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Booz & Company
This document is confidential and is intended solely for
the use and information of the client to whom it is addressed.
Dhahran, November 2012 Discussion Document
Global Petrochemical Feedstock Developments Implications and Opportunities
Prepared for SAEE Booz & Company
The chemical industry is exposed to feedstock and customer industry dynamics
Source: Booz & Company
Dimensions Influencing Chemical Industry
Micro- and Macroeconomic Developments
Wildcards & Black Swans
Supply and
Resources Trends Chemical Industry
Trends
Customer Industry
Trends
November 2012 1
Prepared for SAEE Booz & Company
Various trends drive change in chemicals over the next 10-20 years
Booz & Company Perspective - Key Trends for the Chemical Industry
2025 2020 2015 2010
Megatrends and
Macroeconomic
Trends
Supply and
Resources Trends
Customer Industry
Trends
Chemical Industry
Trends
Major Disruptions &
Black Swans
Consolidation & reconfiguration of competitive landscape
Sustainability imperative & changing energy mix
New growth theme & changing innovation
Megatrends driven discontinuities
Globalization of Businesses
Commoditization & increasing fragmentation of growth
Regulation
Economic crisis Next crisis
Increased nationalism
Increased regionalization / globalization
Race for Resources
Demographic Change
Shift of Political Power
Migration of Wealth
Migration of People
November 2012
Source: Booz & Company
2
Prepared for SAEE Booz & Company
0
5
10
15
20
25
30
-15 -10 -5 0 5 10 15 20 25 30 35
EBITDA Growth 07-11,
CAGR in %
Sales Growth 07-11,
CAGR in %
LG Chem1), 2)
DuPont
Bayer
DSM
SABIC
Reliance
Sinopec1), 2)
Braskem
BASF2)
Dow
Korean / Japanese
Players
Specialty Players
Integrated Chemicals
Emerging Players
Performance Development within Chemicals Segments EXAMPLES
1) Overall EBITDA growth
2) Only chemicals segment
Source: Company information, Bloomberg, Booz & Company
November 2012 3
Emerging players outperform Western peers pursuing different strategies
The competitive landscape has been reshuffled significantly even more changes are expected in the next decade
Top10 Chemicals Companies by Revenue1)
(in bn)
30
Shell 36
LYB 39
Dow Chemical 46
Sinopec 51
BASF 61
ExxonMobil 50
SABIC 39
LG Chem 15
Akzo Nobel 16
Bayer 19
Total 21
Evonik 14
Ineos 21
DuPont 29
Mitsubishi Ch.
Lyondell 3
Ineos 5
Reliance 6
Sinopec 8
SABIC 8
AkzoNobel 10
Degussa 12
BP 14
Shell 16
ExxonMobil 17
Bayer 19
Total 19
BASF 28
DuPont 28
Dow Chemical 29
1) Chemicals revenue only. Based on constant 2011 USD to EUR FX-rate
Source: C&EN, ICIS, Bloomberg, company information, Booz & Company Emerging Player Traditional Player
13
14
28
47
40
2011 2002
15
19
14
11
12
Booz & Company
November, 2012
Trend
4
Prepared for SAEE Booz & Company
In future, the global feedstock developments will lead to additional dynamics and new opportunities
5 November 2012
Impact of Global Feedstock Developments on Propylene, Butadiene and Aromatics Supply
Feedstock
Substitution/
Shifts
Capacity
Substitution
Game
Changing
Technologies
Description Impact on
C2 Supply
Impact on
C3-C6 Shortage
Existing cracker capacity is switching
from heavy feedstock to lighter
feedstock
New gas crackers are replacing
existing naphtha capacity
On-purpose production technologies
are being implemented to close the
growing supply-demand gap
Source: Booz & Company analysis
Prepared for SAEE Booz & Company
Resource discontinuities result in increasing supply of light feedstock and regional differences
Petrochemicals Feedstock Developments Outline
North America
Western and Central Europe
Eastern Europe
Middle East
Asia Pacific
South America and other
Shale Gas in the United States
Associated Gas in Russia
Associated Gas in Iraq
Shale Gas and CTO in China
Green (Petro)chemicals
1
1 2
2
3 3
4
4
Source: Booz & Company analysis
6 November 2012
5
5
5
Prepared for SAEE Booz & Company
The US shale gas bonanza has led to abundant and cheap natural gas and ethane
7
North American Gas Supply Conventional vs. Unconventional, 2000-2020
0
10
20
30
40
50
60
70
80
90
Production (Bcfd)
2020 2015 2010 2005 2000
Conventional Unconventional LNG
Source: Chemsystems, EIA, Credit Suisse, Goldman Sachs, INGAA, Company Reports, CERA, Client Interviews, Booz & Company analysis
Historical Ethane, Propane, and Gas Prices in US
2
4
6
8
10
12
14
16
18
20
$/mmBtu
6/12 6/11 6/10 6/09 6/08 6/07 6/06 6/05 6/04 6/03 6/02 6/01 6/00
Henry Hub Propane Ethane
November 2012
Prepared for SAEE Booz & Company
The flood of ethane favors new ethane-based capacities rather than Naphtha
Source: Booz & Company analysis
Major US Shale Gas Basins and
Base Chemicals Production Locations
US Ethylene Feedstock Sources
New crackers focused on shale gas
Existing crackers
8
65%
63%60%
2015(E)
28%
12%
2010
19%
18%
2005
3%
32%
November 2012
NGLs from Shale Gas
NGLs from Conventional Gas
Naphtha & Heavier
Prepared for SAEE Booz & Company
China is expected to ramp-up shale gas as part of 12th 5-year plan but the impact on chemicals is likely to be different than in US
9
Natural Gas Pipeline (Existing or Planned)
49/51 JV focus on tight gas Evaluating shale gas potential
Submitted 30-year application $1 B annual investment
(currently 2 wells)
Tight gas PSC Evaluating shale gas potential
Tight gas PSC Evaluating shale gas potential
Shale Gas PSC Exploration phase
Drilling 1st shale well
Tarim Basin
(~580 tcf)
Sichuan Basin
(~690 tcf)
China Shale Gas Development
Shale gas reserves by country:
China: 1,275 TCF
USA: 862 TCF
Argentina: 774 TCF
Basins are currently being explored and surveyed,
production is limited
5-year plan calls for 6.5 BCM of production by 2015,
while industry estimates are
~3 BCM
Source: EIA, Bernstein Research, Booz & Company analysis
November 2012
Prepared for SAEE Booz & Company
By 2025, these feedstock developments may lead to capacity additions at highly competitive ethylene cash costs
10
Note: Gas prices were assumed to be USD 3 / mmBtu in Iraq and Russia, and USD 6 / mmBtu in the US and China
Source: Nexant, Booz & Company analysis
Global Ethylene Industry Cost Curve Oil Price at USD 90 / bbl, 2025
Most new supplies to come into play after
2020, adding up to ~29
mn tons of ethylene cap
GCC crackers expected to remain in a cost
leadership position
Shale gas in the US will lead to a sustainable
competitive position
Small scale crackers in Europe and Asia face
severe challenges Middle East North
America Europe, Asia Pacific & Other Regions
Feedstock advantaged Based on regular feedstock
November 2012
3
4
2
1
Prepared for SAEE Booz & Company
Increased substitution of Naphtha by NGLs will impact the supply of C3, C4 and C6 going forward
11 November 2012
Changes in Feedstock
Slate
Changes in Product
Slate
Ethylene
Propylene
Butadiene
Benzene
To
day
By 2
025
Naphtha
NGLs
Naphtha
NGLs
Main mix of raw materials
Ethylene
Propylene
Shortages in C3,
C4, C6
Steam Cracking
Steam Cracking
Expected Changes in Feedstock and Product Slate 2012 - 2025
Source: Booz & Company analysis
Butadiene
Benzene
Prepared for SAEE Booz & Company
Thus, global shortages of up to ~10% of demand for propylene, and ~25% for butadiene are expected in 2025
12 November 2012
4
8
2015
95
3
48
30
6 4
3 3
2
2010
75
1 44
25
3
2025
126
3
52
41
7
5 5
33
14
2020
107
2
48
7
5
Propylene
11% 8% 3%
Shortage as %
of Total Demand
0
10
2025
16
1
10
4
2020
14
1
10
2
2015
12
0
11
1
2010
10
Demand including Potential Shortage By Production Process, in mmtpa
26% 18% 9%
Butadiene Benzene
2025
66
2 7
35
17
5
2020
57
2 6
30
16
3
2015
51
2 5
27
16
1
2010
42
2 3
19
18
8% 5% 2%
Extractive Distillation
Shortage
Dehydrogenation
Other
Coal
Refining
Steam Cracking
Shortage
Methanol Conversion
Shortage
Other
Steam Cracker
FCC
PDH
Metathesis
Source: Booz & Company analysis
Prepared for SAEE Booz & Company
1) Propylene price premium versus ethylene price
2) Fuel (~50%) and other petrochemicals (~15%) account for remaining part (in 2010)
Source: Nexant, Booz & Company analysis
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
3.2
2005 2000 1995 1990 2010
Already today, prices of propylene and butadiene experience disruptions
US By-product Prices Relative to Ethylene Ratio of by-product price to ethylene price
Ethylene (reference)
Benzene-to-ethylene price ratio
Propylene-to-ethylene price ratio Ongoing replacement of Naphtha by Shale Gas in US
has led to lower by-product
(C3, C4, C6) supply
Propylene and butadiene prices have decoupled from
ethylene (primarily produced
from steam cracking)
Benzene prices have remained relatively
unaffected (multiple
production routes)
% of by-product in
heavy liquid
cracking(2)
~5%
~20%
~10%
13
By-product
shortages
November 2012
Wide availability of
by-products
Prepared for SAEE Booz & Company
Shift towards lighter feedstock has led to renewed focus on several on-purpose and alternative technologies for C3, C4 and BTX
Overview of On-Purpose Technologies for C3, C4 and BTX Production
Source: Lummus, Honeywell UOP, Lurgi, Braskem, TPC, ICIS, Booz & Company analysis
November 2012
Butane
Dehydrogenation
Bio-
Butadiene
14
Propane
Dehydrogenation
Methanol to
Propylene
Olefin
Metathesis
Biomass to
Propylene
Key Questions
Are these technologies ready for commercial production,
and are they scalable?
What are the production economics and expected
margins?
What are the ongoing and planned projects, and where?
Coal to BTX Naphtha / LPG to
BTX
C3
(Propylene)
C4
(Butadiene)
Aromatics
Prepared for SAEE Booz & Company 15
Economics for the various technologies require very specific conditions to be commercially attractive
Source: Global Bio-Energies interview, Booz & Company analysis
Production Economics Summary
Propane
Dehydro-
genation
Olefin
Metathesis
Methanol to
Propylene
Biomass to
Propylene
Bio Butadiene
Naphtha /
LPG
Technologies
Coal to
Aromatics
Technology Overall
Attractiveness Comments Technology
Overall
Attractiveness Comments
Propylene propane price disconnect
High maturity and scalability
Low methane / coal prices
High scalability
Economics require low coal (tar) prices high metals
correlation
Moderate economics, scalability and
maturity
Economics require backward integration
Low maturity
Very low maturity Potentially attractive
economics
Economics require low butene and
ethylene prices
High
High
High Medium
Medium
Low
Low Butane
Dehydro-
genation
Poor economics due to low yields
Low scalability Low
November 2012
Prepared for SAEE Booz & Company
1) Propylene price premium versus ethylene price
2) Fuel (~50%) and other petrochemicals (~15%) account for remaining part (in 2010)
Source: Nexant, Booz & Company analysis
2010 2005 2000 1995 1990
Going forward, the increasing imbalances will impact pricing of petrochemicals
By-product Prices Relative to Ethylene
Ethylene (reference)
Benzene-to-ethylene price ratio
Propylene-to-ethylene price ratio
Butadiene-to-ethylene price ratio
16
Wide availability of
by-products
By-product
shortages
November 2012
Price expected to remain structurally high for the medium- to long-term
Only produced by steam cracking; butane dehydrogenation is costly
Price can decline in 3-5 years; volatility may increase in the immediate future
PDH capacity ramping up and propane prices may drop in the US
Price expected to remain stable Market will likely remain tight, but refining,
rather than steam cracking, is the major supply
source
NOT A RECOMMENDATION
FOR SHORT-TERM POSITIONS
Benzene
Trend
Prepared for SAEE Booz & Company 17
Depending on the economics new propylene technologies will capture market share in future Metathesis is at risk
Note 1: Analysis assumes steam cracking and FCC units are the most economical sources of propylene, and assumes an oil price of $90 per barrel in real terms
Note 2: Conservative PDH and MTP supply is based on a 60% utilization of existing capacity and new additions (Nexant); Additional supply is based on 80% utilitzation Source: Chemsystems, ICIS, Booz & Company analysis
November 2012
1,500
96 94 92
900
600
300
0 MMTPA
100 82 80 84
1,200
86 76 2 98
$/ton
$1,428
88
1,800
0 90 78
Projected Global Propylene Cost Curve 2015
2015 Propylene Demand
2012 Price
If marginal naphtha crackers
remain open
PDH (Additional supply)
CTP (Conservative supply) CTP (Additional supply)
FCC, Steam Cracking and Others Metathesis (Conservative supply)
PDH (Conservative supply)
metathesis could be pushed out of the
market bringing
down propylene
prices
Petrochemicals
Players
considering
investments in
on- purpose
Propylene should
explore PDH in
US or MTP in
China / South
America / Africa
Prepared for SAEE Booz & Company
Beyond feedstock potentials, these dynamics impact downstream chemicals resulting in global challenges and opportunities
18 November 2012
Competitiveness of
Downstream
Chemicals
Alternative
Technologies and
Feedstock
Market-back and Feedstock-forward
(Petro)chemicals
Strategies
Price vs. performance of polymers
Opportunities for innovative products
Challenges and Opportunities for Downstream Value Chains
Advancements of niche technologies
Alternative (green) feedstock as opportunities
Backward integration into petrochemicals key for future competitiveness of commoditized chemicals
Increasing level of integration
Source: Booz & Company analysis
Prepared for SAEE Booz & Company
Middle Eastern players have specific opportunities to benefit from this market situation
November 2012
Implications and Opportunities for Middle Eastern players
Core Value Chain / Product Expansion
Current
Geographies
Ge
og
rap
hic
al E
xp
an
sio
n
Extended
Geographies
Forward / backward integrate
within the region
Adjacent
ME
Players
Gro
w g
eo
gra
ph
ica
lly
usin
g e
xis
tin
g c
ap
ab
ilit
ies
Upstream e.g. PDH in
North America
Explore Methane based MTP in South America /
Africa and pot. green
feedstock
Explore Coal based BTX in Asia
New unconventional feedstock in KSA
Participating in integrated plays in Asia
Integrated plays with focus on heavy slates
Conversion and Downstream developments
1
3
2
Source: Booz & Company analysis
19
Prepared for SAEE Booz & Company
New capabilities are required to materialize these opportunities
20
Required Capabilities to Capture Opportunities
Current Capabilities (Cracker +1) Required Capabilities
Efficient operation of large scale base
chemical plants
International supply chain for chemicals
Mastering Petrochemicals technologies
Technical capabilities to adapt and optimize
new technologies, e.g., PDH, MTP
Margin and complexity management in
entire supply chain
R&D capabilities
Capex optimization and project excellence
Adaptation of new skills
Source: Booz & Company analysis
November 2012