D E C M DOWNSTREAM. Downstream Engineering, Construction & Maintenance Briefing. U.S. petchem industry prepares for second wave

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1 D E C M DOWNSTREAM ENGINEERING, CONSTRUCTION & MAINTENANCE MAY 31 JUNE 1 GALVESTON CONVENTION CENTER, TX USA Downstream Engineering, Construction & Maintenance Briefing U.S. petchem industry prepares for second wave U.S. petchem investment is long term, more than just 1st and 2nd wave ACC Labor productivity and craft shortages seen as biggest challenges to future projects Productivity a key challenge for petchem projects

2 CONTENTS Contents U.S. petchem industry prepares for second wave Page 01 U.S. petchem investment is long term, more than just 1st and 2nd wave ACC Page 05 Labor productivity and craft shortages seen as Page 09 biggest challenges to future projects Productivity a key challenge for petchem projects Page 12

3 PAGE 01 U.S. petchem industry prepares for second wave Nine out of 10 petrochemical players believe there will be a second wave of investment in downstream projects, but most believe it will be smaller and slower than the first wave, according to a Petrochemical Update poll. The poll, given to delegates at Petrochemical Update s Downstream Engineering, Construction and Maintenance Conference in New Orleans in June, found that 46% of those polled believe the second wave will be less than half the size of the first wave. But 26% of those respondents believe the second wave will be at least 75% the size of the first wave or bigger, and 22% believe a second wave would be the same magnitude as the first wave. Major First Wave investments Four crackers totaling more than 5 million tonne/- year of ethylene capacity are slated to start operations this year along the U.S. Gulf Coast. Five more are under construction and expected to begin operations before the end of Some 10.3 million tonnes of ethylene capacity will enter the U.S. market before the end of Most of the new plants under construction are cracker-plus projects, and the plus usually includes a polyethylene plant. We do think a second wave is coming. We don t think it will be as large as the first one, Dow s Commercial Director of U.S. Olefins Manav Lahoti said, while speaking in a panel at the Conference. We are still optimistic about the U.S. feedstock position.

4 PAGE 02 U.S. petchem industry prepares for second wave New U.S. Ethylene and Derivative Capacity New U.S. Ethylene Crackers Company Ethylene Capacity (kt/year) Downstream Start-Up Location Chevron Phillips 1500 Polyethylene 2017 Texas Dow Chemical 1500 Polyethylene Elastomers 2017 Texas Exxon Mobil 1500 Polyethylene 2017 Texas Formosa Plastics 1250 Polyethylene Ethylene Glycols 2018 Texas Shell 1500 Polyethylene 2020 Pennsylvania Sasol 1500 Polyethylene Ethyline Oxide Ethyline Glycol Detergent Alcohols Ethoxylates Louisiana New U.S. Ethylene Crackers Company Ethylene Capacity (kt/year) Start-Up Location Dow Chemical Louisiana Indorama Louisiana Restart Lyondell Basell Channelveiw. Tx Evaluating Lyondell Basell Christi. Tx Evaluating Westlake Chemical Kentucky

5 PAGE 03 U.S. petchem industry prepares for second wave Dow s next plans Dow told investors in May that it would invest approximately $4 billion, spread over the next five years. The primary components of this plan include expanding Dow s new TX-9 ethylene cracker in Texas bringing the facility s total ethylene capacity to 2 million tonnes and making it the largest ethylene facility in the world. Dow also said it will begin construction of a world-scale 600,000 tonne/year polyethylene unit in the U.S. Gulf Coast based on Dow s proprietary Solution Process technology. Among other investments, Dow announced it will invest in a new, $100 million state-of-the-art innovation center at its global headquarters in Michigan. The center will house scientists and engineers who will focus research and development activities. The center will support integration strategies, Lahoti said. Second Wave Decisions Total announced a joint venture with Borealis and Nova Chemicals to build a 1 million/tonne year cracker in Port Arthur, Texas, and a new 625,000 tonne/year polyethylene plant in Bayport, Texas. A final investment decision (FID) is expected by the end of 2017 and start up by the end of Shell announced in April that it would start construction on its 1.5 million tonne/year cracker and polyethylene project in Monaca, Pennsylvania in late 2017, with startup expected in the early 2020s. ExxonMobil and Sabic selected a site near Corpus Christi, Texas for their 1.8 million tonne/year joint venture cracker complex which will include polyethylene and mono ethylene glycol production. An FID has not been made. LyondellBasell is evaluating expansion plans for ethylene, polyethylene, propylene and polypropylene (PP) in the U.S., CEO Patel said at the company investor day in April. LyondellBasell plans to make a FID in the third quarter of 2017 on its propylene oxide/tertiary butyl alcohol project for startup in Additionally, around 5 Bcf/day of additional liquefied natural gas (LNG) export capacity is expected to be completed by Future Focus Leadership skills and productivity tied as the most important issue to focus on for future projects, with both getting a 42% vote. Focusing on lessons learned was also important to players, with 16% saying lessons learned from the first wave would be their main focus for future projects. Dow plans to focus on all three concerns, leveraging on the learnings it got from challenges during the first wave, which included productivity and skillsets, Lahoti said. Dow announced the mechanical completion of its 1.5m tonne/year cracker in Freeport, Texas, in March. The project includes 400,000 tonnes/year of Dow s ELITE polyethylene (PE), 350,000 tonnes/year

6 PAGE 04 U.S. petchem industry prepares for second wave of low density PE (LDPE), 320,000 tonnes/year of elastomers, and 200,000 tonnes/year of ethylene propylene diene monomer (EPDM). Start-up is slated for mid The mechanical completion was within a week of our projections we announced three years prior. We learned from issues on previous projects and applied those to this one, Lahoti said. Productivity of the labor force was an issue we worked on. We brought workers from outside the U.S. in to come in and help us get the skillset up. We think these solutions will help us with the second wave. Lahoti said it would be important for all projects in the second wave to improve not just craft labor, but also middle management and project leadership. If you don t have the right eyes on the project, the project is not going to move well, he said. Productivity was an issue, but it was not being highlighted enough because project managers were not noting it. As an industry, we need to continue to develop management and leadership skills as well. Slower pace but we suffered in definitions of the project, Pauw said. That rushing in the first wave also led to over optimistic planning, Pauw said. At least 10% of those polled said that project controls, including schedule, cost, forecasts and controls were their biggest challenges to first wave projects. Don t be too optimistic in delivery. One project can be six months behind because of too much optimism in planning. If something is not in the schedule, workers will get the attitude they can t do this. Productivity drops and safety is impacted. Poor direct labor productivity was listed as the second biggest challenge, getting 30% of the vote. Claims management was considered the third greatest challenge, with 15% stating it was the biggest challenge. At least 5% said that craft labor availability remained a challenge to first wave projects. Late engineering or scope changes were noted as the biggest project challenges by 40% of those polled. Companies won t be in as big of a rush to finish first this time and should spend more time on front end engineering, Henk Pauw, General Manager of Orpic s Liwa Plastics Project in the Middle East said, while speaking in the same panel at the Conference. We did our feed in 12 months. We wanted to get the value out of the project and see the return quickly,

7 PAGE 05 U.S. petchem investment is long term, more than just 1st and 2nd wave ACC The U.S. is in place to be the most competitive global manufacturer of chemicals as a result of hydraulic fracturing and natural gas, and the wave of investments is far from over, the American Chemistry Council (ACC) told Petrochemical Update. I have heard people say that we should not be talking about a second wave of investment, because it is not just going to be a second wave. It is going to be a continuous flow of investment in chemical manufacturing in the U.S. for a significant period of time, ACC President Cal Dooley said while speaking at Petrochemical Update s Downstream Engineering, Construction and Maintenance Conference in New Orleans. Rather it is second wave or third wave, the U.S. is well positioned. Product prices track crude oil, so a strong oil price is beneficial to U.S. producers making the same product using much cheaper NGLs as feedstock. Many people think a competitive ratio between natural gas to oil is 1:7 so $4 natural gas will be competitive if oil is priced at $28/barrel, he explained. The Conference attracted more than 1,000 delegates over a three-day period. Since 2010, $85 billion worth of petrochemical projects have been completed or started construction, according to the ACC. U.S. competitive advantage The first wave of investments in chemical manufacturing came because of the U.S. cost and margin advantage. At least 85% of U.S. petrochemical production is natural gas or natural gas liquid (NGL) as feedstock, while 75% of the world uses oil and naphtha based production, Dooley said. Image Source: American Chemistry Council There were significant investment announcements from when oil spiked to more than $100/barrel. Of those, four crackers totaling more than 5 million tonne/year of ethylene capacity are slated to start operations this year along the U.S. Gulf Coast. Five more are under construction and expected to begin operations before the end of Some 10.3 million tonnes of ethylene capacity will enter the U.S. market before the end of While oil prices declined, recent stability in oil prices and optimism for increased global demand is spurring another round of investments.

8 PAGE 06 U.S. petchem investment is long term, more than just 1st and 2nd wave ACC We will continue to see competitive advantage because we have ability to access tremendous supplies of natural gas, Dooley said. The reserves seem to be growing each time we do an assessment. Dooley pointed to a study IHS did four years ago which predicted that the U.S. had a 30-year minimum natural gas supply for under $4/MMBtu, and said that price estimate has probably dropped because hydraulic fracturing has become even more efficient creating more supply. Chemicals contribution to economy The chemicals industry is contributing to the broader economy more so now than ever before. In 2016, 48% of manufacturing construction spending in the U.S. was from the chemical industry, according to the U.S. Department of Commerce. When you look at the $185 billion in petrochemical spending, at a minimum, it will result in $90 billion in economic activity, Dooley said. That will result in 821,000 permanent new jobs by Now 3oo+ projects The ACC estimates there are 310 projects currently under construction or planned and $185 billion in potential capital investment as of June 2017, up from the 97 projects and $72 billion in Mach cisions Global investments are a big part of second wave investment. 62% of that investment is from firms based outside of the U.S. We have seen now because of our global competitive position, we are the most competitive platform to serve the growing demand for chemicals globally, Dooley said. Source: American Chemistry Council When you look at a multiplier to the broader economy, that investment equals a $250 billion contribution to new U.S. economic output by 2025, Dooley added.

9 PAGE 07 U.S. petchem investment is long term, more than just 1st and 2nd wave ACC Chemical Exports U.S. exports are on the way to a major increase as a result of petrochemical investment. In 2015, the chemical manufacturing sector had $184 billion in exports, accounting for 14% of all U.S. exports. According to the ACC, chemical industry exports are expected to increase an average of 7% through Source: American Chemistry Council Exports of chemicals linked to shale gas are projected to reach $123 billion by 2030, notes ACC, more than double the total in That will drive the trade surplus from these chemicals to increase from $19.5 billion to $48.3 billion by If you go back about 2012, we were exporting about 173 million in chemical products, we will see that increase in 2021 to about 245 million, Dooley said. Appalachia Resources About 80% of the investment so far has been in the U.S. Gulf, but we have seen one investment by Shell in Pennsylvania., he added. Lawmakers in the four-state area have told Congress that a storage hub is a crucial next step in transforming the Appalachian Basin and its natural gas assets into a petrochemical production center. The Appalachian region could become a second center of U.S. petrochemical and resin manufacturing similar to the U.S. Gulf.com/- supply-chain-logistics/northeast-storage-hub-approval-could-accelerate-petrochemical-growth The Hub would handle some 100 million barrels of NGLs and liquid chemicals ethane, methane, ethylene, propylene and chlorine, and include about 3,000 miles of underground pipelines to move the chemicals to industries along a 454-mile corridor in the four states. The cost of the Hub would be around $10 billion according to TopLine Analytics. The concept would be similar to the Mont Belvieu hub in Texas that supports the Gulf Coast chemical industry. If the hub is successful, the U.S. would have the potential to produce enough ethane to supply another six crackers, plus there would additional ethane to ship to the U.S. Gulf region, Dooley said. When the industry thinks about how demand came, it thinks of the U.S. Gulf, but there is tremendous opportunity that has not been tapped, Dooley said.

10 PAGE 08 U.S. petchem investment is long term, more than just 1st and 2nd wave ACC Regulatory ups and downs The U.S. is well placed for chemical investment from a regulatory standpoint. If you look at it from a chemical engineering perspective and look past some of the headlines, we have never had a political environment more sensitive and supportive of the regulatory policy needed to maximize the competitive advantage in the U.S., Dooley said. The U.S. chemical industry has feedstock advantage, tax advantage and more, Dooley explained. One issue has been troubling to the industry however. The one issue that has been somewhat troubling as we look at some of the early actions of the Trump administration and some of the early rhetoric we saw during the campaign is on trade, Dooley said. When you have this glut of new investment coming into the U.S., it is not to serve primarily the domestic market, it is to serve the global marketplace. The U.S. petrochemical industry will benefit today and in the future from trade policies that make sure the U.S. has global access to the marketplace, Dooley said. We need to see efforts in congress and leadership to move forward advancing fair trade policy, Dooley said.

11 PAGE 09 Labor productivity and craft shortages seen as biggest challenges to future projects While the U.S. is preparing for 310 projects and $185 billion in capital investment at the same time an experienced generation of workers retires, quality and productivity are becoming an even bigger challenge than the labor shortage, owners and contractors told Petrochemical Update. U.S. Gulf Coast craft labor used to be the benchmark around the world, it was known as the most productive, safest, most knowledgeable in the world, but I don t think we are seeing that now, Ed Lehotsky, senior vice president of LNG Engineering and Construction at Cheniere Energy, said while speaking at Petrochemical Update s Downstream Engineering, Construction and Maintenance Conference in New Orleans. One of the metrics that I watch as far as productivity is well rejects rates, the quality of the wells the first time, Lehotsky said. I am used to seeing 1-2%, but we are seeing 6% and as much as 12% now in well rejects. Lehotsky said he believes the reason for the decline is because the welders are not as experienced as before.

12 PAGE 10 Labor productivity and craft shortages seen as biggest challenges to future projects Our team has over 1,700 years of combined experience in oil and gas and 900 of that is in liquefied natural gas (LNG) and contractors respect us for our knowledge, but the industry is seeing retirement in both leadership and the crafts, Lehotsky said. We really have to work on this if we want to build these specialty projects on time and on budget. Millennials surpassed both the Baby Boomer generation and Generation X in 2015 as the largest generation in the workforce according to the U.S. Bureau of Labor Statistics. In the first quarter of 2015, about 45 million Baby Boomers were in the labor force. The Baby Boom workforce peaked in size at nearly 66 million in The youngest Boomer is now in their early 50s, while the oldest have recently turned 70. With more Boomers retiring every year, the size of this generation s workforce will continue to shrink. Gulf Coast productivity is not what it used to be, said Joe Thompson, General Manager of Bechtel s Downstream and Chemicals Business, while speaking at the Conference. Millennials outnumber Boomers now. They need experience and training. We have to invest in them. Craft Labor Supply Shortage Eight out of 10 players believe the craft labor supply shortage is serious, according to a Petrochemical Update Poll conducted at the Conference. Source: Pew Research Center The industry is looking for alternative ways to market to new recruits and many believe a total rebranding of the industry will be necessary to appeal to the millennial generation.

13 PAGE 11 Labor productivity and craft shortages seen as biggest challenges to future projects Training Solutions Both owners and contractors are looking at options to train the new workers as well. Cheniere is funding welding programs in Louisiana for both high school, technical colleges and returning serviceman, Lehotsky said. To date, Cheniere has trained at least 90 workers in high quality welding such as stainless steel welding. Fluor is focusing on building the pipeline of skilled craft professionals by offering training to encourage individuals to choose craft careers, said Mark Fields, President of Energy and Chemicals Americas at Fluor. Through our pre-employment training, after-hours training at jobsites and supervisory training, we provide comprehensive training at every stage of a worker s career at no cost, he added. Fluor recently opened the U.S. Gulf Coast Craft Training Center in Texas, which offers pre-employment, tuition-free, industry-recognized training in the welding, pipefitting, instrumentation, millwright and electrical disciplines. We are conducting leadership training courses at sites to improve our foremen and general foremen s skills in effective communication, work planning and safety leadership, Fields said. We also offer after-hours craft training, at no cost, at our jobsites, to encourage our employees to enhance their skills and career growth." Solutions right now While training initiatives are in full force, owners and contractors still must deal with the present shortage of craft labor. Modularization is one solution working well for Fluor. Modularization moves a percentage of the project work offsite to fabrication yards, and helps ensures that our onsite resource needs matches craft availability. This approach helps provide the greatest level of capital efficiency and delivery certainty for our projects, Fields said. Companies are also providing training for veterans. ConocoPhillips has a dedicated recruiting and training division for veterans. Students are under no obligation to work for Fluor after graduation, and we have had more than 300 students graduate from the program since it opened last year, Fields said. Fluor has initiated holistic training to focus not just on the craft, but also on leadership skills to help craft laborers plan and prepare for advancement.

14 PAGE 12 Productivity a key challenge for petchem projects Nearly half of petrochemical players polled believe craft labor productivity is negatively affecting their project s performance, according to a Petrochemical Update Poll. Retirement of experienced workers, inexperienced new workers, inability to attract and train new crafts, and poor planning are some of the main reasons given for productivity challenges, players said at Petrochemical Update s Downstream Engineering, Construction and Maintenance Conference in New Orleans. The most promising technology solution areas to improve productivity, according to those polled, include implementing Advanced Work Packaging and Constraint Analysis, Field Mobility Apps, Onsite Materials Management or Track and Trace Programs, and a Completions or Commissioning Database. Advanced Work Packaging I think there are some key things with Advanced Work Packaging that people need to consider, said William Lewis, Senior Manager and Projects Coordinator at SABIC, while speaking in a panel at the Conference. You must start early in the process, you need to get back to the FEED. When building Advanced Work Packaging, it is important to think with the end in mind and build from there, Lewis said. In the end, you will be going to turnover conditioning activities, so you need to work that back to your construction packages, and back to your design packages, so it all has to flow, he said. I have seen a lot of cases where they try to use a form of Advanced Work Packaging, and don t bring all the factors to the table, and that is just a recipe for failure. Owner involvement is more important to change than many realize, Lewis said. If you think back a couple decades, when we went into the safety venture, it took the owner driving safety to actually make a difference, he said. If you want to improve productivity, the owner has to play a major role in it. The owner will have to mandate it and encourage it to make that change. Plan for Capital Efficiency The most common thing owners fail to do early in the project cycle is sufficiently define the project to support a successful FEED, according to a Petrochemical Update Poll conducted at the Conference. Productivity is a piece of capital efficiency and takes a number of steps. I don t think there is any one thing that is the answer, but there are a couple of important things that can be done, said Jim Collins, President of Business Development for Global Refining, Chemical, Petrochemical and Midstream at AMEC Foster Wheeler. Collins was speaking in a Panel at the Conference. I want to focus very much on the front end, get the definition of scope right, get the plans right, get the right input from the owner side, and put the right construction planning in place at the front end, Collins said. Change really drives a lot of inefficien-

15 PAGE 13 Productivity a key challenge for petchem projects cies. It s not just a cost impact, it is a productivity impact. Assessing all of the potential alternatives and identifying and planning for major risks were also listed high on everyone s list as common things owners fail to do early in the project life cycle. One of the things for the owners to look at is contractor involvement very early in the planning of how the project will be, and construction and put that in the feed and build up from it, Collins said. In the field, there are a number of activities really complemented by Advanced Work Packaging, but that s only good as scope allows. Challenges around labor and training also must be considered. It s different for every project and every region, Collins said. Some regions are more sophisticated and mature. And others, you have to put more effort into that training process. It is a combination of things that will drive productivity and it will take all of it, Collins added. A lot of people are making investments in training and education, which is something that we definitely need to do, but it is not going to happen overnight. In the interim, Lewis suggests moving man hours off site, coming up with an off site fabrication or modularization plan and working that into the Advanced Work Packaging. We need to look at the module yards, fabrication facilities, pipe shops, steel shops and make sure they have a good process for completing the work, scheduling and planning it and getting it out on time, and keeping that schedule on time and in compliance, Lewis said. You have to keep your finger on the pulse of what is going on. Productivity is just as much about hiring and training as it is retaining the same employees who know a project s systems and processes, Lewis said. When you set your sites up, keep the craft in mind. Keep the people in mind, he said. Have good facilities, good eating facilities, good break room, good parking and warehouse facilities. Investments Right Now Many owners and EPC firms have initiated skills training and recruiting programs to get craft labor up to speed, but it will take some time before the crafts are experienced. With all the projects ongoing and the ones we are seeing on the pipeline, this challenge is not something that is going to change real quick, Lewis said.