Shale Gas Revolution

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1 Dr. Kuhlmann International Shale Gas Revolution Its Impact on the Chemical Industry and Global Shipping Trends 7 th Chemical & Product Tanker Conference London, March 18 th, 2015

2 Chemical value chain impacts the demand of commodities traded in European short sea Ship type Industry Oil tanker Product tanker Chemical tanker Container ships Mining Refinery Chemicals Consumer Flow stream Natural sources Feed stocks Commodities Plastics (End products) Consumer products Crude oil Natural gas Naphtha Ethane Aromatics Benzene derivatives C2 derivatives Impact PVC (Polyvinylchloride) PC (Polycarbonate) Automotive Electronics Inorganics Synthesi s gas Impact C3 derivatives PS (Polystyrene) Packaging Salts Others PE (Polyethylene) Feed for steam cracking Product stream exemplary list exemplary list exemplary list exemplary list Major impact on commodities Feed stocks and end-products drive demand for short sea chemicals trade volumes Source: BCG analysis 2

3 3

4 3 Crude Oil Production and Shale Gas Impact in US US crude oil production increased 50% since Driven by the tight oil revolution, which currently forecasts a further 9% growth in which led to a significant reduction of US crude imports Imports of lighter crude has been hit hardest, declining 62% (Mbbld) Crude oil production in the US Forecast Crude imports into US Gulf Coast, kbpd -30% 9,0 7,5 6,0 9% , , , , , , , Source: EIA, STEO Dec 2014 Shale & Tight oil Rest of US production Light 2012 Medium 2013 Heavy Notes: LIght >=32 API; Heavy <=24 API; Sweet <0.7%S, Sour >=0.7%S; Imports are for crude processed in PADD 3 (not all crudes entering PADD 3). Updated Apr 2014 with Jan 2014 data Source: EIA, BCG analysis 4

5 5

6 Crude Oil / Shale Gas Price Differential Thank you bcg.com bcgperspectives.com 6

7 Gas / Oil Price Differential Sensitivity Oil / Gas Differential today 50 US$/ llb / 3 US $/ MBTU or 16 Highly attractive gas cracking in US Breakeven cost requires a differential of 7 With Oil price of 50 US$/llb and Gas price of 8 US$/MBTU the US Petrochemical Industry is not completive * Shale Gas production cost incl Cost of capital ~ 6-7 US$/MBTU Source: BCG * American Chemical Council 7

8 Oil Price Outlook and Potential Impacts Market and competitive fundamentals show that price recovery will take time (>12-18 months) Global inventories will keep on building up at a rate of ~0.8 Mbbld during 1H15, as demand is not expected to grow, while the US oil industry already made investments and drilling plans for the coming months Leading OPEC countries do not rush to act on the market in the near term Reduction of unconventional over-investment in US will require sustained low prices Similarly, discipline among free-riding OPEC countries will require time Some OPEC countries require high oil prices for their fiscal balance Slow oil price recovery expected, steady oversupply, supply / demand in balance needed Current cost scenario implies a longer term price of around $/bbl Most relevant OPEC countries require an oil price around 90 $/bbl to balance their fiscal budgets Clean-up of the market => the smaller & least efficient players will disappear At $50/bbl a slowdown of production growth in the coming months and then a sudden "drop" once hedges expire in 5-6 months Oil price will stay in the range of US$/bbl for the next months and go back to 80 US$/bbl (+) after 24 months 8

9 3 Longer term reinvestment economics will drive price back above 80$/bbl longer-term Global currently forecasted production and break-even prices by types of oil and projects , in $/bbl - Brent real oil price, USD/bbl (2013$) 140 Projected cost of supply Arctic Oil Sands Onshore Middle East Offshore Shelf Extra heavy oil Onshore Russia Onshore Rest of World Deepwater Ultra NA Tight deep- Liquids water 2-4 MMBD spare cap Demand forecasted production in Mbbld World oil demand World oil demand + 2 Mbbld spare cap. 1. Projected cost of supply curve represents the breakeven price of production plus a 10% margin 2.Estimated Oil demand range, considering IEA World Energy Outlook, 2013 Source: Rystad Energy, APICORP; IEA 9

10 Impact of Shale gas cracking in WE - Options Shale gas cracking Import of US ethane into WE will primarily replace long term North Sea gas today used in steam cracking Conversion of some Naphtha steam cracker to ethane feedstock, but relatively expensiv Most Naphtha will continue to maximize LPG ( Butane/Propane ) cracking, max 20-40% possible Economical, technical and logistics limitation for conversion Logistics for Ethane import under construction, conversion from Naphtha to ethane cracking under consideration For most inland SC or older smaller units conversion economically challenging Ethane transport and storage Investments too high to adjust the units Ethylene production in WE based on converted ethane cracking capabilities less than 1 Mill tons Yield modification will reduce Propylene (500kta), C4 s (300kta) and Aromatics (100kta) production in WE Conversion only economically attractive with sustainable high differential between Oil and gas price with Source: BCG 10

11 Impact of Shale gas cracking in WE Conclusion Shale Gas based industry in US strongly dependent on Gas/Oil (naphtha) differential Gas will move back to 6-8 $/MTBU in 2017 * with gas supply/demand being balanced in US Oil market will recover in 12-18months return back to 80$/barrel (plus) Gas / Oil differential > 7, leading to attractive shale gas based cracker economics in US US PE exports marginal attractive vs. WE local production, due to high logistics cost With price pressure on PE and Ethylene some smaller SC and PE units shut down unavoidable Identification difficult, selective premepting factors hard to overcome Inland SC mostly deeply integrated to refining and derivative complexes Close links to existing pipeline systems Regional employment issues and unions pressure Subsidies granted 11

12 Impact of Shale gas cracking in WE - Options The shale gas cost will continuously create cost pressure to stay competitive with WE operations As of 2017 about 2 Mil tons polyethylene might be exported to WE assuming attractive economics in US and availability of currently planned PD capacity Drive integrative optimization and cluster formation to develop synergies and optimization savings Keep cost pressure on existing units, energy cost, safety, flexibility Increase operation flexibility to run SC profitably lower utilization rate with intern recycle etc. Develop feed flexibility to optimize SC for C3 and C4 Improve Refining integration to improve further overall Olefins generation with focus on C3 /C4 Focus SC operation on low C2 but high C3 /C4 production scheme Maintain high value added derivative industry based on C3 and C4 s Reduce continuously logistics and transportation cost Increase cooperation and communication between shipping use and ship owner to identify the highest value added achievale for the benefit of all market participants Source: BCG 12

13 Impact of Shale gas cracking in WE - Options No shut down scenario for the WE Petrochemical Industry Substantial pressure to improve feed flexibility and reduce cost Restructuring und optimization will require flexibility and low cost transportation options Conservative assumption : Optimistic assumption : unchanged transport needs increased transport needs Source: BCG 13

14 Thank you!! Source: BCG 14

15 Dr.Kuhlmann International Thank you bcg.com bcgperspectives.com

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