GCC Petrochemicals Industry

11-12 February 2019

Singapore

1

The chemical industry was created by German scientists and grew in the

US and Saudi Arabia, enabled by feedstock, regulation and megaprojects

Germany US Saudi Arabia

▪ In 1909, Haber-Bosch

process for ammonia

production invented (1918

and 1931 Nobel Prizes)

– World War I munitions

– Fertilizers

▪ In 1925, Franz Fischer and

Hans Tropsch invented a

process to liquify coal / gas

▪ In 1950s, Ziegler and Natta

invented polymerization

catalysts (1963 Nobel Prize)

▪ Ronald Reagan deregulated

the US oil and gas industry in

the early 1980s

– Led to massive growth in

supply and infrastructure

– Enabled petrochemical

investments

▪ Master gas pipeline project

proved to be key enabler

– Allowed country to put

its ethane to good use,

as opposed to flaring it

– Attracted significant

local and foreign

investment to exploit

gas resources

2

Today, the size of the chemicals industry is USD ~4 trillion, with Asia and

GCC driving growth over the past decade

2.6 2.6

3.8

4.1

3.8 3.8

09 112007 201713 15

+4%

Source: European Chemical Industry Council, Chemdata International, American Chemistry Council, GPCA

Global chemicals revenue

USD trillion

Chemicals revenue growth by region

% CAGR 2007-2017

14.0%

9.0%

8.9%

0.5%

-0.7%

-0.7%

-1.8%

NAFTA

GCC

China

Latin America

Rest of Asia

Africa

EU28

3

GCC’s share in global petrochemical capacity has more than doubled over

the past decade, and Saudi Arabia is by far the biggest player in the GCC

Global petrochemical capacity

Million tons per annum (% of total)

GCC chemicals revenue by country

2017, % of total

Source: ICIS, GPCA

Others

20172000

167

(7%)

GCC

Europe

North America

Rest of Asia

China

1,186

2,545

38

(3%)

10%

29%

12%

25%

21%

33%

23%

14%

78%

8%

6%

5%

Kuwait

Oman

Saudi Arabia

Qatar

UAE0%

Bahrain

3%

USD 84 Bn

4

Middle East is the third largest gas producer globally, and is expected to

be the second largest driver of growth until 2035, after US shale gas

Source: BP Statistical Review 2018, BP Energy Outlook 2017

Forecasted gas supply growth

Billion cubic feet per day

2.5

0.5

0.0

1.0

3.5

1.5

3.0

2.0

4.0

Africa

2000 2005 2010 2015

North America

CIS

Asia Pacific

Middle East

Europe

Total natural gas production

Trillion cubic meters per year

5

Price of gas feedstock in Saudi Arabia has been significantly lower than

the rest of the world e.g., the US, although the gap has been closing

Source: Wood Mackenzie

0

2

4

6

8

10

12

14

16

18

2004 2006 2008 2010 2012 2014 2016 2018

US Mont Belvieu Ethane

KSA Ethane

2004 2006 2008 2010 2012 2014 2016 2018

US Mont Belvieu Propane

KSA propane

Ethane price advantage in Saudi Arabia

USD per mmBtu

Propane price advantage in Saudi Arabia

USD per mmBtu

6

Feedstock advantage accounts for ~60% of global annual EBITDA pool; GCC

players have historically focused on the upstream part of the value chain

Petrochemical value pools1,2

EBITDA USD Bn, 2013-2015 weighted average

Coal

Natural

Gas

NGL4

LPG

Naphtha

Gasoil

31

C2

C3

C4

C1

Aro-

matics

Ammonia

Methanol

Ethylene

Propylene

Butadiene,

Butene

BTX5

PE, PVC

PP, ABS

PBR, SBR

PS, ABS,

PET, PC

Urea, VAM,

Acetic Acid

EO, MEG, LAO

PO, Acrylics,

MMA , ACN, ECH

MMA

PX, PTA, SM,

TDI, MDI, Phenol

127

5

19

2.6

1

3.6

69

18

1

4

Final productsIntermediates

Building

blocks

POM

Total

36

Feed-

stock

10

5.5

4.4

0

0.2

0

12

1.2

2.4

8.0

0.1

0.2

74

30

42

2.6

0

0

Feedstock advantage3

First level

Stand-alone value contribution

1 Returns = EBITDA per ton/capital replacement cost per ton 2 Transfer between stages at market price 3 Value pool associated with advantaged feedstock

4 Natural Gas Liquids, both from conventional and shale 5 Benzene, Toluene, Xylene

Source: McKinsey & Company

7

In the late 90’s, GCC regulators put in place a number of key enablers that

unlocked the growth potential of the region in the period 2000-2017

Enablers put in

place in GCC

▪ Master gas project in the

late 1970s, enabling

access to feedstock

▪ Clear regulatory

framework and process

for feedstock allocation

▪ Development of dedicated

industrial cities with their

own authorities, industry-

friendly processes,

infrastructure etc

▪ Access to competitive

project financing

through government

funding agencies 1217

24

38

62

109

142

168

200019951985 20151990 2005 2010 2017

+7%

+9%

GCC petrochemical industry production capacity

Million tons per annum

Source: ICIS, GPCA

8

Regulators pushing GCC players to produce more complicated molecules

and integrate downstream to create more jobs

Regulators pushing for more complicated

molecules…

% base chemical

…and the result is more complicated chemistries

taking place in the GCC

Number of different products

97%

77% 72%62%

23% 28%38%

100%3%

20101990 20202000

C3 and higher

C1 and C2

1128

17

2

20

88

15

26

18

23

3

03

7

2

1990

Butadience

derivatives

35

2000

43

2010 2020

Methane

derivatives

Ethylene

derivatives

Propylene

derivatives

Aromatics

derivatives

1625

51

114

Source: GPCA

9

Success in specialty / downstream products requires customer

proximity, while GCC players rely heavily on long-distance exports

Source: UN Trade Statistics, GPCA

14

52%

2010

48%GCC sales

61%

39%

12

67%

33%

100%

61%

39%

16

66%

34%

2017

Exports

GCC chemicals industry sales

% exports

GCC chemicals exports

% by destination based on value of exports, 2017

64%

14%

6%

10%

3%

Asia

South America

3%

Western Europe

Africa

North America

Rest of the world\

USD 56 Bn

10

GCC players have been steadily increasing their overseas investments to

get closer to customers, as feedstock advantage at home erodes slowly

Drivers of overseas

investment by GCC players

▪ New sources of advantaged

feedstock in North America

– Limited availability of (new)

gas feedstock in GCC

– Increasing feedstock,

energy, utility and labor

costs in GCC

▪ Desire to move closer to

customers

– Better pricing decisions

– Greater ability to gain and

defend market share

– Fear of trade barriers /

trade wars

▪ Access to talent

Overseas capacity of GCC players

Million tons per annum

12%

54%

46%

0%

20172007

27%

24%

49%

29%

59%

2027F

North America

Europe

Asia11

19

39

+6%

+8%

Source: GPCA

11

Chemical industry accounts for ~3% of jobs and ~6% of GDP in the GCC;

in coming years, regulators will be trying to strike balance in their stance

Source: GCC Statistics, GPCA

Employment impact of GCC chemical industry

Thousand jobs in 2017

GDP impact of GCC chemical industry

USD Bn GDP contribution in 2017

166

880

498

216

Total

Direct

Indirect

Induced

▪ 3% of total GCC employment

46

84

27

12Induced

Indirect

Direct

Total

▪ 6% of total GCC GDP

Key factors for regulatory decision-making

▪ Historical objective in supporting industry was

to monetize stranded gas resources

– Convert gas to plastics and export, as

opposed to flaring

▪ Over time, industry became important

employer, GDP contributor and talent pool

▪ Preparing for non-oil economy, regulators need

to balance:

– Challenge of supplying competitive

feedstock

– Risk of losing industry growth and

investment

– Ensuring long-term sustainability and

competitiveness of local industry

12

In summary, GCC petrochemical players are facing a number of

challenges today

Key challenges for GCC petrochemical players

▪ Diminishing price advantage for ethane and propane due to e.g.,

– Competition from US shale gas

– Competition from coal to olefins in China

▫ Slower than before, due to environmental concerns

▪ Limited availability (i.e., volumes) of gas feedstock for petrochemical conversion

▪ No clear pricing framework for liquid feedstocks

1

2

3

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THANK YOU