Ron Gist November 14, 2008

1. The Availability Of Feedstocks In A Global Surplus The Petrochemical Feedstock Association of the Americas (PFAA) Fifthteenth Annual Conference Ron Gist November 14, 2008

2. Today’s Topics • What is LPG? • Why is there a surplus of LPG? • What about naphtha? • Which feedstocks will be cracked?

3. What is LPG?

4. LPG is a BYPRODUCT • LPG is a BYPRODUCT—there are no LPG wells! • LPG is produced as a byproduct of: • Oil production (via the processing of associated gas) • Gas production (via the processing of non-associated gas—including LNG) • Refining • Therefore, LPG is a supply-driven market in which demand must adjust to match supplies. • LPG production tends to increase quickly when one or more of the above industries is expanding quickly.

5. LPG is sometimes “dumped” into the U.S. market • LPG is a global commodity that easily moves between regions. • The size of the surplus will depend on: • Changes in supplies around the world • Changes in demand around the world • The U.S. will receive the LPG that nobody else can use. • Thus, waterborne imports of LPG into the U.S. will likely swing dramatically due to shifts in the global market. These shifts will be: • Seasonal • Year to year

6. LPG is primarily a cooking fuel East of Suez Demand 85 Million Tonnes (2007) West of Suez Demand 143 Million Tonnes (2007) Source: Purvin & Gertz

7. LPG requires complicated distribution systems 7 7

8. Why Is There A Surplus Of LPG?

9. Global LPG supply is growing rapidly LPG production is rising in most regions of the world. Supply growth will be highest in the Middle East. The Middle East will soon surpass North America as the largest producer in the world. Overall global LPG supply growth through should average more than 3%/year. Rapid supply growth will exceed demand growth and create a large supply surplus. LPG Supply, Million Tonnes Source: Purvin & Gertz 9

10. LPG production in the Middle East is expected toexpand significantly LPG production in the Middle East did not rise very fast during the early part of the decade. Project delays have slowed supply growth in the region, but only temporarily. Middle East supply growth should jump sharply during the next few years. Significant growth in LPG production is expected in Qatar, UAE and Iran. LPG Supply, Million Tonnes Source: Purvin & Gertz 10

11. LPG production in Asia is also rising rapidly as new refining capacity is added LPG production is expanding fairly fast in China and India. The regional refining industry is undergoing a massive expansion to meet rising demand for refined products. Regional LPG supply has already increased by nearly 10 MM tonnes per year since 2000 Production should grow at about 4% per year in the near term. LPG Supply, Million Tonnes Source: Purvin & Gertz 11

12. Demand for LPG is also rising quickly, particularly in Asia and the Middle East Asia is now the largest LPG consuming region in the world. The Middle East is becoming a more significant LPG demand center due to rapid expansion of the petrochemical industry. Overall European LPG demand is flat but will increase if low-priced supplies are available for petchems. North American demand growth is also fairly dependent on the price sensitive petchem feedstock market. LPG Demand, Million Tonnes Source: Purvin & Gertz 12

13. LPG demand growth varies from region to region Regional LPG Demand, Million Tonnes • The Middle East will be the fastest growing regional market for LPG. • The market in Asia is also expanding quickly. • LPG demand in Europe and North America is growing at slower rates. Source: Purvin & Gertz

14. Consumption of LPG in the res/com and chemical sectors continue to dominate the global market LPG demand in the residential/commercial sector has been growing faster than the overall market. However, growth in the res/com sector may slow due to high prices. Together the res/com and chemical market sectors account for nearly 75% of total global consumption. Thus, future LPG market growth is very dependent on these two large end-use markets. World LPG Demand, Million Tonnes Source: Purvin & Gertz 14

15. Global LPG exports will expand significantlyduring the next few years Global LPG exports ramped up between 2002 and 2005 but have grown only gradually since 2005. LPG exports will probably start to rise at a faster rate in 2008 and 2009. The Middle East will have the biggest impact on global LPG trade. Total world LPG exports should soar by 10 MM tonnes/year by 2012 and then continue to rise. Major World LPG Exports, Million Tonnes Source: Purvin & Gertz 15

16. Middle East exports will rise sharply through 2010 and continue to increase thereafter Middle East exports were fairly flat in 2006 and 2007 but started to rise in 2008. Between 2007 and 2010, Middle East exports will likely rise by over 7 MM tonnes/year. Exports are expected to rise in Qatar, UAE and Iran. Some decline in exports from Saudi Arabia is expected as petrochemical feedstock demand ramps up. Iraq could again become a net exporter. Middle East LPG Exports, Million Tonnes Source: Purvin & Gertz 16

17. Exports from Africa will also rise sharply for several years and then continue to increase Africa LPG Exports, Million Tonnes • Exports from Algeria will likely remain fairly flat. • However, exports from Nigeria should rise rapidly. • Exports from both Angola and Equatorial Guinea should also increase. • Much of the LPG production growth is associated with LNG projects. Source: Purvin & Gertz

18. Global production of LPG is expected to rise faster than base demand, creating a surplus Supply/Demand, Million Tonnes Source: Purvin & Gertz 18

19. The surplus will be need to be absorbed as ethylene plant feedstocks in all regions Million Tonnes Source: Purvin & Gertz 19

20. USGC waterborne imports of LPGare very seasonal Average Monthly Imports (2003 to 2007) - Million Tonnes Source: Waterborne Energy

21. Conclusions about the LPG market Rising crude oil production and refinery operating rates are producing more LPG worldwide. LNG and GTL (gas-to-liquids) projects will add to the global surplus. Worldwide conventional demand will probably not grow fast enough to absorb the surplus. Petrochemical producers will consume surplus supplies, if prices are low enough. The world LPG market is very dynamic, and it would not take a big shift in global LPG supply or base demand to significantly alter trade patterns and regional market conditions. The U.S. has unique characteristics that make it well suited to take advantage of these changing market dynamics. 21 21

22. In a supply-push market, LPG imports in the U.S. can span a very wide range Waterborne USGC Imports, Million Tonnes • Many possible changes in the global LPG market can affect imports into the U.S. • Thus, imports could range from 6 million tonnes/yr to as much as 12 million. • The implication is that the U.S. LPG and petrochemical markets must be able to react quickly. HIGH CASE Slowdown in China/India Demand BASE CASE LOW CASE Reacceleration in Demand (Res/Comm or Petchem) Source: Purvin & Gertz

23. What About Naphtha?

24. U.S. gasoline demand growth began to slow in response to higher prices U.S. Gasoline Demand, Million Barrels per Day 1.6%/yr growth Source: U.S. EIA history, Purvin & Gertz forecast

25. As refineries adapt to new environmental regulations, there will be petchem implications • Declining demand for gasoline means: • Less need for blending components such as naphtha • Less need for naphtha as a reformer feedstock • More availability of naphtha for other uses • Exports • Petrochemical feedstocks • Why will gasoline demand decline?

26. Energy Act of 2007 significantly increases corporate average fuel economy requirements Miles per Gallon Source: Purvin & Gertz

27. Hybrid cars and some dieselization of light duty trucks is expected Sales of hybrid cars should increase as additional models are offered. Sales of diesel cars will also likely increase but market penetration may be limited. Sales of diesel trucks could grow to ½ of all new pickups Assumes automakers will use this as a tool to meet new CAFE standards Commercial truck users are already buying diesel powered large pickups Source: Purvin & Gertz

28. U.S. gasoline demand growth will slow noticeably past 2010 as new vehicle population increases U.S. Gasoline Demand, Million Barrels per Day 1.6%/yr growth Source: U.S. EIA history, Purvin & Gertz forecast

29. Ethanol content in conventional gasoline will need to increase in all regions to accommodate requirements Ethanol content in conventional gasoline, % • Content in reformulated gasoline (RFG) already at 10% in PADDs I-III. • Ethanol will need to be blended into conventional gasoline at 10% by 2015 • E-85 use will also likely increase but market penetration will be limited. Source: Purvin & Gertz

30. Ethanol will displace imports in the gasoline pool 2008-2010 2000-2007 Million bpd Million bpd Downward pressure on gasoline imports MTBE ban Supply Changes Supply Changes U.S. Gasoline Supply and Demand Changes Source: Purvin & Gertz

31. Refiners can adjust their operations to absorb some of the naphtha Low-cost options include simple changes in distillation cut-points for various products. Small investments (packed towers, etc.) may be needed. Other options are also available to refiners, but will require larger investments. 31 31

32. Exports of pentanes to Canada have soared due to rapidly rising demand for heavy oil diluents Barrels Per Day 25 M bpd Increase Source: U.S. EIA 32 32

33. Refinery consumption of pentaneshas fallen accordingly Barrels Per Day 20 M bpd Drop Source: U.S. EIA 33 33

34. Major conclusions regarding the U.S.natural gasoline market Lower demand for finished gasoline will likely reduce refinery demand for naphtha (natural gasoline), but not as much as might be expected. Also, exports of natural gasoline from the U.S. to Canada for use as a diluent are rising rapidly. Therefore, do not expect plentiful supplies of cheap naphtha for petrochemicals in North America. New ethylene plants in Asia have increased demand for naphtha as a feedstock, and might be a more attractive market for surplus naphtha. 34 34

35. Which Feedstocks Will Be Cracked?

36. The U.S. ethylene industry has many options • The feedstocks with the lowest cash cost will prevail. • LPG may have nowhere else to go: • LPG is a byproduct that must be consumed • The U.S. is the market of last resort • Conversely, ethane can be rejected into the natural gas. • Likewise, naphtha and natural gasoline also have other options: • Exports to Canada as a heavy oil diluent • Modified refinery operations • As a last resort, exports to Asia as cracker feedstocks.

37. THANK YOUFOR YOUR ATTENTION QUESTIONS? 37

38. About this Presentation This presentation has been prepared for the sole benefit of attendees to the PFAA Annual Conference. Neither the analysis nor any part of the analysis shall be provided to third parties without the written consent of Purvin & Gertz. Any third party in possession of the analysis may not rely upon its conclusions without the written consent of Purvin & Gertz. Possession of the analysis does not carry with it the right of publication. Purvin & Gertz conducted this analysis utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY. Some of the information on which this analysis is based has been provided by others. Purvin & Gertz has utilized such information without verification unless specifically noted otherwise. Purvin & Gertz accepts no liability for errors or inaccuracies in information provided by others. 38