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ISM Chemical Group Drivers Behind Raw Material Impacts

ISM Chemical Group Drivers Behind Raw Material Impacts. Gerald W. Cross Eastman Chemical Company February 23-24, 2006. From One Barrel of Oil…. U.S. Data. Petrochemical Feedstocks 7%. Gasoline, Diesel and Jet Fuel 66%. Industrial and Home 27%. Data from www.eia.gov

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ISM Chemical Group Drivers Behind Raw Material Impacts

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  1. ISM Chemical Group Drivers Behind Raw Material Impacts Gerald W. Cross Eastman Chemical Company February 23-24, 2006

  2. From One Barrel of Oil… U.S. Data Petrochemical Feedstocks 7% Gasoline, Diesel and Jet Fuel 66% Industrial and Home 27% Data from www.eia.gov *modified to better fit categories

  3. Oil 20 MM BPD Nat Gas 60 B ft3/day ~ U.S. Petrochemicals Usage Transportation, Industrial & Heating Fuels 93% Petrochem Refining Naphtha Gas Oil 58% Imported 7% Methane (Fuel Gas) 95% Ethane, Propane Natural Gasoline, Butane Gas Processing 5%

  4. Aug '05 – peaked over $70/bbl 200% increase over the last 3 years Jan '06 ~ $58/bbl '05 Avg = $56.7/bbl '04 Avg = $41.4/bbl '00-'03 Avg = $28.3/bbl '90-'99 Avg = $19.7/bbl Why the upward trend? CMAI Data

  5. Global Demand for Oil Has Accelerated Global Economic Recovery Significant growth in China demand growth, rolling 4 qtr avg, mb/d, Demand growth of industrialized countries is ~ 1%

  6. China's crude oil consumption has grown dramatically (yet with low per capita consumption) 1/3 of global population Oil demand, MM bpd Oil demand, bbls per capita per year • China is now 2nd largest user of crude oil globally • 10 years ago – net exporter • Today – import 40% of demand • Projected demand growth of 7.5% per year • ~18 MM bpd in 15 years • India – relatively small demand • Projected demand growth of 5.5% per year

  7. Spot deals Sept '05 ~ $20/mmbtu • Higher costs of ethylene cracker feedstocks • Higher conversion costs Jan '06 ~ $8-9/mmbtu '05 Avg = $8.29/mmbtu '04 Avg = $6.12/mmbtu '00-'03 Avg = $4.27/mmbtu '90-'99 Avg = $2.07/mmbtu CMAI Data U.S. Natural Gas

  8. Highest nat gas prices in the world

  9. ~ Crude Oil and Natural Gas provide feed to Steam Crackers which produce ethylene and propylene with PYGAS as a by-product. PYGAS is separated into Aromatics (BTX) and Aliphatics (Crude streams) Natural Gas also impacts the industry as a feedstock Acetic Acid VAM EVA Toluene Xylene Methanol HC Resins Ethylene Benzene Gas Aromatics Natural Separation Gas Unit Styrene Pygas Naphtha Gas Oil Ethane Propane Butane Steam C9 Resin Oil Cracker Aliphatics (Crude C5 Splitter) Isoprene Crude C4 Olefins Dicyclopentadiene Crude Refinery Oil Piperylenes Propylene Raffinate

  10. Real Life Polymer Examples – SIS Polymers • Supply chain shows shortages and potential shortages • Large number of SIS producers with adequate capacity • In spite of sufficient SIS capacity the upstream supply creates a shortage Steam Cracker Recovered Crude C5’s Purified Isoprene SIS Styrene Ethylene Benzene DeWitt & Company

  11. Relationship of Crude Oil to Adhesive Raw Material Products Gasoline impacts the costs of numerous downstream products. • Aromatics and aliphatics – gasoline pool – octane boosters • Alternative value 97.6% correlation CMAI Data U.S. Data

  12. Relationship of Crude Oil to Adhesive Raw Material Products Strong demand from China Benzene has historically traded at 2x crude when supply and demand have been in balance. '05 Avg = $2.90/gal '04 Avg = $2.88/gal '00-'03 Avg = $1.28/gal '90-'99 Avg = $1.05/gal CMAI Data U.S. Data

  13. Relationship of Crude Oil to Adhesive Raw Material Products Increase following benzene Styrene price typically changes by 1 c/lb for every 10 c/gal change in Benzene price Tight supply/demand CMAI Data U.S. Data

  14. Recent and Current Issues • Hurricanes Katrina and Rita • Damages and Recovery • Look Forward

  15. Impact of Hurricanes Katrina, Rita, and Ivan • Impact on Crude Oil and Natural Gas Infrastructure • Katrina went through the eastern 1/3 • Rita went through the western 2/3 • Ivan only brushed the edge (Sept '04) Hurricane Ivan ('04)

  16. Impact of Hurricanes Katrina, Rita, and Ivan Impact of Ivan (Sept '04): • Ivan hit two states away from Louisiana: • 7% of Gulf oil production shut-in • 4% of Gulf natural gas production shut-in Impact of Katrina (Aug '05): • 90% of Gulf crude oil production shut-in • 75% of Gulf natural gas production shut-in • 8.5% of US refining capacity shut-in Impact of Rita (Sept '05): • 100% of Gulf crude oil production shut-it • 80% of Gulf natural gas production shut-in • 16 major refineries in the Gulf Coast region shut-in

  17. Current Assessment of Damage and Losses Data as of 1/19/2006 • Overall damage caused by Hurricanes Katrina and Rita • Greatest natural disaster to affect the oil and gas development in the history of the Gulf of Mexico • Platforms • 115 destroyed • 52 significant damage • Substantial production will take several months to resume • Rigs • 8 destroyed • 19 suffered extensive damage • 19 adrift • Pipelines • 183 damaged • Only 22 returned to service • 65% of large diameter pipelines that were damaged still have not been repaired and returned to service • Assessments on pipeline and facility damages are still ongoing • Additional damage will likely be reported

  18. Current Assessment of Damage and Losses Data as of 1/19/2006 • Hurricane damage to Gulf oil and gas facilities still being discovered offshore • Repair of damaged oil and gas production cannot be completed before the 2006 hurricane season begins • About 255,000 bbls/day of oil capacity projected shut-in • About 400 MM cubic feet of daily gas capacity projected shut-in • 100% Gulf oil production shut in by the two storms • 1.5 MM bbls/day – total Gulf oil production • 396,000 bbls/day remains shut in • 94% Gulf gas production shut in by the two storms • 10B cubic feet (bcf) – total Gulf gas production • 1.8 bcf remains shut in

  19. As of early January, 27.4% of crude oil still shut-in • Cumulative losses since 8/26 have been over 100 MM bbls (~20% of annual GOM production)

  20. As of early January, 19.5% of natural gas still shut-in • Cumulative losses since 8/26 have been over 500 BCF (~15% of annual GOM production)

  21. Raw Materials and Energy – Looking Forward Some significant infrastructure damage – will affect supply & prices of crude oil, natural gas and other products for weeks, if not months. Disclaimer • Can't forecast natural disaster impacts • Forward look based on info from multiple consultants and gov. sources Crude Oil: • Prices around $68/bbl • Average from 1990-1999 was $19.70/bbl • 2006 – likely to remain high; slow decline Natural Gas: • Prices – wide variability - $8-9/mmbtu • Average from 1990-1999 was $2.07/mmbtu • Inventories are high • Warm winter so far • Cold weather would likely increase prices • 2006 – likely to be high through Q1 • Probably some decrease the rest of year • Dependent on weather and recovery in GOM region Comments from DOE-EIA • Crude Oil • 2005 avg = $57/bbl est • 2006 avg = $64-65/bbl est Comments from DOE-EIA • Natural Gas • 2005 avg = $9.15/mmbtu est • 2006 avg = $9/mmbtu est • Likely $10+ thru winter

  22. Raw Materials and Energy – Looking Forward Unleaded Gasoline • Prices increased significantly after hurricanes • Reached ~$2.25/gal for wholesale ULP • Fell due to imports and inventories • Average from 1990-1999 was $0.596/gal • Q1 price likely to remain high • Price likely to follow crude oil pricing Benzene: • December settlement of $2.18/gal • Jan - $2.46/gal • Feb nomination - $3.00/gal • Price likely to remain volatile • Supply/demand and crude oil movement Logistics and Transportation • Still an issue

  23. Closing Summary • Cost Increases in the U.S. economy • Each $10/bbl increase in oil = $2.6 B/yr • Each $1/mmbtu increase in natural gas = $3.7 B/yr • Basic raw materials and energy • Inventories above average • But, prices continue to be volatile • Several chemical intermediates are tight • Need to know supply chain and any weak links • Dependent on raw materials, energy, and production capability • Producers are getting squeezed • Security of supply may be key for the foreseeable future

  24. Thank you Gerald W. Cross Eastman Chemical Company Kingsport, TN

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