Transformation in the GCC Chemical Industry Dave Witte, SVP IHS, Division Head, Energy & Chemicals dave.witte@ihsmarkit.com
Agenda Challenges facing the GCC economies Chemicals as a solution Challenges to chemicals Transformation framework
The GCC faces difficult macro-oriented challenges Energy Supply The nature of short-cycle shale creates a new set of oil dynamics Energy Demand Lower oil demand growth due to environmental regulations and emerging/disruptive technologies Geopolitical Landscape Continuing economic mediocrity, expanding workforce, political tensions and protectionist risks Requirements Reduce economic dependence on oil Create quality jobs Stimulate GDP growth Accelerate structural reforms Expand private sector
Budget deficit For most, current account deficits are moving toward a better balance, but budget deficits remain problematic 2018 Oil Parity Budget Break-evens 120 100 One break-even lower than Brent and one higher = budget deficit UAE Both break-evens higher than Brent = current account and budget deficit 80 60 Iraq Iran Kuwait Saudi Arabia Qatar Oman 40 20 0 Source: IHS Markit 0 10 20 30 40 50 60 70 80 90 100 Current account 2017 IHS Markit
US$, Billions Dependence of GCC economy on oil creates volatility; future risks to oil amplify uncertainty Oil and Non-oil GDP Contribution to GCC Economy 1,200 Chart Title 1,000 800 600 400 200 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Oil Non-Oil
Million Bbl / day OPEC Share, % Million Bbl / day OPEC market share volume growth constrained first by shale, then by demand growth - with considerable volume & price risk OPEC & Non-OPEC Crude Oil Production Total oil (liquids) demand, 1990 2040 90 50% 45% 120 110 Base Case 60 40% 100 30 0 OPEC Non-OPEC % OPEC 35% 30% 25% 90 80 70 History Mobility Disruption Case 60 1990 2000 2010 2020 2030 2040
Labor Force (Millions) Demographics show an expanding workforce that needs economic expansion to create high-quality private sector jobs GCC Labor Force and Participation 40 30 20 10 0 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Saudi Arabia United Arab Emirates Oman Kuwait Qatar Bahrain
Investment in value-add chemicals is enabler of and part of a mix of solutions to the GCC economic challenges Leverages hydrocarbon resources Enhances refinery competitiveness Creates highvalue jobs Enables downstream development Fosters innovation
Million metric tons Leverages the vast hydrocarbon resources while reducing economic dependence on oil World Base Chemical Annual Change In Demand 40 30 20 10 0-10 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25 27 29-20
Net cash margin Enhances refinery competitiveness; de-risks strategy of refining as a pull-through strategy of equity barrels East-of-Suez refinery margin analysis 2022 25 20 15 10 5 0-5 -10-15 Source: IHS Markit 1st Quartile 2nd Quartile 3rd Quartile 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Cumulative crude capacity, thousand b/d 4th Quartile 2017 IHS Markit
Enables downstream manufacturing industry to further accelerate job creation and economic diversification More than 96% of all manufactured goods are directly touched by the business of chemistry Supporting more than 25%, of a diversified economy across virtually ALL key end sectors
Investment in chemicals creates employment with a significant multiplying affect on growth in other economic sectors U.S. Business of Chemistry Industry Snapshot Total jobs = 6,298 (thousands) Multiplier = 6.8 Direct jobs 812 Supplier jobs 2,707 Expenditureinduced jobs 2,779 Multipliers understate the economic importance of the chemical industry by ignoring downstream affects Source: 2017 ACC Guide to the Business of Chemistry
Fosters innovation by funding core research activities that solve tomorrow s problems US chemical companies invested $91 billion in leading research & development in 2016 Plastics are critical in improving vehicle safety and fuel efficiency Solar power relies on siliconbased chemistry Building insulation saves up to 40 times energy used to create it Chemistry needed to create lithium rechargeable batteries Source: 2017 ACC Guide to the Business of Chemistry
US$ Million Middle East share performance demonstrates a shift in investor sentiment to other regions and a more diversified portfolio Index Share Price Performance Middle East Commodity Chemical EBITDA 300 Middle East Commodity US Diversified EU Diversified 196% 184% 25,000 20,000 200 15,000 100 15% 10,000 5,000 0 April-10 April-12 April-14 April-16 0 2010 2011 2012 2013 2014 2015 2016 Source: IHS Markit, Company Disclosures 2017 IHS Markit Source: IHS Markit, Company Disclosures 2017 IHS Markit
Millions Metric Tons Million Metric Tons Regional expansion shifts away from advantaged gas to a more diversified liquid hydrocarbon backbone GCC Total Aromatic & Olefin Capacity 100 GCC Aromatic & Olefin Feedstocks 100 80 80 60 60 40 40 20 20 0 90 95 00 05 10 15 20 25 30-05 10 15 20 25 30 Source: IHS Markit Ethylene Propylene (PG/CG) Paraxylene Benzene 2017 IHS Markit Naphtha to Aromatics LPG Stm. Cracking Propane to PDH Naphtha Stm. Cracking Ethane Stm. Cracking
North America Central and South America Western Europe Central and Eastern Europe Middle East and Africa Japan China Other Asia World North America Central and South America Western Europe Central and Eastern Europe Middle East and Africa Japan China Other Asia World average Low consumption and evolving demographics in nearby markets suggest opportunities in value-add chemicals Specialty chemicals consumption per capita, 2015 ($) Specialty chemicals volume growth rates, 2015-20 (%) 350 300 250 200 150 100 50 0 7 6 5 4 3 2 1 0 BUT Key Success Factors for Value-add are Vastly Different than Commodity Chemicals
Agenda Challenges facing the GCC economies Chemicals as a solution Challenges to chemicals Transformation framework
To achieve high performance in a shifting external environment, GCC chemical companies must transform and adapt High Performance Framework Strategy Business Model Process Resources Capabilities People
Begin by developing a clearly-articulated strategy High Performance Framework Business Model Strategy Process Set Ambitious goals Diversify from monetization to value-add and growth Increased market awareness and customer intimacy Align portfolio/organization Resources Capabilities People
Recognition that new strategies likely require new business models High Performance Framework Strategy Clearly define model that aligns with overall strategy Business Model Process Value proposition/offerings and value capture mechanism Structure, process and capability requirements Resources Capabilities People Proactive model management
Build a unique set of agile customer-facing capabilities High Performance Framework Business Model Strategy Process Competitor differentiation Market impact/valued by customers Transferable and adaptable to new opportunities Resources Capabilities People Understanding of potential deficiencies
Conclusions GCC faces economic headwinds; diversification is needed to meet expansion challenges The chemical industry is a key enabler and a part of the solution for economic growth Commodity chemical investment for resource monetization is unlikely to meet the challenges GCC chemical producers have an opportunity to refocus/retool business models and strategies GCC chemical companies and policies will need to adjust to improve agility and capability