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October 6, 2010
Canadian Plastics Resin Outlook 2010 Conference
Outlook for Polyolefins
James ViroscoManager Special of Projects, Strategy
Michelle Gutierrez
Senior Analyst
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Agenda
Overview of Nexant
North American Natural gas
Drilling Technology
North American Natural Gas Liquids
Nexants PE and PP Outlook
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Overview of Nexant
Overview of Nexant
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Nexant is a global consulting firm specializing in the Petroleumand Chemicals industry
We focus on the global
petrochemical, chemical, polymer
and specialty chemical industries
working with companies at the
corporate and divisional levels,as well as with a broad range of
financial institutions and investors
We apply industry relevant
content, methodologies/processes and tools to assist
clients in achieving desired
strategic and transaction-related
results
We conduct engagements withan integrated client/consultant
team approach to ensure
consensus on results and
implementation
TechnologyEvaluationsTechnologyTechnologyEvaluationsEvaluations
CommercialAnalysis
CommercialCommercial
AnalysisAnalysis
Strategic
Planning
StrategicStrategic
PlanningPlanning
FinancialServicesFinancialFinancial
ServicesServices
MARKET AND
COMPETITION
INDUSTRY AND
TECHNOLOGY
TechnologyEvaluationsTechnologyTechnologyEvaluationsEvaluations
CommercialAnalysis
CommercialCommercial
AnalysisAnalysis
Strategic
Planning
StrategicStrategic
PlanningPlanning
FinancialServicesFinancialFinancial
ServicesServices
MARKET AND
COMPETITION
INDUSTRY AND
TECHNOLOGY
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The Chemicals consulting group was largely formed throughthe acquisit ion of Chem Systems in 2001
Chem Systems established and recognized:
More than 40 years of service
Capabilities:
General management consulting capabilities augmented by deep industry
content knowledge and expertise
Broad services over entire spectrum of chemical and related industries
Highly experienced personnel
Combination with Nexant strengthens our service offerings:
Complete coverage of the supply chain
Commitment to web-delivered products and services
Strong, complementary traditions
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Nexants Petroleum and Chemicals services span upstreamdown through polymers and specialties
UPSTREAMOIL & GAS
Nexant
Nexant
ChemSystems
DOWNSTREAM OIL PETROCHEMICALS POLYMERS SPECIALTIES
Before 2001
After 2001
Energy Technology and Management
Energy & Chemicals Consult ing
Energy Solutions (Software)
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We are positioned to support clients globally, with over 150professionals worldwide
Main OfficesProject Offices
Representative Offices
San Francisco
White Plains, NY
Tokyo
Washington
London
Bangkok
Houston
Buenos Aires
Singapore
Seoul
Delhi
Duesseldorf
Shanghai
Beijing
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North American Natural GasNorth American Natural Gas
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Three categories of unconventional gas are being exploited shale and tight gas, and coal bed methane gas hydrates arein the R&D stage
Shale Gas
Gas produced from matrices and natural fractures of extremely low permeability
shale formations that are frequently both source rock and reservoir trap
Tight Gas Gas produced from very low permeability sandstone and limestone formations where
it was trapped after migrating from the source rock
Coal Bed Methane
Gas produced from coal seams where it is stored as adsorbed gas and dissolved inwater that is found in the natural fractures of the seams
A fourth category is still in the R&D stage:
Gas Hydrates
Gas trapped in solid ice-like crystals of carbon dioxide and methane that can trap 164
volumes of methane per volume of solid hydrate
The clathrate crystals form in the pore spaces of sandstone sediments, creating
seals that can trap additional volumes of migrating gas in underlying free gas zones
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North Americas shale gas plays cover a broad geography
Principal shale gas plays
are located throughout
most of North America and
hold very large gas
resources
U.S. plays: GIIP = 522
982 TCF
Canada plays: GIIP > 1250
TCF
Shale gas production in
North America is dominated
by the United States, with
approximately 95% of the
combined total gasproduction
U.S. plays : ~ 8.0 BCFD
Canada plays: ~ 0.4 BCFD
North America Shale Gas Reserves
Source: Canadian Discovery GIIP = Gas Initially In Place
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U.S. conventional and unconventional gas plays have a highdegree of overlap
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The U.S. Energy Information Administration (EIA) 2010 Outlookreflects the importance of shale gas to future U.S. gas supply
In this scenario, the EIA
includes Tight Gas as a
conventional gas supply source
The indigenous gas supplycontinues to be stable in the
long term
Unconventional gas production,
which includes Shale Gas andCBM, will reach 208 BCM (7.4
TCF) in 2030, offsetting the
decline in conventional gas and
reducing gas imports
At the end of the forecastperiod, approximately 33% of
U.S. gas supply will come from
unconventional gas sources
U.S. Gas Supply EIA 2010 Outlook(Billion Cubic Meters)
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Nexant forecasts U.S. shale gas production will reach 7.5 TCF
The Barnett play will reach a peak
production plateau of 2.2 TCF in the
2015
The Marcellus, Fayetteville, and
Haynesville plays will be the main
growth areas from 2015 to 2025
The Marcellus and Rocky Mountain
plays will be the main growth areas
from 2025 to 2030
Several plays, not shown, will
produce over the forecast period;
however, these areas either have
limited reserves or will be constrained
by low gas price
The discovery of more attractive
plays will displace or defer the
expansion of the higher cost areas of
existing plays
U.S. Shale Gas Production Forecast by Play(TCF)
0
1
2
3
4
5
6
7
8
2007 2008 2009 2015 2020 2025 2030
Barrett Haynesville Marcellus Utica
Atrim Fayeteville Woodford Barnett-Woodford
Hilliard-Baxter Lewis-Mancos Others
G
as
Production-
TCF
XLS: C:\Documents and Sett ings\jservello\ My Documents\J une 2008\Linde\ Draft Report\ May 5 2010\US
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Gas production from Canada shale gas plays reaches 2.6 TCF
Commercial shale gas production is
just commencing in Canada, and
there is little experience to draw upon
except through analogy with U.S.plays and extensive Canadian tight
gas operations
Large shale plays have been
identified with characteristics similar
to U.S. plays The Horn River and Montney shale
gas plays in British Colombia will be
the main growth areas, reaching a
combined production of 2.3 TCF (6.3
BCFD) in 2030 The Utica shale gas play in Quebec
will reach 0.3 TCF (0.8 BCFD) in
2030
Canada Shale Gas Production Forecast
0
1
1
2
2
3
3
2007 2008 2009 2015 2020 2025 2030
Horn River Montney Utica
Gas
Productio
n-
TCF
XLS: C:\Document s and Sett ings\j servello\ My Documents\June 2008\Linde\Draft Report \May 12, 2010\US
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Drilling TechnologyDril ling Technology
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Horizontal dril ling and fracture stimulation breakthroughs havemade shale gas exploitation economically viable
As shale gas reservoirs are extensive
in the lateral dimension, horizontal
drilling and fracture stimulation ofwells that intersect the reservoirs
parallel to the bedding plane exposes
more reservoir to the wellbore
Traditional directional drilling takes
some 2,000 feet to bend tohorizontal, while modern technology
can make a 90 degree turn from in a
few feet
The lateral lengths can extend over
thousands of feet, increasing thedrainage radius of the wells and
reducing the number of wells required
Horizontal Drilling Technology
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Multi lateral wells increase the production rates of individualwells by contacting even more of the reservoir
Multilateral configurations range
from two wellbore branches to anarray of branches in horizontal
fan arrangement (pinnate)
Through the application of
multilateral drilling technology,the wells can effectively drain
segments of the reservoirs that
would otherwise require
numerous additional wells, thus
mitigating the environmentalimpact and footprint
Multilateral Drill ing
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Fracture stimulations are widely used in the industry toimprove the production performance of oil & gas wells
Modern technology has permitted
the application of massive
fractures required for tight gasand shale gas development
Two properties increase the
ability of formations to fracture:
Presence of hard minerals like
silica that crack like glass
Internal pore pressure that creates
or helps to propagate fractures
Fracture fluids are the fluids used
to fracture the formation and totransport proppants that will keep
the fractures open to gas flow
Fracture Stimulation Treatments
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Some new developments in shale gas fracturing technologyare promising
Simo fracs: Two or more adjacent wells are fractured simultaneously toexpose the formation to more pressure, creating a more extensive network of
fractures
Staged fracs: The shale formation is fracced in discreet sequential intervals,allowing the operators to adjust the fracture design according to responses
Numerical simulation: Models that predict fractures propagation, allowingsufficient time to engineer the fracture program to achieve the desired results
Digital applications: Monitoring in real time the hydraulic fracture propagationby employing micro-seismic arrays to ensure that the fractures achieve the
designed length and do not extend into adjacent strata
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North American Natural Gas LiquidsNorth American Natural Gas Liquids
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Nexants oil price scenarios in constant dollars are: High $110/bbl Medium $70 /bbl Low $45 /bbl. Oil settled in at anapproximate average of $62 /bbl for 2009
Brent Crud e
0
20
40
60
80
100
120
140
160
180
1980 1990 2000 2010 2020 2030
$/bbl
History Medium High Low
Spot Brent FOB Sullom Voe oil prices averaged US$77/bbl
in Q1 2010 and US$81/bbl in Q2 2010
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Due to growing supplies of unconventional sources, US naturalgas prices have fallen below crude oil equivalent
U.S. Natural Gas
0
2
46
8
10
1214
16
18
20
1990 2000 2010 2020 2030
H
enryHub$/mmbtu
History Medium
High Low
Crude Oil Equivalent (Medium)
USGC natural gas spot prices averaged US$5.1/MMBtu in
Q1 2010 and US$4.1/MMBtu in Q2 2010
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This has resulted in a strong incentive to extract ethane from cheap natural gas
0
2
4
6
8
10
12
14
2005 2006 2007 2008 2009 2010 YTD*
Natural Gas Ethane
plus higher gas production has boosted U.S. ethane production
U. S. Ethane and Natural Gas PricingUS $ per MMBtu
*Prices are average January-August 2010
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Ethane has steadily increased as the feedstock of choice forethylene, displacing C5+ liquids
0
10
20
30
40
50
60
70
2005 2006 2007 2008 2009
%
oftotalfeedstock
usage
Ethane Propane C5+
NPRA Petrochemical Production Survey data
U.S. Feedstocks for Ethylene
North American
ethylene crackers are
going Light driven bycheap feedstock
availability
75 % of all U.S. based
crackers are now lightfeedstock capable
Light means lighter
feedstocks such as
ethane, propane, and
E/P mixes
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Reduced prices have resulted in improved ethane and propanederived ethylene margins relative to naphtha
restoring some degree of cost advantage to the USGC
Ethylene Variable Cost Marg in
-150
-100
-50
0
50
100
150
1990 1993 1996 1999 2002 2005 2008 2011
$/ton
Ethane Propane Standard Naphtha
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PE and PP OutlookPE and PP Outlook
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Global economic growth was negative for the first time in overforty years in 2009. However, Nexant forecasts a return to moretraditional growth levels; no double dip is foreseen
GDP History and Outlook
-10%
-5%
0%
5%
10%
15%
20%
1980 1990 2000 2010 2020 2030
World North America Western Europe China Japan
2010 Data is estimated
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Nexants outlook calls for a margin trough in 2010-2012followed by profitability recovery
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Significant changes are anticipated in global polyethylene nettrade
-15000
-10000
-5000
0
5000
10000
15000
20000
NorthAme
rica
SouthAme
rica
WesternEurope
Central/Eas
tern
Europe
MiddleEast
Africa
Ja
pan
Asia
2000 2005 2010 2015 2020 2025
NetTrade(thousandtons)
POPS2009_ER_FR_Sec_1
The Middle East has
become the major exporting
region of PE. By 2015, the
region is set to have net
exports of over 11 milliontons/year, rising to over 16million tons/year by 2025
In contrast, Asia Pacific
under the same scenario is
set to be importing over 11
million tons/year by 2025
Western Europe will see
net PE imports rise to just
under 3 million tons by2025
North America, currentlywith a significant export
position is also forecast to
move to become a net
importer by 2015
PE NET TRADE 2000-2025(Thousand tons per year)
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Changes are also forecast in global polypropylene net trade
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
NorthAmerica
SouthAmerica
WesternEurope
Central/Eastern
Europe
MiddleEast
Africa
Japan
Asia
2000 2005 2010 2015 2020 2025
NetTrad
e(thousandtons)
POPS2009_ER_FR_Sec_1
The Middle East
has become the major
exporting region of PE
in the world
North America and
Western Europe will
move to net import
positions as older units
are closed anddemand recovers
As refinery
investment grows in
South America, the
region is alsoexpected to grow its
polypropylene net
trade position
PP NET TRADE 2000-2025(Thousand tons per year)
Li ht N th A i ki f d t k ill h l
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Lighter North American cracking feedstocks will have longterm implications on the polyolefins industry and even otherpolymers and petrochemicals
Polyethylene
Cost advantage should result in increased production, forestalling the need for
imports
Polypropylene
Lower cracker by-product production should result in reduced propylene supplies
resulting in somewhat higher propylene and PP pricing
Polystyrene
Volumes suffered in the past decade, partly due to less expensive polypropylene.
Rising polypropylene prices should stimulate polystyrene demand
Butadiene Derivatives
Lighter feedstocks result in reduced supplies and higher pricing