ECONOMIC IMPACTS AND MARKET CHALLENGES FOR THE METHANE TO DERIVATIVES

PETROCHEMICAL SUB-SECTOR

19th Annual Stakeholder EventAlberta's Industrial Heartland Association

Canadian Energy Research InstituteOverviewFounded in 1975, the Canadian Energy Research Institute (CERI) is an independent, registered charitable organization specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors.

Our mission is to provide relevant, independent, and objective economic research of energy and environmental issues to benefit business, government, academia and the public.

CERI publications include:

• Market specific studies

• Geopolitical analyses

• Commodity reports (crude oil, electricity and natural gas)

In addition, CERI hosts an annual Petrochemicals Conference, and Energy Forum.

Canadian Energy Research InstituteCERI receives financial support from its core funders which include Natural Resources Canada, Alberta Energy and the Canadian Association of Petroleum Producers.

In addition, the institute benefits from funds provided by donors which include:

• Alberta’s Industrial Heartland• Chemistry Industry Association of Canada• Government of Saskatchewan• Ivey Foundation• University of Calgary

CERI also receives in-kind support from the following contributors:

• Alberta Energy Regulator• Advisian Worley Parsons Group• Petroleum Services Association of Canada• Lithuanian Energy Institute• Deloitte Canada Ltd.

Presentation Outline

NATURAL GAS MARKET OUTLOOK

PETROCHEMICAL INDUSTRY

METHANE-DERIVED PRODUCTS

ECONOMIC AND ENVIRONMENTAL ANALYSIS

ECONOMIC IMPACTS

CONCLUSIONS

Natural Gas supply and demand forecasts

Canadian natural gas production forecast

Industrial use, oil sands, power generation, LNG, chemicals and petrochemicals production

0

5000

10000

15000

20000

25000

2005 2010 2015 2020 2025 2030 2035

mm

cfd

Pipeline Exports LNG Exports Supply Demand

Global Petrochemical OutlookPetrochemicals markets and emerging trends

Source: IHS Chemical 2016

North America Petrochemical OutlookLow cost feedstock advantage leading to investments in chemicals and derivatives

Methanol OutlookMethanol demand is forecast to grow at 4% globally compound annual growth rate (CAGR)

Source: Argus 2017

METHANE DERIVATIVES & EMERGING TECHNOLOGIES

Synthesis Gas (Syngas)

Hydrogen (H2)

AmmoniaNatural Gas (N.G)

Urea

Formaldehyde

Acetic Acid

Methyl tert-butyl ether (MTBE)

Dimethyl ether (DME)

Methylamine

Methanol to Olefins (MTO)

Methanol to Propylene (MTP)

Methanol to Gasoline (MTG)

METHYL METHACRYLATE (MMA)

Fischer-Tropsch Process

Methanol (MeOH)

Liquified Petroleum Gas

(LPG)

Methane (CH4)

CO2

Natural gas liquids(NGLs)

Credit potential?

Economic Assessment1. Assessment of 9 technologies:

Methanol, Hydrogen, MTP, MTO, MTG, Ammonia, Urea, Formaldehyde and Fischer Tropsch Gasoline

2. Key Assumptions

3. Life Cycle Costs (LCC): NPV of CAPEX (ISBL- inside battery limits and OSBL – Outside Battery Limits), Natural Gas costs, taxes, etc.

4. Jurisdictional competitiveness comparison: AB, ON, USGC

5. Discounted NPV and Internal Rate of Return (IRR)

6. Direct and indirect economic impacts: GDP, Employment

7. Scenarios:

Tax incentives

Provincial CO2 Tax Assumptions

Canada ($/t-CO2): 20 (2019), 30 (2020), 40 (2021), 50 (2022->)

Alberta ($/t-CO2): 30 (2019), 30 (2020), 40 (2021), 50 (2022->)

Ontario: Mid-range CO2 Price Forecast (ICF Study for ON Energy Board)

Price Assumptions

Derivative prices are kept constant

Where available 2016 are used

Natural Gas Price Assumption USGC AIH Sarnia Average 2016 Prices

Natural Gas (US$/ MMBTU) 2.34 1.56 2.38 Henry, AECO and DawnHubs Prices

Results: IRR for 9 Methane Derivatives

Methanol, FTS and Hydrogen meet the 10% expected rate of return

The economics is sensitive to natural gas and product prices

Applying the new US Corporate Tax Code improves the IRR of Hydrogen and Methanol by 1.7% and 1.5%, respectively. For methanol, this is a benefit of US$ 39 Million on NPV bases

Methanol NPV Jurisdictional Comparison

Gone

Hydrogen NPV Jurisdictional Comparison

Gone

HigherExemptionlimit

MTO NPV Jurisdictional Comparison

Gone

Methanol: Life Cycle Costs Make-up

Now 12%-14%

Methanol: Corporate Tax Rebates Scenarios

Provincial Tax RebateCould Increase IRR by:

1.1% in AB0.9% in ON

Corporate Tax RebateCould Increase IRR by:

2.3% in AB2% in ON 10%

11%

12%

13%

14%

15%

16%

17%

18%

0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%

Scenario I Scenario II

IRR%

MeOH

AIH

Sarnia

Economic ImpactsInput-Output Modeling Results for a Methanol Plant in AB and ON

Direct and indirect impacts on GDP at provincial and federal levels

Significant economic impacts at provincial and national levels compared to the total capital invested (TCI)

Changed due to US tax change

Concluding Remarks

• New capacity for ethylene, propylene and methanol followed energy and demand growth dynamics

• Results show that some opportunities exists for methane derivatives sub-sector in Alberta. This is driven principally by 10-15% low feedstock prices, OPEX and corporate taxes.

• CO2 taxes based on the Carbon Competitive Incentive (Output-Based Allocation) seems to sustain economic competitiveness against the USGC.

• However, the new US Tax Code will likely make USGC the most competitive jurisdiction. For example, it improves the IRR of Hydrogen and Methanol by 1.7% and 1.5%, respectively.

Thank You for Your TimeWWW.CERI.CA

CANADIAN ENERGY RESEARCH INSITUTE

@CERI_CANADA

Allan Fogwill | President & CEO

403.220.2367

afogwill@ceri.ca

UPCOMING STUDIES:An Economic Assessment of Electricity Generating OptionsEconomic Impacts and Market Challenges for the Methane to Derivatives Petrochemical Sub-SectorUPCOMING CONFERENCE:Petrochemical Conference: June 10-12 2018, Kananaskis, AB