Dave Witte Executive Vice President Business Advisory Services

Issues Facing Chemical Investment in Alaska s Cook Inlet Dave Witte Executive Vice President Business Advisory Services March 31, 2011 Anchorage 10-year Bangkok Resource Extraction Projects Projection Singapore Shanghai Houston New York London Düsseldorf Dubai

Presentation Outline CMAI Introduction and Role Overview of Global Chemical Industry Shale Gas Impacts on Chemicals Alaska Chemical Investment Opportunities

CMAI.. Leading global chemical consultancy firm for 30 years Serves over 2500 diverse clients from eight global offices Wellhead to brand-owners to retail Serves the oil and gas sectors via a consultancy alliance with Purvin & Gertz Provides analysis based on complex dynamics such as: Price analysis and forecasting Production capacities and costs Trade patterns Emerging technologies Materials/feedstock supply Cross industry cooperation (renewables) Socio-political factors Governmental regulation and policy

CMAI s role was to independently evaluate potential for chemicals as an industrial pull-through of ANS gas Two studies commissioned 2009 and 2010. First study gas-liquids Second study methane and liquids 1. Identify potential products and volumes 2. Evaluate potential markets 3. Analyze competitiveness

Presentation Outline CMAI Introduction and Role Overview of Global Chemical Industry Shale Gas Impacts on Chemicals Alaska Chemical Investment Opportunities

2011 Global EBIT Weighting Factors 676 Million Tons of Demand Plastics 28% Light Olefins 31% Methanol 8% Aromatics 15% Chlor-Alkali 18%

Basic Chemicals & Plastics Global Demand Recovery and Growth are Impressive Sharp decline followed by a sharp recovery in the Developing World (BRICs) New spending supports growth: Consumption levels rising Especially in China Concern about capacity overhang delays future investment plans Millions of Metric Tons Percent Annual Growth Demand Change (%) 12% 60 50 40 30 20 10 0 Demand Change -10-2% -20 Capacity -4% Additions -30-6% 2000 2005 2010 2015 10% 8% 6% 4% 2% 0%

Growth Favors Labor & Hydrocarbon Advantage Production growth is indicative economic development and/or relative cost position Mature Economies need an export cost advantage to advance production Developing economics attract local investment to support local demand International Markets are the perfect remedy for a slow or less-developed domestic environment - if you can compete Cumulative Production Growth Million Metric Tons 800 700 600 500 400 300 200 100 0 Middle East (Hydrocarbon Rich) Developing Countries Developed Countries 90 95 00 05 10 15 20

Asia & India Demand Growth Critical to Recovery and Sustained Growth Recovery in 2009 was confined to Asia & India Developed world was still searching for a real stimulus Region represents majority of future demand growth - absorbs capacity around the globe 35 30 25 20 15 10 5 0-5 Annual Demand Growth Millions of Metric Tons Share of Global Total: Rest of Asia & India China 90 95 00 05 10 15 2009 2010-2015 176% 67%

Trade Position is a Strategic Consideration 250 200 150 100 50 0 Global Imports Million Metric Tons +34 2011-76 90 95 00 05 10 15 20 Volume of Basic Chemicals & Plastics trade continues a steady climb Emergence of demand ahead of local scale creates opportunity Trade is the perfect antidote for a mature, domestic market that has a cost advantage

Global Trade Position may have Canada & the U.S. were severely impacted by the recession Developing a cost advantaged position became critical to operating decisions International markets remain open to those who can compete Rescued a Market 9.0 7.5 6.0 4.5 3.0 1.5 0.0 U.S. & Canada Net Exports Millions of Metric Tons Polypropylene Polyvinyl Chloride Polyethylene 90 95 00 05 10 15 Percent of Production 30% 25% 20% 15% 10% 5% 0%

Presentation Outline CMAI Introduction and Role Overview of Global Chemical Industry Shale Gas Impacts on Chemicals Alaska Chemical Investment Opportunities

Price Maker Since hydrocarbon prices are such an important component of production costs, in our industry the Price Makers are the highest cost component of supply ultimately satisfying demand. In other words, producers high on the flat portion of the cost curve setting the clearing price. Price Taker A producer that can alter (increase) its rate of production and sales without significantly affecting the market clearing price of its product. In other words, producers low on the cost curve enjoying the best margins.

Inflated Prices Reflect 3X Higher Costs Hyper Oil Markets lead to Record Production Costs Negative Influence on Demand but Higher Prices are Necessary to: Cover rising Raws Global Cash Cost of Production $1000 $900 $800 $700 $600 $500 $400 $300 $200 $100 U.S. $ per Metric Ton Justify Capacity 2010 View Current View $0 1990 1995 2000 2005 2010 2015

Indexed Rise Highlights Diverging Hydrocarbon inputs represent majority of production cost. Rate of cost push evident in the market varies greatly: High for oil refinery based products Low to moderate for gas based Product Economics 300 275 250 225 200 175 150 125 100 75 Cash Cost of Production Index: 2004 = 100 W.E. Ethylene U.S. Polypropylene U.S Paraxylene U.S. Ethylene U.S. ECU 04 05 06 07 08 09 10 11 12 13 14 15

Price Difference U.S. Natural Gas vs. U.S. and Alberta petchem industry was built on advantaged gas. A clear reversal of fortune has occurred. Presents a solid opportunity to leverage a significant cost advantage. Brent Crude Oil 15% 0% - 15% - 30% - 45% - 60% (btu Basis) Source: Purvin & Gertz - 75% - 75% 1990 1995 2000 2005 2010 2015 15% 0% - 15% - 30% - 45% - 60%

NAM Cumulative Production Growth N. America lost significant finished goods manufacturing to advantaged labor cost countries. This exodus has impacted domestic demand for petchems. Expansion requires a major commitment to the export market 70 60 50 40 30 20 10 0 4.1% AAGR Millions of Metric Tons 0% AAGR 2010 +6.0% -14.6% 2.3% AAGR? 1.2% AAGR 90 95 00 05 10 15 20 Ability to expand Gas Demand will define Critical Path

Conclusions For Mid Term Analysis Real demand growth has resumed. Developing countries are and will drive demand. Low-cost resource rich countries provide deficits. High crude & low gas prices separate natural gas liquid users, especially ethane, from the rest. Shale is a game changer for gas-based chemicals - but U.S. & Canadian expansion requires export strategy

Presentation Outline CMAI Introduction and Role Overview of Global Chemical Industry Shale Gas Impacts on Chemicals Alaska Chemical Investment Opportunities

Petrochemical & Derivatives Strategic Drivers Demand driven by consumption of durable / non-durable consumer goods. Divergence of crude oil, coal and natural gas Role of emerging economies for demand growth Slowing of Middle East capacity additions Globalization of trade Environmental legislation Role of National Oil companies

Petrochemical Critical Success Factors Every Petrochemical Project Needs (desires): Low Cost of Production Driven by availability & cost of feedstocks & energy Low Logistics Costs for RM s & Finished Products Proximity to feedstocks and end use markets Infrastructure availability and quality Low Capital Cost, Preferably Versus Other Locations Includes site & logistics capital Channel to Market (Commercial Strengths) Good, Stable Investment Climate Taxes, cycle timing, regulations, incentives, etc.

Alaska Gas & NGL Potential Uses Source NGL Separator Plant: Product Use NH3/Urea Plant 1) Raw stream Dry Gas Pipeline (Methane) Methanol Plant Enriched 2) NGL 2) Methane Natural GTL & LNG Gas 3) De-ethanizer Enstar Pipeline Export In-State Use 4) De-propanizer 5) De-butanizer Polyethylenes & MEG Plants Export Ethane Ethylene Plant Pentanes Butanes Polypropylene & PG Plants PDH Plant Export Propane Propane Tank Farm In-State Use

Alaskan Natural Gas & Ethane Prices Natural Gas price in Alberta is usually lower than the Chicago price, based on the cost of pipeline shipment, since Alberta is long on gas, (as is the US Gulf Coast). North Slope gas and ethane will be priced based on their netback after pipeline shipments to Alberta while Cook Inlet prices will be the North Slope price plus tariff. Ethane prices in Alberta are based on its BTU value in its only alternative use, as natural gas shipped to the US. However, US ethane has to compete against crude oil based cracker feedstocks on the USGC, so its price is higher than its BTU value there when crude oil is high relative to gas (as it is now). Ethane at Cook Inlet will have a greater discount to the USGC than natural gas will. North Slope Prices: NG = $5.51 Ethane = $6.01 Cook Inlet Prices: NG = $6.81 Ethane = $7.31 Differential vs USGC NG = (- $1.17) Ethane = (-$4.53) Note: The 2018 prices and differentials to the USGC shown here are in Constant 2009 $/ MMBTU. Differential to USGC NG = (- $2.57) Site comparison Table here Ethane = (-$5.83) Alberta Prices: NG = $7.06 Ethane = $7.56 Differential to USGC NG = (- $0.92) Ethane = (-$4.28) Chicago Price: NG = $7.92 NG Diff to USGC = (- $0.06) USGC Prices: NG = $7.98 Ethane = $11.84

Alaska Has Logistics Advantages to Asia and the US West Coast Cook Inlet has advantaged due to its location in the middle of the great circle route, with the potential backhaul freight rate reductions to Asia. >3,000 vessel passages/ year Specific advantages include: Favorable logistics costs versus Alberta production for Asian markets Favorable logistics costs versus Asian production for US West Coast markets Competitive logistics costs versus USGC for US West Coast markets

Advantaged Polyethylene Delivered Cash Costs to China Company A Company B Alaska Company D Company E Company F Company G Company H Company I Company J Company K

Alaskan Petrochemical Channel to Market Issues A foreign company would be considered a domestic supplier in the US market if it has production capacity in Alaska, which could help in marketing to customers and in its dealings with the government. An Alaskan plant would not only have duty free access to the entire US market, but would also be able to participate in the North American Free Trade Agreement with Canada and Mexico, as well. The first mover on petrochemical investment in Alaska will understand the local situation better than latecomers will, and is better positioned for additional future petrochemical and downstream investments. Partnering with or buying a US company could facilitate market development activities for an Alaskan plant s owner (IPIC bought Nova, and SABIC bought GE Plastics).

Alaskan Petrochemical Channel to Market Issues Political stability of the US government and tax system. A weak dollar could favor a US investment that is based on domestic capital, operating costs and raw materials. Cycle timing is favorable for manufacturers. 2010/11 is the bottom of the chemical cycle trough. Investment in productive assets is a way to use funds that might be underperforming in financial investments. Alaska will be an ally in this process. This is not an acquisition of an existing company, but rather the establishment of a new presence/company in Alaska. Alaska will likely strongly support that endeavor.

Petrochemical Critical Success Alaska s score: Low Cost of Production Factors High, but for gas and gas liquids derivatives Low Logistics Costs for RM s & Finished Products Good, especially for solid products Low Capital Cost, Preferably Versus Other Locations Poor?, high assumed escalation vs USGC Channel to Market (Commercial Strengths) Moderate, No local industry - requires established player with export focus but West Coast and Asian markets an option Good, Stable Investment Climate Poor, Uncertainty over volumes, schema and timing

Conclusions The chemical industry is demonstrating significant growth globally, especially in developing world primarily Asia. Fundamental changes in oil vs. gas prices are creating an opportunity for those with natural gas and natural gas liquids. Gas rich regions are typically dislocated from market demand; many are in high-risk investment areas Chemical companies are searching for investment opportunities with a stable and clear investment climate. Assuming clarity of supply, Alaska has advantages in supplying Asian import demand.