The Market for Petrochemical Feedstocks in a Changing Oil Price Environment A North American Perspective

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1 The Market for Petrochemical Feedstocks in a Changing Oil Price Environment A North American Perspective Michael Sloan Principal ICF International 2 nd Annual European Petrochemicals Conference Dusseldorf Germany March 11,

2 ICF International Disclaimer Warranties and Representations. ICF endeavors to provide information and projections consistent with standard practices in a professional manner. ICF MAKES NO WARRANTIES, HOWEVER, EXPRESS OR IMPLIED (INCLUDING WITHOUT LIMITATION ANY WARRANTIES OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE), AS TO THIS PRESENTATION. Specifically, but without limitation, ICF makes no warranty or guarantee regarding the accuracy of any forecasts, estimates, or analyses, or that such work products will be accepted by any legal or regulatory body. Waivers. Those viewing this presentation hereby waive any claim at any time, whether now or in the future, against ICF, its officers, directors, employees or agents arising out of or in connection with this presentation. In no event whatsoever shall ICF, its officers, directors, employees, or agents be liable to those viewing this presentation. 1

3 Introduction to ICF ICF International (NASDAQ:ICFI) is a global consulting firm with more than 70 offices and 5,000 employees worldwide, headquartered in the Washington DC area. European offices in London, Brussels, Warsaw Prominent position in each area of expertise: Energy, environment, and infrastructure Health and social programs Public safety and defense Growing commercial work, especially in the energy, environment, and infrastructure space. Long-standing relationships with diverse energy industry and association clients: INGAA, AGA, API, CERI, PERC, NGSA KEY AREAS OF WORK Market Evaluation and Analysis Strategic Planning Support Scenario Analysis Economic Impact Analysis Due Diligence Support for Investments and Acquisitions Regulatory Analysis Financial Modeling and Risk Assessments Environmental Policy Analysis Environmental Impact Assessments Testimony and Litigation Growing Houston, Calgary, and Marcellus area energy practices. Track record of strong organic growth and successful acquisitions. 2

4 Today s Conversion 1. Lower oil prices, higher uncertainty 2. Growth in North American NGL production continues to drive petrochemical feedstock markets 3. Decline in the North American ethane surplus 4. Integration of North American and international propane markets 5. Naphtha markets remain tied to crude oil prices 3

5 Oil Prices Oil prices began to fall in July 2014 In U.S. $/Bbl much of the decline has been driven by changes in currency exchange rates A decline in oil prices was not a surprise. The magnitude of the decline is a surprise Today s oil prices don t matter. Long term oil prices matter 4

6 déjà vu all over again?(with a nod to Yogi Berra) 5

7 All Over Again! 6

8 ICF Crude Oil Price Scenarios ICF s assessment of crude oil production and demand trends suggests that, in the long term, WTI oil prices should average around $75 per barrel. ICF s Low, Base Case and High oil price scenarios reflect a reasonable range of long term oil price outcomes. However, oil prices are likely to fluctuate widely around the long term trend in all scenarios. ICF does not anticipate a sustained rebound above $100/bbl. $120 $100 $80 $60 $40 $20 $0 WTI Crude Oil Price (2013$/Bbl) Actual Projected Historical Base Case High Oil Price Case Low Oil Price Case 7

9 Impact on Crude and Condensate Production Current North American crude and condensate production is at about 14.0 million bpd. Production in ICF s Base Case is projected to continue to rise slowly until 2020, and flattens at about 15 million bpd thereafter. +15% -21% In the High Case, production is expected to increase to about 17.5 million bpd by In the Low Case, oil production begins to drop below current production levels to about 12 million bpd by Production decline concentrated in the Bakken, Rocky Mountains, Western Canada 8

10 Oil Price Impacts on NGLs Production Lower oil prices result in reduced oil-directed drilling and drilling in wet-gas plays, which in turn reduces NGL production in North America. However, NGL production continues to rise, along with growth in natural gas production Even in the low oil price case +7% -9% Majority of North American growth is in Marcellus/Utica Production in this region is not sensitive to oil prices 9

11 North American Ethane Balance Cases derived by assuming different levels of ethane rejection. Includes exports from Marcus Hook (Sunoco) and Morgan s Point (Enterprise). Timing uncertain on many projects. Some projects still in pre-feed. Least likely projects crossshaded. Over 150 MBPD of speculative demand not included. 10

12 North American Ethane Supply/Demand Balance In the Base Case, currently planned demand will require moderately aggressive ethane recovery through Announced North American ethane crackers are completed. Announced export capacity is developed and fully utilized No major new projects entering the pipeline. Additional demand would require aggressive (higher cost) ethane recovery. Or higher oil prices to stimulate greater production. Difficult to meet projected demand in the low oil price case. Ethane prices remain linked to natural gas prices. Henry Hub gas prices increase to $5 by

13 North American Propane Supply/Demand Outlook North American propane production increases by about 50% between 2014 and Roughly 70% of the growth comes from the Appalachian Basin Significant growth in production from the WCSB, Bakken, and Eagle Ford North American Propane demand growth increases by almost 20 percent between 2014 and billion gallons per year in PDH petchem facilities 600 million gallons per year from engine fuel market growth. Stable traditional markets (residential, commercial) Demand Total North American Production 12

14 Planned Export Terminals Significantly Add to Current Export Capacity 13

15 Comparing Propane Supply with Demand Planned North American propane export capacity will exceed supply available for export. Sufficient to integrate the North American and international markets through Changes in propane exporter risk sharing model? 14

16 Propane Price Outlook International price of propane will remain linked to crude oil prices. Likely to fall relative to crude Expect continued volatility North American LPG export capacity will exceed available supply starting in Near term prices increase to equilibrate with international markets In the longer term, U.S. propane prices will be set by International price minus the incremental transportation costs to market. U.S. prices will fall as exports must go further to find markets Growth in U.S. exports likely to push down European propane prices. 15

17 Final Thoughts Long term oil prices are expected to be lower than recent levels, although prices will remain subject to significant price volatility. The impact of the oil price decline in the U.S. is accentuated by changes in currency exchange rates. Oil prices Have a major impact on North American crude oil production Have a modest impact on North American NGL production Have limited impact on North American natural gas production Lower NGL production will significantly reduce the ethane overhang in the North American market. Higher ethane prices relative to natural gas Lower incentives to develop ethane export markets Growth in North American LPG export capacity is closing the recent atypical arbitrage window on North American propane prices. Growth in North American exports are likely to drive down propane prices relative to oil in other regions, particularly Europe 16

18 Final Thoughts Naphtha as a petrochemical feedstock remains on the economic margin (unless oil prices fail to rebound). Naphtha prices will remain tied to oil prices Naphtha production will remain tied to oil production and refining activity. North American feedstock price advantage shrinks as demand catches up with supply Market adjustment accelerated by the oil price decline. Oil price uncertainty changes the economic attractiveness of petrochemical feedstocks. And drive home the value of flexibility for petrochemical producers. 17

19 Thank you. Michael Sloan

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