How co-product credits will preserve naphtha’s viability as an olefin feedstock Jim Foster Senior Editor, Analytics

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Agenda

• Ethane’s growing popularity

• Propylene feeling the pinch

• Naphtha’s positive co-product scenario

• Ethane rejection and the impact on naphtha

Feedstock advantage key to profits, but…

Betting on the current shale gas craze requires going all-in on ethylene – and foregoing any profits from aromatics, propylene or butadiene.

per ton Ethylene Ethane Propane EP Mix Normal Butane Light Naphtha Gas Oil 2 Full Range NaphthaFeedstock 231.88$ 487.14$ 282.93$ 642.13$ 860.67$ 920.83$ 994.22$

Ethylene 987.71$ 537.65$ 846.06$ 508.45$ 392.10$ 272.45$ 353.65$ Propylene 26.32$ 159.20$ 68.14$ 162.60$ 152.68$ 138.15$ 143.99$ Crude C4s 37.25$ 58.02$ 43.79$ 135.84$ 107.22$ 114.18$ 125.98$ Pygas 17.87$ 69.84$ 34.22$ 74.83$ 178.27$ 177.41$ 184.34$ Gas Oil (6 oil) -$ -$ -$ 10.53$ 65.90$ 151.41$ 89.58$ Hydrogen/Fuel 24.85$ 49.05$ 32.47$ 39.04$ 28.23$ 22.57$ 25.10$ Co-product credit 1,094.00$ 873.77$ 1,024.69$ 931.28$ 924.41$ 876.17$ 922.65$

Margin $/mt 862.13$ 386.63$ 741.76$ 289.16$ 63.74$ (44.66)$ (71.57)$ RATIO 372% 79% 262% 45% 7% -5% -7%

Ethane remains the most popular feedstock

• Currently has the best margins

• Produces the most ethylene – which is the industry’s largest-volume feedstock

• Ethane is the reason natural gas is driving new cracker construction

• Ethane crackers also are less expensive, with naphtha crackers costing about 40% more for a similar scale plant

• Ethane makes basically only ethylene

• 80% of ethylene is used for polymers, produced by back-integrated companies

Ethane – big return for small investment

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Ethane and ethane/propane mix not only have the largest margins, but also the lowest feedstock costs – providing the best return on investment.

Ethane Propane EP Mix Normal Butane Light Naphtha Gas Oil 2 Full Range NaphthaFeedstock Cost 231.88$ 487.14$ 282.93$ 642.13$ 860.67$ 920.83$ 994.22$ Margin 862.13$ 386.63$ 741.76$ 289.16$ 63.74$ (44.66)$ (71.57)$ Return on Feedstock Cost 372% 79% 262% 45% 7% -5% -7%

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Why shale gas changed US petrochemical dynamics

75%

16%

5% 1%

1%

1%

1%

Methane Ethane Propane Butane Pentanes Hexanes Inerts/Other

Marcellus shale gas composition

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Excess ethane has widened US cracker margins

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Wide margins motivate new crackers and expansions

10 million metric tons of additional ethylene capacity planned in the US – if all is built.

Less than half a million tons of additional propylene and crude C4 will be produced from these new and expanded cracker projects.

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Agenda

• Ethane’s growing popularity

• Propylene feeling the pinch

• Naphtha’s positive co-product scenario

• Ethane rejection and the impact on naphtha

Heavier liquids, 30%

NGL, 70%

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Propylene feeling the pinch

After Shale Gas

Before Shale Gas

Propylene production suffers

• Changing feeds has reduced propylene production in crackers by more than 50%.

• Refineries, which make 50% of propylene, remain at or below 2008 levels.

Heavier Liquids, 13%

NGL, 87%

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On-purpose propylene projects in the US

Year Company Location Const. Type Feedstock FS Quantity Propylene

2015 Enterprise USG New PDH Propane 1,650,680,195.68

1,642,427,000.00

2015 Dow Freeport, TX New PDH Propane 1,661,758,586.25

1,653,450,000.00

2015 Formosa Point Comfort, TX New PDH Propane 1,329,406,869.00

1,322,760,000.00

2015 LyondellBasell Channelview, TX New Metathesis Propane 502,958,932.11

500,444,200.00

Unknown Williams Alberta, Ontario New PDH Propane 1,005,917,864.21

1,000,888,400.00

12-17 Total Million lbs 6,150,722,447.24

6,119,969,600.00

12-17 Total MT 2,789,949.40

2,776,000.00

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On-purpose propylene production

Cumulative output growth from crackers and PDH

-

2,500,000.00

5,000,000.00

7,500,000.00

10,000,000.00

2012 2013 2014 2015 2016 2017

Ethylene Propylene Pygas Crude C4

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Agenda

• Ethane’s growing popularity

• Propylene feeling the pinch

• Naphtha’s positive co-product scenario

• Ethane rejection and the impact on naphtha

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Could the US lose its ethane advantage?

Ethane Surplus/(deficit) in MT/year

(4,000,000.00)

(2,000,000.00)

-

2,000,000.00

4,000,000.00

6,000,000.00

2012 2013 2014 2015 2016 2017

Ethylene margins shrink as ethane price climbs

Historic ethane and ethylene prices

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Scenario: Ethane at 2011 average, ethylene 2x ethane

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Assumptions: Ethane at 2011 average of $567.18 per metric ton. Ethylene valued at a 2-to-1 ratio against ethane (down from the current 5-to-1 ratio). All other prices as of COB October 3, 2012.

In this scenario, the ethane-based return falls from 372% to 74%. Light naphtha remains profitable, but the return on feedstock cost falls from 7% to 2%.

Ethane Propane EP Mix Normal Butane Light Naphtha Gas Oil 2 Full Range NaphthaFeedstock Cost 567.18$ 487.14$ 551.17$ 642.13$ 860.67$ 920.83$ 994.22$ Margin 419.15$ 328.02$ 381.28$ 233.73$ 20.99$ (74.36)$ (110.12)$ Return on Feedstock Cost 74% 67% 69% 36% 2% -8% -11%

Cracker yield percentages

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The large amount of pygas (aromatics) and crude C4 (butadiene) from light naphtha allows for potentially large co-product credits if aromatics and

butadiene prices climb.

Naphtha prices expected to trend lower

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Scenario: Naphtha price falls 25%

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Assumptions: Ethane at 2011 average of $567.18 per metric ton. Ethylene valued at a 2-to-1 ratio against ethane (down from the current 5-to-1 ratio). Naphtha price down 25% from current level to $645.50/mt. Benzene price at a 1.5-to-1 ratio with naphtha. RBOB gasoline priced at 3-to-1 ratio with naphtha. Full-range naphtha maintains a 10% premium over light naphtha. All other prices as of COB October 3, 2012.

Extending the scenario to include a drop in naphtha – and a subsequent drop in benzene – ethane’s return on feedstock is down slightly at 73% and light naphtha climbs to 32%, up from 2%. Full range naphtha also is profitable at 20%.

Ethane Propane EP Mix Normal Butane Light Naphtha Gas Oil 2 Full Range NaphthaFeedstock Cost 567.18$ 487.14$ 551.17$ 642.13$ 645.50$ 729.47$ 710.05$ Margin 413.93$ 315.83$ 373.87$ 213.77$ 208.88$ 89.15$ 144.42$ Return on Feedstock Cost 73% 65% 68% 33% 32% 12% 20%

Butadiene also could provide a boost to light naphtha

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Scenario: $3,500 butadiene

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Assumptions: Ethane at 2011 average of $567.18 per metric ton. Ethylene valued at a 2-to-1 ratio against ethane (down from the current 5-to-1 ratio). Naphtha price down 25% from current level to $605.64/mt. Benzene price at a 1.5-to-1 ratio with naphtha. RBOB gasoline priced at 3-to-1 ratio with naphtha. Butadiene at $3,500/mt. All other prices as of COB October 3, 2012.

Ethane Propane EP Mix Normal Butane Light Naphtha Gas Oil 2 Full Range NaphthaFeedstock Cost 567.18$ 487.14$ 551.17$ 642.13$ 645.50$ 729.47$ 710.05$ Margin 433.57$ 346.42$ 396.96$ 285.39$ 265.41$ 149.35$ 210.84$ Return on Feedstock Cost 76% 71% 72% 44% 41% 20% 30%

Extending the scenario to include a jump in butadiene provides a boost across the board, pushing light naphtha to 41% from 32% and ethane to 76% from 73%. If butadiene approached record-high levels, the profitability of light naphtha would climb to 50%

How likely is the US to overbuild?

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The petrochemical industry follows an approximate 8-year cycle of profitability. Overbuilding during peak times causes supplies to lengthen. The additional capacity also tends to coincide with an economic downturn, resulting in reduced demand.

Are we entering a period of overbuilding?

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“If the petrochemical industry knows anything, it’s how to overbuild.”

-- Senior Vice President of major engineering firm

Peak behavior

• Expansion in current business areas

• Too much new capacity by too many companies

• Capacity tends to start up at the same time

• Does any of this apply to the current petrochemical environment?

Valley behavior

• Market share drives sales

• Some companies exit because of heavy loses (resulting in cheap acquisitions)

• Little new investment

• Demand starts to catch up with supply as older units are closed

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The trend could go global

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Who has shale gas?

• US – 482 Trillion Cubic Feet

• China – 1,275 Trillion Cubic Feet

• Mexico – 681 Trillion Cubic Feet

• Argentina – 774 Trillion Cubic Feet

• Australia – 396 Trillion Cubic Feet

• All of Europe – 639 Trillion Cubic Feet

• South Africa – 485 Trillion Cubic Feet

• All of Africa – 1,042 Trillion Cubic Feet

• Saudi Arabia was not included in the EIA study, but the country expects

to be producing from shale gas by 2020. They call their reserves “very

significant.”

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Agenda

• Ethane’s growing popularity

• Propylene feeling the pinch

• Naphtha’s positive co-product scenario

• Ethane rejection and the impact on naphtha

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Is ethane rejection possible?

Ethane Surplus/(deficit) in MT/year

(4,000,000.00)

(2,000,000.00)

-

2,000,000.00

4,000,000.00

6,000,000.00

2012 2013 2014 2015 2016 2017

Potential ethane rejection

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Ethane oversupply leads to ethane rejection

At the point of ethane rejection, propylene, pygas and Crude C4 need to support continued drilling – or the wells shift from NGLs to oil.

75% of Marcellus shale is methane

75%

16%

5% 1%

1%

1%

1%

Methane Ethane Propane Butane Pentanes Hexanes Inerts/Other

16% of Marcellus shale is ethane

US oil and gas rig count

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Oil Gas

Crude vs. natural gas