Is your organization mobilized for the Shale Gas Decade?

January 22, 2014

Tom Gellrich

TopLine Analytics

© 2012 TopLine Analytics. All rights reserved.

Agenda

• Dramatic North American Advantage

• Chemical Industry Drives Next Wave

• Four Disruptive Impacts

• Strategic Questions

• Conclusions

• Questions and Answers

Shale Revolution?

“U.S. energy landscape is changing on the back of cheap natural gas from shale deposits, which is turning producers away from “offshoring” energy-intensive industries. The discovery of shale gas is perhaps the greatest development in the modern era. Shale gas is a huge – and potentially long-term – competitive advantage for U.S.-based companies”

Andrew LiverisCEO Dow Chemical Company

1973 Energy Shock

Source EAI

3.2x Increase

1979 Energy Shock

Source EIA

2.0x Increase

2008 – 2012 Shale Shock

3.8x Decrease

Source EIA Natural Gas

NA Shale gas among the largest gas fields

Marcellus Natural Gas production exceeded Saudi Arabia in late 2013

Source EIA

Unconceivable Production

North American Advantage

Source: World bank Pink Sheet

2008 2012

Average natural gas prices $/MBtu

$2.74$11.86

$15.59$2.98

$10.32

$11.40

$14.38$1.25

Chemical Industry Drives the Next Wave

0%

20%

40%

60%

80%

100%

Chemical Feedstock

Methane

Ethane

Propane

Fuel

Typical Shale gas

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

Ethylene Economics

Source: NYMEX 11/13/2013

5.3x Delta

Ethylene Cost US China

Natural Gas costs $/MMBTU 3.75

Crude Oil costs $/BBL 109

Equivalent $/ton 184 1051

Ratio for one ton ethylene 1.29 2.98

Ethane Feedstock costs $/ton 238 3132

Catalyst + Other $/ton 2 2

By Product Credits $/ton 179 1631

Utilities $/ton 136 256

Direct Costs $/ton 167 172

Total ethylene Cost $/ton 364 1931

Typical ethylene margin 2.50%

Transfer price for ethylene $/ton 373 1980

Polyethylene Economics

Source: NYMEX 11/13/2013

3.8x Delta

Polyethylene Cost US China

Natural Gas costs $/MBTU 3.75

Crude Oil costs $/BBL 109

Ethylene cost $/ton 373 1980

Ratio for one ton of HDPE 1.025 1.025

Ethylene cost $/ton 383 2029

Utilities $/ton 15 36

Direct Cost $/ton 51 17

Other Costs $/ton 132 132

Total Costs $/ton 580 2214

Typical polyethylene margin 3.00%

Potential HDPE selling price $/ton 598 2281

Polyethylene Processor Economics

2.9x Delta

Polyethylene Part US China

Polyethylene HDPE $/ton 598 2281

Part weight grams 100 100

Parts units 20000 20000

Polyethylene HDPE $ 598 2281

Utilities units 44 109

Labor $/Hour 31.79 1.38

Labor $ 95 4

Other Costs $ 102 75

Non Polyethylene HDPE Costs $ 241 185

Typical part processor margin 14.00%

Potential Part HDPE selling price $/ton 864 2540

Dramatic Shift In 7 Years

Source: American Chemistry Council

Ethylene

2005

Middle East N America China W Europe NW Asia

Old Normal:Middle East half the cost of the rest of the world

2012

New Normal:Middle East and NA at parity, rest of the world at 4x cost structure

Global Chemical Shift

• “The feedstock cost for new crackers in [Saudi Arabia] will be around $6/MBtu as there’s not enough ethane availability … this cost will be much higher than the US gas price, which is currently at $3.50-4.00/MBtu” – Jamal Malaikah, president and COO, National Petrochemical Industrial Co (NATPET), Apr 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 at APIC, May 2013

• “The shale gas revolution in the US has turned the global petrochemical industry inside out…Basic petrochemicals can now be made in the United States for about half the cost as in Europe”– Tom Crotty, Ineos group director, ChemWeek Interview October 2013

• “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 at APIC, May 2013

Chemical Industry RespondsNA Investments 2012 to 2020

• $70 billion in capital investment– 97 projects

– 60 million metric tons of chemicals

– 40% increase in ethylene capacity

• Jobs: – 485,000 direct

– 700,00 indirect

• Taxes (federal, state, local)– $20 billion during investment phase

– $14 billion on-going

• Just the startSource: American Chemistry Council

Chemical Industry Output (volume)

100 to 500% disadvantaged

Unknown – new technology

30 to 80% advantaged

Source: IHS basic chart, TopLine Analytics predictions

Chemical Industry value chain will be selectively disrupted

Four Disruptive Impacts

Shale Gas economics drive Opportunity and Risk:

• NA On-Shoring

• Full Substitution

• Partial Substitution

• Shale Gas versus Crude Oil

Changes Drive Core Strategies

Manufacturing Products Customers Supply Chain

How do I rapidly shift my manufacturing to realize NA cost base?

What do I do with my cost disadvantaged Northwest Asia and Western Europe manufacturing sites?

How do I shift my product innovation focus to?:

• Natural gas advantaged chemicals?

• Avoid cost disadvantaged feedstock?

How do I keep my downstream customers who will shift their manufacturing to NA?

How do I gain share from competitors with manufacturing outside of NA?

How do ensure that my suppliers are aggressive and pass the advantage on to me?

Do I shift make versus buy?

How do change my global transport and distribution system?

Strategic Issues Require Strategic Initiatives

Manufacturing Products Customers Supply Chain

Competitor analysis and strategiesMergers, Acquisitions, Divestitures, Spin-offs

Alliances, Joint VenturesProduct innovation IP

Corporate re-alignment to focus and ensure changeSupplier, Customer, Distributor relationships

Scenario analysis

Leaders are “all in”

Shale Gas Conclusions

• NA Business Revolution.

• Chemical Industry at the core, fuel and feedstock.

• New normal, unconventional thinking is required.

• Leaders lead, is your organization mobilized?

We assist companies in addressing the challenges and opportunities to compete in the changing landscape brought on by the shale gas revolution

Tom Gellrich www.TopLineAnalytics.com 267-205-1263

TopLine Analytics

Questions?