New Investment in Shale Advantaged Chemicals 33 rd USAEE/IAEE North American Conference Pittsburgh 27 October 2015 Martha Gilchrist Moore Sr. Director, Policy Analysis and Economics

The Chemical Industry is Energy-Intensive Source: ACC analysis Fuel, Power and Feedstock Costs as a Percent of Total Costs

Shifting Petrochemical Competitiveness In the US and Canada, historically cheaper to crack ethane, propane and other natural gas liquids (from natural gas) In Western Europe and NE Asia, naphtha (from oil refining) is primarily used Correlation between feedstock and energy prices Thus, feedstock costs (and competitiveness) are driven by relative oil and gas prices 10 years ago, US near top of global cost curve Plus a wave of low-cost capacity in the Middle East US emerges as low-cost producer Share of US ethylene production from NGLs increases from 59% in 2005 to 92% in Middle East ethane supplies are becoming constrained. Lower oil prices have eroded some competitiveness, but U.S. remains feedstock-advantaged

Divergence between Naphtha and Ethane Prices Key Competitiveness Sources: US Energy Information Administration, Chemical Week, ICIS

Oil and Natural Gas Prices (oil equivalent) Source: Energy Information Administration

Oil-to-Gas Ratio: A Proxy for U.S. Petrochemicals Competitiveness Oil price declines have created some uncertainty about future Current ratio remains very favorable for U.S. competitiveness Growth likely to slow but be offset by stimulative consumer effect When the ratio is above 7, U.S. competitiveness is enhanced. Sources: EIA, ICE, NYMEX

Natural Gas Liquids Production Source: Energy Information Administration

Ethane and Propane Production in PADD I (East Coast) Source: Energy Information Administration

U.S. Chemical Industry Investment Improved feedstock competitiveness led to surge of announcements to build new chemical manufacturing capacity Building began as early as 2010 with small projects to increase ethane utilization As of the beginning of October, ACC is tracking 246 projects valued at $153 billion 63% of projects are foreign or include a foreign partner Additional projects in Canada and Mexico In addition, ACC is tracking more than 500 plastic processor projects

Cumulative Announced Chemical Industry Investments (from Shale Gas) Source: ACC analysis

The Build-Out is Underway (Chemical Industry Construction Spending) $ Billions (seasonally adjusted annual rate) Note: Data are presented as a 3 month moving average to smooth month-to-month variations. Source: Census Bureau

US Chemical Industry Capital Investment: Incremental Due to Shale Gas Billions of 2013 Dollars More projects likely to be announced Peak year for investment outlays –2017 Source: ACC analysis This is in addition to the $30 billion per year that the industry normally invests… Note: excludes projects designated as “delayed/uncertain”

Shale Advantage Driving Capacity Expansion Across Many Products Ethane, Propane and NGL Feedstock Ethylene – capacity could grow by more than half Ethylene Derivatives – PE, vinyls, MEG, EO, etc. Ethlyene cracker co-products – on-purpose propylene (PDH, MTP), butadiene Complementary products, i.e., chlor-alkali for PVC, industrial gases, etc. Methane Feedstock Methanol Nitrogeneous fertilizers – ammonia, urea and derivatives (AN, UAN) Demand Driven Products Chemistry used in hydraulic fracturing, drilling, and oil/gas production

Olefin Yields by Feedstock

Composition of Announced Projects Investment by Industry Segment* Source: ACC analysis *Some large cracker projects with derivatives projects not separately broken out

Geography of Shale-Advantaged Chemical Investment Source: ACC

Much of the New Capacity is Export-Oriented U.S. trade surplus for the selected chemicals increases from $19.5 billion to $43.3 by Trade deficit in C1 chemistry shrinks, but continues for aromatics C2 trade balance expands in just about every regions. C3 derivative exports recover after PDH/MTP projects come online. Source: Nexant

U.S. Captures Market Share Away From Western Europe… Basic Chemicals - Volume Index of Production (2007=100) Sources: Eurostat, Federal Reserve, METI, ACC analysis

Unpredictable energy dynamics Workforce development issues Chemical plant operations personnel, engineers, etc. Construction trades and labor Shortages of key equipment, etc. Both lead to capital cost escalation Wage increases Costs of valves, pressure vessels, pumps, etc. escalating Infrastructure bottlenecks (e.g., Houston Ship Channel) Market access/trade exposure (e.g., protective tariffs) More stringent environmental and other regulations affecting license to operate Market imbalances (short- or over-supply) created by variations in regional supply vs. demand growth and government policies Key Chemical Industry Investment Risks

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