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The US shale gas boom, outlook and implications for global petrochemicals To view the recording, please visit: www.icis.com/us_shalegas_webinar Joseph Chang, Global Editor ICIS Chemical Business August 06, 2013
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Page 1: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

The US shale gas boom, outlook and implications for global petrochemicals To view the recording, please visit:

www.icis.com/us_shalegas_webinar

Joseph Chang, Global Editor

ICIS Chemical Business

August 06, 2013

Page 2: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

About ICIS

Page 3: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

ICIS Is Part of World’s Largest Information Provider

www.icis.com

www.rbi.co.uk

www.reedelsevier.com

Page 4: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Consulting

Prices, News, Analysis, Consulting

Prices

News Analysis

Test

Page 5: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

About our speaker

Page 6: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Joseph Chang

Global Editor of ICIS Chemical Business

Page 7: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Agenda

• Macro and profit outlook

• US shale gas boom and petrochemical feedstocks

• Margin analysis

• US cracker projects

• US and global market implications

• Past North American expansion wave 2000-2002

• LNG export threat?

• Conclusions

Page 8: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

2013 macro and profit outlook

• US economy – slow but steady growth, led by housing,

automotive and energy

• China growth rate slowing. Government policies geared

towards tighter money

• Europe flat to down but stabilizing

• Q2 profits for US chemical companies solid but volumes

flat; modestly positive outlook for 2013

• Bullish outlook on US petrochemical and polymers margins

because of low-cost shale gas feedstock

Page 9: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Shale gas boom now visible from space - FT

Page 10: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Main steam cracker feedstocks

• Naphtha derived from crude oil ⇒ethylene, propylene, aromatics, C4s

for butadiene (Europe, Asia)

• Ethane derived from natural gas ⇒

ethylene only (Middle East, North

America)

• LPGs (propane, butane) derived from

natural gas ⇒ mainly ethylene and

propylene

Ethane52%

LPG28%

Naphtha12%

Other8%

North America steam cracker feedstock breakdown based on ethylene demand, 2012

Source: ICIS supply and demand database

Page 11: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

US ethane prices fall as output rises

Page 12: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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US contract ethylene margins hit record highs

Page 13: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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US spot ethylene margins hit record

Page 14: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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US ethane advantage vs naphtha

Page 15: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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US cracker output of co-products (as % of total ethylene output)

• The lightening of cracker feedstocks to more gas cracking reduces

availability of co-products. Ethane produces almost only ethylene!

• The pricing of co-products could shift from by-product pricing towards

alternative, on-purpose processes

Propylene

15%18%21%24%27%30%

2000

2005

2010

2015

2020

SOURCE: ICIS Consulting

Butadiene

4%

5%

6%

7%

8%

2000

2005

2010

2015

2020

SOURCE: ICIS Consulting

Benzene

4%5%6%7%8%9%

2000

2005

2010

2015

2020

SOURCE: ICIS Consulting

Page 16: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Global ethylene cost curve steepens

Source: American Chemistry Council

Page 17: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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US widens global ethylene cost advantage

Source: ICIS

Page 18: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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US polyethylene cost advantage

Source: ICIS

Page 19: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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US chemical prices track crude oil – not natural gas

R2 US IPEX, natgas = 4.0% R2 US IPEX, crude oil = 85.1%

Page 20: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

New US ethane crackers based on shale gas Company Capacity Location Downstream Status Start-up

Sasol 1.5m tonnes Lake Charles, Louisiana

LDPE, LLDPE, EO, MEG

Title V permit appl complete as of May 8,

2013; FID 2014

2017

OxyChem/ Mexichem

544,000 tonnes Ingleside, Texas

EDC, VCM Submitted PSD appl Dec 21, 2012

Feb 2017

ExxonMobil Chemical

1.5m tonnes Baytown, Texas

PE PSD draft permit as of Jun 3, 2013

Late 2016

Chevron Phillips Chemical

1.5m tonnes Cedar Bayou, Texas

PE PSD permit granted Jan 17, 2013; FEED complete;

FID to come 2013; Construction 2014

mid-late 2017

Dow Chemical

1.5m tonnes Freeport, Texas

PE. LDPE, EPDM,

elastomers, LAO

EPC phase; responded to EPA on incomplete PSD

permit appl mid-July

2017

Shell World-scale Monaca, Pennsylvania

PE, MEG NA 2019-2020*

Formosa Plastics

1.2m tonnes Point Comfort,

Texas

LDPE, MEG Incomplete PSD permit appl as of Apr 9, 2013

2017

Page 21: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Ethylene expansions based on shale gas

* Timing uncertain due to June 13, 2013 explosion at site

Company Capacity Location Start-up

Williams 272,158 tonnes Geismar, Louisiana Q4 2013*

INEOS 115,000 tonnes Chocolate Bayou, Texas end 2013

Westlake Chemical 113,399 tonnes Lake Charles, Louisiana 2014

Westlake Chemical 82,000 tonnes Calvert City, Kentucky Q2 2014

LyondellBasell 363,000 tonnes La Porte, Texas mid-2014

LyondellBasell 113,000 tonnes Channelview, Texas 2015

LyondellBasell 363,000 tonnes Corpus Christi, Texas Late 2015

BASF Fina Petrochemicals NA Port Arthur, Texas 2014

Page 22: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Companies considering new crackers in US

Company HQ Capacity

LyondellBasell Netherlands World-scale

Hanwha Chemical South Korea World-scale

Axiall US World-scale

Indorama Ventures Thailand 1.3m tonnes

SABIC Saudi Arabia World-scale

Braskem Brazil World-scale

PTT Global Chemical Thailand World-scale

Aither Chemicals US 272,000 tonnes

Page 23: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

US ethylene capacity could expand by 38%!

• New crackers: 9.0m tonnes* (7)

• Expansions/debottlenecks: 1.4m tonnes (8)

• Total: 10.4m tonnes = 38% of US capacity

• Current capacity: 27.1m tonnes/year

*Assumption of world-scale cracker at 1.25m tonnes/year

Page 24: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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0

1000

2000

3000

4000

5000

6000

7000

2012 2013 2014 2015 2016 2017 2018 2019

Addi

tiona

l Cap

acity

, ‘00

0s to

nnes

/yea

r Timing of announced US ethylene expansions

Page 25: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Oil/gas ratio and US announcements

Page 26: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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North America PDH projects (on-purpose propylene from propane feedstock)

Company Capacity Location Start-up

Enterprise Products 750,000 tonnes Texas Q3 2015

Ascend Performance Materials 1,000,000+ tonnes Alvin, Texas Q4 2015

Dow Chemical 750,000 tonnes Freeport, Texas 2015

Williams 500,000 tonnes Alberta, Canada Q2 2016

Formosa Plastics 658,000 tonnes Point Comfort, Texas 2016

Dow Chemical NA NA 2018

Enterprise Products NA Texas NA

Petrologistics NA Houston, Texas NA

Page 27: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Implications of the US shale boom

• 7 new ethane crackers and derivative units in the US will solidify the US footprint in the global petrochemical market

• Shift to gas-based feedstock leads to structural shortages of propylene (C3) and butadiene (C4). However, to fill the propylene gap, 8 PDH (on-purpose propylene) projects planned to use cheap propane

• $72bn in new chemical investments in the US by 2020 already announced – ACC

• US chemical exports to jump, especially for PE plastic. US chemical trade surplus could rise to $46bn by 2020 – from $800m in 2012 - ACC

• US manufacturing renaissance – re-shoring could add $80-120bn in economic output – Boston Consulting

Page 28: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Global reaction: Asia Petrochemical Industry Conference (APIC), Taipei, Taiwan – May 2013

• “The shale gas revolution initiated in the US… is now reshaping not only the energy industry, but global economy and geopolitics as well.” This could cause “a great deal of discomfort” to Asia’s petrochemical sector.

Yoshimitsu Kobayashi, chairman of the Japanese Petrochemical Industry Association

• “The supply of low-priced products that are based on coal and shale gas will become a threat to the existing petrochemical industry and will bring a significant change in its structure.”

Han-Hong Ban, chairman of the Korea Petrochemical Industry Association

Page 29: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Global reaction: Middle East

• “The feedstock cost advantage of Gulf petrochemical producers used to be somewhat obvious. But changes in the global economy are challenging previously held assumptions. The shale gas boom in North America promises to provide fresh impetus to petrochemical producers there.”

Abdulwahab Al-Sadoun, secretary general of the GPCA, Nov 2012

• “The feedstock cost for new crackers in [Saudi Arabia] will be around $6/MMBtu as there’s not enough ethane availability, so cracker operators will have to use more propane than ethane. This cost will be much higher than the US gas price, which is currently at $3.50-4.00/MMBtu but will be reduced to $2 once there is increased production of shale gas.”

Jamal Malaikah, president and COO, National Petrochemical Industrial Co (NATPET), Apr 2013

Page 30: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Global reaction: Europe

• INEOS deal to import US ethane for Europe crackers (Rafnes,

Norway and potentially Grangemouth, UK) by 2015

• Versalis considering importing US ethane for Europe crackers

(Brindisi, Italy and Dunkirk, France).

• “There are several companies that are already offering ethane at very

favourable prices from North America either from the Gulf or the

Philadelphia Marcus Hook area. There are some very large operators

that are starting to look for long-term contracts” – CEO Daniele Ferrari,

Apr 18 2013

• Borealis investigating US ethane imports for cracker in

Stenungsund, Sweden

Page 31: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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US ethylene expansions in global context

US (17%)

Others (83%)

~39m tonnes of additional capacity expected globally

Page 32: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Global ethylene outlook

Page 33: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Global implications – changes in behavior

Japan: Companies planning to shut 3 naphtha crackers • “Recent changes in the global ethylene market… such as forecasted

production increases from shale gas in the United States, has resulted in an urgent need to fundamentally restructure and reform domestic petrochemical business”

Mitsubishi Chemical, Feb 2013, statement withdrawing from Keiyo Ethylene JV

Comperj petrochemical project in Brazil delayed indefinitely • Braskem/Petrobras project supposed to be the largest ever in Latin America • Originally planned to be naphtha-based and start up in 2012-2013 • Now will be gas-based IF Petrobras can supply at the right price

Brazil’s Braskem shifting to gas-based investments • “Competing against a US polyethylene [PE] player is a challenge… Ethylene

and PE is where the money is being made in the US, and here we are looking into what we might do. A PE plant and cracker is one alternative.”

Fernando Musa, CEO, Braskem Americas, May 2013

Page 34: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Case study The last wave of North America cracker expansions

2000-2002

Page 35: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Last wave of North America crackers 2000-2002

• 3 world-scale crackers – NOVA/Carbide, Formosa, BASF Fina

Petrochemicals – plus Dow expansion in Freeport, Texas

• Followed major debottlenecks in 1997-1999 and 2 world-scale

crackers in late 1997

• From 1997-2002, a 14% increase in US ethylene capacity (with

NOVA/Carbide in Canada, over 20%)

• Natural gas price spikes in early 2000s

• US economic recession 2001-2002

• Resulted in what was called the “worst cycle downturn in

history” from 2000-2002

Page 36: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Motivation: The next cycle upturn, predictably in 7 years

• Sept 7, 1996, Chemical News & Intelligence

• Chem Systems is looking towards a cycle of about seven

years - an upturn in the year 2000 and a 'fly-up' and peak in

2002 which could even match that in the late 1980s

Page 37: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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The 7-year cycle myth NOVA Chemicals annual report 2000

Page 38: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Motivation: Feedstock advantage

• “US Expected to Have Advantage in Petrochemical Market”

• Feb 2, 1998, Chemical Market Reporter

• Another advantage: feedstock. The Exxon official states, "First, we have it.

And second, the natural gas liquids such as ethane and propane allow

producers to construct manufacturing plants at much lower investments

than the naphtha crackers common in most of the rest of the world.“

• “NGLs expected to dominate N.A. Olefins Feedstock Arena”

• Apr 6, 1998, Chemical Market Reporter

• A sizable portion of feedstock demand will be met by NGL processed from

the new offshore Louisiana fields. Output could rise from 289,000

barrels per day in 1995 to as much as 634,000 barrels by 2005

Page 39: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Louisiana offshore gas boom – 1996, 1997

• From the Louisiana Mid-Continent Oil and Gas Association

history timeline:

• 1996 — After more than a decade of depressed prices and activity,

the oil and gas industry began to see a rebound. New drilling

activity in the Gulf of Mexico spurred on by the development of

new technology and the overall worldwide demand for oil gave a

new push to Louisiana oil and gas production.

• 1997 — Record-breaking lease sale in the Gulf of Mexico. Nearly

$1 billion exposed as bids by companies seeking to drill in the Gulf of

Mexico, proving that the Gulf of Mexico is not a “dead sea.”

Page 40: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Last wave of cracker expansions

Company Project Capacity Location Start-up

BASF Fina Petrochemicals New cracker 920,000 tonnes Port Arthur, Texas Feb 2002

Formosa New cracker 900,000 tonnes Point Comfort, Texas Jun 2001

Dow Chemical Expansion 318,000 tonnes Freeport, Texas Q1 2001

Union Carbide/NOVA New cracker 1.3m tonnes Joffre, Alberta, Canada Oct 2000

Mobil Expansion 272,000 tonnes Beaumont, Texas Q2 1999

Union Carbide Expansion 318,000 tonnes Taft, Louisiana Q4 1998

Exxon New cracker 680,000 tonnes Baytown, Texas Q4 1997

Westlake New cracker 816,000 tonnes Lake Charles, Louisiana Q4 1997

Chevron Chemical Expansion 318,000 tonnes Port Arthur, Texas Q3 1997

Page 41: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Olefins ‘deep depression’

• Worst of all worlds – overcapacity, surging feedstock costs, economic downturn

• “Olefins business hits deep depression”

• Aug 6, 2001, Chemical Market Reporter

• The massive increase in domestic ethylene capacity comes

during one of the roughest years for the olefins industry. Last

winter, the price of natural gas, traditionally around $2/MMBtu,

skyrocketed to an all-time high of $9 to $10/MMBtu, crippling

margins and exports. Natural gas prices have retreated since

February, but they remain high in historical terms. In addition, the

US economy has been on a downward tilt all year.

Page 42: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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0

5

10

15

20

25

30

35

2013-2017 1997-2002 1989-1992

Planned US capacity expansion vs past cycles Ethylene capacity, % increase

Note: 1997-2002 excludes NOVA’s cracker in Joffre, Alberta, Canada

Page 43: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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The US LNG export threat?

Page 44: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Gearing up for US LNG exports

• Sabine Pass LNG export terminal in Louisiana being

built by Cheniere Energy Partners

• 6 trains, each with 4.5m tonnes/year of liquefaction capacity

for total of 27m tonnes/year

• Scheduled to start deliveries in late 2015 through 2018

• 6 long-term supply contracts signed – UK, France, Spain,

India, South Korea (non-FTA approval May 2011)

• Freeport LNG gets approval for non-FTA exports

• Conditional approval in May 2013 to export 9m tonnes/year

Page 45: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Chemical CEO comments against LNG

• “Unfortunately, policy makers have been given a flawed

report that overlooks vital dynamics, including a

manufacturing renaissance that is already underway and

much needed by this country.” – Dow CEO Andrew Liveris

• “We think it very short-sighted and bad public policy to

allow our nation’s natural gas advantage to be stripped and

sent overseas to build a new manufacturing base that

would otherwise be built here in the US.” – Huntsman CEO

Peter Huntsman

Page 46: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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US LNG export impact

• Argument: Higher demand from LNG exports could raise overall natural gas prices and increase volatility. And higher gas prices could hurt energy intensive manufacturing sectors such as auto, steel, paper – all are customers of the chemical industry

• KEY to petrochemicals: What about impact on NGLs?

• LNG is typically dry gas (methane) for fuel with NGLs (ethane, propane) stripped out

• More natgas production for LNG exports COULD result in more supplies of NGLs (ethane and propane)

• BUT some NGLs will be exported – ex: US ethane to Europe

• Can NGL prices decouple from natgas prices? They have in 2013

Page 47: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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But, US exports of ethane, propane will also rise

• INEOS signs deal to import US ethane to its cracker in Rafnes, Norway by 2015. Considering US ethane for cracker in Grangemouth, UK

• Versalis studying US ethane imports for crackers in Brindisi, Italy, and Dunkirk, France

• Borealis investigating US ethane imports for cracker in Stenungsund, Sweden

• China planning to build 17 PDH (on-purpose propylene) projects.

This will require 6X current propane imports. Companies already signing deals with US natural gas companies

Page 48: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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US natural gas – not just for crackers!

• Utilities – all new electric power plants to be gas-fired. No one is

going to build coal or nuclear in the near future

• Methanol plants – Methanex moving 2 plants from Chile to

Louisiana; Celanese/Mitsui new 1.3m tonne/year plant in Texas

• Fertilizer plants – CF Industries $3.8bn new ammonia units; OCI

$1.4bn new unit; Mosaic and Agrium to come. 8 plants planned

• Gas-to-liquids (GTL) – Sasol planning massive project

• Transportation – ex: municipal bus fleets, garbage trucks

• Demand for US ethane and propane for export to Europe, Asia

Page 49: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

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Conclusions

• US ethylene and derivatives capacity to increase substantially through

2020, boosting global footprint. US exports of plastics to jump

• US producers to enjoy cost advantage and relatively high margins until

about 2017 when the flood of capacity comes on

• Extremely low US natgas prices are not likely to last in the long run

because of increasing demand draws on gas. Even NGLs will be exported

• Multiple factors have to come in line for US market to absorb a 33-38%

jump in ethylene capacity – growing global economies, low NGL prices,

high oil prices, capacity closures in other regions or lack of expansions

• Major US overcapacity scenario for 2017-2020 = lower prices for

ethylene and derivatives

Page 50: The US shale gas boom, outlook and implications for global petrochemicals By ICIS Chemical Business

www.icis.com

Thank you!

Joseph Chang, Global Editor, ICIS Chemical Business

[email protected]

212-791-4224


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