MEG: Will Shale Gas &

Coal Based Projects Solve

the Supply Crunch

Ashish Pujari, Sr. Director, Aromatics & Fibers

August 5, 2014

Mumbai, India

• Supply – Demand Forecasts

• Olefins & Shale Gas

• American Construction Boom

• Coal & China

• Conclusions

Agenda

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Global Net Annual Capacity Change Global Demand Change

Global Net Changes – Capacity & Demand

Million Metric Tons

Saudi Operations issues are expected to

reduce available capacity

• Multiple extended shutdowns in

2014 -2015 for reactor replacement

• Rumored to be running at reduced

rates at 4-5 units, very high rates at

the rest to fill the gap

• They have managed the situation

effectively

We assume 400 Kta lost production each

year in 2014 - 2015. Increased risk of

unplanned shutdowns should not be

ignored

Global Supply Chain May Impact Supply

Significant uncertainty over Chinese

coal-based capacity

• Six units using Coal to MEG (CTM)

oxalate-ester technology

• Over 1 million MT capacity on-line,

and at least 2 million MT more in

the works

• Quality getting better, but still not

accepted by polyester fiber

• Unproven logistics capability –

can they deliver on-spec, on time?

We assume technology will be fully

successful with high operating rates by

2016

Nameplate Capacity Can Mislead

0

20

40

60

80

100

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Demand Total Capacity Operating Rate

MEG, Million Metric Tons Operating Rate, Percent

89%

Result: Stressful MEG Operating Rates!

• Supply – Demand Forecasts

• Olefins & Shale Gas

• American Construction Boom

• Coal & China

• Conclusions

Agenda

-12.0

-6.0

0.0

6.0

12.0

90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Total Asia Others Middle East West Europe North America Annual Demand Increase

Million Metric Tons

Ethylene Capacity Additions

Chemical Projects Leveraging Local Natural

Resources Gas/Coal/Oil

Requires

Infrastructure

and policy

definition

Needs

infrastructure

and

government

support Focus is

primarily

LNG

LPG/MTO

investigations early

but promising

Active Projects Reserve potential

Numerous

shale and LPG

based projects.

Potential for

MTO

Continued

gas, liquid &

LPG based

investing

Numerous

CTO / MTO

projects

underway

Polyethylene 57%

EO/EG 12%

EDC 14%

Others 17%

2013 N. American Ethylene Demand = 31.1 Million Metric Tons

EO/EG Share of Ethylene Demand in North

America

Announced Polyethylene Requirement

65%

EOEG 1%

Other 22%

Undeclared 12%

Total New North America Ethylene Capacity = 12.4 Million Metric Tons

Great Expectations – The Time Is Right For

EOEG

0

200

400

600

800

1,000

1,200

1,400

C2 Integrated - Naphtha C2: Integrated - Ethane C2: Integrated - Ethane

MEG, US Dollars Per Metric Ton

2013 Asia Spot Price

Asia North America Middle East

The Shale Boom Promises Much for NAM

Cash Costs

Cash Costs

Cash Costs

• Huntsman – Port Neches, TX

− Re-purposing a PD Glycols reactor

− 160 kta MEG + DEG in 2015 (no HPEO)

• Shell – Geismar, LA; Qatar

− Not official; probable 200/275 kta EO/MEG 2017 at Geismar

− Announced 2 X 700kta MEG (OMEGA) Qatar 2018 – 2019

− Converting EGS Singapore to all-HPEO

• Ineos - Battleground, TX -Rumors say MEG only, HPEO “maybe later”

-Delayed from 2015 original forecast; 2017 possible

• Sasol – Lake Charles, LA

− Back-integration for ethoxylates; Engineering underway

− Estimate 100kta HPEO, 300kta MEG 2018

Dramatis Personae – Who Shall Build?

• Formosa Plastics Corp – TX or LA?

−Have announced 2 new crackers, nothing official on EOEG

−Low cost MEG for their global polyester business

• MEGlobal (Dow & PIC) – Freeport or Kuwait?

−MEG is their first name

−Need new capacity to retain strategic relevance

• Axiall/Lotte JV – Louisiana 2018?

−Recent JV announcement, exploratory effort

−Not obvious partnership, but some synergies

• Marley’s Ghost?

−Possible surprise visitor(s)

Dramatis Personae – Who Might Build?

• Supply – Demand Forecasts

• Olefins & Shale Gas

• American Construction Boom

• Coal & China

• Conclusions

Agenda

The Wave Keeps Building Change in outlook since last year

0

5

10

15

20

25

2013 2015 2017 2019 2021 2023

Mill

ion

met

ric

ton

s

Capacity Addition

2013

2014

39% increase

0 5 10 15

Methanol

Ethylene

Ammonia

PE

Propylene

EDC

PVC

Million metric tons

Top Capacity Additions by 2020

2013 Forecast

2014 Forecast

The Wave Crests in 2017 but…

• New players continue to enter the water

• Others remain on shore waiting to see how good the

surf is

• Feedstock availability continues to expand keeping

pricing attractive

• This wave has the potential to keep building

Labor Shortage Pushing Costs UP

• Skilled and unskilled

labor represent 35% of

project cost

• Add engineering and

project management

total labor related costs

total 46%

• Based on this it is easy

to see why this is a

major concern

9%

19%

16%

8% 11%

27%

10%

TYPICAL PROJECT COST BREAKDOWN

Eng & PM Skilled Labor Un Skilled Labor

Bulks & Civil Steel & Pipe Equipment

Elec & Inst.

What Companies Are Doing

• Current projects will

require 50,000 skilled

labors in 2015

• Is there enough time

for training and co-ops

to help?

• Project timing critical

0 20 40 60 80

Provide co-op programs

Train specific competencies

Retain key talent

Increase college recruiting

Using nontraditional labor pools

Poach from others

Retain retiring employees

Percent

Skilled Labor is a Major Concern

• Key concerns

– Project foremen

– Welders

– Pipefitters

– Electricians

• Rates are rising

• Companies are being

proactive

• Higher rates encourage

relocations 0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

Ind

ex 2

00

5 =

1.0

USGC Skilled Labor Index Welders Pipefitters Electricians

Unskilled Labor Issues

• Rates have not

increased significantly

• Availability is higher

• Opportunities to

develop skills

encourage loyalty

0.9

1.0

1.1

1.2

1.3

1.4

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

Ind

ex 2

00

5 =

1.0

US Labor Cost

Unskilled Skilled

EPC’s Backlogs* Have Significant Increased

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

0

10

20

30

40

50

60

70

80

90

100

20

00

20

01

20

02

20

03

20

03

20

04

20

05

20

06

20

06

20

07

20

08

20

09

20

09

20

10

20

11

20

12

20

12

20

13

20

14

Year

s R

eve

nu

e

$ B

illio

n

$Billion Years

* Selected public companies

Equipment Lead Times

• Some increases in lead

times evident

• Many long lead time items

already ordered

• Some items could pose

issues

• LNG project equipment

has not been ordered

0 25 50 75

Multistage Pumps

Compressors

Atmospheric Vessels

Pressure Vessels

Heat Exchangers

Furnaces

Incinerators

Gas Fired Turbines

Transformers

Switchgear

Motor Control Centers

Control Valves

Lead Times (weeks)

2013Q4 2013Q3

Project Cost Escalation Outlook

50

100

150

200

250

300

2000 2005 2010 2015 2020

Ind

ex 2

00

0 =

10

0

North American Index

50

100

150

200

250

300

350

2000 2005 2010 2015 2020

Ind

ex 2

00

0 =

10

0

Market Index

Labor

Equipment

Steel

EPM

Permitting

• Many projects are

awaiting permits –

approvals taking up to 16

months

• Texas GHG permit

situation adds new

unknown.

• Environmental groups

impacting process

Longer Project Cycles

• The wave will continue to build

– New project will be added

• Project delays can be anticipated

– Permitting is biggest risk here

• Project costs will increase from current levels

– Labor is the main risk factor

– Average project cost increases generally below levels

anticipated by many

• Modularization can help mitigate delays and

labor risks

• Supply – Demand Forecasts

• Olefins & Shale Gas

• American Construction Boom

• Coal & China

• Conclusions

Agenda

Non Conventional Capacity Share Increasing

Rapidly in China

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Conventional Selective EO Hydration

METEOR (Dow Trademark) OMEGA (Shell Trademark)

Bio Ethanol – Ethylene – EO Glycerine/Sorbitol Hydrogenolysis

Coal-Based Oxalate Ester Methanol - Ethylene - EO

Coal to MEG Process Flow

Coupling Reactor

Regeneration

Reactor

Purified Syngas

2CO 2NO

2RONO

½ O2

Make-up ROH

Make-up NO

4H2

(CH2OH)2

(MEG)

2ROH

H2O

(COOR)2

Hydrogenation

Reactor

GEM Chemical

+Tongliao,150 KTA

Startup Dec 2009

+Tongliao 2nd Phase: 2015-2016

400 KTA

Henan Yongjin Chemical

Luoyang, 200 KTA

Sinopec Hubei Fertilizer

200 KTA

Startup May 2014

Shanxi Xiangkuang Coal Chemical

Signed EPC, 200 KTA

Startup 2015

Hualu Henshen Chemical

Pilot Plant, 50 KTA

Aug. 2012

Henan Yongjin Chemical

Xingxiang, 200 KTA

Startup July, 2012

Henan Yongjin Chemical

Puyang, 200 KTA

Startup Aug. 2012

Henan Yongjin Chemical

Anyang,200 KTA

Startup Jan. 2013

Inner Mongolia Xinhang Energy

Signed EPC in 2012, 200 KTA

Startup 2015

Project Locations and Status

Xinjiang Tianye Chemical

Pilot Plant, 50 KTA

Jan 2013

Qianxi Coal Chemical

Signed EPC, 300 KTA

Startup 2015

GEM Tongliao

On-stream Project

High-probability Project

Medium/Low-probability Project

Coal mining Area

Main Polycondensate Base

• FRISM (Fujian Research Institute on the Structure of Matters, Chinese Academy of Sciences)

• SRIPT (Shanghai Research Institute of Petrochemical Technology, Sinopec)

• Ube / Highchem • Wuhuan Engineering

Major Coal to MEG Technologies

• Ube is a pioneer of syngas to MEG process. Ube / Highchem’s new technology claims to be highly competitive.

• FRISM, SRIPT (Sinopec), and Wuhuan provide competing indigenous technologies.

• MEG selectivity in hydrogenation reaction is the key to economics and product quality.

• Some side reaction products such as 1,2 butanediol are difficult to separate.

• FRISM process continues to experience product quality issues in the first four plants.

• However, the issues can possibly be overcome with better control of reaction conditions, improved catalyst with better MEG selectivity, and better purification technology.

Status of Coal to MEG Technologies

Assumption:

Process

Technologies

− Oxalate Ester

Route - Fujian

Research Institute

of Structured

Matters

Plant

− Integrated from

coal to MEG

− Modern design with

200 KTA MEG

Feedstock

− Thermal Coal

(5,000 kcal/kg) at

local market price

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000 RMB per Metric Ton

Inner Mongolia Xinjiang Henan

Margin FD Cost TFC VC (Exclude FD)

Coal to MEG Cash Cost and Margin – Base Case

Coal to MEG Cash Cost Comparison

Cumulative MEG Capacity (Million Tons)

2012 EOEG Industry Cash Costs

Inner Mongolia

WEP Avg.

NEA Avg.

NAM Avg.

MDE Avg.

0

200

400

600

800

1000

0 5 10 15 20 25

Dollars per Metric Ton

Total Cash Cost

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile

Xinjiang

Henan

• Supply – Demand Forecasts

• Olefins & Shale Gas

• American Construction Boom

• Coal & China

• Conclusions

Agenda

Non Conventional Supplies Essential to Avoid

Shortage

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

North America West Europe Middle East

Indian Subcontinent Northeast Asia Southeast Asia

Demand

Change in Capacity, Million Metric Tons

Next wave of new EO-EG capacity online

2015-2018

Next committed investments:

• Huntsman 115/160 Kta EO/MEG Texas

2015

• Shell 1.5 million tons MEG Qatar, 2017-

2018

• Sadara HPEO & Derivatives, 2016

• Reliance 550/800 kta EO/ MEG India 2016

USA Outlook - three new units possible by

2018/19

China – high MEG prices will encourage

continued efforts to prove Chinese Oxalate

Ester technology.

It Is A Far, Far Better Thing…

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