Global Chemicals Shifts to the U.S.

Due to the Shale Revolution

Tom Gellrich TopLine Analytics

© 2015 TopLine Analytics. All rights reserved.

June 7th 2018 Canonsburg, PA

1973 Energy Shock

Source EIA

3.2x Increase

1979 Energy Shock

Source EIA

2.0x Increase

2008 – 2012 Shale Shock

3.8x Decrease

Source EIA Natural Gas

North American Advantage

Source: World Bank Pink Sheet Average natural gas prices $/MBtu

2018 Q1

$2.8 $6.9

$8.8$3.1

2008

$10.3 $11.4

$14.4$1.3

Natural Gas

+$4 to 6

Shale Gas drivesthe Chemical Industry

0%

20%

40%

60%

80%

100%

Chemical Feedstock

Methane

Ethane

Propane

Fuel

Typical Shale Gas

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

Global Chemical Shift

• “The feedstock cost for new crackers in [Saudi Arabia] will be around $6/MBtu as there’s not enough ethane availability … this cost will be much higher than the US gas price, which is currently at $3.50-4.00/MBtu”

– Jamal Malaikah, president and COO, National Petrochemical Industrial Co (NATPET), Apr 2013

• “The shale gas revolution initiated in the US… is now reshaping not only the energy industry, but global economy and geopolitics as well.” This could cause “a great deal of discomfort” to Asia’s petrochemical sector.

– Yoshimitsu Kobayashi, chairman of the Japanese Petrochemical Industry Association at APIC, May 2013

• “The shale gas revolution in the US has turned the global petrochemical industry inside out…Basic petrochemicals can now be made in the United States for about half the cost as in Europe”

– Tom Crotty, Ineos group director, ChemWeek Interview October 2013

• “The supply of low-priced products that are based on coal and shale gas will become a threat to the existing petrochemical industry and will bring a significant change in its structure.”

– Han-Hong Ban, chairman of the Korea Petrochemical Industry at APIC, May 2013

Dramatic Cost Shift

Ethylene

1980-2010

Middle East N America China W Europe NW Asia

Old Normal:Middle East half the cost of the rest of the world

2015

New Normal:• Middle East and

NA at parity• Rest of the world

at >2x cost

Changes in Global Industry

• M&A: Axiall (Georgia Gulf + PPG Chlor-Alkali)• JV: PPT Global Chem + Marubeni Corp• Doubling down on investments: LyondellBasell• Relocating existing plants to U.S.: US Methanol• Middle East investment in U.S.: SABIC• Commercialization of new technologies: PDH BDH• European + Asian shutdowns: Total Carling • Increased NA investments: Formosa• Non – Gulf Coast U.S. investment: Shell• U.S. Ethane exports: Ineos• U.S. Backward Integration: BASF

“due to U.S. shale gas”

Chemical Industry U.S. Announced Investments

• $185 billion in capital investment, 301 projects

• 464 thousand direct and indirect new jobs by 2025

• $310 billion increase in economic output

• $26 billion in new tax revenue by 2025

Source: American Chemistry Council January 2018

60% investment foreign

50% + capacity increase

50% of construction spending by manufacturing

Appalachian Basin Plastics

Source: Shell Graphic

Ethane advantage $12/Bbl• M. Belvieu price $26/Bbl• Cost transport via ATEX $14/Bbl

Polyethylene LLDPE advantage $0.07/lb• Texas spot $0.65/lb• Cost rail transport $0.07/lb

Appalachian Basin Ethane1,000s Bbl

World demand is for 4 to 5 new world scale crackers per year

0

200

400

600

800

Shell

Rejected by 2020

Rejected future Growth by 2030

Mariner East

ATEX

Mariner West

World Scale Crackers Total 7.8

5.5 Conceivable Appalachian Basin

2.3 Unlikely PotentialAppalachian Basin

Chemical Industry Drives the Next Wave

Shal

e G

as Ethane

Methane

Propane

Butane

Ammonia

Methanol

Ethylene

Propylene

N-Butylene

Isobutylene

Market Sectors

Apparel and Accessories

Beverages and Tobacco Products

Chemicals

Computer and Electronics

Fabricated Metal Products

Food and Kindred Products

Leather and Allied Products

Machinery, Except Electrical

Nonmetalic Mineral Products

Paper

Petroleum and Coal Products

Pharmaceuticals

Plastics and Rubber Products

Primary Metal Manufacturing

Printed Matter and Related Products

Textile and Fabrics

Textile Mill Products

Transportation Equipment

Wood Products

Product Categories

Fertilizers

Adhesives / Sealants

Alkyd Resins

Solvents

Corrosion Inhibitors

Textiles

Inks, Adhesives

Shampoos, Detergents, Soaps

Paints

Coatings

Pipes, Hoses, Wire Coating

Coolant, Antifreeze

Films, Packaging, Bottles

Paint Remover

Plastics

Tires and Rubber

Lubricant Additives

Solvent, Industrial Cleaners

Source: PwC and TopLine Analytics