&desaliniza2onwater

KuwaitlooksforwayoutofadomesDcgasconundrumInterfaxEnergyOct7,2014

ShaleRevolu2on

“U.S.energylandscapeischangingonthebackofcheapnaturalgasfromshaledeposits,whichisturningproducersawayfrom“offshoring”energy-intensiveindustries.Thediscoveryofshalegasisperhapsthegreatestdevelopmentinthemodernera.Shalegasisahuge–andpoten2allylong-term–compe22veadvantageforU.S.-basedcompanies”

Andrew Liveris CEO Dow Chemical Company

Source:IHSCERAWeek2012HoustonTexas

ShaleGasdrivestheChemicalIndustry

0%

20%

40%

60%

80%

100%

ChemicalFeedstock

Methane

EthanePropane

Fuel

TypicalShalegas

Source: Typical Shale Gas: Western Marcellus Shale Gas: Chesapeake Investor Presentation 2011

GlobalChemicalShiP

•  “Thefeedstockcostfornewcrackersin[SaudiArabia]willbearound$6/MBtuasthere’snotenoughethaneavailability…thiscostwillbemuchhigherthantheUSgasprice,whichiscurrentlyat$3.50-4.00/MBtu”

–  JamalMalaikah,presidentandCOO,Na2onalPetrochemicalIndustrialCo(NATPET),Apr2013

•  “Theshalegasrevolu2onini2atedintheUS…isnowreshapingnotonlytheenergyindustry,butglobaleconomyandgeopoli2csaswell.”Thiscouldcause“agreatdealofdiscomfort”toAsia’spetrochemicalsector.

–  YoshimitsuKobayashi,chairmanoftheJapanesePetrochemicalIndustryAssocia2onatAPIC,May2013

•  “Theshalegasrevolu2onintheUShasturnedtheglobalpetrochemicalindustryinsideout…BasicpetrochemicalscannowbemadeintheUnitedStatesforabouthalfthecostasinEurope”

–  TomCropy,Ineosgroupdirector,ChemWeekInterviewOctober2013

•  “Thesupplyoflow-pricedproductsthatarebasedoncoalandshalegaswillbecomeathreattotheexis2ngpetrochemicalindustryandwillbringasignificantchangeinitsstructure.”

–  Han-HongBan,chairmanoftheKoreaPetrochemicalIndustryatAPIC,May2013

ChemicalIndustryU.S.Investments2012to2022

•  $164billionincapitalinvestment–  264projects–  70millionmetrictonsofchemicals–  61%foreigninvestment

•  Jobs:–  738,000permanent–  316,000temporary

•  $301billionincreaseeconomicoutput•  $106billionincreaseinchemicalshipments

Source:AmericanChemistryCouncilMarch2016

U.S.ChemicalConstruc2onInvestment

Source:ACCanalysisofCensusBureaudata

$Billions

ChangesinGlobalIndustry

•  M&A:Axiall(GeorgiaGulf+PPGChlor-Alkali)•  JV:PPTGlobalChem+MarubeniCorp•  Doublingdownoninvestments:LyondellBasell•  Reloca2ngexis2ngplantstoU.S.:USMethanol•  MiddleEastinvestmentinU.S.:SABIC•  Commercializa2onofnewtechnologies:PDHBDH•  European+Asianshutdowns:TotalCarling•  IncreasedNAinvestments:Formosa•  Non–GulfCoastU.S.investment:Shell•  U.S.Ethaneexports:Ineos•  U.S.BackwardIntegra2on:BASF

EthyleneProduc2on

EthaneFeedstock

Ethylene Propylene

Butadiene FuelGas

Oil(naphtha)Feedstock

Ethylene Propylene Butadiene

FuelGas Aroma2cs

EthyleneEconomics

Source:NYMEXFeb2nd20152.3xDelta

EthyleneCost US ChinaNaturalGascosts $/MMBTU 2.6CrudeOilcosts $/BBL 54Equivalent $/ton 128 521Ra2oforonetonethylene 1.29 2.98EthaneFeedstockcosts $/ton 165 1552Catalyst+Other $/ton 2 2ByProductCredits $/ton 108 1102U2li2es $/ton 94 127DirectCosts $/ton 167 172TotalethyleneCost $/ton 321 750 Typicalethylenemargin 2.50% Transferpriceforethylene $/ton 329 769

Source:NYMEXSep2015

Drama2cCostShiPEthylene

1980-2010

MiddleEastNAmericaChinaWEuropeNWAsia

OldNormal:MiddleEasthalfthecostoftherestoftheworld

2015

NewNormal:•  MiddleEastand

NAatparity•  Restoftheworld

at>2xcost

PolyethyleneEconomics

1.9xDeltaSource:NYMEXSep2015

PolyethyleneCost US ChinaNaturalGascosts $/MMBTU 2.6CrudeOilcosts $/BBL 54Ethylenecost $/ton 329 769Ra2oforonetonofHDPE 1.025 1.025Ethylenecost $/ton 337 788U2li2es $/ton 10 13DirectCost $/ton 51 51OtherCosts $/ton 132 132TotalCosts $/ton 530 984 Typicalpolyethylenemargin 3.00% PotenDalHDPEsellingprice $/ton 546 1013

ChemicalIndustryDrivestheNextWave

Shal

e G

as

Ethane

Methane

Propane

Butane

Ammonia

Methanol

Ethylene

Propylene

N-Butylene

Isobutylene

MarketSectors

ApparelandAccessories

BeveragesandTobaccoProducts

Chemicals

ComputerandElectronics

FabricatedMetalProducts

FoodandKindredProducts

LeatherandAlliedProducts

Machinery,ExceptElectrical

NonmetalicMineralProducts

Paper

PetroleumandCoalProducts

Pharmaceu2cals

Plas2csandRubberProducts

PrimaryMetalManufacturing

PrintedMaperandRelatedProducts

Tex2leandFabrics

Tex2leMillProducts

Transporta2onEquipment

WoodProducts

ProductCategories

Fer2lizers

Adhesives/Sealants

AlkydResins

Solvents

CorrosionInhibitors

Tex2les

Inks,Adhesives

Shampoos,Detergents,Soaps

Paints

Coa2ngs

Pipes,Hoses,WireCoa2ng

Coolant,An2freeze

Films,Packaging,Boples

PaintRemover

Plas2cs

TiresandRubber

LubricantAddi2ves

Solvent,IndustrialCleaners

>98%

Source:PwCandTopLineAnaly2cs

Wherearethechemicalsgoing?

AsianMiddleClass

U.S.istheLandofOpportunity

•  HighlyprofitableduetoShaleGas•  Uniquemul2decadesadvantage•  Lowpoli2calrisk•  Chemicalindustryacceptance•  Highmanufacturingproduc2vity•  Growinglaborpool•  Compe22on

ChemicalIndustryManufacturingJobs

•  Full2mepermanentjobs•  Averagesalaryforoperator$60k+benefits•  Jobscon2nueyearaPeryear•  Verydifficulttooff-shore•  Skilledposi2ons–hightech•  Communityfocused

AppalachianBasin

•  Avoidtransporta2oncosts– LocalrawmaterialsfromShaleGas– Localcustomerdemand

•  AvoidtheGulfCoastboplenecks– Landtoexpand– Railandtolesserextentroadinfrastructure– EPAnon-apainmentarea

AppalachianBasin

•  Shellbroketheice– Valida2onofloca2on– Demonstratevaluetothepublic– Localcommunitysupport– Buildoutof‘ecosystem’

•  SuppliersandLaborpool•  Voca2onaland2yeardegreeprograms•  Upgradeofroad,railandbargeinfrastructure

•  Nextprojectwillbemucheasier

BasinStorageHub

•  Keyenablinginfrastructure•  Reducesriskfornewchemicalplants•  Makesregionalinvestmentspossible•  Publicprivatepartnership•  $10Billionmegaproject•  KeydriverbehindsuccessofU.S.GulfCoast

Déjàvu?

AppalachianStorageHubpoten2alreachesfromShellfacilitytoannouncedPTT/Braskemsites.ItcoverssamegeographicaldistancesastheTexas–LouisianaStorageHubwithkeystoragepointareainthesaltdomesofMontBelvieuTexas.

InvestmentPause

•  UnprecedentedU.S.ChemicalInvestment–  Isitreal?Willcondi2onscon2nue?

•  Acceptanceofnewnorm– CrudeOilat$50barrel– NaturalGasinU.S.at$3withrestofworld2-3x

•  Demandonsupplychainraisescostby30%•  Megaprojectsares2ll:

– Betthecompany– Betyourcareer

NextWaveSh

ale

Gas

Ethane

Methane

Propane

Butane

Ammonia

Methanol

Ethylene

Propylene

N-Butylene

Isobutylene

Source:PwCandTopLineAnaly2cs

Polyethylene

EDC

EPDM

Ethanol

Alpha Olefins

Vinyl Acetate

Ethylene Glycol

Ethanolamine

Ethyl Oxylates

Glycol Ether

Chloro Ethanes

Polyvinyl Chloride

NextWaveSh

ale

Gas

Ethane

Methane

Propane

Butane

Ammonia

Methanol

Ethylene

Propylene

N-Butylene

Isobutylene

Source:PwCandTopLineAnaly2cs

40%Imported

50%Imported

ShaleGasConclusions

•  TheNAShaleGasrevolu2onhascausedaGlobalChemicalIndustryrevolu2on

•  ChemicalsandmanufacturedproductscanbeproducedcheaperinNA

•  Implica2onsaredisrup2veandofferopportunity

•  Newnormal,unconven2onalthinkingisrequired

•  Leaderslead,isyourorganiza2onmobilized?

TopLineAnaly2csWeassistcompaniesinaddressingthechallengesandopportuni2estocompeteinthechanginglandscapebroughtonbytheshalegasrevolu2on

TomGellrich www.TopLineAnaly2cs.com 267-205-1263

Ques2ons?