Is Liquids Cracking the Future of Gulf Coast Petrochemicals?

1. Is Liquids Cracking the Future of Gulf Coast Petrochemicals? Fran Keeth Executive Vice President Shell Chemicals Limited

2. Petrochemical feedstock: oil and gas Gas Cracking Separation of natural gas and natural gas liquids (NGLs) Ethane, Propane,Butane Raw Natural Gas ‘Gas’ Cracker Ethylene power, heat • USGC Ethylene Production • 70% from Gas • 30% from Liquids Liquids Cracking Refinery distillation Crude Oil Liquids Cracker Naphtha, Gas Oil Ethylene Co-products (Propylene, C4s, Gasoline, Aromatics) transportation fuels, heat, power

3. Ethylene manufacture From Liquids From Gas (NGL) Fixed Cost Energy • Co-Product • Credits: • Propylene • C4s • Gasoline • Aromatics Co-Product Credits • Feedstock • Liquids Fixed Cost Energy Net Ethylene Cost Net Ethylene Cost • Feedstock • Gas (NGL)

4. Natural Gas to Crude Oil Ratio 1990 – 1997 Average = 0.60 1998 – 2004 Average = 0.88 @ 6 MMBtu/bbl

5. Historical ethane vs. naphtha cracking margins for generic USGC crackers Source: CMAI

6. Global ethylene production costs • Middle East lowest cash cost • Ethane availability enables Middle East supply growth • Middle East 9% of world ethylene today 14% by 2010 Source: CMAI

7. 9.9 2.5 1.0 1.8 -1.0 -1.0 export import 1996 2001 2010 Shifting trade flows in polyethyleneNet trade in polyethylene 1996 – 2010 (mln t/a ) 0.3 1.8 1.9 -0.4 -0.9 -1.1 -2.0 -1.0 -8.3 -0.9 -1.3 -1.1 Source: historical data - Parpinelli TECNON; Shell forecasts

8. Co-Product Price Composite Index USGC Generic Naphtha Cracker Percent Basket of naphtha cracker co-product values, normalized by crude price and indexed to long-term average, includes propylene, C4s, pyrolysis gasoline components Increasing in 2004 1985 – 2003 Average = 100%

9. Higher Values for “non-C2” On-Purpose Propylene Growth Source: CMAI

10. US Ethylene Market Expected demand growth met by capacity creep/de-bottlenecks Source: CMAI

11. USGC Refining Picture - Current • No new grass roots US refineries in last 30 years • US fuels demand greater than domestic supply • Global demand and limited supply growth => favorable margins in recent years • Clean fuels regulations • - less sulfur • - less aromatics (Bz) • - lower vapor pressure & MTBE • Invested/investing in hydrotreating & coking

12. Western Hemisphere Crude Shifts Source: Simmons & Co., Platts

13. USGC Refining Picture – Future? • Refinery additions - chemicals feed? • Gasoline future: FCC, coking, benzene extraction • Distillate future: Hydrocracking & coking • Steam cracking as ‘conversion capacity’ • Only integrated refining/chemical companies likely to play

14. High Natural Gas/ Oil Ratio Low Relative Competitiveness of USGC Cracking – Gas vs. Liquids Future? X Past X Co-product Values Weak Strong

15. Conclusions • Liquids cracking competitiveness improves • Demand does not warrant new crackers (liquid or gas) • New liquids feedstock opportunities may be created • Revitalization of USGC petrochemicals based on liquids feeds unlikely We need to make the most of what we have