[email protected], MBA, M.Eng
Comparative Petrochemical Plant Economics in North America
CERI 2015 Petrochemical Conference
June 7-9, 2015
Introduction
Project funded by
Original data Dec 2012 Key variables updated May 2015
Agenda1. Motivation2. Model Approach3. Results4. Impacts5. Competitive Actions6. Summary
Motivation
Provide accurate, defensible and repeatable information and representative cash flows to demonstrate the various pros and cons of petrochemical plant investment in Alberta?
1
Capital Investment In Canada
$-
$50
$100
$150
$200
$250
$300
$350
$400
$450
Billi
ons
Rest of Canada Canada Housing (Ex-Alberta Alberta Oil & Gas Alberta
Perception Vs RealityPerception is that Alberta is not competitive compared to GC due to high capital cost Oil Sands over runs 61% to 107% (These projects are still profitable at these
escalated CAPEX amounts) Theory predicts oil sands over runs: mining, schedule driven, new technology
Not true for Alberta Petrochemical Projects Dow Chemical LHC-1 Project 15% under budget Historical data for Alberta projects indicates petrochemical projects are typically within
2% to 10% over sanctioned cost
Project Planning prior to
Sanction 60-85%
Ownership
New Technology
Complexity
Regulatory Regimes
Escalation Feed Stock type
Model Approach
Is Alberta competitive?
2
Approach
Life cycle cost of petrochemical plant (methanol)
Apples to apples comparison Locations: AIH, USGC, RMWB Verifiable & objective Economic model for investors
Why Methanol?
Globally traded Many uses:
Fuel/biofuel/diluent Feedstock Plastics/fibres
World-class sized plant Proven technology Reference plants
Why Methanol?
Plant Description
Methanol Plant ~ US$1B 4-year build Capacity 300 MMg/year
Natural gas feedstock Clean and level site
2CH4 + 3H2O => 2CH3OH + 2H2 + H2O
Assumptions
1. Revenue: Tide-water world market prices1. US$1.66/gal2. Incremental supply has no impact on price3. Unit train rail distribution to Vancouver
2. Economic model ~100 variables1. Real model 2. $0.80 Cdn/USA3. WACC 8.9%4. D/E 1.635. Terminal values profit in perpetuity
3. Class V Capital Cost4. Market price natural gas feedstock5. Standard Government tax treatment
Assumptions
Conservative constant real price of $1.66 / gal used in model equivalent to $550/MT
Capital Cost EstimateInside Battery Limits (ISBL)
USGC Standard
Factor
USGC US$ MM
AIH US$ MM
RMWB US$ MM Notes
Owner's Costs
7% $29 $29 $29 Independent of location (same owner)
Equipment 20% $81 $82 $83 Equipment purchased globally
Materials 19% $77 $78 $79 Materials and bulks sourced globally
Engineering 16% $67 $67 $67 Globally sourced for ISBL (local for OSBL)
Construction 37% $173 $203 $345 Construction is local & stick-built
ISBL Total $427 $459 $602
Total $814 $860 $1,075 OSBL+ISBL+ Working Capital + Other Soft%USGC 100% 106% 133%
Overheated Market Consideration
Hot market Rates go up
and Productivity goes down
Market heat scale=UnemploymentJob Vacancies
Market Heat Productivity Impact
7 = Cold Market, 20% bonus
3 = Neutral (Compass Intl Standard)
1= Hot Market, 25% penalty
Market Heat Productivity ImpactYear Market Heat
USGC AIH
2012 2.4 0.6
2014 1.8 1.1
2015 1.9 1.7
Results
So does Alberta stack up?
Updated 2015 Numbers!!
3
Cumulative NPVGC AIH RMWB
NPV $1,225 $1,589 $1,225
IRR 21.4% 23.3% 18.6%
($1,500)
($1,000)
($500)
$0
$500
$1,000
$1,500
- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
NPV
(US$
MM
)
Execution Year
Net Present Value $US MM
Aberta IndustrialHeartland
Gulf Coast
RMWB
DifferencesNPV Differential $US MM
Gulf Coast versus Alberta Industrial Heart Land
Sensitivity
NPV Top Sensitivities:
1. Cost of Capital2. Natural Gas Cost3. Tax Rates4. Operating Rates5. Winter Productivity
Impacts
What are the key differences?1. Tax2. Product Distribution3. Natural Gas Price4. Construction Labour Costs
4
Notional Project Tax RatesAlberta 25% Stable, balanced-
budget governments
$ 29-66MM annually $312MM NPV
impact
Louisiana 43% Ability to negotiate Massive deficit
governments
1
Distribution Costs
AIH Unit train to tide water $24MM annually $150MM NPV Impact
USCG Free!
2
Natural Gas Price3$0.69 /MMBTU differential $19MM annually$118MM NPV
$-
$2
$4
$6
$8
$10
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025+US
$ /
MM
Btu
YearHenry Hub Nymex (GC) Alberta Plant Gate (AIH) Spread USD/MMBTU
Construction CostsAIH Penalty Versus GCProductivity 12% (Winter Work)
- Winter 35% for 1/3rd of build = 12%Hot Market 3%Remote Factor = 0%Exchange rate = (19%)= 16% construction cost penalty6% Capital cost penalty$44 MM
4
Risk Sensitivities1. WACC higher favours USGC2. Gas price volatility favours AIH3. Falling C$ - favours AIH4. Interest rates higher favours USGC5. Market heat favours AIH
5
Year Market HeatUSGC AIH
2012 2.4 0.6
2014 1.8 1.1
2015 1.9 1.7
Competitive Actions
So what do we do?
5
Competitive Actions
Local consumption of methanol to mitigate shipping price advantage Fuel Diluent Chemical production
Winter construction Modularization
Tailored planning Understanding & adapting to local contracting
conditions and labour supply constraints Political support for value added industries
6. Summary
AIH Lower taxes Feedstock price Feedstock
availability Weak Cdn$
Winter constructionMarket Access
USGC Lower Capital Cost Tidewater
Extreme weatherFeedstock competition
Alberta Is CompetitiveWith USGCAlberta Industrial Heartland: Marginally higher capital cost but higher project profits
Slide Number 1IntroductionAgendaMotivationCapital Investment In CanadaPerception Vs RealityModel ApproachApproachWhy Methanol?Why Methanol?Plant DescriptionAssumptionsAssumptionsCapital Cost EstimateOverheated Market ConsiderationMarket Heat Productivity ImpactMarket Heat Productivity ImpactResultsCumulative NPVDifferencesSensitivityImpactsNotional Project Tax RatesDistribution CostsNatural Gas PriceConstruction CostsRisk SensitivitiesCompetitive ActionsCompetitive Actions6. SummarySlide Number 31