State of the Chemical and Petrochemical Industry Is India the next driver? Presentation to IOC Conclave 29 July 217 Dave Witte Senior Vice President, IHS Markit GM - Oil Markets, Midstream, Downstream and Chemicals +1 281 752 3276 dave.witte@ihsmarkit.com 1
IOC Petrochemical Conclave Economy, Energy and Geopolitics Global Chemical Industry Trends India in the Context of the World 2
IOC Petrochemical Conclave Economy, Energy and Geopolitics Global Chemical Industry Trends India in the Context of the World 3
Global economies poised to accelerate, but not to the levels seen in the last decade Real GDP, Annual % Change 1 8 6 4 2-2 -4 2 23 26 29 212 215 218 World Advanced countries Emerging markets Annual % Change in GDP 214 215 216 217 218 219 World 2.8 2.8 2.5 3. 3.2 3.1 USA 2.4 2.6 1.6 2.3 2.7 2.3 Canada 2.6.9 1.4 2.7 2.3 2.3 Eurozone 1.2 1.9 1.7 2. 1.8 1.7 UK 3.1 2.2 1.8 1.4 1. 1.2 China 7.3 6.9 6.7 6.6 6.3 6.1 Japan.2 1.2 1. 1.3 1..7 India 6.9 7.7 7. 7.3 7.4 7.6 Brazil.5-3.8-3.6.2 1.7 3.5 Russia.8-2.8 -.2 1.5 2.1 1.8 4
Geo-political, economic and regulatory uncertainty impacts investment decisions Extent and degree of trend toward economic isolationism Goods movement - Global trade framework Labor movement China s economic pivot Reduced export reliance Push toward service Inter-Asia integration One-belt/One Road Climate policy 5
MMb/d Rig count How will OPEC manage the reactivity and velocity of US shale production? Monthly US crude oil production US horizontal oil rig count by play 11. 1.5 1. 9.5 1,4 1,2 1, 9. 8.5 8. 7.5 7. History 8 6 4 2 6.5 6. Jan-13 Apr-14 Jul-15 Oct-16 Jan-18, EIA Feb-11 Feb-13 Feb-15 Feb-17 Other Bakken Permian Eagle Ford Niobrara Source: Baker Hughes, IHS Markit Markit 6
Full-cycle costs in Dated Brent terms (US dollars per bbl) Break-even price in WTI terms (US dollars per bbl) Q1 213 Q2 213 Q3 213 Q4 213 Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 Q1 216 Q2 216 Q3 216 Q4 216 The oil industry is cutting costs to make up for lower prices Break-even prices for representative new projects, 214 and 216 $1 $9 $8 $7 $6 $5 $4 $3 $2 $1 $ Middle East onshore 214 216 US tight oil Canadian oil sands (SAGD) Notes: Full-cycle costs are expressed in terms of the Dated Brent price necessary for a project to break even, assuming a 1% internal rate of return. The 214 and 216 break-even estimates for these supply sources are intended to broadly depict the change from the start of the oil price collapse in mid-214 to the latter part of 216. For details on how break-even prices of representative new projects for each supply source are estimated, please see the box "How we estimated the break-even prices in this report." Median well break-even prices of several US tight oil wells $8 $7 $6 $5 $4 $3 $2 $1 $ Notes: The break-even price is the WTI price required for the project to cover all of its estimated capital and operating costs and generate a 1% rate of return. The plays are the Bakken, Bone Spring, Eagle Ford, Niobrara/Wattenberg, Scoop, Stack, Wolfcamp Delaware, and Wolfcamp Midland. The cost of oil the oil price needed to justify investment has fallen across the board, but by different degrees depending on the geography and type of development Lower service sector costs and improvements in how projects are designed, built and operated are two central forces that have pushed down the cost of oil around the world 7
Canada United States Brazil Russia United Kingdom Kazakhstan Norway Oman India Argentina Azerbaijan Colombia Mexico China Million barrels per day Non-OPEC supply growth neutralizing OPEC cut impact Annual change in crude oil production for selected non-opec countries, 216 18 1..8.6.4.2. -.2 -.4 -.6 -.8-1. 216 217 218 8
1Q 213 2Q 213 3Q 213 4Q 213 1Q 214 2Q 214 3Q 214 4Q 214 1Q 215 2Q 215 3Q 215 4Q 215 1Q 216 2Q 216 3Q 216 4Q 216 1Q 217 2Q 217 3Q 217 4Q 217 1Q 218 2Q 218 3Q 218 4Q 218 Million barrels per day A near-term global supply surplus is set to reemerge World oil (liquids) demand and production by quarter 12 11 1 Demand Production Outlook 99 98 97 96 95 94 93 92 91 9 9
Million barrels per day Million barrels per day New non-opec supply needs sanctioning by 219; half is deep water and ultra-deep water (mainly Brazil and DWGoM) Non-OPEC projects by terrain 12 Non-OPEC projects by terrain in 225 3. Onshore Shallow water (<1, ft) 1 Ultra-deep water (>5 ft) 2.5 Deepwater (1,-5, ft) 8 2. 6 Deepwater (1,-5, ft) 1.5 4 Shallow water (<1, ft) 1. 2 Onshore.5 215 22 225. North America Africa Asia CIS Europe Latin Middle East 1
IOC Petrochemical Conclave Economy, Energy and Geopolitics Global Chemical Industry Trends India in the Context of the World 11
Uncertainty driving some common reactions across the industry Dynamic Increasing protectionism Uncertain gas-oil spreads Economic mediocrity, policy uncertainty Strategy Defensive: domestic-focus except for clear areas of competitive advantage Asset optimization via feedstock flexibility Focused opportunistic investment Inorganic expansion via M&A Corporate and industry restructuring 12
Million of Tons or Billion $ (214) Percent Base Added Capital investment has fallen to the lowest levels since Y2K recent uptick toward 221 Capital Spending in the Chemical Industry 1 8% 8 6% 6 4 Additions well below 4% required to balance growth 4% 2 2% % 2 22 24 26 28 21 212 214 216 218 22 China Asia ex China Middle East & Africa Americas Europe Spend 13
Deal Volume, US$ (Billion) X LTM EBITDA Money flows move M&A to record levels 25 15 2 12 15 9 1 6 5 3 26 27 28 29 21 211 212 213 214 215 216 Transaction Size Commodity Specialty Sources: Company research, FactSet, Capital IQ, press releases, HSBC Notes: Multiples based on LTM EBITDA at the time of the transaction 14
IOC Petrochemical Conclave Economy, Energy and Geopolitics Global Chemical Industry Trends India in the Context of the World 15
Population Millions GDP Billion $ Customers: India population to exceed China within ten years; GDP lags but turning up China and India Population 2-24 2, China and India GDP Growth Rate 2-24 35, 3, 1,5 25, 2, 1, 15, 5 1, 5, 2 25 21 215 22 225 23 235 24 2 25 21 215 22 225 23 235 24 China India China India 16
Million Metric Tons Industry not meeting domestic demand India Net Trade 216 2 1-1 -2-3 -4 Ethylene Equiv Benzene Equiv India Propylene Equiv Paraxylene Equiv Decision making and permitting remains a slow process in India Although India is a naphtha exporter, new cracker projects struggle to source sufficient feeds; feedstock pooling required C3 derivatives (ex PP), chloralkali, styrene little/no capacity in India. Investment would stimulate downstream demand Not much petchem investment by foreign companies in India 17
Kg per Capita Growth headroom exists for all value chains 216 Per Capita Consumption 25 2 15 1 5 Styrenics Polyester PE PP PVC China India World 18
Kg/Capita Percent Specialties also have opportunity for strong demand growth leading the world Regional specialty chemicals consumption per capita: 216 35 Forecast specialty chemicals volume growth rates by region: 216 21 8 3 25 7 6 5 2 4 15 1 Average world per capita consumption = 75 kg pp 3 2 5 1 North America Western Europe Middle East and Africa China Other Asia North America Central and South America Western Central Europe and Eastern Europe Middle East and Africa Japan China India Other Asia 19
Thousand Metric Tons Thousand Metric Toms Demand growing from a small base; current capacity quickly outpaced PVC, PTA,PP and PE Demand, Tons 5, India: PVC, PTA, PP & PE Capacity, Demand and Net Deficit 5, 4, 4, 3, 3, 2, 1, 2, 1, -1, -2, 215 22 225 23 India China World -3, 215 22 225 23 Capacity Demand Net Deficit Healthy demand growth will lead to a net deficit of about 24 million tons by 23 for PVC, PTA, PP & PE Note: India capacity growth build beyond 22 without hypo capacity. 2
Million Metric Tons Capex Required, $ Bn Maintaining a reasonable trade balance will require massive investment India : Opportunity and Capex Requirement (PE, PP, MEG and PVC) 45 4 35 3 25 2 15 1 5 217 219 221 223 225 227 229 231 Total Demand Total Deficit Total Capex Required, $ Bn 9 8 7 6 5 4 3 2 1 21
Challenges exist, but not insurmountable with policy and planning Attribute Feedstock Availability Feedstock Cost Demand/Demand growth Issue Availability constrained No advantage; but CAPEX advantaged High Demand Growth Potential Growing refined product demand creates refinery integration options Competitive with global liquids investment; need scale/integration Large growing local market a substantive structural advantage Technology Access Ease of doing business Infrastructure Low Low but improving Below average Needs policy support for efficient regulatory framework, incentives and public investment 22
Conclusions Economic outlook trending higher Oil pricing still uncertain; shale retards upward price movement uncertainty impacting chemical investment and changing industry structure via M&A India s improving fundamentals stand out as a bright beacon in a sea of uncertainty The time is now for policy and investment planning to capture the chemical potential 23