Ian.Morrison@stantec.comP.Eng, MBA, M.Eng

Comparative Petrochemical Plant Economics in North America

CERI 2015 Petrochemical Conference

June 7-9, 2015

Introduction

Project funded by

Original data Dec 2012 Key variables updated May 2015

Agenda1. Motivation2. Model Approach3. Results4. Impacts5. Competitive Actions6. Summary

Motivation

Provide accurate, defensible and repeatable information and representative cash flows to demonstrate the various pros and cons of petrochemical plant investment in Alberta?

1

Capital Investment In Canada

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450

Billi

ons

Rest of Canada Canada Housing (Ex-Alberta Alberta Oil & Gas Alberta

Perception Vs RealityPerception is that Alberta is not competitive compared to GC due to high capital cost Oil Sands over runs 61% to 107% (These projects are still profitable at these

escalated CAPEX amounts) Theory predicts oil sands over runs: mining, schedule driven, new technology

Not true for Alberta Petrochemical Projects Dow Chemical LHC-1 Project 15% under budget Historical data for Alberta projects indicates petrochemical projects are typically within

2% to 10% over sanctioned cost

Project Planning prior to

Sanction 60-85%

Ownership

New Technology

Complexity

Regulatory Regimes

Escalation Feed Stock type

Model Approach

Is Alberta competitive?

2

Approach

Life cycle cost of petrochemical plant (methanol)

Apples to apples comparison Locations: AIH, USGC, RMWB Verifiable & objective Economic model for investors

Why Methanol?

Globally traded Many uses:

Fuel/biofuel/diluent Feedstock Plastics/fibres

World-class sized plant Proven technology Reference plants

Why Methanol?

Plant Description

Methanol Plant ~ US$1B 4-year build Capacity 300 MMg/year

Natural gas feedstock Clean and level site

2CH4 + 3H2O => 2CH3OH + 2H2 + H2O

Assumptions

1. Revenue: Tide-water world market prices1. US$1.66/gal2. Incremental supply has no impact on price3. Unit train rail distribution to Vancouver

2. Economic model ~100 variables1. Real model 2. $0.80 Cdn/USA3. WACC 8.9%4. D/E 1.635. Terminal values profit in perpetuity

3. Class V Capital Cost4. Market price natural gas feedstock5. Standard Government tax treatment

Assumptions

Conservative constant real price of $1.66 / gal used in model equivalent to $550/MT

Capital Cost EstimateInside Battery Limits (ISBL)

USGC Standard

Factor

USGC US$ MM

AIH US$ MM

RMWB US$ MM Notes

Owner's Costs

7% $29 $29 $29 Independent of location (same owner)

Equipment 20% $81 $82 $83 Equipment purchased globally

Materials 19% $77 $78 $79 Materials and bulks sourced globally

Engineering 16% $67 $67 $67 Globally sourced for ISBL (local for OSBL)

Construction 37% $173 $203 $345 Construction is local & stick-built

ISBL Total $427 $459 $602

Total $814 $860 $1,075 OSBL+ISBL+ Working Capital + Other Soft%USGC 100% 106% 133%

Overheated Market Consideration

Hot market Rates go up

and Productivity goes down

Market heat scale=UnemploymentJob Vacancies

Market Heat Productivity Impact

7 = Cold Market, 20% bonus

3 = Neutral (Compass Intl Standard)

1= Hot Market, 25% penalty

Market Heat Productivity ImpactYear Market Heat

USGC AIH

2012 2.4 0.6

2014 1.8 1.1

2015 1.9 1.7

Results

So does Alberta stack up?

Updated 2015 Numbers!!

3

Cumulative NPVGC AIH RMWB

NPV $1,225 $1,589 $1,225

IRR 21.4% 23.3% 18.6%

($1,500)

($1,000)

($500)

$0

$500

$1,000

$1,500

- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

NPV

(US$

MM

)

Execution Year

Net Present Value $US MM

Aberta IndustrialHeartland

Gulf Coast

RMWB

DifferencesNPV Differential $US MM

Gulf Coast versus Alberta Industrial Heart Land

Sensitivity

NPV Top Sensitivities:

1. Cost of Capital2. Natural Gas Cost3. Tax Rates4. Operating Rates5. Winter Productivity

Impacts

What are the key differences?1. Tax2. Product Distribution3. Natural Gas Price4. Construction Labour Costs

4

Notional Project Tax RatesAlberta 25% Stable, balanced-

budget governments

$ 29-66MM annually $312MM NPV

impact

Louisiana 43% Ability to negotiate Massive deficit

governments

1

Distribution Costs

AIH Unit train to tide water $24MM annually $150MM NPV Impact

USCG Free!

2

Natural Gas Price3$0.69 /MMBTU differential $19MM annually$118MM NPV

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$2

$4

$6

$8

$10

2005

2006

2007

2008

2009

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2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

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2025+US

$ /

MM

Btu

YearHenry Hub Nymex (GC) Alberta Plant Gate (AIH) Spread USD/MMBTU

Construction CostsAIH Penalty Versus GCProductivity 12% (Winter Work)

- Winter 35% for 1/3rd of build = 12%Hot Market 3%Remote Factor = 0%Exchange rate = (19%)= 16% construction cost penalty6% Capital cost penalty$44 MM

4

Risk Sensitivities1. WACC higher favours USGC2. Gas price volatility favours AIH3. Falling C$ - favours AIH4. Interest rates higher favours USGC5. Market heat favours AIH

5

Year Market HeatUSGC AIH

2012 2.4 0.6

2014 1.8 1.1

2015 1.9 1.7

Competitive Actions

So what do we do?

5

Competitive Actions

Local consumption of methanol to mitigate shipping price advantage Fuel Diluent Chemical production

Winter construction Modularization

Tailored planning Understanding & adapting to local contracting

conditions and labour supply constraints Political support for value added industries

6. Summary

AIH Lower taxes Feedstock price Feedstock

availability Weak Cdn$

Winter constructionMarket Access

USGC Lower Capital Cost Tidewater

Extreme weatherFeedstock competition

Alberta Is CompetitiveWith USGCAlberta Industrial Heartland: Marginally higher capital cost but higher project profits

Slide Number 1IntroductionAgendaMotivationCapital Investment In CanadaPerception Vs RealityModel ApproachApproachWhy Methanol?Why Methanol?Plant DescriptionAssumptionsAssumptionsCapital Cost EstimateOverheated Market ConsiderationMarket Heat Productivity ImpactMarket Heat Productivity ImpactResultsCumulative NPVDifferencesSensitivityImpactsNotional Project Tax RatesDistribution CostsNatural Gas PriceConstruction CostsRisk SensitivitiesCompetitive ActionsCompetitive Actions6. SummarySlide Number 31