India New Delhi

Background Paper

Parallel Roundtable 1: Refining and Petrochemical Sector; New Growth Potentials and Rationalization

IEF16 Roundtable 1 1

The observations presented herein are meant as backgroundfor the dialogue at the 16th International Energy Forum. Theyhave been prepared in collaboration with The BostonConsulting Group and should not be interpreted as the opinionof the International Energy Forum or The Boston ConsultingGroup on any given subject.

Disclaimer

IEF16 Roundtable 1 2

• Technological disruptions are creating new challenges for the refiners

• Demand for oil is shifting towards petchems as growth from transport sector is expected to slow

• Refiners need to be more proactive to respond to shifting demand to ensure value creation and supply security

• Discuss how shifting demand is impacting refining and petchems sector and its long term implication

• Why O&G companies should recalibrate their strategy and move downstream to petchems

• To suggest key success factors that would enable transformation and value creation for O&G players

Introduction

Market Context Session Objectives

Key Question: How do global shifts affect the refining and petrochemical sector? How do we ensure that supply chains are sufficiently resilient to respond to disruptions, energy transition, and shifting demand?

IEF16 Roundtable 1 3

Demand side Supply side

Electric vehicles Renewables Efficiency gains Increase in shale oil supply

Technological shifts are reshaping energy sector

Disruptions

IEF16 Roundtable 1 4

1.06.0

6.0

25.0

23.0

38.0

21.0

26.0

27.0

2016

4.07.04.0

28.05.0

24.0

7.0

2000

Hydro

Renewables14.0

2040

Oil

Gas

Coal

Nuclear

33.0

Fuel—wise shifts in primary energy demand (2000–2040) in %

Changing the primary global energy mix

IEF16 Roundtable 1 5

Supply is outpacing demandGap between supply and demand of refined products to further increaseby 1.2 Mb/d during 2017-21, to reach 3.3 Mb/d

Refining margins are heavily impacted Margins for heavy distillates expected to turn negative across regions post 2030

Refinery closures to continue in order to rebalance the marketNet closure level of 1.41 Mb/d is estimated for the period 2018–2022 Europeto lead with ~43% of these closures

With oil demand growth slowing, refiners face 3 key challenges going forward

1

2

3

IEF16 Roundtable 1 6

Global refinery crude distillation capacity set to increase by 7.0 Mb/d by 2022

Leading to the situationof oversupply in market

100

102

104

106

0

CAGR 1.3%

2021

104.9

Africa

0.8

Latin America

Middle East

2.3

97.2

2015

North America

0.8

0.1

Europe

0.2

FSU

0.6

Million barrels per day

2.2

China

0.9

Other Asia

4.0

3.0

2.0

1.0

0.0

Million barrels per day

Ø 3

+57%

2021

3.3

2020

3.1

2019

2.5

2018

2.1

2017

2.1

2016

2.1

As demand for oil falls and new capacity comes onlinein Asia and ME, excess capacity increases by 1.2 Mb/d

Source: IEA Market Report Series: Oil 2017

Supply outpacingdemand

IEF16 Roundtable 1 7

Global refining supply curve forecast

Refining margins impacted: Increased surplus is heavily impacting future margins of refiners

Source: BCG Analysis

$/bbl

kbpd

2050204020302020

2050Lubes/

FCC/ASP

2040 2030 2020FCC

2016 utilization = 84%

IEF16 Roundtable 1 8

1.5

1.0

0.5

0.0

0.23

Russia &Caspian

0.33

Europe

0.61

LatinAmerica

-0.06

US &Canada

0.25

Mb/d

Total

1.41

Asia-Pacific

0.05

Middle East

~1.4 Mb/d net refinery closures expected during 2018-2022 period

Multiple capacity closures planned to balance global refinery market; Europe to lead with majority of closures

Source: OPEC World Oil Outlook

IEF16 Roundtable 1 9

India growing at fasterrate than global average

Expected global demand forpetrochemicals in medium term

1,513

2024

1,446

2023

1,386

2022

1,343

2021

1,305

2020

1,272

2019

1,234

2018

1,193

2017

1,141

2016

1,090

Million MT per year+4%

2025

Middle East

North America

Oceania

South America

Europe

Asia

Africa

+8.3%

+4.8%

+4.5%

+3.3%

As demand for oil in transport declines, petrochemicals demand is expected to grow, driven by emerging countries

India

Russia

China

Brazil

IEF16 Roundtable 1 10

While they are ramping uppetrochemicals CAPEX….

Big oil players are decommissioning underperforming refining assets

5,294-23%

4,082

2010

Refining capacity in WE (Kbpd)

2016

As a result, O&G majors look to reduce refining exposure and invest in higher margin petrochemicals segment

Mar 13, 2018 :Exxon planning multibillion-dollar Gulf Coast expansion that would boost Baton Rouge refinery

Feb 27, 2018 : Saudi's SABIC in talks to join Shell in Iraq's Nebras petchem project

Jul 7, 2017: Total nears deal to invest up to $2 billion in Iran's petrochemical industry

IEF16 Roundtable 1 11

76742

3 Sabic & 1 Sipchem

(2013-2015)

Current(2011)

63

Capacity (MTA)

Current + Announced

(2016)

Sadara(2016)

Petro-Rabigh II(2015)

Endproducts

Intermediates

Saudi Arabia total petrochemical capacity by 2016

Specifically, companies in the Middle East are extending downstream towards more value added products

Note: Total capacity includes intermediate and end productsSource: Client data; BCG analysis

EVAEPDMSBRPBRPMMA

EVAPolyolsNylon 6,6PMMAEPR

MethylaminesPolyolsEpoxy resinsPolyurethanes

Exampleof new

products

IEF16 Roundtable 1 12

End-products

Intermediates

2 4 6 10-2 8 12 14-2

0

2

6

8

4

0

Packaging (plastic)Alternative energy (wind, solar, etc.)

Textile Chemicals (not fibers)

Past growth(% CAGR)

Textile fibers

Oilfield Fluids and Chemicals

Electronics

Pulp and Paper chemicals

Alllubricants

Synthetic Lubricants

Personal Care Ingredients

Automotive

Agriculture ChemicalsIndustrial Cleaning Chemicals

Medical disposables

Construction Products

Projected Growth (% CAGR)

$50B chemicals revenue

Auto, construction and packaging sectors are goingto lead petrochemical consumption

Note: Forward growth next 3—5 years. Trailing growth last 3—5 years for most sectors. Lubes/syn lubes presence treated same as automotive. Ag chems only fertilizer, pesticides. Surfactants not includedSource: BCG analysis

IEF16 Roundtable 1 13

Scenario planning Consolidation

3 likely scenarios could emerge in future companies should make flexible long—term plans accordingly

Digital

Digital has the potential to create opportunities across the chemical value chain and unlock significant value

Consolidation within petchems sector could enable transformation

O&G companies should consider three key factorsfor ensuring supply security and value creation

IEF16 Roundtable 1 14

Fast

Slow

Extent of change Low High

Pace of change

BaseFragmented, uncoordinated efforts across companies, regions and sectors limit

extent and pace of change

Incremental

Large scale change spearheaded by a few players,

but gains scale and momentum slowly

Disruptive

Consumer choices and/or technology cause disruptive change. Coordinated efforts across sectors, companies,

governments lead to a multiplier effect

Scenario based planning: 3 potential scenarioscould emerge in the future

IEF16 Roundtable 1 15

Connected lab solutions disrupts QC and R&D labs

VERITRAX chem. pump control, inventory mgmt. and ordering

Precision farming service of Dupont Pioneer

R&D Supply chain Operations Marketing and sales

Big data Digital service New business model

Predictive maintenance through data analytics

Smart manufacturing solutions to improve efficiency

E-enabled sales tool

End-to-end supply chain management tool

Simulation of properties and reactions for chemicals

Artificial intelligence platform for RandD and production

Software solutions to increase e.g., chemical RandD productivity

Digitial supply chain optimisation and integration

Digital supply chain control towers offer visibility, new ways to steer and optimise

Predictive algorithms to select best crop protection and increase yield

Quantification and digital expression of production process to change marketing

New business models

New digital growthDigitize the core

Digital has potential to create opportunities acrossthe chemicals value chain

IEF16 Roundtable 1 16

East-man

–Solutia (2012)

2.9%

Ashland

–ISP

(2011)

3.1%

PPG

–Georgia

Gulf (2013)

3.5%

Ecolab

–Nalco (2011)

3.7%

Solvay

–Rhodia (2011)

4.8%

Aditya Birla

–Columb. Chem.(2011)

5.0%

East-man

–Taminco(2014)

5.0%

Air Liquide

–Airgas(2015)

5.6%

Solvay

–Cytec(2015)

5.7%

Sherwin Williams

–Valspar(2016)

6.0%

Evonik

–Air

Products(2016)

7.4%

Akzo

–ICI

(2008)

8.8%

Clariant

–Süd

Chemie(2011)

8.9%

1.8%

7.1%

ADM

–Wild

Flavors(2014)

9.4%

Merck

–Sigma Aldrich(2015)

9.6%

6.3%

3.3%

DSM

–Fortitech

(2013)

10.0%

BASF

–Cognis (2010)

10.6%

5.4%

5.2%

BASF

–Ciba

(2009)

12.0%

Ø 8

12.5%

Dow

–DuPont(2016)

13.9%

11.9%

2.0%

Henkel

–Nat’l Starch (2008)

Ecolab

–Cham-pion

(2013)

10.0%

4.1%

DuPont

–Danisco(2011)

16.4%

9.8%

6.6%

14.1%

Total synergiesCost synergiesGrowth synergies

2008–2016 acquisitions in the chemicals industry

Consolidation: our analysis shows that consolidation creates growth and cost synergies on an average of 8%

Source: Acquirer or target investor relations reports, analyst reports; BCG analysis

Synergies as percentage of target company sales

IEF16 Roundtable 1 17

Become a market leader via segment consolidation and roll—up(Ineos—PVC, Styrenics Indorama—PET, LANXESS— additives)

Portfolio migration towards more coherence for superior shareholder returns(e.g., Dow DuPont, Solvay, LANXESS, ...)

Support value chain integration to capture additional value(e.g., Indorama—PET Borealis—compounding and recycling)

Move to new segments and leverage capabilities(e.g., Merck—Millipore, Sigma Aldrich, DuPont—Danisco..)

Improve competitiveness via cost synergies—incl. site network (e.g., BASF—Ciba)

Accelerated capability building (e.g., SABIC—GE Plastics ChemChina—various)

Petchem companies to actively consolidateto enable transformation

Source: Acquirer or target investor relations reports, analyst reports; BCG analysis

IEF16 Roundtable 1 18

How are challenges faced by Asian refiners different from their western counterparts?

How could disruptions in petrochemicals sector impact refining sector?

What could be some of the new business models that could emerge as the global refining sector rebalances itself?

What could be the government's role as a facilitator to ensure supply security and healthy growth in the sector?

Key Questions

1

2

3

4

IEF16 Roundtable 1 19

India New Delhi

Background Paper

Parallel Roundtable 1: Refining and Petrochemical Sector; New Growth Potentials and Rationalization