Feedstock Challenges and Market Implications for Middle East Petrochemical Producers

Feedstock Challenges and Market Implications for Middle East Petrochemical Producers

Agenda 1. Current MENA gas situation 2. Country examples (Saudi Arabia, Kuwait, UAE) 3. Implications for petrochemicals 4. Conclusions

MENA gas challenges Explosive growth of demand Economic and population growth Air-conditioning Petrochemicals, LNG, aluminium Mature oil fields requiring EOR Very uneven reserves distribution Limited development of intra-regional gas trade MENA cross-border gas trade had limited success (AGP, Dolphin based on low gas prices) Maintaining LNG exports with long-term contracts (Qatar, Oman, UAE) Expansion plans: New industrial cities, expansion of existing plants and transportation systems (Saudi Arabia, Oman, UAE) Lower reliance on oil revenues for exports (mainly Saudi Arabia) Complex and expensive sour gas reserves (UAE)

Reserves, resources (Tcf) MENA gas: The haves and have-nots 1800 1600 1400 1200 Shale gas potential Exploration potential Reserves 1000 800 600 400 200 0 Sources: BP, USGS, EIA, Petrenel, Baker Hughes, Manaar research

Reserves, resources (Tcf) Consumption, production (Tcf/year) MENA gas: The haves and have-nots 1800 1600 1400 1200 Shale gas potential Exploration potential Reserves Production Consumption 6 5 4 1000 800 3 600 2 400 200 1 0 0 Sources: BP, USGS, EIA, Petrenel, Baker Hughes, Manaar research

Gas exports/imports (Bcf/day) Some growth in MENA gas exports to 2015; little thereafter 25 20 15 10 5 UAE Bahrain Syria Lebanon Oman Oman Libya Egypt Algeria Qatar Jordan Kuwait Iran Yemen Libya Yemen Oman Libya Egypt Algeria Qatar On current trends: MENA gas export growth is virtually all driven by Qatar & Algeria Neither will grow much after 2015 Oman exports declining New importers appearing (Kuwait, Bahrain, Fujairah) Possible export growth from Israel, Iraq, (Libya and Iran?) More gas production (including unconventionals) a necessity for regional and global markets 0-5 2008 2015 Source: Fattouh & Stern

Gas exports/imports (Bcf/day) Imports growing, including LNG 0.0-0.5-1.0-1.5-2.0-2.5-3.0 Jordan Bahrain Kuwait Syria Iran Lebanon UAE 2008 2015 Source: Fattouh & Stern,eds. (2010) Despite its large gas reserves, the UAE is increasingly a net gas importer New MENA gas/lng importers emerging Dubai and Kuwait in 2010 Abu Dhabi/Fujairah (2015) Bahrain (2015?) Lebanon?

Gas exports (Bcf/day) Long-term global gas export balance 15.0 5.0 1990-5.0 2000 2010 2020 2030-15.0-25.0 Middle East and Africa are the two major exporting regions Asia is the major importing region Russia supplies Europe Big change is the emergence of North American gas exports after 2015 However, total Middle East gas exports do not grow much -35.0 North America Europe & Eurasia Africa S & C America Middle East Asia Pacific

Implications of soaring MENA gas demand Need for improved efficiency and end to gas flaring Challenges to gas-based industrialisation & job creation Need for new gas exploration & development Power cuts and economic damage

Numerous different Gulf unconventional gas plays Gulf unconventional plays varied, potentially large Sour and contaminated gas (CO 2, H 2 S, nitrogen) Tight gas (sands & carbonates) Shale gas, condensate and oil Deep and ultra-deep Mixed resources (e.g. deep, tight and sour) Source: PacWest; Manaar research

Gas price equivalent ($/MMBtu) Gas pricing reform slowly materialising 25 HIGH-COST FUELS 20 15 10 INTERNATIONAL BENCHMARKS HIGH NEXT-GENERATION PRICES 5 LOW LEGACY PRICES HIGH NEXT-GENERATION PRICES 0 Source: Manaar research

Cost of alternative energy ELECTRICITY GENERATION COST ($C/KWH) 0 2 4 6 8 10 12 14 16 18 20 Gas, $1 Gas, $8 Gas, $15 Oil, $20 Nuclear Coal CCS Solar PV ($2.50/W) Solar PV ($2/W) Alternative generation (solar, nuclear, coal CCS) is cheaper than LNG or oil However, high-cost domestic gas (e.g. unconventional) at ~$8/MMBtu is still competitive against alternatives Source: Manaar research 12

% power generation from oil Gas policy motivations vary by country (bubble size indicates market size) Yemen Iraq Lebanon Bring gas to domestic consumers 90% 70% Kuwait Save domestic oil for export Syria Libya 50% Saudi Arabia Limit dependence on gas imports Grow domestic gas to sustain exports Oman Egypt 30% Iran UAE - Northern Emirates Morocco Jordan Qatar Algeria 10% Tunisia Dubai -100% -50% 0% Bahrain 50% 100% Abu Dhabi -10% Net gas imports

Agenda 1. Current MENA gas situation 2. Country examples (Saudi Arabia, Kuwait, UAE) 3. Implications for petrochemicals 4. Conclusions

Oct '10 Nov '10 Dec '10 Jan '11 Feb '11 Mar '11 Apr '11 May '11 Jun '11 Jul '11 Aug '11 Sep '11 Oct '11 Nov '11 Dec '11 Jan '12 Feb '12 Mar '12 Apr '12 May '12 Jun '12 Jul '12 Aug '12 Sep '12 Oct '12 Nov '12 Dec '12 Production / Consumption (kbbl /day) Saudi Arabia Gas Issues 3000 2500 2000 1500 1000 500 0 Saudi Arabia Apparent Crude Oil Consumption Gasoline Consumption High, seasonal demand for direct crude burn for power generation Fuel shortages this summer Delays to Wasit gas development Unconventional gas exploration beginning Refining mismatch too much fuel oil, not enough diesel & gasoline Major refining expansions, but primarily for domestic use Kerosenes Consumption Fuel Oil Consumption Diesel Consumption LPG Consumption Refinery Output Source: JODI; Manaar research

Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Oil production/consumption, kbbl/day Kuwait: challenges on gas 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Crude oil exports Product exports Domestic consumption The Middle East s first LNG importer LNG imports have cut domestic oil consumption (fuel oil) significantly However, progress on Jurassic gas/condensate (tight, sour, deep) limited by technical & political problems Source: JODI; Manaar research

Gas supply/demand (Bcf/day) Abu Dhabi: gas supply squeezed to 2016 12 10 Some new gas may be available for export (most likely to other Emirates) from 2016 But little progress on Bab to date Full nuclear programme (5.6 GW) can displace ~1 Bcf/day by 2020 8 6 4 Bab Hail Shah IGD 2 AGD-II OGD-III Imports Existing fields Demand Demand with alternative energy Demand with alternative + efficiency 0 28/03/2013 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Gas supply/demand Oman: needs unconventional gas to maintain LNG exports 5.00 4.50 4.00 3.50 LNG exports Oil sector Industry Power Supply 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Gas production, consumption (BCM/year) Iraq s petrochemical progress likely to be slow 100 90 80 70 60 50 40 30 20 10 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Oil-field use Shrinkage Power Power - Kurdistan Petrochemicals Fertilisers Other industry City gas CNG transport Exports - Turkey/EU Exports - Kuwait Exports - Mashreq Exports - LNG Reinjected Flared Associated gas Non-associated gas

New regional competitors could emerge Tcf Discovered to date 2010 gas demand Israel 26 0.2 Palestine 1.4 0 Cyprus 5-8 0.1 Lebanon 0 0.1 Syria 8.5 0.6 Jordan 0.2 0.1 Egypt 77 1.9 Gas demand assumes conversion of all oil-fired power to natural gas USGS estimates 122 Tcf (3544 BCM) recoverable gas and 1.7 billion bbl oil from the Levant Basin Conservative as pre-dates Leviathan and Aphrodite discoveries Resource potential easily sufficient for significant exports and petrochemical/industrial use

Agenda 1. Current MENA gas situation 2. Country examples (Saudi Arabia, Kuwait, UAE) 3. Implications for petrochemicals 4. Conclusions

Petrochemical capacity by country & type Total GCC 2013 Petrochemical Production Capacity, mn tons 0.92 Saudi Arabia UAE 18.20 8.08 Oman 9.50 Qatar 8.10 Kuwait Bahrain 89.90 2013 GCC Petrochemical Production Capacity by type, mn tons 29.68 49.30 Basic petchems Fertilizers Polymers 24.92 30.80 Intermediat es & Chemicals

Petrochemical capacity (million tonnes/year) Petrochemical capacity a function of gas endowment; national strategy 100 90 Saudi Arabia 80 70 60 50 40 30 20 10 0 Kuwait Oman UAE Qatar Bahrain 0 2 4 6 8 10 12 14 16 Gas prodution (Bcf/day)

Capacity (ktonnes/year) Example at one site: Ruwais 25000 20000 Paraxylene Terephthalate Benzene Melanine 15000 Polyethylene Polypropylene 10000 5000 0 2007 2008 2009 2010 2011 2012 2013 2014e 2015f 2016f LDPE Propylene Ethylene Ammonia LLDPE Ethylene glycol Urea Naphtha Project database (extract) Project Product Feedstock Capacity (ktpa) Status Borouge I Ethylene Ethane 600 Online Borouge II Ethylene Ethane 1450 Online Borouge III Ethylene Ethane 1500 Planned Fertil I Ammonia Naphtha 470 Online Fertil II Ammonia Naphtha 695 Planned

Agenda 1. Current MENA gas situation 2. Country examples (Saudi Arabia, Kuwait, UAE) 3. Implications for petrochemicals 4. Conclusions

Uncertainties Balance of MENA s light crudes and NGLs vs heavy crudes Role of alternative energy especially nuclear in displacing oil & gas in power sector Pace of new MENA gas developments (including unconventional) and intraregional gas trade Progress in reforming gas pricing; new pricing policies New regional markets for gas Gasification of new areas (Iraq, Levant, etc) Shipping (ECAs), ground transport Response to challenge of unconventional gas and US petrochemical revival

Contact Details Robin Mills, Head of Consulting, Manaar Energy Consulting, Dubai, UAE robin.mills@manaarco.com +971 4 326 6300 www.manaarco.com