US Chemical Manufacturing and Supply Chains Opportunities for the Delmarva Peninsula 3rd Annual Delmarva Freight Summit New Castle County Chamber of Commerce June 26, 2013

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Agenda • Project overview

• Chemical industry trends • Chemical manufacturing and the Delmarva Peninsula

• Supply chain implications

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IHS Consulting: An Integrated Approach

• Supply Chain

• Macroeconomics

• Chemicals Insight

• Industry Forecasts

• Energy Insight

• Safety and Security

• Transportation & Trade

• Sustainability 3

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Macroeconomic and Industry Context

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Research • Chemicals market study − Key commodities

− Relevance to Delaware and the Delmarva Peninsula

• Delaware primary research − Chemicals industry leaders − Distribution and logistics firms − Transportation agencies and companies

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Chemicals Supply Chains • Analyze key multi-modal

infrastructure (including pipelines) • Analyze regional and

wider supply chains • Chemical flows analysis

and forecasts

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Objectives and Deliverables • Identify economic opportunities • Analyze infrastructure investment opportunities • Conduct SWOT analysis

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5 Years Ago... The North American Chemical Industry Was Looking Ugly! • Canada was starting to see natural gas and ethylene plant feedstock production declines • Mexico had not had a major chemical investment in 20 years and project Phoenix died • The United States had oversupply of high cost chemical assets − no feedstock advantage − domestic demand was shrinking − trend in off-shoring of manufacturing

Global Investment Focus was on Asia & Middle East Capacity Rationalizations in North America 8© 2013, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

North America Energy Advantage Emerges…Is It Sustainable? $US per Million Btu 20

Gas as % of Crude 120%

18

100%

16 14

80%

12

10

60%

8 40%

6 4

20%

2 0

0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Crude (WTI) Natural Gas Gas as % of Crude

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Changes in Global Energy Markets have a profound impact on Petrochemicals… U.S. Natural Gas as a Percentage of Brent Crude Oil 120% Comparative Btu Price Basis

120%

100%

100%

80%

80%

60%

60%

40%

40%

20%

20%

0%

Quickly becoming the largest natural gas producer in the world…

90

95

00

05

10

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15

20

0%

North America Energy Advantage Emerges…Is It Sustainable? $US per Million Btu 20

Gas as % of Crude 120%

18

100%

16 14 12

10 8 6

The shift from crude oil parity to a significant advantage for natural gas has sparked renewed interest in North American based chemical and derivative investments

4

80%

60% 40% 20%

2 0

0% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 Crude (WTI) Natural Gas Gas as % of Crude

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Ethane Based Competitive Advantage Develops Dollars Per Ton, Ethylene Manufacturing Cash Costs By Plant 950 2003: WTI Crude = $31/bbl; US Natural Gas = $5.50/mmbtu 850 2009: WTI Crude = $62/bbl; US Natural Gas = $4.00/mmbtu 750

2009

650 2003

550 450 350 Asia

250 150

West Europe

North America

Middle East

50 0

25

50 75 100 Cumulative Ethylene Capacity (Million Tons)

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125

150

North American Ethylene Capacity Increases To Leverage Advantaged Ethane Announced (-000- MT) BASF/Fina (Port Arthur) Chevron Phillips (Cedar Bayou) Dow (Taft / Freeport) Eastman Equistar (All locations) Exxon (Baytown) Formosa (Point Comfort) Ineos (Chocolate Bayou) Oxy (Ingleside) Sasol (Lake Charles) Shell (Northeast) Westlake (Lake Charles/Calvert City) Williams (Geismar) Nova (Sarnia) Braskem/Idesa (Mexico) Total Cumulative Total

2012-2014 180 386 90 521

1500 1500*

1500 800 107 550* 1400 1000* 310 300

1,894

* Dow, Shell, NOVA, and Oxy capacity additions shown are IHS estimates © 2013, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

•Dow, 13 Shell, NOVA, and Oxy capacity additions shown are CMAI estimates

2016-2020

250* 1000 9,500 11,394

Ethylene: Domestic Producers Will Be Increasingly Export Focused • Naphtha cracking economics remain the 15.0 Global Price Setter

North America Net Exports Million Metric Tons Percent of Production Polypropylene Vinyls Polyethylene

12.5

• Business plans for new capacity include significant exports • Exports to be 50% of future production – ethane cost position is critical

35%

10.0

30% 25% 20%

7.5 15%

5.0

10%

2.5

5%

0.0

0% 90

95

00

05

10

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15

20

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The Shale Influence…..More • More natural gas and oil production • More investment in plants, equipment, and logistics

• More domestic ethylene production − More ethylene and derivatives, − Eventually more propylene and butadiene

• More chemical production based on natural gas − Methanol, ammonia, fertilizers

• More NGL production − Rapidly expanding pipeline logistics capability − New fields are being developed continually

• More exports of hydrocarbons and chemicals • More countries look to develop their shale © 2013, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

The Shale Influence…..Less • Less polyethylene export to Mexico − As domestic production starts in 2016

• Less co-product production − Pygas, propylene, and butadiene

• Less NGL Rail shipments as pipeline infrastructure is developed − Logistics investments catch up with increasing production

• Less polyethylene shipments to the Northeast − If and when the Northeast Shell cracker project proceeds

• Less coal shipments − As coal fired power plants are retired

• Less costly energy

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New capacity is necessary to return N. America to historical production levels… North American Basic Chemicals and Plastics Production Change (1990 base) 80

80

Million Metric Tons

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

90

95

00

05

10

15

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20

Pace of growth in North American production will depend on ability to sustain advantage… • Wide divergence

North American Basic Chemicals and Plastics Production Cumulative Change 1990-2020 80

80

Million Metric Tons

70

between oil and natural gas prices attracts $100 Billion in investment

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0 90 95 00 05 10 15 U.S. Natural Gas as a Percentage of Brent Crude Oil

• Moving product into

20

120%

120%

100%

100%

80%

80%

60%

60%

40%

40%

20%

20%

0%

90

95

00

05

10

15

20

0%

international markets has been critical to recovery and will be key to future growth

• A portion of the new

capacity will relate to units funded by foreign direct investment

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Profit Continues to Cycle Global Earnings Before Interest and Taxes U.S. $ per Metric Ton – Volume Weighted Basis

$300

North America West Europe Asia

Global Average

$250

$300

$200

$250 $200

$150

$150

$100

$100

$50

$50

$0

$0

-$50

-$50

-$100

-$100 85

88

91

94

97

00

03

06

09

Significant Regional Differences 19

12

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18 34

Chemical Industry Trends • After a weak 2012, improving

economic fundamentals are expected to enhance future growth prospects • Chemical demand continues to

migrate to the developing world • Unconventional feedstocks

will play an increasing role in shaping the global industry © 2013, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Chemical Industry Trends (cont’d) • High-cost regions need

strategies to offset increasing competitive pressure • Dislocation of supply and

demand increase need for sound supply-chain and go-tomarket strategies • New competitors emerge as

markets expand West in China and unconventional resource owners enter the stage © 2013, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Chemicals Manufacturing and the Delmarva Peninsula North Claym ont

Marshallt on

Clayto n Cheswold

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Supply Chain Implications • Regional competitive advantages/disadvantages − Infrastructure and connectivity

− Proximity to markets − Existing assets, economies of scale, labor pool, etc. − Regulatory environment

• Export markets, competition, and logistics • Transportation and supply chain costs and global

risks

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Bob Brodesky Director, IHS Supply Chain +1 (781) 301-9072 [email protected]

Tony Palmer Senior Director, IHS Chemicals +1 (914) 831-1753 [email protected]

Chris Grillo Senior Consultant, IHS Supply Chain +1 (781) 301-9288 [email protected]

© 2013, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.