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Polymer Supply

Issues

What to expect in North American

Supply

Agenda - PE

• Outside Backdrop

– Asia

– Middle East

– Europe

– Other (Brazil, Mexico)

• Regional Supply Demand

– Specifically, likely trade balance?

• Pricing Drivers

Primary Agenda – NA Expectations

• Near Term Supply Demand

• Shale Gas

– Feedstock availability

– Potential for export

– Impact

• Capital Program

• Potential for Exports or Imports

• Pricing Drivers

• Wrap-up with a look at major Issues

GLOBAL BACKDROP

Prior Thinking

• Middle East – Tsunami of PE and ethylene

• Asia – Heavy growth and import needs

• Europe – uncompetitive and mature growth, expect a little rationalization & imports, but probably not much

• South America – a nice potential market !

• North America – unbelievable overnight change from famine to feast, “too good”

HOW DOES THIS GET MESSED UP?

DeWitt’s Methodology

• Collect SD Data from Companies, Associations, and Governments as needed

• Discuss issues, trends and events continuously

• Stay abreast on the subtleties of competitiveness

• Develop globally balanced Supply Demand balances each year based on analysis of data

• Discuss with commercial participants, generating and presenting our seasoned expectations

• Utilize public data as well as undisclosed data, as background, to develop forecasts

• However, companies do not disclose all of their derivative plans when they announce crackers !

Develop Macro Growth Scenario

• In 2012, the main problem is slowing in EU

• The US appears to be taking off a little

• Expect US will be in the 2.0 +/-

• Think China will rebound, very committed to the 7-8 percent GDP for job formation

• Concerns are negative press, high energy cost, and more Arab Spring

• Positives are Energy Mushroom and Jobs in energy and manufacturing

Global Ethylene Underpinnings

• 2011 had its ups and downs, 2012 a little better, Capacity growth slows

• Market peak continues to look like 2013-14

• Capacity growth for 15-16 is just beginning, could get delayed

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World PE Supply and Demand

LLDPE Prod HDPE Prod LDPE Prod Capacity Demand Y/Y Growth

• Stronger NA growth in 2011 offset by large inv swing in Asia

• Recovery in 2012 in Asia as capacity growth slows

• Business peak in 2013 - 14

ME and Asian Projects

• Sanctions/Operability have stalled Iranian projects

• Other projects are just beginning, more are deferred by geopolitical events

• Major expansion occurs in Asia much more than in Middle East

• Large portion is MTO that will likely present some major challenges

Chinese Consumption

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Cap

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IMP HDPE

IMP L LLD

Prod LDPE

Prod LLDPE

Prod HDPE

Dem LD

Dem HD

• Expect polymer growth to resume in China to 8-9 % levels

• Significant capacity growth but constrained some by competitive pressures

• Expect most imports to be sourced “East of Suez”

• Capacity utilization has been limited mainly by operability

• With domestic consumption of ~ 9 mil tons, the remainder goes mainly to China

• Will need Iranian capacity to achieve this in 2013-14

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Africa/Middle East PE Supply and Demand


Other Areas

• South America is Growing nicely but tends to manage it markets regarding trade

• Limited Brazilian expansion will come in mid teens to later to utilize Presalt gas

• Limited export potential despite desires

• Western South America will add Cracker PE facilities with LNG but timing continues to slide

• Expect little out of Argentina, Venezuela

• Europe will see growth supplied by others, but may see some Shale gas potential about end decade via E&P or ethane imports

World Net PE Trade

Observations re Global Backdrop

• Despite worries and risk, Asia is keeping

the ME pretty well balanced with its

capabilities

• ME Capabilities are world scale BUT limited

by people/material avail. and Geopol. Items

• Despite shale gas, ME economics are

better than NA

• NA exports will be opportunistic

North America

US Ethylene PE Chain Margin, c/lb

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PEAvgMargin PECost Ethylene EthaneCashCost

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1100

Major Pricing Mechanism

Observation and Premise • Competitiveness driven by feedstocks

• ME remains best followed by US, Canada

• ME advantage not able to compete in NA with freight requirements and logistics costs

• Asia and Europe need naphtha cracking to meet demand, full replacement by ethane is beyond the scope of reality

• Hence, Asian pricing must support naphtha

• North American pricing will likely follow that of its incremental demand, ie export

Competitive Costs, USD/met

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Asia, Naph

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September 2011 DeWitt Petrochemical Forum

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North America PE Supply and Demand


• Demand includes Exp so 2011-12 flatten as dom grow offsets export

• Capacity is getting tight as we move forward due to delay of expansion

• Actually showing dem exceeding cap because we believe it will be built

Observations

• US expansion is very late after Shale Gas

evolution erased thoughts or rationalization

• Reasonable probability of nearterm snugness

• What about all the announced expansions ?

• Notice the S/U dates have been “foggy” ?

• Companies are very short of development

teams and unsure of permitting schedules

• Most people think in terms of 4-5 years !

DeWitt Petrochemical Forum

US Expansions

Ethylene 2011 2012 2013 2014 2015 2016 2017 2018

CAPACITY/ 26710 26710 26710 26710 26710 26710 26710 26710

TOTAL PRODUCTION 24335 25065 25817 26592 27389 28211 29057 29929

24335 24822 25318 25824 26341 26868 27405 27953

Westlake 120 200 120

Lyondell debottlenecks 286 200

Dow Deb restarts 360 100 -400

Ineos 115

Williams 270

BASF Total BFLP 200

CP Chem 1500

Dow 1200

Formosa 800

Shell Marcellus 1200

Possible US Incumbant 1200

Sasol 1200

Unnannounced Offshire entrant 1200

Lyondell JV ?

Oxy ?

New Capacity 0 0 865 786 120 2300 3400 2400

Cum Capacity 26710 26710 27575 28361 28481 30781 34181 36581

Cap Utilization 91% 94% 94% 94% 96% 92% 85% 82%

slip 1 year 94% 97% 96% 97% 99% 94% 88%

Other Actions of Note

• Canadian Development in Alberta

• Eastern Canada Capacity Rescued

• Mexican development more likely with the

impact of reducing US exports to Mexico

Issues - Shale Gas

• Government regulation can slow it but “gold rush” development has already defined a massive expansion of NG and ethane supply

• Water is likely really not a concern re environment but may be a worry re supply

• Logistics are needed but don’t seem to be a prob.

• Volume is massive and only gets better with all the LNG and NG demand developments – LNG trucks, Power Generation, CNG autos

• LNG export will occur and possibly Ethane export

• Ethane supply will still likely be in significant surplus

Issue – PE Supply

• Volume should be tighter near term but we

think it will be adequate

• Export capability may be crimped by

domestic demand in tight supply mode

• Longer term capacity could be long but

history shows actual expansion never

equals announcements !

Issue – Cost & Profitability

• Pricing mechanism for PE looks to be a

price taker version based on higher priced

exports to Asia, already in place !

• Ethylene has a lot of the margin in it

• Ethane also is holding a lot of the margin

• PE Integrated versus non integrated

effective net pricing may become a

problem

Thank You !

Shale Gas

“a great story that can evolve elsewhere”


Reservoir Map “in Progress”


NGL Transportation


Gas Well Economics USD per MSCF


Bentek

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Marcellus Eagle Ford Fayetteville

Normal Cost

Mkt Price

Net Cost

Gas Well Investment Returns


BENTEKEK

10+%

DeWitt Petrochemical Forum

Global Interest is Growing

Poland

Hungary

Austria France

U.K.

China

B.C.

Australia

Saskatchewan

Quebec

India

“Hydraulic Fracking used in

1,000,000’s of wells Worldwide”

September 2011 DeWitt Petrochemical Forum ExxonMobil 8/10/2011

Ground Water

Shale

The Equalizer

LNG


LNG Provides a Market Price

• Can raise US nat gas & ethane pricing

• Can raise ME ethane pricing

• Can compete with crude and cause

lower demand and prices for naphtha

• Can reopen option to crack heavier feed

(likely a long way off)


Long Range Economics ~ 2020

Observations

• LNG today priced @ $ 10

• Future price likely lower

with more supply

• Stranded gas will move

up in price

Simple math calc

LNG deepsea Gas

Price

$9

Transportation/Cooling $3

Netback to shipper $6

Ethane value cpg $ 0.55

Ethylene Cost per mt $600


Competitive Costs, USD/met

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Pot.

Avail

Eur.

US Ethylene Supply Demand

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Prod Cap Op Rate

• Capacity additions are slowing down, Iranian projects stalled by sanctions

• Next wave of additions are smaller in number and just starting projects

• Nearterm operations are limited more by operability

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