Ethylene – Good Today, Better Tomorrow – A Year …...Goldman Sachs 2012 Chemical Intensity Day...
Transcript of Ethylene – Good Today, Better Tomorrow – A Year …...Goldman Sachs 2012 Chemical Intensity Day...
Tim Roberts, SVP Olefins & Polyolefins Americas
March 27, 2012
Ethylene – Good Today, Better Tomorrow – A Year LaterGoldman Sachs Chemical Intensity Day
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Cautionary Statement
• The information in this presentation includes forward-looking statements. These statements relate to future events, such as anticipated revenues, earnings, business strategies, competitive position or other aspects of our operations or operating results. Actual outcomes and results may differ materially from what is expressed or forecast in such forward‐looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results to differ from forward-looking statements include, but are not limited to, availability, cost and price volatility of raw materials and utilities; supply/demand balances; industry production capacities and operating rates; uncertainties associated with worldwide economies; legal, tax and environmental proceedings; cyclical nature of the chemical and refining industries; operating interruptions; current and potential governmental regulatory actions; terrorist acts; international political unrest; competitive products and pricing; technological developments; the ability to comply with the terms of our credit facilities and other financing arrangements; the ability to implement business strategies; and other factors affecting our business generally as set forth in the “Risk Factors” section of our Form 10-K for the year ended December 31, 2011, which can be found at www.lyondellbasell.com on the Investor Relations page and on the Securities and Exchange Commission’s website at www.sec.gov.
• This presentation contains time sensitive information that is accurate only as of the date hereof. Information contained in this presentation is unaudited and is subject to change. We undertake no obligation to update the information presented herein except as required by law.
Goldman Sachs 2012 Chemical Intensity Day 2
lyondellbasell.com Goldman Sachs 2012 Chemical Intensity Day
Last Year We Said: The Stars are Aligning for a Bright Tomorrow
• Positive macro factors– Global GDP– Asian development
• Supply trends– Limited construction– Limited Middle East gas avails– Existing asset reliability
• U.S. natural gas– A Middle East analog– Fractionator construction– Elevated crude oil price
3
These trends plus two key factors continue to define industry and regional profitability:– Regional Raw Material Costs– Global Supply / Demand
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With Supply/Demand Still Recovering, Natural Gas versus Crude is Currently the Dominant Factor
Goldman Sachs 2012 Chemical Intensity Day
Raw material factors define regional competitiveness
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Raw Materials &
Utilities
Capital & Labor
Integrated Polyethylene Production Cost Global Capacity Cost Curve
67%33%
Cos
t of E
thyl
ene
Prod
uctio
n
Global Naphtha Cracking
50-60 ¢/lb
Middle East
Ethane Crackers
5-15 ¢/lb
N. Amercia
Ethane Crackers
20-30 ¢/lb
Source: CMAI
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Both Natural Gas and Crude Prices have Contributed to Differential Performance in the US Ethylene Industry
Goldman Sachs 2012 Chemical Intensity Day
Crude price increases have been as much a factor as have US natural gas price declines
5
0
30
60
90
120
150
0
5
10
15
20
25
Dec-08 Dec-09 Dec-10 Dec-11
US$/
Barr
el
US$
/ Mill
ion
BTU
Crude Oil Brent
Natural Gas
Delta
1H'09 Q1'12 Delta
Ethane-based (US) 20 23 3
Naphtha-based (US) 35 54 19
Ethylene price (NEA) 34 61 27
Cost of Ethylene Production(¢/lbs)
Source: CMAI
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Are Crude Oil Prices likely to Remain Elevated?
6Goldman Sachs 2012 Chemical Intensity Day
Factors influencing continued strong price
Factors influencing to the downside
• Global economic growth and crude consumption
• Global vehicle sales• Rising production costs
– Marginal crude sources– Middle east social cost pressures
• Political instability in producing nations
• US production resurgence• Vehicle fuel efficiency• Regulations diversifying fuel mix
Most experts forecast continued elevated crude oil
Year 2011 2012E 2013E 2014E 2015E 2016E
$/bbl 111 117 103 102 104 108
Brent Crude Oil Forecast
Source: CMAI
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Will Natural Gas Prices Remain Low?
Goldman Sachs 2012 Chemical Intensity Day
• Production has remained strong despite reduced rig count
• Estimate that rig count must fall below 700 to stabilize inventory levels
Source: EIA, Bentek
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Source: Global Insight
Year 2011 2012E 2013E 2014E 2015E 2016E
$/mbtu 4.0 2.8 3.7 4.3 4.6 4.9
Henry Hub Price Forecast
40
45
50
55
60
65
70
500
750
1,000
1,250
1,500
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Bcf
per
Day
Rig
Cou
nt
Monthly Gas Rig Count Production
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Drilling Technology is Driving the Success
Goldman Sachs 2012 Chemical Intensity Day
Potential for further improvements as experience develops and majors become more significant participants
Note: Mcf = thousand cubic feet.
0
200
400
600
800
1,000
1,200
1,400
1,600
2000 2005 2010 2015
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
McfPerDay
8
pre-shale post-shale
Source: IHS CERA. May not be used for any purpose without the express written consent of IHS CERA
Well productivity has increased dramatically
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Low Prices and Abundant Supply are Forecast to Drive Strong Natural Gas Demand Growth
Goldman Sachs 2012 Chemical Intensity Day
Natural gas end use increase leading to increased ethane production in a well supplied natural gas environment
9
0
1
2
3
4
5
2015 2020
TCF
(cha
nge
from
201
0)
Elec.Gen
Industrial
Trans. Fuels
Exports toMexico
LNG Exports
Gas Demand Growth NG Supply Sources
Source: PIRA Source: EIATC
F
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Natural Gas NYMEX Price Breakevens by Play(15% After Tax Rate of Return)
10Goldman Sachs 2012 Chemical Intensity Day
$2.3
7 $3.1
9
$3.2
3
$3.5
3
$3.6
0
$3.7
5
$3.8
6
$3.8
7
$4.1
2
$4.2
0
$4.5
5
$4.5
8
$4.6
4 $5.2
4
$5.3
1
$5.5
3
$6.6
5
$6.7
6
$6.8
7
$0.0
0
$1.8
5
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
Eagle
Ford Shale
- Liquids
Rich
Marce
llus S
hale - S
W Liqu
ids Rich
Cana W
oodford Shale
Marce
llus S
hale - S
W
Barnett
Shale - S
outhern Liquids
Rich
Barnett
Shale - C
ore
Marce
llus S
hale - N
E
Horn R
iver B
asin
Huron S
halePined
ale
Haynes
ville
Shale - C
ore LA / T
X
Eagle
Ford Shale
- Dry
Gas
Barnett
Shale
Fayett
eville
Shale
Woodford Shale
- Ark
oma
Granite
Was
h - Horiz
.
Piceance
Bas
in Valley
Haynes
ville/
Bossie
r Shale
- NE TX
Cotton Vall
ey H
orizontal
Cotton Vall
ey V
ertica
l
Powder R
iver C
BM
Source: Investment Banks
• Most fields yield an acceptable return at $5-6.00/mmbtu• Low natural gas prices drive production to NGL rich fields
NGL Rich Gas
Dry Gas
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The Value of NGLs Drives Production Even at Low Natural Gas Prices
11Goldman Sachs 2012 Chemical Intensity Day
Dry vs. Rich Gas: NGL Uplift (Margin Over Fuel Value)NGL Component Values vs. Natural Gas
$0
$5
$10
$15
$20
$25
Gas Ethane Propane Butane NaturalGasoline
Mar
ket V
alue
, $/M
MB
TU
$2.41
$5.31
0
1
2
3
4
5
6
Dry Gas Rich Gas(2.5 GPM)
Very Rich Gas(5.5 GPM)
$/M
MB
TU
$0
Potential for further improvements as experience develops and majors become more significant participants
Source: CMAI, LYB
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Trend Toward Wet Wells Benefits US Ethylene Producers
Goldman Sachs 2012 Chemical Intensity Day
As drilling emphasis shifts, ethane production is not being sacrificed, in fact, it can be increased
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US NGL ProductionUS Gas Production
If we assume 10% shift from dry gas to wet gas NGL production can increase significantly
Source: LYB
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Both the Mid-Stream and Ethylene Industries are Responding to this Trend
Goldman Sachs 2012 Chemical Intensity Day
Development has been like a game of leapfrog and the next step is significant fractionation and pipeline
infrastructure addition
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0
50
100
150
200
1H'2012 2H'12 1H'13 2H'13 1H'14
thou
sand
b/d
0
200
400
600
1H'2012 2H'12 1H'13 2H'13 1H'14
thou
sand
b/d
Gulf Coast Fractionation Capacity Ethane Additions
Pipelines Flowing into Mont Belvieu
Ethane Cracking Capacity Growth
Sources: LYB
0
10
20
30
40
50
1H'12 2H'12 1H'13 2H'13 1H'14
thou
sand
b/d LYB
Other
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Ethane Premiums to Natural Gas have Grown but so has the Advantage Versus Global Naphtha
14Goldman Sachs 2012 Chemical Intensity Day
Ethane price at equivalent value to:• US natural gas energy value: 15-20 c/gal• Global naphtha economics: 115-150 c/gal
0
10
20
30
40
50
00-05 Avg. 06 07 08 09 10 11
¢ / g
al E
than
e
-5
0
5
10
15
20
00-05Avg.
06 07 08 09 10 11
Cos
t of E
thyl
ene,
¢ /
lb
US Ethane Advantage to NE Asia Naphtha
Ethane Premium to Fuel Value ("Frac Spread") US Ethane Advantage to NE Asia Naphtha
Source: CMAI
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Shift in Feed Mix Has Significantly Impacted Co-Products
Estimated Propylene Production (1)
Sources: CMAI.(1) Estimated co-product production based on 2011 ethylene production and 2006 and 2011 feed mixes.
Goldman Sachs 2012 Chemical Intensity Day 15
0
5
10
15
20
2006 Mix 2011 Mix
0
2
4
6
8
2006 Mix 2011 Mix50%
100%
150%
200%
250%
2006 Mix 2011 Mix
0%
40%
80%
120%
160%
2006 Mix 2011 Mix
• Co-product capabilities add significant value• Future growth in durable products could further benefit co-products
Estimated Butadiene Production (1)
Propylene Price as a % of Ethylene
Butadiene Price as a % of Ethylene
(MMLbs.)
(MMLbs.)
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Ethane is Not the Only Important NGL in the US Market
Goldman Sachs 2012 Chemical Intensity Day
Propane:– Can limit ethane pricing– Greatly expands the cracking pool
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US Cost of Ethylene Production US NGL Supply Growth
0
10
20
30
40
50
2009 2010 2011
¢ / l
bs
Propane COE*Naphtha COEEthane COE
Source: CMAI
* COE – Cost of Ethylene
Source: Bentek
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2011 2012 2013 2014 2015 2016
thou
sand
b/
d
C4+
Propane
Ethane
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Strong LYB Results in Global Trough
Global Refining Operating Rates
Global Ethylene Effective Operating Rates
76%
78%
80%
82%
84%
86%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
Performance has been driven by actions, geographic position and assets, not cycle
80%
85%
90%
95%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Trough Peak Trough
Trough Peak Trough
Sources: CMAI, Purvin & Gertz.
Goldman Sachs 2012 Chemical Intensity Day 17
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At These Low Operating Rates Global Margins Have Been Near Trough Levels
Goldman Sachs 2012 Chemical Intensity Day
Asian margins have been weak, Asian prices set the global price
0
10
20
30
40
50
60
70
80
90
2005 2006 2007 2008 2009 2010 2011
cent
s / p
ound
Naphtha-based Production Cost
Spot Ethylene Price
Margin
Typical NE Asian Cycle MarginsNortheast Asian Ethylene Margins
0
5
10
15
20
25
30
Trough Mean Peak
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Source: CMAI
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40%
50%
60%
70%
80%
90%
100%
100
150
200
250
300
350
400
450
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Eff
ectiv
e O
pera
ting
Rat
e (E
OR
)
Bill
ions
of P
ound
s
DemandCapacity
World EOR @ 95% On-Stream
Cyclical Upside is a Second Chapter in a Positive Story
Goldman Sachs 2012 Chemical Intensity Day
Balance begins to shift in favor of producers in 2012 / 2013
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Source: LYB,CMAI
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Economic Progress and Increased Consumption are a Focus in Developing Economies
Goldman Sachs 2012 Chemical Intensity Day
Economic forecasts anticipate a significant increase in the Asian middle class -this typically drives ethylene demand
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Expanding Number of Upper/Middle Class Households In Asia
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The Path from Concept to Full Production is Long
A major ethylene project can require 5+ years to move from concept to production
Goldman Sachs 2012 Chemical Intensity Day
ID Task Name20132012
Q3 Q3 Q2 Q4Q2Q1 Q1 Q1Q2
1 Technology Supplier Selection
2 Basic Engineering and Estimate
3 EPC Bidding and Award
4 FEED Package
5 Permitting
6 Detailed Engineering
7 Major Equipment Procurement
8 Site Prep and Construction
9 Commissioning and Start-up
2016
Q1Q4 Q4 Q2
201520142011
Q4 Q4Q3 Q3Q1Q3 Q1 Q2Q2 Q3
Feasibility
Engineering and Permitting
Construction and Start-up
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
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The Stars Are Aligning For A Bright Tomorrow
• View from a US ethylene producer perspective – Geography, geology, technology are
positively aligned
– Economics of crude oil and natural gas support U.S. producers
– Infrastructure investments are bringing NGL’s to the market
– Supply / demand positioned for a cyclical upside
– New U.S. plants are not forecast to start-up until 2016+
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We continue to believe: – Good today and better tomorrow– The stars are aligning