Global Propylene & Derivatives SummitHouston 2014

Mathew GeorgeIndian Oil Corporation Ltd

Americas Dominate Global Energy Supply Growth

Source: BP Energy Review

US Petchem Feedstock Exports

Source:Platts

US Petchem Feed Stock Prices

Source:Platts

Ethane Cracking & Co-Product Challenge

•Lightening of cracker feedstocksreduces availability of co-products;Ethane produces almost only ethylene!

•Tightness in propylene and butadienealready being felt.

•On purpose routes crucial to meetdemand!

•Pricing of co-products could shift fromby-product pricing towards alternative,on-purpose processes

Source:ICIS

US Propane Demand & Supply•8 projects announced in the US; total C3 capacity of over 3m tons• Low propane prices plus prospects of increased availability• China too building PDH plants – 17 projects in the pipeline, 11 already confirmed!

Source:ICIS

North American PDH Projects(on purpose propylene from propane)

Company Capacity (KTA)

Location Start Up

Enterprise Products 750 Texas Q3 2015

Ascend Performance Materials 1000 + Alvin, Texas Q4 2015

Dow Chemical 750 Freeport, Texas 2015

Williams 500 Alberta, Canada 2016

Formosa Plastics 658 Point Comfort, Texas 2016

Dow Chemical NA NA 2018

Enterprise Products NA Texas NA

Petrologistics NA Houston NA

Source:ICIS

US Propylene could become cheap again

Propylene is going through some long-term gyrations in the US. As recently as the1990s, the US had so much excess propylene that consultancies such as ProbeEconomics called the country the “OPEC of propylene”.

Polymer grade propylene was selling at more than a 20% discount to ethyleneand polypropylene (PP) was promoted as a way of getting rid of excess propylene

That has changed and could change again.

The excess propylene was a by-product of producing all the gasoline this countrywas demanding.

But in the last 20 years, things changed: US gasoline demand growth slowed almost to a halt The Environmental Protection Agency (EPA) started requiring that

renewable, non-refinery fuels make up part of the gasoline pool More and more ethylene was made with light, gas-liquid feedstocks that

produce little propylene by-product Propylene prices shot up. Polymer grade propylene was selling for as much as

40% more than ethylene, which hurt US propylene derivatives producers andexposed PP to strong competition from polyethylene(PE) and other materials.

The propylene market could change again thanks to propanedehydrogenation (PDH) economics.

PDH economics can put a ceiling on propylene prices.

If the propylene price exceeds reinvestment levels, more PDH plants will bebuilt, and the propylene price will fall back again.

It will take a few years, because PDH plants are being delayed by highconstruction costs and the scarcity of resources – Petrologistics and Williamshave both announced delays.

The big shale gas push has made it hard to find engineers, constructionworkers and equipment to build petrochemical plants right now.

PDH Economics – Harbinger of Change?

The PDH-determined price ceiling will not be all that high because the UShas shale-advantaged propane.

There has been a lot of talk about rising propane exports and how that isincreasing the propylene price. That is certainly happening, but US propane,particularly in stranded areas should be significantly advantaged for years tocome.

PDH technology is attractive. According to Probe estimates, PDH is profitableright now and could do well on much lower propylene prices.

The only current US PDH operator, Petrologistics, for now enjoys high grossmargins – exceptionally high for a commodity chemical producer andequivalent to margins realised by value-added chemical companies such asDuPont.

PDH Economics – Harbinger of Change?

Ethylene Dynamics

•Ethylene prices should stay up because there still is a significant amountof naphtha, condensate or gasoil being cracked in the US, even as virtually all UScrackers that were once designed to run 100% naphtha or gasoil have been convertedover the last decade to use a significant amount of natural gas liquids (NGLs).

•For instance, the Chevron Phillips Chemical plant at Cedar Bayou, Texas, wasdesigned for naphtha or gasoil but is now understood to run purely on ethane andpropane.

•Many other crackers have converted but still reportedly run on about 5% naphtha.This includes Shell at Norco, Louisiana, and Dow Chemical at multiple locations.

•Some crackers are running much more naphtha, gasoil or condensate than that,because they are committed to supplying cracker byproducts within their owncompanies or to customers on long-term contract. It is believed that the ExxonMobiland Formosa crackers fall into this category.

Ethylene Dynamics•Basic economics suggests that, if these liquids crackers are to keep operating, theyhave to receive prices for ethylene and co-products sufficient to at least cover theircash costs.

•So, on which products or co-products will crackers raise prices in order to bringrevenue up to cash cost levels? Butadiene (BD) does not amount to much, and pygasprices are already set by gasoline values.

•That leaves ethylene and propylene, but propylene prices should remain anchoredby PDH economics.

•That leaves ethylene.

•Liquids crackers have to make their extra money on ethylene. This may be whyethylene prices are elevated today and may remain so in the immediate future.

•So what does that do to the relationship of propylene to ethylene prices? Withethylene prices being elevated in this manner and with propylene prices headeddown to PDH ceiling levels, we can expect propylene prices to be less than ethyleneprices once again.

•Forecasts with three energy-economic scenarios:•Path A: Slow, steady economic growth•Path B: Higher growth interrupted by a Middle-East-based oil price shock. Growth resumes, but with moreinflation•Path C: Another recession followed by slow growth, and lower oil prices•PDH projections in the Path A scenario. The red line gives the variable cost of producing pound of propylenein the plant, and the green line gives the “reinvestment” propylene price that would induce someone to build anew plant. The blue line gives the market price of polymer grade propylene, which is currently way higher thanreinvestment pricing and is shown to come down to reinvestment pricing or below.

•In Path B, with its high oil prices, propylene prices also come down to PDH reinvestment levels.•Only in Path C, with its low oil prices, does PDH lose its profitability. Prices drop down close to variable costs,which means that no more PDH plants are built and existing ones are eventually be scrapped.

Source:Probe/ICIS

•PROPYLENE VERSUS ETHYLENEFigure shows the effect of the three scenarios on the ratio of propylene to ethylene prices. •As the figure shows, it is expected that the ratio would return to former levels. •If this happens, it will give a big boost to propylene derivatives in the inter-material competitive battle and help with the budding US manufacturing resurgence.•Companies such as Brazil’s Braskem that purchased propylene derivative businesses in the US will become a lot happier about their situation.

Source:Probe/ICIS

China On Purpose Propylene ProjectsCompany Capacity

(KTA)Process Location Start

Up

Tianjin Bohai Chemical 600 CB&I Lummus, Catofin technology

Tianjin Sep 2013

Ningbo Haiyue New Material

Co. Limited

600 CB&I Lummus, Catofin technology

Ningbo, Zhejiang Q2 2014

Zhejiang Satellite

Petrochemical Co.

450 UOP Process Pnghu, Zhejiang Q2 2014

Shaoxing San Yuan

Petrochemical Company

450 UOP Process Shaoxing, Zhejiang

Q2 2014

Zhangjiagang Yangzijiang

Petrochemical

600 UOP Process Zhangjiagang,

Jiangsu

Q2 2014

Yantai Wanhua Polyurethanes 750 UOP Process Yantai, Shandong Q2 2015

Fujian Meide 660 UOP Process Fuzhou, Fujian Q4 2015

Haiwei Group 500 NA Hengshui, Hebei 2015

Jiangsu Haili Chemical Co 600 NA Dafeng, Jiangsu 2016

Source:Platts

China On Purpose Propylene Projects

Company Capacity (KTA)

Process Location Start Up

Zhangjiagang Yangzijiang

Petrochemical

600 NA Zhangjiagang, Jiangsu

2016

Zhejiang Satellite

Petrochemical Co.

600 NA Pinghu, Zhejiang 2017

Total (11 Projects) 6410

Source:Platts

Asia On Purpose Propylene Projects

Company Capacity (KTA)

Process Location Start Up

Hyundai Oil Bank 300 RFCC(PropyleneMode)

Daesan, South Korea

2011

CPC 450 RFCC Dalin , Taiwan Nov 2012

Pertamina 179 ROPP Balongan, Indonesia

Jan 2013

GS Caltex 250 RFCC Yeosu, South Korea

Mar 2013

Hyosung 280 PDH Ulsan, South

Korea

Existing

Hyosung 300 PDH Ulsan, South

Korea

Q2 2015

SK Gas 600 PDH, LummusCatofin

Ulsan, South

Korea

2016

Source:ICIS

On Purpose Propylene - Outlook At present, propylene demand exceeds supply, as evidenced by

the run-up in prices.

U.S. propylene prices have been lower than ethylene prices forthe past 20 years, but the propylene shortage led to an increasein the ratio of propylene to ethylene prices, from 0.95 in 2005 to1.5 in 2013.

The combination of low-cost propane from shale gas productionand high-priced propylene created a significant advantage foron-purpose production of propylene through the propanedehydrogenation (PDH) process.

On Purpose Propylene - Outlook PDH is in the middle of the supply curve relative to other technologies.

With current prices, naphtha cracking and the on-purpose metathesisprocess, which cannot benefit from the propane-to-propylene pricespread, rank as the most expensive technologies.

The current spread and the competitive cost position of PDH on thesupply curve have induced Dow Chemical, Formosa Plastics, EnterpriseProducts, Williams Companies, and Ascend Performance Materials toannounce new PDH plants in North America.

Looking forward, the price spread between propylene and ethylene isunlikely to be sustained.

Asia Propylene - Outlook The conventional naphtha cracking and fluid catalytic cracking (FCC)

processes are no longer sufficient to satisfy the increasing demand for propylene due to the increased supply of ethylene and slow growth of the gasoline market.

The supply of propylene is expected to show a shortage of about 10 million tons in 2016 in Asia alone.

Over 8 million tons of On purpose propylene projects have been announced in Asia already

Expected that another 1 million will be announced

Remaining shortage is expected to be met by RFCC run in Propylene mode and ROPP processes

Exports of US Propylene to Asia - Constraints

Where are the ships?

Orders for new builds not matching demand for gas transport requirements

Port Facilities

HSE Issues

Will the lower cost of US Propylene be enough to pay the additional supply chain cost?

More Likely ScenarioExports of Polypropylene from US to Asia

Positive Balance of ISO containers in US Ports

Repositioning freights towards Asia especially China – Cheap freight rates

Asia may move towards production of other C3 chain materials like Propylene Oxide, Cumene, Acrylics and import PolyPropylene from US