Polymer Consulting

International, Inc.

Shale Gas verses Oil: The Battle for

Global Supremacy
Presented at IPA
September 17, 2015

This is me a few weeks ago

PCI

Then came

PCI

Greece economic crisis

China economic slowdown
Iran sanctions to be lifted on promise of nuclear agreement
China stock market crisis
China currency devaluation
Second China stock market crisis
US stock market crisis
Second China currency devaluation
Donald Trump leading Republican presidential candidate

So today, I am not so happy

PCI

In Argentina, next months presidential election will

determine which face you will have

Latin America has problems in 2015 which

could continue in 2016

PCI

Argentina
Gas shortages
Trade restrictions
Presidential elections in October
Will there be a currency devaluation? (blue~+60%)
Brazil
Corruption issues
Severe drought impacting electricity costs, production
Recession (-2.4%)/inflation (polymer demand down)
Currency decline (Chinas devaluation impact)
West coast/north
Weak economies lower demand growth
Venezuela multiple problems
Central America
Demand growth lower than expected

While there are many short-term issues there

is one major long-term issue facing the
North American petrochemical industry

What will be the impact of low oil prices on

the future competitiveness of the shale gas
driven investments in the export market?

OR
PCI

An American Chemical Council (ACC)

study estimated that about $125 billion is
being invested in shale oil and gas
More than $25 billion will be spent on the 7
cracker projects under construction in North
America (exclusive of the 7 expansions)
More than $6 billion will be spent on the 3
PDH projects under construction in the US
About $50 billion more would have been invested in
shale gas projects with oil at $100/barrel
PCI

The new shale paradigm

PCI

The US is exporting gas (reverse flow and new terminals)

Oil imports have been reduced by one-third
Oil exports not allowed (Congressional act to change, EIA
study) but refined products can be exported
North America is the second lowest cost producer of ethylene
and ethylene derivatives
North America will likely be the lowest cost producer of
propylene and propylene derivatives
Unprecedented construction in petrochemicals
Middle East and China investing in the United States

But, as the saying goes: whatever goes up

must come down

In the fourth quarter of 2014 oil prices unexpectedly dropped to

levels no one expected or predicted ($35-$40/bbl) and there
has not been any move to increase prices significantly by
curtailing production ($45-$55/bbl)
One suggested reason: stop the development of shale gas and
shale oil and delay petrochemical projects in North America (US)

Has it been successful?

PCI

The price of oil and has deteriorated beyond

expectations

Thursday, August 28

PCI

The spread between oil and gas has also been

impacted

There was an immediate reaction

Shale oil and gas exploration and new well production

essentially stopped
Many existing wells (drilling rigs) were shut in
Oil and oil-dependent company profits dropped substantially
with personnel and other cost reductions
Petrochemical investments not already under construction
were postponed

But the actual impact on oil and gas production

did not go as was expected

PCI

Low prices have impacted oil and gas drilling

PCI

But, due to continuously improving technology, oil

and gas production has not decreased accordingly

While the number of working wells has declined,

gas production has actually increased

PCI

Significant technology improvements have

resulted in increased production

One of the developments increasing production at

a lower cost: multi-level stacked horizontal drilling

Cline shale map www.shaleexperts.com

With oil and gas prices both dropping there

will be a battle for export market share
Global Supremacy

PCI

So, who will win?

There is a quantitative measure of North American

export competitiveness

PCI

The American Chemical Council (ACC) had commissioned a

study that calculates ethylene produced from ethane and from
naphtha
The study revealed that when the ratio of the oil price relative
to the natural gas price was below 7, naphtha was the more
competitive feedstock
When the ratio was above 7, ethane was the more
competitive feedstock
At $100/bbl the US ethylene competitive advantage was
substantial

So how has the lower oil prices affected

export competitiveness?

In spite of the low oil price, North American

competitiveness remains strong
Source: ACC
Oil price, $/bbl
Gas price, $/MMBTU

Oil: $47.78
on 9/10/15
Gas: $2.71
on 9/10/15
Highly
competitive
above 15

Ratio: 17.6

Gas prices have not declined as much as oil but

the ratio has never been below 15

PCI

North America is still the second lowest cost

producer of ethylene and ethylene derivatives

Petrochemical feedstock competitiveness has not

changed position but the gap has narrowed
Naphtha C2/C3 (market price) Asia and Europe
Singapore naphtha

Middle East liquids/naphtha (discounted)

China coal-based ethylene

US naphtha

Middle East propylene (discounted)

Malaysia ethane

US propylene (2015)

US ethane Gulf coast

Mexico/Argentina/Brazil ethane (referenced)
US ethane Northeast
Western Canada ethane
Middle East ethane

PCI

Ethane is still the feedstock of choice and North America

still has an advantage over naphtha

PCI believes that the winner will be

GAS
PCI

So the question becomes:

How much and how soon will the new shale gas
driven capacity impact the export market?

PCI

First wave: seven new crackers under construction.

Company

New cracker

Location

KTA

Products

Target

1 BraskemIDESA

Mexico

1,000 1Q16

2 Chevron Phillips*
3 Dow*

TX

1,500

2018 Polyethylene

TX

1,500

2017 Polyethylene, other

4 ExxonMobil*
5 Formosa Plastics*

TX

1,500

2017 Polyethylene

TX

1,750

2017 Polyethylene

6 Oxychem/Mexichem
7 Sasol*

TX

550

LA

1,500

Total

Polyethylene

2017 EDC/VCM
2018 Polyethylene,EO/EG

9,300

and seven ethylene expansions

Expansions

Company
1 DuPont*
2 LyondellBasell

Target

Products

TX

80
875

2015-17 Polyethylene

Canada

650

2016 Polyethylene

5 Shell*
6 Westlake

LA

250

2017 EO/EG

LA

2017 Polyethylene

7 Williams

LA

110
650

3&4 NOVA

*estimated capacity
Total

PCI

Location KTA
TX

2017 Polyethylene

2016 Merchant

2,615
11,915

..totaling 12 million tons per year

But, there are many critical issues

PCI

Delays during Construction

Procurement (in spite of global sourcing)
Labor (shortages with rate escalation)
Welders are the most critical skillset
Weather (hurricane seasons: August-November)
Post-construction
Logistics
Port of Houston is currently congested (other ports will
be used but there are infrastructure issues)
Houston rail service is currently congested and rail
cars could be a problem
Exports: ship schedules and availability
Overcapacity (fight for domestic and export sales)
It is doubtful that any company will meet its
target startup (delays of 4-12 months)

There will likely be a second wave

New

Potential new ethylene projects

Company
Location
1 Axiall/Lotte

LA

2 Braskem Americas

WV

3 ChevronPhillips#2*
4 FormosaPlastics#2*
5 Indorama/partner*
6 PTT/Marubeni

TX
LA
OH

7 SABIC
8 Shell

Not decided
PA

9 Shin-etsu

LA

10 Total
11 Williams#2

TX

Total announced

LA

LA

KTA

Products
1,000 EDC/VCM/PVC
1,100 Polyethylene
1,200 Polyethylene
1,000 EDC/VCM/PVC;HDPE
1,500 EO/EG;PE?
1,000 Polyethylene
1,200 Polyethylene
1,500 Polyethylene
500 EDC/VCM/PVC
1,000 Polyethylene
1,200 Merchant

12,200

*etimatedcapacity.CrackersarealsobeingconsideredbyKoreancompanies
(e.g.,HanWha,SK)andJapaneseproducersandtradingcompanies

PCI

PCI believes that at least three of these could be

built based on specific drivers

Polyethylene will have the largest share of the

new derivative capacity

PCI

There will be a LOT OF POLYETHYLENE!

Many of the announced propylene

investments are not yet proceeding

Company

Project

Capacity

Ascend/C3

PDH, TX

1,100

BASF

MTP,LA

Dow

PDH, TX

750
750

Enterprise

PDH, TX

750

Formosa Plastics

PDH, TX

750

RexTac

PDH, TX

Williams

PDH, Canada

PO

Other Merchant Timing

X
X
X

500

Total

4,600

Actual

2,000

PCI

PP

Comments

2016 Delayed
201819 No final approval

201516 Under construction

2015 Underconstruction
2017 Delayed
Canceled
201617 Needofftaker

This will impact the longer term supply of

propylene

The propylene market has experienced

another dramatic change

PCI

Initially, ethylene crackers switched from naphtha to ethane

creating a propylene shortage for almost three years
This year propylene became oversupplied
Refineries are operating their FCC units at full capacity to
produce refined products that can be exported generating
excess propylene
Ethylene crackers are using ore propane and butane
which increases propylene production
Propylene prices have dropped but polypropylene is tight so
prices have remained high
Polypropylene margins are very high (happy producers)
As polypropylene demand increases, the excess propylene
will be used up (demand year-to-date is very high: +5.5%)
Propylene could become tight again in 2016 and remain tight
until the PDH units start up (2016/2017)

Polypropylene Expansions

Unlike polyethylene, there has not been much new PP capacity

announced:
Braskem: will depend upon ability to source propylene
Formosa Plastics: 650 KTA on hold for at least one year
Rextac: will not proceed
As there will be about 5% of under-utilized polypropylene capacity
(~1.5 MM tons/year) die to expected propylene tight supply
There will be an immediate surge in polypropylene production and
exports
Until new capacity starts up polypropylene could remain very tight
with high margins

PCI

No new PVC capacity being built

PVC is benefitting from lower power costs (chlor-alkali) and

lower ethylene costs (EDC/VCM)
High exports due to low cost position (strong global demand
growth) but export prices are weak with competition from China
Domestic demand (construction) should further improve in 2016
EDC expansions: Westlake, Occidental/Mexichem, but no new
PVC yet (due to low capacity utilization)
But companies are already planning expansions for 2020 in
anticipation of tightening supply:
Axiall new cracker JV with Lotte (~1 MM tons PVC)
Formosa second cracker (HDPE and PVC)
Shin-etsu new cracker (500 KTA ethylene=1 MM tons PVC)
PVC is likely to tighten by the end of 2016 resulting in
reduced exports and higher prices

PCI

The shale gas investment pendulum

Nothing for
ten years
PCI

Way too
much!

Which may not have been so bad if the fundamentals that

drove these investments did not change

And so the Share Wars begin

PCI

There will be a severe battle for domestic market share

There will be a severe battle for export market share
Latin America will be a major battleground
China and Southeast Asia will be another strategic battleground
but displacing current suppliers will be more difficult
Other regions will also be targeted but the volumes will be much
lower
About 10 million tons per year of new ethylene capacity will be
starting up globally (2016-18) mainly in the Middle East (higher
exports) and China (lower imports)

PCI believes that the oil-to-gas price ratio will be high

enough to ensure a US export competitive advantage
compared to Asian and European naphtha based
producers

At the end of the day.

PCI

The US chemical industry is being reborn with an unprecedented

level of investments in new and existing ethylene crackers
Five new US crackers and 5 expansions (First Wave pre-2020)
One cracker in Mexico and two expansions in Canada
Three to five new US crackers (Second Wave post-2020)
Three new PDH units with three more possible
The net result is that there will be a continuous stream of new
cracker and PDH unit construction through 2021
PCI believes that the onslaught of all of the new capacity
(2017/2018) could result in severe polyethylene margin erosion
due to the oversupply but polypropylene and PVC margins should
be strong

Polymer Consulting
International, Inc.

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