Naphtha Export Markets:Petchem Demand & Refining Outlook

Andrew Reed, PrincipalESAI Energy, LLC

Argus Condensate & NaphthaSeptember 30, 2016

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New Studies

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“Invisible” Naphtha Market

North Asia Demand

Europe Demand

Refining Outlook

Conclusions for U.S. Exports

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Invisible Naphtha Market

Heavy

Light-Full Range

C5+

0

5,000

10,000

15,000

20,000

2016 Global Supply('000 b/d)

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Naphtha Absorption

Petrochemical

Gasoline

Diluent & Other

0

5,000

10,000

15,000

20,000

2016 Disposition('000 b/d)

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Gasoline Blending Considerations

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Naphtha Absorption in Gasoline

28%

13%

2016 Global Gasoline Blending Ratios

Heavy Naphtha

Light Naphtha (isomerate and straight-run)

Cracked Gasoline (FCC and other)

Oxygenates (ethanol, alkylate, butane, other)

• Gasoline market > 40% naphtha

• High content in Africa/Europe/ME

• Low content in China/Asia

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0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

North America Latin America Europe FSU/EE Africa Middle East Asia

Naphtha/C5+ Demand by Region('000 b/d)

Naphtha Demand by Region

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(500)

500

1,500

2,500

3,500

4,500

5,500

6,500

2015 2016 2017

Ethylene Capacity,‘000 TPA

Asia Ethylene Capacity by Feedstock: Cumulative Change vs 2014

Ethane

LPG

Naphtha & C5+

CTO/MTO & Other

Rationalization in Japan & Taiwan leads to net

decrease in Asian naphtha-fed capacity

Asia Ethylene Investment

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Asian Naphtha Consumers

Japan, S. Korea & Taiwan

2.3 million b/d

Naphtha-fed crackers,

little flexibility

Biggest contributors to global demand growth in 2015

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(500)

(400)

(300)

(200)

(100)

0

100

200

Japan South Korea Taiwan China Other Asia India

Asia Naphtha Balances'000 b/d

“Big 3” deficit exceeds 1 million b/d

Asia’s Biggest Importers

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Rationalized 1.3 MTPA capacity

Ethylene output rose 4% in 2015, will fall ~7% in 2016

Japan’s “Capacity Constraint”

14

15

16

17

18

19

20

21

22

23

Q1 '14 Q2 Q3 Q4 Q1 '15 Q2 Q3 Q4 Q1 '16 Q2 Q3 Q4

Ethylene,'000 t/d

Japan Ethylene Capacity & Production

Projected Ethylene Production

Ethylene Production

Capacity

Sumitomo Chaiba

Mitsubishi Kashima

Asahi Kasei Mizushima

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“Big 3” naphtha demand will fall 60,000 b/d in 2016, erasing half of 2016 gains

Naphtha Demand in Decline

760

800

770

600

650

700

750

800

850

2011-2014 avg 2015 2016

'000 b/d Japan Naphtha Demand

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U.S. Naphtha Supply to Asia

400

500

600

700

800

900

1,000

2014 2015 2016 2017 fcst

'000 b/dJapan & South Korea Deficit & Imports from Selected Sources

Mideast & India

Russia

Europe

Africa

USA

S/D Deficit

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Europe Loss of Naphtha to NGLs

U.S. ethane displaces naphtha at some units

Antwerp FAO- more NGLs

Carling, Porta Marghera

~1.5-2 MTPA loss of naphtha-cracking capacity

Rafnes (Ineos)

Grangemouth (Ineos)

Wilton (SABIC)

Stenungsund (Borealis)

Fife (Exxon-Shell)

Antwerp (Fina Olefins)

Carling (Total)

Porta Marghera (Versalis)

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900

950

1,000

1,050

1,100

1,150

1,200

1,250

1,300

1,350

Q1 '14 Q2 Q3 Q4 Q1 '15 Q2 Q3 Q4 Q1 '16 Q2 Q3 Q4 Q1 '17 Q2 Q3 Q4

('000 b/d) OECD Europe Naphtha Demand & Capacity

Naphtha Demand Demand implied by Ethylene Capacity Adjustment for Outages

Slightly stronger demand in 2016, capacity decreases lay ahead

Outages Undermined 2015 Demand

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U.S. Naphtha Supply to Europe

0

50

100

150

200

250

300

2014 2015 2016 2017 fcst

('000 b/d)OECD Europe Deficit & Imports from Selected Sources

Russia

Algeria

USA

Deficit

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Refining Outlook

Will refinery supply follow demand lower?

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1,100

1,120

1,140

1,160

1,180

1,200

1,220

1,240

1,260

1,280

1,300

Dec

'14

Mar

'15

Jul '

15

Sep

'15

Dec

' 15

Mar

'16

Jul '

16

Sep

'16

Middle Distillate StocksMln bbls

Storm Clouds for Refiners

640

650

660

670

680

690

700

710

720

730

740

Dec

'14

Mar

'15

Jul '

15

Sep

'15

Dec

' 15

Mar

'16

Jul '

16

Sep

'16

Gasoline StocksMln bbls

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Non-OECD Throughput Growth & Recovery

0

250

500

750

1,000

Q115 Q315 Q116 Q316 Q117 Q317

China & India Throughput Growth,Yoy change (‘000 b/d)

China India

(250)

0

250

500

750

1,000

Q115 Q315 Q116 Q316 Q117 Q317

Middle East Throughput,yoy change (‘000 b/d)

(750)

(500)

(250)

0

250

500

Q115 Q315 Q116 Q316 Q117 Q317

LatAm, Africa & Russia Throughput,yoy change (‘000 b/d)

Latin America

Africa

Russia

Total

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Margins: Evidence of Pressure in Europe/Asia

$3

$6

$9

$12

$15

Q115 Q315 Q116 Q316 Q117 Q317

$/bblSingapore Cracking (Dubai)

$3

$6

$9

$12

$15

Q115 Q315 Q116 Q316 Q117 Q317

$/bblRotterdam Cracking (Brent)

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Displacement of Throughput in Europe & Asia

(750)

(500)

(250)

0

250

500

750

1,000

Q115 Q315 Q116 Q316 Q117 Q317

Europe Throughput, yoy change (‘000 b/d)

(500)

(250)

0

250

500

750

Q115 Q315 Q116 Q316 Q117 Q317

Japan, S. Korea & Taiwan Throughput,yoy change ('000 b/d)

Japan South Korea

Taiwan Total

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Conclusions

Petrochemical Naphtha Demand• Asian demand on decline, Europe to follow

Refinery supply• Throughput cuts undermine supply, but not

enough to lift imports

Naphtha Deficits• Europe deficit flat ~150,000 b/d• North Asia deficit falls to < 1.1 mln b/d

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Andrew ReedPrincipal, ESAI Energywww.esaienergy.com

areed@esai.com781-245-2036

Thank you

26