OLEFINS AND METHANOL. 34th IHS World Methanol Conference OCTOBER 2016

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1 OCTOBER 2016 OLEFINS AND METHANOL 34th IHS World Methanol Conference Steve Lewandowski, Vice President - Olefins steve.lewandowski@ihsmarkit.com

2 Agenda On purpose olefins production becomes an important segment of the capacity picture. Ethylene operating rates are high globally so on purpose supply becomes critical to close balance. Less so the case for propylene. Many methanol projects, in China, at different stages of operations, construction, and planning. Little activity in rest of the world on methanol to olefins and derivatives. Coal to olefins/derivative margins in positive territory. Merchant methanol based assets are more challenged on margins. Will olefins move up or methanol prices/margins have to adapt? 2

3 Ethylene The Market

4 Primary Ethylene Production Routes Feed Mix and Co-products key to cracker Metrics Crude Oil Refinery Gas Extraction plant NGL Fractionator Natural Gas Coal Syn Gas Naphtha Gas Oil Ethane Propane Butanes Natural Gasoline MTO CTO Ethylene Unit Fuel Oil MTO/MTP Methane/Hydrogen Ethylene Propylene Crude C4 Butadiene Mixed Butylenes Pygas Benzene Toluene/Xylene Heavy Aromatics C5/C6 Non Aromatics Ethylene Propylene 4

5 Million Metric Tons Global Ethylene Supply Four main production regions. Non-traditional sources on the rise 16-pt World: - IHS Ethylene clustered Production column by Region % 8.0% 6.0% 4.0% 2.0% 0 0.0% N. America S. America CIS & Baltics W. Europe C. Europe SE Asia NE Asia Indian Subc. Middle East Africa Total Capacity Percent from Non Steam Cracker 5

6 Global Ethylene Feed Type (China Break Down) Volumes by type up across the board driven by ethane and other (CTO/MTO) 2016 Global Naphtha 42.6% Ethane 36.3% 2021 Global Naphtha 38.0% Ethane 40.1% Other 6.4% Notes: Production = 146 Million Metric Tons LPG 14.8% Other 8.6% LPG 13.3% Notes: Production = 175 Million Metric Tons Ethylene China by Feed Type, MMTA Naphtha plus Ethane - LPG CTO MTO

7 Million Metric Tons GDP Elasticity Ethylene Demand and Demand Growth Dominated by Polyethylene Ethylene Demand Growth by Derivative PE EO/EG EDC EB Other LAO VAM GDP Elasticity 0.0 7

8 Percent Global Ethylene NAMEPLATE Capacity Operating Rates 2015 peak not seen since early 2000 s, outlook stronger, effective operating rates are high are they sustainable at this level? Global Ethylene Operating Rates Global Op Rate Global Op Rate (Steam Cracker) NEA Op Rate WEP Op Rate 8

9 Ethylene Equivalent Trade Flow West Europe 11, ,563 Northeast Asia 4,924 5,331 17,365 19,628-7,212-9,445 North America 12,269-13, South America -2,583-2,912-3,696 Middle East Others* Southeast Asia *Others: Africa, Indian Sub., CIS & Baltic, Central Europe -7,094-10,013-11,080 9

10 Propylene The Market

11 Key Routes to Produce Propylene Crude Oil LPG, Naphtha, Gas Oil Crude Unit FCC Unit Ethane Refinery Grade Propylene Natural Gas Nat Gas Processing Ethane, Propane, Butane Propane Steam Cracker Propylene Splitter Polymer/ Chemical Grade Propylene Coal Nat Gas Coal-to-Olefins Coal-to-Propylene Methanol-to-Olefins Methanol-to-Propylene Propane Dehydrogenation

12 Million Metric Tons World: PG/CG Propylene Prod. by Feedstock Global Propylene Supply by Technology On-Purpose production needed to enhance supply to meet strong demand By-Product / Co-Product Stm. Crackers FCC Splitters Dehydro Metathesis Methanol to Olefins Coal to Olefins Coal to Propylene HS FCC Others On-Purpose Total Capacity 12

13 Global Propylene Capacity Growth (China Break Down) PDH and CTO lead the On-Purpose build 2016 Global Supply PDH 9% Methanol 1% FCC 33% Coal 3% Other 4% Cracker 50% 2021 Global Supply Coal 6% PDH 8% Methanol 3% FCC 31% Other 4% China Propylene Cracker 7,995 9,609 11,253 FCC 5,559 8,097 8,682 PDH - 3,017 6,550 Methanol 10 1,652 3,465 Coal Methanol 422 2,843 6,780 Metathesis Cracker 48%

14 Million Metric Tons GDP Elasticity Propylene Demand and Demand Growth Dominated by Polypropylene Propylene Demand Growth by Derivative GDP Elasticity 14

15 Propylene Equivalent Trade Flow West Europe 1,489 1,066 1,912 1,032 1,757 3, ,739 Northeast Asia -229 North America 1,605-2,930-2, South America *Others: Africa, Indian Sub., CIS & Baltic, Central Europe Middle East Others* -1,534-2,344-4, Southeast Asia

16 34th Annual World Methanol Conference/ Oct 2016 China and Methanol

17 Million Tons Coal-to-Olefin Doubling of Capacity More projects in the planning stage but many have been shelved. Mongolia Capacity (C2, C3) Planning China Construction Production In Production Under Construction

18 Million Tons Many merchant methanol-based MTO projects But like CTO/CTP, many have been shelved Domestic Import 12 Capacity (C2, C3) Ethylene Propylene Planning Construction Derivatives Production In Production Under Construction

19 Stranded Western Canada Gas to China Options to serve China demand Could be any of a number of gas producers. Ship Methanol Methanol Plant MTO/PO Plant Ship Pellets Methanol Plant MTO/PO plant Stranded gas: Trinidad, Russia, Iran, US, Canada, etc. 19

20 US Dollar Per Metric Ton World Cash Costs US loses some cost advantage but maintains about $400/ton. World Ethylene Cast Cost Comparison U.S. Ethane Northeast Asia Naphtha West Europe Naphtha China CTO China MTO China MTP China CTP China PDH Notes: CTO/MTO : Cash costs based on one ton of total olefin basis (50/50 ethylene/propylene) 20

21 Dollars Per Metric Ton Coal-to-Olefins / Polyolefins Outlook on Margins Positive margins for all of the coal-to-olefins units. Int and Non-Int Margins Int CTO Margins CTO Margins Int CTP Margins CTP Margins 21

22 Dollars Per Metric Ton Merchant Methanol-to-Olefins and Derivatives Outlook on Margins Will these assets run with negative margins? Product slate for ethylene less PE driven more by MEG/vinyls. Propylene slate better aligned with global average Int and Non-Int Margins Int MTO Margins MTO Margins Int MTP Margins MTP Margins 22

23 Million Metric Tons Percent China s Ethylene Self-Sufficiency Approaches 60% China s Million Metric Ethylene Tons Balance Percent, % Domestic Derivative Equivalent Demand Net Equivalent Import Self-sufficiency 23

24 Million Metric Tons Percent China s Propylene Self-Sufficiency above 80% China s Million Propylene Metric Tons Balance Percent, % Domestic Derivative Equivalent Demand Net Equivalent Import Self-sufficiency

25 MTO/CTO Ethylene Derivatives CTO is PE based, MTO more non-pe builds MTO-Ethylene Derivative CTO- Ethylene Derivatives Merchant 20% EDC 4% HDPE 43% EDC 10% Ethylene Oxide 27% HDPE 96%

26 MTO-MTP/CTO-CTP Propylene Derivatives CTO is PP based, MTO aligned with global mix of products. MTO/MTP- Propylene Derivatives Propylene Oxide 3% Merchant 28% CTO/CTP- Propylene Derivatives Polypropylene 63% Acrylonitrile 6% Polypropylene 100%

27 $ Billion IRR Relative Capex / return US Ethylene Producer Investment Scenarios Returns okay for Methanol chemistry, capital outlay is extremely high. Ethane + PDH CTO MTE + PDH Hvy. Nap + PDH GTO Base Capex Base IRR 35% 30% 25% 20% 15% 10% 5% 0% C2= 6 units 20 units 6 units 6 units 20 units 6 MMTA C3= 5.33 units LONG 5.33 units 0.68 units LONG 4 MMTA 2015 IHS, Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent. 27

28 Take Away Global ethylene gets tight and on purpose methanol chemistry will play and an important role. Global propylene will be better supplied and less stress on system to close the balance. Trade trends for contained ethylene and propylene trade are completely opposite for China, ethylene shorter propylene balanced. Margins will be more challenged for methanol plants on merchant methanol purchases. Will methanol drop or olefins move up in price to keep margins in the black? Investment cost for methanol chemistry to supply ethylene/propylene needs should require a risk premium due to the overall level of investment, even with a cash cost advantage.

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