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What is the Future of the Gulf Coast Petrochemical Industry?. Presentation at a Conference Sponsored by Global Energy Management Institute, University of Houston April 29, 2005 Avi Nash.

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what is the future of the gulf coast petrochemical industry

What is the Future of the Gulf Coast Petrochemical Industry?

Presentation at a Conference Sponsored by

Global Energy Management Institute,

University of Houston

April 29, 2005

Avi Nash

Avi Nash LLC

slide2
This information is proprietary and not to be copied, or redistributed in any form, without the permission of Avi Nash LLC

Avi Nash LLC

future of the gulf petrochemical industry
Future of the Gulf Petrochemical Industry
  • Yes, There IS a Future!
  • It Will be Different…but for Reasons Different From Just the “Feedstock Issue”
  • Key Differences Beyond Feedstock Mix.
    • Product Mix
    • Players
    • Profitability

Avi Nash LLC

slide4
Setting the Stage
  • The Issues
  • Feedstock Shifts
  • Product Mix Shifts
  • Ownership Shifts
  • Putting it All Together

Avi Nash LLC

slide5

Geo-Political Factors

  • Government Policy: US; Foreign

ENERGY

REGULATIONS

Product

Mix

Innovation

Future of the Gulf Coast Petrochemical Industry

Profitability,

Ownership

Competitive

Dynamics

“Center of Gravity”

Of Supply

DEMAND

Avi Nash LLC

slide6
Setting the Stage
  • The Issues
  • Feed-stock Shifts
  • Product Mix Shifts
  • Ownership Shifts
  • Putting it All Together

Avi Nash LLC

slide7
Conventional Wisdom: Since 2000, the Cost of Energy, Particularly Gas, Has Crippled USGC Competitiveness

Reality: (1) The Trend is Not New

Source: Avi nash LLC

Avi Nash LLC

slide8

Conventional Wisdom: Since 2000, the cost of Energy, particularly Gas, Has Crippled USGC Competitiveness (cont..) Reality: (2)Decline in Competitiveness is Far from Across-The-Board

Avi Nash LLC

slide9
Reality: 3) Recent Energy Prices Mask Deeper Issues Facing US Gulf Coast Producers: Others are Catching up!

Mid-1980s

5 = Favorable; 1= Unfavorable

Avi Nash LLC

slide10
Reality:3) Recent Energy Prices Mask Deeper Issues Facing US Gulf Coast Producers: Others are Catching up! (Cont’d)

2005

5 = Favorable; 1= Unfavorable

Avi Nash LLC

slide11
Reality: 3) Recent Energy Prices Mask Deeper Issues Facing US Gulf Coast Producers: Others are Catching up! (Cont’d)

2015E

5 = Favorable; 1= Unfavorable

Avi Nash LLC

why the marginalization of us competitiveness reasons are partly structural partly self inflicted
We’ve used up Most of Stranded Gas (Others Haven’t).

Globalization (via Capitalism!!) Has Shifted the Playing Field for Demand..and Supply.

Periodic Cyclical Peaks Encourage Complacency

Commoditization, With Increasing Maturity

Why the Marginalization of US Competitiveness?Reasons are Partly Structural; Partly Self-Inflicted

Structural

  • Have we Done The Best We Can …to Replace More of What We Use?
  • …To Cut Costs More Aggressively?...More Proactively?
  • …And Consistently, Instead of Periodically?
  • Innovation Has Lagged: “The R&D Productivity Issue”
    • What you Spend vs. What you Get For It.

Self-Inflicted

Avi Nash LLC

slide13
Setting the Stage
  • The Issues
  • Feedstock Shifts
  • Product Mix Shifts
  • Ownership Shifts
  • Putting it All Together

Avi Nash LLC

of course the gas hit is real with the most direct hit being to methanol and ammonia no surprise
Of Course, The Gas Hit is Real…With the Most Direct Hit Being to Methanol and Ammonia (No Surprise !)
  • Regulation shrinks Demand (MTBE)
  • Gas Hit Shuts Celanese Methanol (Acetic Acid)

Chemdata Inc.

Avi Nash LLC

slide15
The “Oil & Gas Story” is more Complex for Other Products. In case of Ethylene, consider 3 Scenarios for Oil and Gas

Note: WSJ (4/28): WTI $51.62/bbl; Henry Hub $7.09/mmbtu

Avi Nash LLC

slide16
Reality: The North American “Hit” is Real…But varies by Producer, Oil/Gas Prices and position in the Cycle.

Delivered Cash Cost Comparison For HDPE, cents/lb

Avi Nash LLC

this is borne out by recent profitability share prices
This is Borne Out by Recent Profitability & Share Prices

Naphtha Margins less Ethane Margins

Uniform Stock Performance

Needed to Justify the Higher Cost of Capital of Naphtha Crackers

Nova Chem.

(Alberta+flexi)

Westlake

(Ethane)

¢/Lb

Lyondell

(Flexi)

CMAI Global Inc; Compustat Inc.

Avi Nash LLC

perception of the hit may exceed reality in some cases
Perception of the Hit May Exceed Reality in Some Cases
  • Oil-to-Gas Ratio Has Limited Room to Fall Further.
  • Self-Correcting Actions Get Triggered
    • Debottlenecking of Liquid Crackers; Shutdown of Old Gas Crackers
    • Increase in Capacity in Canada (Ethylene), Trinidad (Methanol, Ammonia)
    • LNG Importation Projects

Avi Nash LLC

slide19

Need: Practical Ways of Reducing “Gas-Feed” Cost and its VolatilityUS Challenge( For Industry and Regulators):“Why Should a 6.0x Oil-to-Gas Ratio be the New Level? Why Not Higher?”

  • Creative Ways to Accelerate Regional Production?

…Alaska; Canada; Mexico; Trinidad.

  • Facilitating Infrastructure For Getting the Gas Where it is Needed.
  • Addressing and Resolving Objections to LNG Terminals?

Avi Nash LLC

perception of the hit may exceed reality in some cases20
Perception of the Hit May Exceed Reality in Some Cases
  • Oil-to-Gas Ratio Has Limited Room to Fall Further
  • Self-Correcting Actions Get Triggered
  • Product Mix Shifts
  • Bottom Line: Gas Hit is Real but,
  • No Longer Asymmetric with Oil (as it was from ’50-’00)… and so unlikely to further worsen Competitive Position
  • Disproportionately Relevant for Products Such as PE and EG.

Avi Nash LLC

slide21
Setting the Stage
  • The Issues
  • Feedstock Action…and the Reaction
  • Product Mix Shifts
  • Ownership Shifts
  • Putting it All Together

Avi Nash LLC

slide22
“What Will the Gulf Coast (Be Allowed to) Make?”This Has Been Changing Meaningfully…and Will Continue To do so

...Partly From Less Gas Cracking

Gas-Based Crackers

Flexi-Based Crackers

Avi Nash LLC

competitive advantage is still decent in some areas relative to say polyethylene
End-Markets still driven by higher per-capita GDP

Exterior Paint

Disposable Hygiene Products

Furniture, Housing, Appliances

Engineered Plastics

U.S. Growth Will Trail Overseas…

But Imports Unlikely in the Intermediate Term

BOTTOM LINE: Competitive Advantage on the Gulf Coast for BASF, ROH, Lyondell (PO) etc.

Competitive Advantage is Still Decent in Some Areas. Relative to, Say, Polyethylene

Propylene Chain

(Acrylic Acid, Propylene Oxide, Oxo-Alcohols, Phenol-Acetone)

Vinyl-Chain:

VCM, PVC, Rigid PVC Fabrication

  • End Markets Driven by US Housing Market and Substitution.
  • Structural Issues Discourage Mid-East Investment
    • China’s PVC Advantage Limits Export Opportunity.
    • Freight Cost for Caustic.
  • U.S. Sheltered from Imports in Rigid Applications, eg: Pipe, for Freight Cost Reasons.
  • BOTTOM LINE: Shin-etsu Investing Heavily in N.Am. Gulf Coast.

Avi Nash LLC

competitive advantage varies by product and affects product mix
Competitive Advantage Varies by Product…and Affects Product Mix

U.S. Share of Global VCM, Ethylene(C2) & Polyethylene Market

Ethylene & PE share declines have accelerated; VCM Decline stays steady

Polyethylene

C2

VCM

Avi Nash LLC

one likely result integration importance should rise
One Likely Result: Integration Importance Should Rise
  • Attempt by Many to Emulate Best Practices in Refinery-Cracker Integration.

- “How Much of the 5¢/Lb Potential Are WE Capturing?”

  • Greater Upgrading of By-Product Streams
  • Reinvestment in Mega Sites (Similar to Ludwigshafen)
    • Disproportionately Higher vs. Industry and Company averages
    • Enough to Maintain al least Acceptable Competitiveness

Avi Nash LLC

us challenge industry and regulators
US Challenge (Industry and Regulators):

How Best Can the Gulf Coast Improve Competitiveness..

…. in Chains Where it has Advantage,

…. Such that the Competitiveness Can be Defended?

Example: Propylene

  • How much more Propylene can be squeezed out?
  • At What Cost… Under Different Scenarios?
  • Directed into Which Products and Markets?
  • “Captively”, or Left to Others to Upgrade?

Example: Refinery-Cracker Integration

  • How Best to Leverage Scale & Infrastructure on Gulf Coast?
  • How to Accelerate Incorporation of Best Practices Involving Process Technology, Process Control, ERP, Software, Logistics, Outsourcing?
  • What Limiting Steps need to be overcome for the next level of Benefits?

Avi Nash LLC

mix shift end markets
Mix Shift: End Markets
  • Stating the Obvious:
  • Fewer Exports of Certain Commodities, eg ethylene-chain derivatives
  • More Volatile Exports of these as US increasingly becomes the swing producer
  • Greater Exports of specialized Derivatives, Materials

Avi Nash LLC

secular product mix shift less material intensive more knowledge intensive
Secular Product Mix Shift: Less Material- Intensive, More Knowledge-Intensive
  • European Case History

Ciba-Geigy, Sandoz, Rhone-Poulenc, Hoechst, ICI,

and, to a lesser extent, Bayer, Akzo, Solvay

  • US Transformations: Pharma or Ag Biotech

Monsanto, American Cyanamid, and, to a lesser

extent, Du Pont

  • US Transformations: More Downstream

Rohm and Haas, 3M

  • Bottom-Line: Disproportionate Growth in Value of “Users”

Formulators: eg Sherwin-Williams

Distributors/Service Providers: eg Gases, Sigma-Aldrich, Ecolab

Materials: eg 3M,ITW(Adhesives), Toray, Fiberite

Avi Nash LLC

industry challenge how to increase the productivity of r d
Industry Challenge: How to Increase the Productivity of R&D?
  • What to Spend on?
  • How Much to Spend?
  • Equally Importantly,

Reducing “False Positives”, and

Reducing “False Negatives” in the R&D Process.

  • The Role of Fresh Approaches

High Thru-Put Experimentation

Informatics

Avi Nash LLC

slide30
Setting the Stage
  • The Issues
  • Feedstock Action…and the Reaction
  • Product Mix Shifts
  • Ownership Shifts
  • Putting it All Together

Avi Nash LLC

ownership changes
Division of Companies.

PTA, EG (Dow Chemical)

Polyester, Spandex (Dupont)

Polyethylene, Olefins (BP)

Small, or Mid-Sized Players

Millenium

Celanese

Semi-Commodity Companies eg: Great Lakes, Noveon.

Drivers:

Move Down Stream

Cash Out

Ownership Changes

Sellers

Buyers

  • “Private Equity” Firms.
    • Not Strategic Owners.
  • Focused Industry Players.
    • Relatively New Entrants, e.g: Koch, Sun
    • Consolidators, e.g: Lyondell.
  • Foreign Competitors.
  • Drivers:
    • Size, Share
    • Market Access
    • “Synergy”
    • “Make a Quick Buck”

Avi Nash LLC

slide32

Ownership Changes: Changes Little in Most Cases. Most Products Continue to Have too Many Players to Allow Pricing Power.Acquisitions Driven by Size or Share Alone Fail to Deliver

US Ethylene Industry Structure is Way Too Fragmented

  • Question:
    • What is the Franchise Quality of the Purchased Assets?
    • What is the Acquirer's confidence in Adding Value to Acquired Assets?
    • What is the price paid relative to “Cycle-Average” Earnings?

Avi Nash LLC

slide33
Setting the Stage
  • The Issues
  • Feedstock Action…and the Reaction
  • Product Mix Shifts
  • Ownership Shifts
  • Putting it All Together

Avi Nash LLC

putting it all together
Putting it all Together
  • Why the Gulf Coast Industry Won’t Go Away

. Infrastructure, Integration, Logistics Advantages

. People & Productivity Advantages +

Proximity to the #1 Market

. “Delivered-Cost” Advantage in Local market

for Many Products

Avi Nash LLC

putting it all together35
Putting it all Together
  • Why the Gulf Coast Industry Won’t Go Away
  • Why the Gulf Coast Industry Will Slow/Shrink

. Local market Growth Slowing

. “Delivered-Cost” Advantage into Export Markets

Disappearing in some cases

. “Delivered-Cost” Advantage in Local Markets shrinking

. Demise of Old Non-integrated Assets (slowed by Exit

Costs), often without reinvestment in new ones

Avi Nash LLC

putting it all together36
Putting it all Together
  • Why the Gulf Coast Industry Won’t Go Away
  • Why the Gulf Coast Industry Will Slow/Shrink
  • Why Disparities will Increase Between Players

. Big Differences in Execution, Focus

. Big Differences in Innovation: R&D, Production, Marketing

. Big Differences in Re-investment: Cap-Ex, R&D

. Big Differences in Profitability

Avi Nash LLC