Booz Company Feedstock Developments Nov26 Presentation

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


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


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


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


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


6 November 2012

5

5

5


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


The flood of ethane favors new ethane-based capacities rather than Naphtha


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


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


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


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


Butadiene

Benzene


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



1) Propylene price premium versus ethylene price

2) Fuel (~50%) and other petrochemicals (~15%) account for remaining part (in 2010)


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


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


1) Propylene price premium versus ethylene price

2) Fuel (~50%) and other petrochemicals (~15%) account for remaining part (in 2010)


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


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



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


19


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


November 2012

Booz Company Feedstock Developments Nov26 Presentation

Documents

booz company dimensions

company information

chemical industry micro

macroeconomic trends

dow chemical

heavy feedstock

chemicals segment source

emerging players