GlobalChemicalsManufacturingShi6stotheAppalachianBasin

TheShaleRevolu,on3.0

TomGellrichTopLineAnaly2cs

©2015TopLineAnaly2cs.Allrightsreserved.

Oct11,2017UAcaSummitV–CantonOH

1973EnergyShock

SourceEIA

3.2xIncrease

1979EnergyShock

SourceEIA

2.0xIncrease

Manufacturing

30%-

2008–2012ShaleShock

3.8xDecrease

SourceEIANaturalGas

Manufacturing

30%+

NorthAmericanAdvantage

Source:WorldbankPinkSheetAveragenaturalgasprices$/MBtu

20164Q

$2.5 $4.6

$6.9$3.0

2008

$10.3 $11.4

$14.4$1.3

NaturalGas

ShaleGasDisappoin2ngGlobalExperience

•  Europe–bannedoruneconomic–  FranceGermanyScotlandoutrightbans–  Polanduneconomic

•  SouthAfricagiantKarooBasin’stechnicallyrecoverableshalegasresourcedowngraded30xfrom390tcfto13tcf

•  Brazilhighlyan2cipatedValedoJuruáfieldnowbanned•  SaudiArabiawithalltheresourcestechnical,economicand

governmentfinallylookingtobringonfirstShaleGasfield•  China’sshalegasdepositsdroppedby6%in2016,asnonew

shalegasdepositswerefound

ShaleGasdrivestheChemicalIndustry

0%

20%

40%

60%

80%

100%

ChemicalFeedstock

Methane

EthanePropane

Fuel

TypicalShaleGas

Source: Typical Shale Gas: Western Marcellus Shale Gas: Chesapeake Investor Presentation 2011

EthyleneEconomics

Source:NYMEXFeb2nd20152.3xDelta

EthyleneCost US ChinaNaturalGascosts $/MMBTU 2.6CrudeOilcosts $/BBL 54Equivalent $/ton 128 521Ra2oforonetonethylene 1.29 2.98EthaneFeedstockcosts $/ton 165 1552Catalyst+Other $/ton 2 2ByProductCredits $/ton 108 1102U2li2es $/ton 94 127DirectCosts $/ton 167 172TotalethyleneCost $/ton 321 750 Typicalethylenemargin 2.50% Transferpriceforethylene $/ton 329 769

Source:NYMEXSep2015

ChangesinGlobalIndustry

•  M&A:Axiall(GeorgiaGulf+PPGChlor-Alkali)•  JV:PPTGlobalChem+MarubeniCorp•  Doublingdownoninvestments:LyondellBasell•  Reloca2ngexis2ngplantstoU.S.:USMethanol•  MiddleEastinvestmentinU.S.:SABIC•  Commercializa2onofnewtechnologies:PDHBDH•  European+Asianshutdowns:TotalCarling•  IncreasedNAinvestments:Formosa•  Non–GulfCoastU.S.investment:Shell•  U.S.Ethaneexports:Ineos•  U.S.BackwardIntegra2on:BASF

“duetoU.S.shalegas”

GlobalChemicalShin

“Thefeedstockcostfornewcrackersin[SaudiArabia]willbearound$6/MBtuasthere’snotenoughethaneavailability…thiscostwillbemuchhigherthantheUSgasprice,whichiscurrentlyat$3.50-4.00/MBtu”

–  JamalMalaikah,PresidentandCOO,Na2onalPetrochemicalIndustrialCo(NATPET),Apr2013

GameOver

InvestmentShin

CancelsAl-KaraanaQatar$6.3BCracker1/2015ApprovesBeaverCounty$5B+Cracker6/2016

Startsupw/DowChemical$20BSadara8/2016Announcesw/ExxonMobil$10BGulfCoast6/2016

U.S.ChemicalConstruc2onInvestment

Source:ACCanalysisofCensusBureaudata

$Billions

50%ofallmanufacturinginvestment

ChemicalIndustryU.S.Investments2012to2022

•  $164billionincapitalinvestment–  264projects–  70millionmetrictonsofchemicals

•  Jobs:–  738,000permanent–  316,000temporary

•  $301billionincreaseeconomicoutput•  $106billionincreaseinchemicalshipments

Source:AmericanChemistryCouncilMarch2016

60%foreign

50%capacity+

Howdoestranslateinglobaltradeandothermanufacturing

•  Lowcostchemicalsandplas2csgointoeverything

•  UShasincreasinglaborpool,EuropeandChinahavedecreasinglaborpool

•  UShaslongestablishedmanufacturingknowhow,technicaleduca2onandacceptanceofmanufacturingasriseofthemiddleclass

•  UShasuntappedinfrastructureofbrownfieldabandonedrustbeltsites

•  Costtoexportfinishedproductsisverylow–shipsgobackemptyonenneedingballast

AppalachianBasinPlas2cs

Logis2csAdvantage-  LocalShaleGas-  LocalcustomerdemandLegacyAdvantage-  Technicalknowledge-  Equipmentsuppliers

Source:ShellGraphic

AppalachianBasinLogis2cs

Ethaneadvantage$12/Bbl•  M.Belvieuprice5/16/17$26/Bbl•  CosttransportviaATEX$14/Bbl

PolyethyleneLLDPEadvantage$0.07/lb•  Texasspot5/12/17$0.60/lb•  Costrailtransport$0.07/lb

Workingcapitalimpactofinventoryinpipeline/railnotfactoredin

AppalachianBasinEthane

0

200

400

600

800

MarinerE

ATEX

Shell

Rejectedby2020

Rejectedfuture

MarinerW

5.5ConceivableWorldScaleCrackers

1.0Shell2.5Rejectedby20201.3Rejectedfuturegrowth0.7MarinerE

2.3UnlikelyPotenAalWorldScaleCrackers

0.5MarinerW1.8ATEX

1,000sBbl

Worlddemandisfor4to5newglobalscalecrackersperyear

AppalachianStorageHub

•  Keyenablinginfrastructure–  Storageplusinterconnectedpipelines– NGLs–  Chemicalbuildingblocks

•  Liquiditywin/winsuppliers/customers•  Déjàvu:keydriverbehindU.S.GulfCoastgrowth•  Minimizesanother‘Katrina’economicimpact•  Reducesriskfornewchemicalplants•  NumerousbillsinCongressandDOEsupport•  MountainNGLmovingaheadrapidly

AppalachianBasin

•  Shellbroketheice–  Valida2onofloca2on– Demonstratevaluetothepublic–  Localcommunitysupport–  Buildoutof‘ecosystem’

•  SuppliersandLaborpool•  Voca2onaland2yeardegreeprograms•  Upgradeofroad,railandbargeinfrastructure

•  Nextprojectwillbemucheasier•  Shellisnotdoneyet…

NolargeflatsitesintheAppalachianBasin

•  Requirescrea,vethinking–canbemanaged

•  Acquireandcombinemul2plesites•  Repurposeandmoveexis2ngsiteholderstoother

loca2ons•  Investincrea2ngflatland•  Separateeleva2ons,forseparatepurposes:

–  OfficeandLabs–  RawMaterial–  FinishedGoods–  Truckpark–  Cracker–  Polyethyleneunit

NositesinUSGulfCoast>50neleva2on

Theriskofhurricanesandfloodingisfarlessmanageable.PetrochemicalindustryisasmuchdrivenbyriskasitisbyROI

Katrina,Harvey,Nate

•  Onceinathousandyears?Twiceinadecade?•  Harveyforcesshutdownof54%USethylene

IHSMarkitSep5,2017

•  ‘HurricaneHarveyHasCrippledtheFounda2onofU.S.Plas2cProduc2on’FortuneSep2,2017

•  Na2onalimpact“U.S.industrialoutputplunged0.9percentinAugust…HurricaneHarvey'sdamagetotheoilrefining,plas2csandchemicalsindustries”FederalReserveSept15,2017

Katrina,Harvey,Nate

•  CostofCrackershutdown–  Controlledshutdown+hurricaneoverfacility+cleanup+repair+tes2ng+startup=18days

–  10%ofcapacitys2llofflineat24days–  18daysisalossof5%ofannualproduc2on–  Replacedequipment+over2me+outsourcedaddi2onallabor+disposalofoffspecproduc2on=$?

–  Longtermlossofcustomers$?–  Netbo�omlinenega2veeasilyinto8figuresperfacility

•  Sameoutsourcedworkforcealreadystretchedwithnewcrackers,maintenanceonexis2ngcrackers,nowonclean-upandrepairfromHarvey

•  Addi2onalworkforceshortagesduetodemandforHarveyresiden2al+retail+commercialrecoveryefforts

•  Crackerexpansionssloweddownun2lgrounddries

HarveyEnvironmentalImpact

CHEMICAL AMOUNT(kg)

Sulfurdioxide 98,380

VolaAleorganiccarboncompounds,unspecified 67,575

Carbonmonoxide 52,180

Butane 38,667

Nitrogenoxides 34,348

Isopentane 23,582

Ethylene 16,343

Propane 11,582

Pentene 11,020

Isobutane 11,003

2-Methylpentane 9,524

Pentane 5,482

Propene 5,349

Ethane 5,039

2,2-Methylbutene 4,626

Methane 3,900

1,3-Butadiene 3,519

Hexane 3,175

trans-2-Hexene 2,494

Cyclohexane 2,358

trans-2-Butene 2,277

Butene 1,973

3-Methylhexane 1,859

Hydrogensulfide 1,842

2-cis-Butene 1,814

Toluene 1,769

Isobutylene 1,350

2,2,3-Trimethylpentane 1,270

Methylcyclohexane 1,224

2,2,4-Trimethylpentane 1,179

1-Butene 1,043

Xylene 998

Cyclopentane 680

Heptane 680

Benzene 566

2,2,5-Trimethylhexane 500

Isoprene 500

1,cis-2,trans-3-Trimethylcyclopentane 500

Cyclopentene 454

Source:Texas Commission on Environmental Quality

Source: Texas Commission on Environmental Quality August 27-30, 2017

Arkema‘supplychaineffect’

•  ArkemaCrosbyTXproducesorganicperoxides

•  Organicperoxidesarepolymeriza2onini2ators

•  Arkemaisleadingproducer,withCrosbyTXtheirflagshipfacility

•  Floodingofthefacilitycausedlossofrefrigera2on•  Monthsofinventorydecomposed•  Shortagepolymeriza2onini2atorscauseshortagesofpolymer•  Onefacilityinahighlyintegratedindustrycanhavearipple

effecttoen2resupplychain

Harvey…acalltoac2on?

•  ImpliesashintoAppalachianBasin•  AppalachianBasinisalreadycostadvantaged•  Storagehubprovidescri2calelementtoreducerisk

•  Shellisleadingtheway,proac2velyengagingthecommunity,brininginsuppliers,developingapipelineoftrainedworkers

•  Harveyisjustanotherelementincreasingthea�rac2venessoftheAppalachianBasin

ChemicalIndustryDrivestheNextWave

Shal

e G

as

Ethane

Methane

Propane

Butane

Ammonia

Methanol

Ethylene

Propylene

N-Butylene

Isobutylene

MarketSectors

ApparelandAccessories

BeveragesandTobaccoProducts

Chemicals

ComputerandElectronics

FabricatedMetalProducts

FoodandKindredProducts

LeatherandAlliedProducts

Machinery,ExceptElectrical

NonmetalicMineralProducts

Paper

PetroleumandCoalProducts

Pharmaceu2cals

Plas2csandRubberProducts

PrimaryMetalManufacturing

PrintedMa�erandRelatedProducts

Tex2leandFabrics

Tex2leMillProducts

Transporta2onEquipment

WoodProducts

ProductCategories

Fer2lizers

Adhesives/Sealants

AlkydResins

Solvents

CorrosionInhibitors

Tex2les

Inks,Adhesives

Shampoos,Detergents,Soaps

Paints

Coa2ngs

Pipes,Hoses,WireCoa2ng

Coolant,An2freeze

Films,Packaging,Bo�les

PaintRemover

Plas2cs

TiresandRubber

LubricantAddi2ves

Solvent,IndustrialCleaners

>98%

Source:PwCandTopLineAnaly2cs

NextWaveSh

ale

Gas

Ethane

Methane

Propane

Butane

Ammonia

Methanol

Ethylene

Propylene

N-Butylene

Isobutylene

Source:PwCandTopLineAnaly2cs

Polyethylene

EDC

EPDM

Ethanol

Alpha Olefins

Vinyl Acetate

Ethylene Glycol

Ethanolamine

Ethyl Oxylates

Glycol Ether

Chloro Ethanes

Polyvinyl Chloride

ShaleGasConclusions

•  TheU.S.ShaleGasrevolu2onhascausedaGlobalChemicalIndustryrevolu2on

•  ChemicalsandmanufacturedproductscanbeproducedfarcheaperinNA

•  Implica2onsaredisrup2veandofferopportunity

•  AppalachianBasinisthenewfron2er

•  Leaderslead,isyourorganiza2onmobilized?

TopLineAnaly2csWeassistcompaniesinaddressingthechallengesandopportuni2estocompeteinthechanginglandscapebroughtonbytheshalegasrevolu2on

TomGellrich www.TopLineAnaly2cs.com 267-205-1263

Ques2ons?