North American Shale Gas - Implications for Global PetrochemicalsAndrew Lee FaggPrincipalNexant Asia Limitedlfagg@nexant.com

APIC ANNUAL MEETING, Taipei, May 2013

1APIC 2013

Shale Gas Overview Opportunities and Developments in Chemicals Impact and Outlook on Global Markets

Agenda

2APIC 2013

Shale Gas Overview

3APIC 2013

Unconventional feedstocks – Is this the final chapter of the oil & gas age?

Shale Gas Overview

Source: EIA

4APIC 2013

Fracking wrenches (fractures) open rockdeep beneath the earth’s surface, freeing uptrapped natural gas.

Fracturing process begins with smallexplosive charges deep in the well. Millionsof gallons of fracking fluid (sand, chemicalsand water) are then pumped into the well athigh pressure creating the shale fracture andgas release.

Key Issues

Ground water and air contamination.

Waste water storage & disposal

Potentially a catalyst for earthquakes

Shale Gas Overview

Hydraulic fracking technology has enabled access to unprecedented oil and gas reserves in North America and potentially across all global regions longer term

Source: Total

5APIC 2013

Natural Gasoline (C5+)

Dry Gas Field (non Associated Gas)

Gas Condensate Field(Non Associated Gas)

Conventional Oil Field

NGL Fractionation

Petroleum Refining

Refinery GasPropaneButanesNaphthaGasoil

GasolineJet/KeroDieselHeating Oil

Sales Gas(Primarily Methane)

Ethane

Propane

ButanesLPG

LPG

Refined Products

Crude Oil

Heavy Condensate

Gas

Gas Gas Processing (NGL Recovery)

NGLs

AssociatedGas

Shale Oil Field

AssociatedGas

Shale Gas Field (non Associated

Gas)

Shale resources have resulted in increased availability of ethane and other NGLs therefore increasing the availability of petrochemical feedstocks

Shale Gas Overview

Conventional Feedstock sources

6APIC 2013

Overview of major shale gas basins in North America. Which span most of the continent. Today, the only significant shale gas producing region in the world.

NORTH AMERICAN SHALE GAS RESERVES NORTH AMERICA GAS SUPPLY MIX, 2006-2030

0

200

400

600

800

1000

2006 2009 2012 2015 2018 2021 2024 2027 2030Bi

llion

Cubic

Metr

es

Conventional Shale Tight CBM

Shale Gas Overview

Production of shale gas, and other non-conventional gas sources, are more than sufficient to coverdeclining gas production from conventional sources.

AAGR -0.5%

AAGR 1.7%

7APIC 2013

0%

20%

40%

60%

80%

100%

120%

0

2

4

6

8

10

12

14

16

18

20

22

2001 2003 2005 2007 2009 2011

Gas a

s a %

of cr

ude o

il pric

e

US$ p

er M

BTUs

Disparity in global gas pricing set to continue longer-term despite increasing connectivity enabled by LNG

Source: Nexant

OVERVIEW OF GLOBAL GAS PRICES

Shale gas has enabled a disconnect in North American gas prices relative to the wider energy market

Shale Gas Overview

Source: Nexant

NORTH AMERICAN GAS PRICING TRENDS

Crude Oil (WTI) Natural Gas Price Gas Price as % of Crude

PROJECTED WELLHEAD PRICES(2015Est, $/MMBtu)

(Units = Thousand Metric Tons)

$2

Source: EIA

$10

$15$1-2

$2

$4$5 $2

8APIC 2013

Opportunities and Developments in Chemicals

9APIC 2013

Ethane43%

Propane28%

iso-Butane6%

n-Butane10%

Condensate13%

4.000 3.0675.000

7.16218.103

0

5

10

15

20

25

30

Dry Gas 1000 Btu Wet/Gas/Unprocessed1250 Btu

Processed Gas 1250Btu

Crude Oil

Reve

nue f

rom

Millio

n Mcfe

Dry Gas Value Wet Gas Value NGL Value Crude Value

Source: Nexant

ASSOCIATED ENERGY VALUES

TYPICAL NGL SPECIFICATION

Source: Nexant/BP/Dow

Gas companies are targeting wet/heavy fields due to the attractive co-product values associated with 3rd party sales of NGLs. Thus increasing domestic availability of ethane and propane and pushing prices lower.

Opportunities & Developments in Chemicals

1000 Mcf of 1000 Btu

Content Dry Gas – Not Processed

1000 Mcf of 1250 Btu Gas – Not

Processed

125 Bbls NGLs

1000 Mcf of 1250 Btu Gas Processed

770 Mcf Dry Gas

125 Bbls NGLs

1000 Mcf of 1000 Btu Gas Converted to Oil Equivalent

~5.8 to 1

Gas = $4/MM Btu, NGLs = $57/Bbl, Crude = $105/Bbl

Source: Nexant

GAS COST SUPPLY CURVE

Gas P

rices

Dry GasWet Gas

Gas Resources

10APIC 2013

US ETHYLENE FEEDSTOCK RATIO

26%45%

69% 76%

0%

20%

40%

60%

80%

100%

2005 2011 2015F 2020F

Weig

ht Pe

rcent

Ethane Propane Butanes Heavier than C4's

200

400

600

800

1000

1200

1400

1600

2005.1 2007.1 2009.1 2011.1US

dolla

rs pe

r ton

Ethane E/P Naphtha

US ETHYLENE CASH COST OF PRODUCTION

Opportunities & Developments in Chemicals

Ethylene cracking feedstock slate has shifted predominantly into more ethane, therefore improving product margins and production competitiveness versus heavier feedstock slates

Many of the regions existing crackers have undergone feedstock conversions/process optimisationinvestments to maximise ethane cracking potential

Source: NexantSource: Nexant

11APIC 2013

0

200

400

600

800

1000

1200

1400

1600

0 20 40 60 80 100 120 140 160

Ethy

lene C

ash C

ost (

$/ ton

ethy

lene)

Ethylene Cumulative Capacity (million tons)

Note: * Mainly includes ethane and E/P crackers in Venezuela, Africa, W. Canada, Malaysia and Australia.

ME Ethane and E/P

Others Ethane and E/P* N. America Ethane, E/P, Mixed Feed

Asia/ Naphtha

Asia/W. Europe Naphtha

Source: Nexant

GLOBAL ETHYLENE COST CURVE

Opportunities & Developments in Chemicals

The shale gas effect has resulted in a structural change in global ethylene competitiveness. Despite this ethylene producers in the Middle East continue to hold a significant advantage

12APIC 2013

US18%

Others82%

164

0

50

100

150

200

250

2015 2025

Millio

n ton

s

The key question is how much new production capacity will come from the US based on the availability of competitively priced ethane and other NGLs? The answer is tied to natural gas production.

PROJECTED ETHYLENE GLOBAL CAPACITY CHANGE

ETHYLENE CAPACITY ADDITIONS, 2025

Base Case1% Gas Production

Growth

US13%

Others87%

Global capacity addition = 68 million tons

Global capacity addition = 68 million tons Source: Nexant

232+68

High Case2% Gas Production

Growth

NB this analysis assumes a standardised gas specification across the forecast

Opportunities & Developments in Chemicals

13APIC 2013

US ETHANE: POSSIBLE SUPPLY SCEARIOS

Source: Nexant

The total additional supply of US ethylene based on ethane fall within a range of 8.5-12 million tons (6 – 9 steam crackers).

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Millio

n bar

rels

per d

ay

Base case High case

Additional ethane supply during 2013-2017 Base case 222 MM BPD, or Ethylene 3.7 kta High case 377 MM BPD, Ethylene 6.2 kta

Additional ethane supply during 2018-2025 Base case 306 MM BPD, or Ethylene 5.1 kta High case 345 MM BPD, Ethylene 5.7 kta

INITIAL INVESTMENT STEP SECONDRY INVESTMENT STEP

SHORT TERM ETHANE SURPLUS

Opportunities & Developments in Chemicals

Surplus ethane is keeping prices low. This will change is the market over invests in new ethane basedethylene capacity – thus changing the supply and demand dynamic.

14APIC 2013

• HIGHER GAS PRODUCTION• INCREASED ETHANE RECOVERY• LOWER ETHANE PRICING

GOVERNMENT POLICY SUPPORTING LNG EXPORTS

POWER SECTOR CONVERSIONS (COAL)

INCREASED ECONOMIC ACTIVITY/GDP

SEVERE WEATHER (HOT/COLD)

C1 DERIVATIVE INVESTMENTS

– GTL

– CHEMICALS (METHANOL/AMMONIA)

INCREASED GAS DEMAND

Investment opportunities in new ethane crackers will primarily depend on total US gas production and the factors that support this.

Opportunities & Developments in Chemicals

LOW HIGH

15APIC 2013

• LOWER GAS PRODUCTION• REDUCED ETHANE RECOVERY• HIGHER ETHANE PRICING

GOVERNMENT POLICY OPPOSING LNG EXPORTS

POWER SECTOR CONVERSIONS (GREEN ENERGY)

DEREASED ECONOMIC ACTIVITY/GDP

ENERGY EFFICIENCY POLICY

– CONSTRUCTION REGULATIONS

– LOW ENERGY CONSUMING APPLIANCES

INCREASED GAS DEMAND

However in reality there is significant downward pressure on gas consumption principally due to energy efficiency /green policy. However the market may expand if proposed LNG projects are approved.

Opportunities & Developments in Chemicals

LOW HIGH

16APIC 2013

Source: TIMERA ENERGY Source: Nexant

POTENTIAL US LNG EXPORT PROJECTS LNG DELIVERED COST 2015E

Approximately 100 bcma of additional LNG export capacity is under review. However to date the Department of energy has only approved around half of these projects.

Jordan CoveCapacity:12 bcma

Cove pointCapacity:11 bcma

ApprovedNot Approved

Freeport:12.5 bcma

Sabine Pass:22 bcma

Lake Charles:19.3 bcma

Cameron:24 bcma

0

2

4

6

8

10

12

$ mm

BTUS

TX LA

Opportunities & Developments in Chemicals

17APIC 2013

Impact and Outlook

18APIC 2013

0

100

200

300

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Index

(198

4 Q1=

100)

WE USA

~$200

Average cash margins in the US have been considerably higher versus European and other conventional naphtha based producers in Asia – despite weaker market conditions

Source: Nexant

BASE CHEMICALS CASH MARGIN INDEX(Petrochemicals and Polymers)

Impact & Outlook

19APIC 2013

40%

6%

7%

3%

3%

3%2%

2%

3%

0%1%

-1%0%

-1000

0

1000

2000

3000

4000

5000

6000

Methanol Ammonia Urea Ethylene PE EO MEG EDC Propylene PP Butadiene Benzene ParaXylene

Speculative 2012-2017 Firm 2012-2017

Source: Nexant

US TOTAL CAPACITY CHANGES OVER 2012-2017

The prospect of higher returns is promoting significant interest in new petrochemical investments. These are primarily focused across C1 and C2 product value chains.

C1 C2 C4 AromaticsC3

Unit: Thousand tons, % AAGR

Interest in propylene production via PDH is also forecast due to increased availability of propane.

Impact & Outlook

20APIC 2013

Propylene output from stream crackers has declined as US olefin producers optimise to crack more ethane. PDH projects are expected to cover the shortfall created from ethylene crackers

Refinery output of propylene is expected to remain largely unchanged with most operators running at highrates and benefitting from the impact of both shale gas and shale oil.

Source: Nexant

0

2

4

6

8

10

12

14

2008 2010 2012 2014 2016

Millio

n ton

s

Steam cracker Refinery On-Purpose Domestic Demand

US PROPYLENE PRODUCTION & DEMAND

Impact & Outlook

-600

-400

-200

0

200

400

600

800

1000

1200

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Thou

sand

tons

Steam cracker - naphtha Steam cracker - mixed feedFCC offgas recovery Propane dehydrogenationSteam cracker - E/P Steam cracker - heavy liquidSpeculativeSource: Nexant

US NET PROPYLENE CAPACITY CHANGES

Petrologistics

Dow

Enterprise

21APIC 2013

-4

-3

-2

-1

0

1

2

3

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Millio

n ton

s

North America WE

10

15

20

25

30

35

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Mi

llion t

ons

North America WE

North American production is forecast to show reasonable trend growth over the next few years as new investments in ethylene and derivatives capacity are realised and global markets recover

Source: Nexant

ETHYLENE PRODUCTION EQUIVALENT

Source: Nexant

ETHYLENE PRODUCTION EQUIVALENT (NET CHANGE)

Noted: product includes PE, SM, EO, EDC Noted: product includes PE, SM, EO, EDC

Impact & Outlook

AAGR 3.5%

AAGR 0.7%

22APIC 2013

-4

-3

-2

-1

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Millio

n ton

s

China Middle East North America

Global chemicals production growth is now clearly concentrated in 3 regions.

Source: Nexant

ETHYLENE PRODUCTION EQUIVALENT (NET CHANGE)

Noted: product includes PE, SM, EO, EDC

ETHYLENE PRODUCTION EQUIVALENT

Noted: product includes PE, SM, EO, EDC

Impact & Outlook

10

15

20

25

30

35

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Mi

llion t

ons

China Middle East North AmericaSource: Nexant

23APIC 2013

-7000

-6000

-5000

-4000

-3000

-2000

-1000

0

1000

2000

3000

Methanol Ammonia Urea Ethylene PE EO MEG EDC Propylene PP Butadiene Benzene Para Xylene

Source: Nexant

US TRADE PATTERN OVER 2012-2017

The impact of shale gas on US trade is not expected to be too significant in the short-term as the main investment wave is not anticipated until post 2017.

C1 C2 C4 AromaticsC3

Unit: Thousand tons 2012 2017

Positive numbers indicate net exportNegative numbers indicate net import

Impact & Outlook

24APIC 2013

US energy boom expected to result in a sustained gas surplus and lower average prices relative tocrude oil markets

Associated supply of ethane and other NGLs will also increase and support significant investmentopportunities across North America.

Short-term impact of additional capacity in the region will not have a significant impact on globalmarkets or global trade of ethylene derivatives.

A more substantial investment wave will commence post 2016/2017. However the full potential of thiswill depend on overall gas demand & production in the region

Ultimately shale resources present new opportunities across all regions, and are not unique to NorthAmerica, and will support future expansions of the petrochemical sector for the longer-term.

Some final thoughts

Impact & Outlook

25APIC 2013

GLOBAL ESTIMATE OF SHALE GAS RESOURCES (TRILLION M3)

17

19

US

Mexico

22Argentina 14South Africa

11Canada

6Brazil

Source: EIA

15NorthAfrica

18Europe

11Australia

2India

36China

26APIC 2013

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