ISM Chemical GroupISM Chemical GroupDrivers BehindDrivers Behind
Raw Material ImpactsRaw Material Impacts
Gerald W. CrossGerald W. CrossEastman Chemical CompanyEastman Chemical Company
February 23-24, 2006February 23-24, 2006
From One Barrel of Oil…From One Barrel of Oil…
PetrochemicalPetrochemicalFeedstocksFeedstocks
7%7%
Gasoline, DieselGasoline, Dieseland Jet Fueland Jet Fuel
66%66%
Data from www.eia.gov*modified to better fit categories
IndustrialIndustrialand Homeand Home
27%27%
U.S. Data
OilOil20 MM20 MMBPDBPD
Transportation,Transportation,Industrial &Industrial &
Heating FuelsHeating Fuels
RefiningRefining NaphthaNaphthaGas OilGas Oil 7%7%
PetrochemPetrochem
Nat GasNat Gas60 B60 B
ftft33/day/day
MethaneMethane(Fuel Gas)(Fuel Gas) 95%95%
GasGasProcessingProcessing
Ethane, PropaneEthane, PropaneNatural Gasoline,Natural Gasoline,
ButaneButane 5%5%
U.S. Petrochemicals UsageU.S. Petrochemicals Usage
~
93%93%
58% Imported58% Imported
Crude Oil PriceNA WTI ($/bbl)
0
10
20
30
40
50
60
70
Jan
-19
90
Jul-
19
90
Jan
-19
91
Jul-
19
91
Jan
-19
92
Jul-
19
92
Jan
-19
93
Jul-
19
93
Jan
-19
94
Jul-
19
94
Jan
-19
95
Jul-
19
95
Jan
-19
96
Jul-
19
96
Jan
-19
97
Jul-
19
97
Jan
-19
98
Jul-
19
98
Jan
-19
99
Jul-
19
99
Jan
-20
00
Jul-
20
00
Jan
-20
01
Jul-
20
01
Jan
-20
02
Jul-
20
02
Jan
-20
03
Jul-
20
03
Jan
-20
04
Jul-
20
04
Jan
-20
05
Jul-
20
05
Jan
-20
06
200% increase over the last 3 years
'90-'99 Avg = $19.7/bbl
'00-'03 Avg = $28.3/bbl
'04 Avg = $41.4/bbl
'05 Avg = $56.7/bbl
CMAI Data
Why the upward trend?Why the upward trend?
Jan '06 ~ $58/bbl
Aug '05 – peaked over $70/bbl
Global Demand for Oil Has AcceleratedGlobal Demand for Oil Has Accelerated
demand growth, demand growth, rolling 4 qtr avg, rolling 4 qtr avg,
mb/dmb/d,,
0.0
0.5
1.0
1.5
2.0
2.5
3.0
97 98 99 00 01 02 03 04
Significant Significant growth in growth in
ChinaChina
Global Global Economic Economic RecoveryRecovery
Demand growth of industrialized countries is ~ 1%
(yet with low per capita consumption)(yet with low per capita consumption)
0.6 1.5
4.3
9.6 10.4
25.8
0
5
10
15
20
25
India China Brazil Russia UK USA0
1
2
3
4
5
6
7
70 75 80 85 90 95 00 05
China
Japan
Germany
Oil demand, MM bpd Oil demand, bbls per capita per year
China is now 2nd largest user of crude oil globally
10 years ago – net exporter Today – import 40% of demand Projected demand growth of 7.5% per year
~18 MM bpd in 15 years India – relatively small demand
Projected demand growth of 5.5% per year
China's crude oil consumption has grown dramaticallyChina's crude oil consumption has grown dramatically
1/3 of global 1/3 of global populationpopulation
Natural GasUS Contract Burner Tip ($/mmbtu)
0
2
4
6
8
10
12
14
Jan
-19
90
Jul-
19
90
Jan
-19
91
Jul-
19
91
Jan
-19
92
Jul-
19
92
Jan
-19
93
Jul-
19
93
Jan
-19
94
Jul-
19
94
Jan
-19
95
Jul-
19
95
Jan
-19
96
Jul-
19
96
Jan
-19
97
Jul-
19
97
Jan
-19
98
Jul-
19
98
Jan
-19
99
Jul-
19
99
Jan
-20
00
Jul-
20
00
Jan
-20
01
Jul-
20
01
Jan
-20
02
Jul-
20
02
Jan
-20
03
Jul-
20
03
Jan
-20
04
Jul-
20
04
Jan
-20
05
Jul-
20
05
Jan
-20
06
• Higher costs of ethylene cracker feedstocks
• Higher conversion costs
'90-'99 Avg = $2.07/mmbtu
'00-'03 Avg = $4.27/mmbtu
'04 Avg = $6.12/mmbtu
'05 Avg = $8.29/mmbtu
CMAI Data
Jan '06 ~ $8-9/mmbtu
U.S. Natural Gas
Spot deals Sept '05 ~ $20/mmbtu
Highest nat gas
prices in the world
Crude Oil and Natural Gas provide feed to Steam Crackers which produce ethylene and propylene with PYGAS as a by-product.
PYGAS is separated into Aromatics (BTX) and Aliphatics (Crude streams)Natural Gas also impacts the industry as a feedstock
NaturalGas
GasSeparation
Unit
RefineryCrude
Oil
SteamCracker
Pygas
Benzene
Aliphatics (Crude C5 Splitter)
NaphthaNaphthaGas OilGas Oil
EthaneEthanePropanePropaneButaneButane
Propylene
Ethylene
Xylene
Toluene
Aromatics
~
Dicyclopentadiene
Isoprene
Raffinate
Piperylenes
C9 Resin Oil
HCResins
Methanol
Acetic Acid VAM EVA
Crude C4 Olefins
Styrene
Real Life Polymer Examples – Real Life Polymer Examples – SIS PolymersSIS Polymers
Supply chain shows shortages and potential shortagesSupply chain shows shortages and potential shortages
Large number of SIS producers with adequate capacityLarge number of SIS producers with adequate capacity
In spite of sufficient SIS capacity the upstream supply creates a In spite of sufficient SIS capacity the upstream supply creates a shortageshortage
RecoveredCrude C5’s
SIS
Ethylene
Benzene
Styrene
DeWitt & Company
PurifiedIsoprene
Steam Cracker
Crude Oil vs. Gasoline ULRNA WTI ($/bbl)
0
30
60
90
120
150
180
210
240
Jan
-19
90
Jul-
19
90
Jan
-19
91
Jul-
19
91
Jan
-19
92
Jul-
19
92
Jan
-19
93
Jul-
19
93
Jan
-19
94
Jul-
19
94
Jan
-19
95
Jul-
19
95
Jan
-19
96
Jul-
19
96
Jan
-19
97
Jul-
19
97
Jan
-19
98
Jul-
19
98
Jan
-19
99
Jul-
19
99
Jan
-20
00
Jul-
20
00
Jan
-20
01
Jul-
20
01
Jan
-20
02
Jul-
20
02
Jan
-20
03
Jul-
20
03
Jan
-20
04
Jul-
20
04
Jan
-20
05
Jul-
20
05
Jan
-20
06
Un
lea
de
d G
as
olin
e, R
eg
ula
r ($
/ga
l)
0
10
20
30
40
50
60
70
80
Cru
de
Oil, W
TI ($
/bb
l)
Gasoline, Unleaded Regular NA
Crude Oil WTI NA
CMAI Data
Relationship of Crude Oil to Adhesive Raw Material Relationship of Crude Oil to Adhesive Raw Material ProductsProducts
U.S. Data
Gasoline impacts the costs of numerous downstream products.
Aromatics and aliphatics – gasoline pool – octane boosters Alternative value
97.6% correlation
Crude Oil vs. Benzene Price
0
50
100
150
200
250
300
350
400
Jan
-19
90
Jul-
19
90
Jan
-19
91
Jul-
19
91
Jan
-19
92
Jul-
19
92
Jan
-19
93
Jul-
19
93
Jan
-19
94
Jul-
19
94
Jan
-19
95
Jul-
19
95
Jan
-19
96
Jul-
19
96
Jan
-19
97
Jul-
19
97
Jan
-19
98
Jul-
19
98
Jan
-19
99
Jul-
19
99
Jan
-20
00
Jul-
20
00
Jan
-20
01
Jul-
20
01
Jan
-20
02
Jul-
20
02
Jan
-20
03
Jul-
20
03
Jan
-20
04
Jul-
20
04
Jan
-20
05
Jul-
20
05
Jan
-20
06
Be
nze
ne
($
/ga
l)
0
10
20
30
40
50
60
70
80
Cru
de
Oil, W
TI ($
/bb
l)
Benzene NA
Crude Oil WTI NA
Benzene has historically traded at 2x crude when supply and demand have been in balance.
'90-'99 Avg = $1.05/gal
'00-'03 Avg = $1.28/gal
'04 Avg = $2.88/gal
'05 Avg = $2.90/gal
Strong demand from China
CMAI Data
Relationship of Crude Oil to Adhesive Raw Material Relationship of Crude Oil to Adhesive Raw Material ProductsProducts
U.S. Data
Benzene vs. Styrene Price
0
60
120
180
240
300
360
420
480
Jan-
1990
Jul-1
990
Jan-
1991
Jul-1
991
Jan-
1992
Jul-1
992
Jan-
1993
Jul-1
993
Jan-
1994
Jul-1
994
Jan-
1995
Jul-1
995
Jan-
1996
Jul-1
996
Jan-
1997
Jul-1
997
Jan-
1998
Jul-1
998
Jan-
1999
Jul-1
999
Jan-
2000
Jul-2
000
Jan-
2001
Jul-2
001
Jan-
2002
Jul-2
002
Jan-
2003
Jul-2
003
Jan-
2004
Jul-2
004
Jan-
2005
Jul-2
005
Jan-
2006
Ben
zen
e ($
/gal
)
0
10
20
30
40
50
60
70
80
Styren
e ($/lb)
Benzene NA
Styrene NA Contract-Market
Styrene price typically changes by 1 c/lb for every 10 c/gal change in Benzene price
Tight supply/demand
Increase following benzene
CMAI Data
Relationship of Crude Oil to Adhesive Raw Material Relationship of Crude Oil to Adhesive Raw Material ProductsProducts
U.S. Data
Hurricanes Katrina and RitaHurricanes Katrina and Rita Damages and RecoveryDamages and Recovery Look ForwardLook Forward
Recent and Current IssuesRecent and Current Issues
Impact of Hurricanes Katrina, Rita, and Impact of Hurricanes Katrina, Rita, and IvanIvan
Impact on Crude Oil and Natural Gas Infrastructure
Katrina went through the eastern 1/3 Rita went through the western 2/3 Ivan only brushed the edge (Sept '04)
Hurricane Ivan ('04)
Impact of Ivan (Sept '04):Impact of Ivan (Sept '04): Ivan hit two states away from Louisiana:Ivan hit two states away from Louisiana: 7% of Gulf oil production shut-in 7% of Gulf oil production shut-in 4% of Gulf natural gas production shut-in4% of Gulf natural gas production shut-in
Impact of Katrina (Aug '05):Impact of Katrina (Aug '05): 90% of Gulf crude oil production shut-in90% of Gulf crude oil production shut-in 75% of Gulf natural gas production shut-in75% of Gulf natural gas production shut-in 8.5% of US refining capacity shut-in8.5% of US refining capacity shut-in
Impact of Rita (Sept '05):Impact of Rita (Sept '05): 100% of Gulf crude oil production shut-it100% of Gulf crude oil production shut-it 80% of Gulf natural gas production shut-in80% of Gulf natural gas production shut-in 16 major refineries in the Gulf Coast region shut-in16 major refineries in the Gulf Coast region shut-in
Impact of Hurricanes Katrina, Rita, and Impact of Hurricanes Katrina, Rita, and IvanIvan
Overall damage caused by Hurricanes Katrina and Rita Overall damage caused by Hurricanes Katrina and Rita Greatest natural disaster to affect the oil and gas development in Greatest natural disaster to affect the oil and gas development in
the history of the Gulf of Mexicothe history of the Gulf of Mexico
PlatformsPlatforms 115 destroyed115 destroyed 52 significant damage52 significant damage Substantial production will take several months to resumeSubstantial production will take several months to resume
RigsRigs 8 destroyed8 destroyed 19 suffered extensive damage19 suffered extensive damage 19 adrift19 adrift
PipelinesPipelines 183 damaged183 damaged
Only 22 returned to serviceOnly 22 returned to service 65% of large diameter pipelines that were damaged still have 65% of large diameter pipelines that were damaged still have
not been repaired and returned to servicenot been repaired and returned to service Assessments on pipeline and facility damages are still ongoingAssessments on pipeline and facility damages are still ongoing
Additional damage will likely be reportedAdditional damage will likely be reported
Current Assessment of Damage and Current Assessment of Damage and LossesLossesData as of 1/19/2006
Hurricane damage to Gulf oil and gas facilities still Hurricane damage to Gulf oil and gas facilities still being discovered offshorebeing discovered offshore
Repair of damaged oil and gas production cannot be Repair of damaged oil and gas production cannot be completed before the 2006 hurricane season beginscompleted before the 2006 hurricane season begins About 255,000 bbls/day of oil capacity projected shut-inAbout 255,000 bbls/day of oil capacity projected shut-in About 400 MM cubic feet of daily gas capacity projected About 400 MM cubic feet of daily gas capacity projected
shut-inshut-in
100% Gulf oil production shut in by the two storms100% Gulf oil production shut in by the two storms 1.5 MM bbls/day – total Gulf oil production1.5 MM bbls/day – total Gulf oil production 396,000 bbls/day remains shut in396,000 bbls/day remains shut in
94% Gulf gas production shut in by the two storms 94% Gulf gas production shut in by the two storms 10B cubic feet (bcf) – total Gulf gas production10B cubic feet (bcf) – total Gulf gas production 1.8 bcf remains shut in1.8 bcf remains shut in
Current Assessment of Damage and Current Assessment of Damage and LossesLossesData as of 1/19/2006
• As of early January, 27.4% of crude oil still shut-in• Cumulative losses since 8/26 have been over 100 MM bbls (~20% of annual GOM production)
• As of early January, 19.5% of natural gas still shut-in• Cumulative losses since 8/26 have been over 500 BCF (~15% of annual GOM production)
Raw Materials and Energy – Looking ForwardRaw Materials and Energy – Looking Forward
Some significant infrastructure damage – will affect supply & prices of Some significant infrastructure damage – will affect supply & prices of crude oil, natural gas and other products for weeks, if not months.crude oil, natural gas and other products for weeks, if not months.
DisclaimerDisclaimer Can't forecast natural disaster impactsCan't forecast natural disaster impacts Forward look based on info from multiple consultants and gov. sourcesForward look based on info from multiple consultants and gov. sources
Crude Oil: Crude Oil: Prices around $68/bblPrices around $68/bbl
Average from 1990-1999 was $19.70/bblAverage from 1990-1999 was $19.70/bbl 2006 – likely to remain high; slow decline2006 – likely to remain high; slow decline
Natural Gas: Natural Gas: Prices – wide variability - $8-9/mmbtuPrices – wide variability - $8-9/mmbtu
Average from 1990-1999 was $2.07/mmbtuAverage from 1990-1999 was $2.07/mmbtu Inventories are highInventories are high Warm winter so farWarm winter so far
Cold weather would likely increase pricesCold weather would likely increase prices 2006 – likely to be high through Q12006 – likely to be high through Q1
Probably some decrease the rest of yearProbably some decrease the rest of year Dependent on weather and recovery in GOM regionDependent on weather and recovery in GOM region
Comments from DOE-EIAComments from DOE-EIA Crude OilCrude Oil
2005 avg = $57/bbl est2005 avg = $57/bbl est 2006 avg = $64-65/bbl est2006 avg = $64-65/bbl est
Comments from DOE-EIAComments from DOE-EIA Natural GasNatural Gas
2005 avg = $9.15/mmbtu est2005 avg = $9.15/mmbtu est 2006 avg = $9/mmbtu est2006 avg = $9/mmbtu est
Likely $10+ thru winterLikely $10+ thru winter
Unleaded GasolineUnleaded Gasoline Prices increased significantly after hurricanesPrices increased significantly after hurricanes
Reached ~$2.25/gal for wholesale ULPReached ~$2.25/gal for wholesale ULP Fell due to imports and inventoriesFell due to imports and inventories Average from 1990-1999 was $0.596/galAverage from 1990-1999 was $0.596/gal
Q1 price likely to remain highQ1 price likely to remain high Price likely to follow crude oil pricingPrice likely to follow crude oil pricing
Benzene: Benzene: December settlement of $2.18/galDecember settlement of $2.18/gal
Jan - $2.46/galJan - $2.46/gal Feb nomination - $3.00/galFeb nomination - $3.00/gal
Price likely to remain volatilePrice likely to remain volatile Supply/demand and crude oil movementSupply/demand and crude oil movement
Logistics and Transportation Logistics and Transportation Still an issueStill an issue
Raw Materials and Energy – Looking ForwardRaw Materials and Energy – Looking Forward
Closing SummaryClosing Summary
Cost Increases in the U.S. economyCost Increases in the U.S. economy Each $10/bbl increase in oil = $2.6 B/yrEach $10/bbl increase in oil = $2.6 B/yr Each $1/mmbtu increase in natural gas = $3.7 B/yrEach $1/mmbtu increase in natural gas = $3.7 B/yr
Basic raw materials and energyBasic raw materials and energy Inventories above averageInventories above average But, prices continue to be volatileBut, prices continue to be volatile
Several chemical intermediates are tightSeveral chemical intermediates are tight Need to know supply chain and any weak linksNeed to know supply chain and any weak links Dependent on raw materials, energy, and production Dependent on raw materials, energy, and production
capabilitycapability Producers are getting squeezedProducers are getting squeezed
Security of supply may be key for the foreseeable Security of supply may be key for the foreseeable futurefuture
Thank youThank you
Gerald W. CrossGerald W. CrossEastman Chemical CompanyEastman Chemical Company
Kingsport, TNKingsport, TN
