Strategic Advisors in Global Energy

Change Creates Opportunities: Petrochemicals

PFC Energy Abu Dhabi Seminar by Carlo Barrasa, Downstream & Petrochemicals Group 12 November 2009

Within Context Of Global Energy Demand

67% Transport, Residential, Agricultural & Other

33% Industrial

71% Other Industrial

29% Chemical & Petrochemical

228 MMb/d (2008 oil equivalent)

75 MMb/d (2008 oil equivalent)

Petrochemical and chemical energy demand represents approximately 10% of total energy demand This represents a significant portion of total energy demand & is the single largest consumer of energy in the industrial sector
Abu Dhabi Seminar | Page 2

The History of Plastics

Impact of 1973 Oil Embargo

Impact of Great Recession

Data excludes polyester fibers

Only two consumption declines have ever occurred in the history of petrochemicals, but the most recent decline is demand driven
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The Future of Plastics

Demand pullback concentrated in OECD markets

Data excludes polyester fibers

The Great Recession will cause the plastics industry to lose five years of growth
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Global Polyolefins Penetration

Increased adoption of polyolefins

Gradual intermaterial substitution of other plastics

In order to its maintain penetration rate, polyolefins producers will continue building products that promote displacement
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Polyolefins Demand Outlook

08 15 CAGR

1.8%

4.8%

1.7%

4.3%

4.8%

4.8%

4.3%

All developing markets will exhibit robust growth in polyolefins consumption as light manufacturing continues moving out of OECD
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Regional Polyolefins Outlook

Per capita consumption

Figures in kg per person

Asia Pacific alone will comprise nearly 55% of the global consumption growth with over 15 million tons in additional demand
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Rationale For Demand Growth

Significant upside potential in developing countries for additional consumption on a per capita basis

Expanding economies will gradually move towards more consumer-oriented markets

Product innovation will promote continued displacement of traditional materials

OECD countries will still be significant markets as they will drive material innovations

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Capacity Additions
Regional breakdown of steam cracker announcements

10 projects, 11.1 million tons

4 projects, 3.8 million tons

13 projects, 10.0 million tons

17 projects, 19.5 million tons

Over 44 million tons of ethylene capacity has been announced with no capacity additions being added in OECD markets
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How Much Cracking Capacity Will Be Needed?

Likely additions are announced projects that have been probability-adjusted

With only 23 million tons of incremental demand, approximately 12 million tons of announced is unlikely to be added Capacity rationalization is likely to occur within the next five years
Installed base of nearly 130 million tons Utilization at less than 80% for 2009
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Will Capacity Shutdown?

Environment that would favor rationalization Weak consumer demand in OECD markets High oil prices increasing the input cost of liquids-based cracking Prevailing refining economics dictating shutdowns of refineryintegrated complexes Climate change policy initiatives that add incremental costs Environment that would favor over-capacity Signs of increasing demand in developing markets Favorable co-product economics to promote continued operation Increased rate of rationalization of refineries that produce petrochemicals Protectionist measures by world governments

In a high priced, higher capacity environment, smaller operators will tremendous pressure to maintain necessary utilization
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What Will Future Capacity Look Like?

Increasing economies of scale

1999 Average Cracker Size 344 KTA Ethylene

2009 Average Cracker Size 538 KTA Ethylene

Announced Average Cracker Size 1,010 KTA Ethylene

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Economies of Scale
Ethylene production cost, USGC example

On a non-integrated basis, average sized crackers from ten years ago are ill-equipped to compete in the present environment
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Economies of Scale
Polyethylene production cost, USGC example

PE conversion costs include cash cost of HDPE production ex ethylene costs

On an integrated basis, oil-based producers without economies of scale are the most at risk of rationalization
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How Much Capacity Is At Risk?

Cracking capacity excludes China & India

Given the proximity to low cost Middle East production & the regions oil-based feedslate, European capacity is most at risk to shutdown
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Strategy In A Volatile Environment

With the looming additions, existing capacity will be under pressure with rationalization occurring within the next few years However, it will be difficult to shutdown enough capacity to achieve historical utilization due to stickiness of existing sites This environment will produce a more volatile environment with petrochemical cycles lasting months rather than years

Given such an environment, producers will need to be steadfast in their operating strategy to weather the storm
Option 1: Focus on being the lowest cost producer Option 2: Focus on being a niche producer Option 3: Focus on being a customer-centric producer
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Strategic Options For Producers

Option 1: Focus on being the lowest cost producer

Maximize economies of scale

Lower transition cost by minimizing the number of grades produced Focus production on high volume fungible grades of product Work with feedstock suppliers in order to secure necessary feedstock to maximize uptime

Continuously seek out cost reductions

Focus marketing group to target high volume customers to minimize transaction costs (e.g. physical product traders) Invest in feedstock flexibility to ensure the lowest feed costs

Seek opportunities to increase scale by buying other high volume sites

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Strategic Options For Producers

Option 2: Focus on being a niche producer

Seek opportunities to produce specialty products

Increase sales expertise to sell products on a value basis Increase marketing expertise to interact with customers to stay ahead of product trends

Invest in R&D personnel to innovate on product technology

Work with customers to build customized solutions Develop products with unique characteristics capable of displacing other materials

Consider making an acquisition of companies that already produce specialty products

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Strategic Options For Producers

Option 3: Focus on being a customer-centric producer

Maximize customer touch points to promote intimacy

Increase customer service staff to address administrative issues Increase tech service staff to help customers solve processing problems Develop marketing programs designed to maintain customer loyalty (e.g. rebates, joint advertising)

Offer product logistics & terminal inventory to offer product on just-in-time basis Consider investing in companies that have considerable exposure to product distribution

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Conclusions
The industry has grown aggressively with only two demand declines over the past forty years Despite the recent demand loss, the industry will resume its growth trends in 2010
By 2015, over 55% of the growth in polyolefins consumption will occur in Asia Pacific OECD markets will still be significant accounting for over 20% of the growth polyolefins consumption

Given the forecasted level of consumption and capacity additions, existing capacity will need to be rationalized Smaller, oil-based producers are most at risk of shutting down This will produce an environment that will be more volatile than previous downturns Thus, necessitating a focused operating strategy to weather the storm
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Strategic Advisors in Global Energy

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