Petrochemical Supply Chain and Logistics 2017

1Experience / Expertise / Excellence www.plgconsulting.com
Experience / Expertise / Excellence
SHALE GAS
INDUSTRIAL
EXPANSION
Global & Domestic
Implications Over the Next
Decade
R
Taylor Robinson
President
PLG Consulting

Experience
About PLG
PLG Team
▪ Real-world, industry
veterans
▪ Delivering value to over
200 clients since 2001
▪ Over 50 logistics, supply
chain, market, and
engineering experts
Core Expertise
▪ Bulk commodity logistics
▪ Surface transportation
and logistics
▪ Energy and chemical
markets
▪ Logistics infrastructure
design
▪ Investment strategy and
corporate development
Services Include
▪ Market analysis &
strategy
▪ Investment thesis,
target identification, due
diligence, post-
transactional support
▪ Diagnostic
assessments and
optimization
▪ Supply chain design
and operational
improvement
▪ Independent logistics
technology assessment
and implementation
▪ Site selection
▪ Logistics infrastructure
design & engineering
Partial Client List

Today’s Presentation Agenda
I. U.S. Shale Gas
Overview
II. Industrial Build-Out
Impact
III. Polyethylene Expansion
Update

I. U.S. Shale Gas Overview

Shale Revolution Has Impacted
Markets, Logistics and U.S. Economy
Feedstock
(Ethane)
Byproduct
(Condensate)
Home Heating
(Propane)
Other Fuels
Other Fuels
Gasoline
Gas
NGLs
Crude
Proppants
OCTG
Chemicals
Water
Cement
Generation
Process
Feedstocks
All Manufacturing
Steel
Fertilizer (Ammonia)
Methanol
Plastics
Petroleum Products
Petrochemicals
Inputs Wellhead
Direct
Output
Thermal Fuels Raw Materials
THE WAVE CONTINUES
U.S. petrochemical expansion based on
abundant, low cost energy and feedstocks is impacting other
manufacturing industries
MACRO IMPACTS TO-DATE INCLUDE
Dramatic reduction in crude imports, lower electricity costs,
lower gasoline prices, increased refined products exports
Downstream
Products
Chemicals
(Coal)

2008 2010 2012 2014 2016 2018 2020
Phase III – “Manufacturing”:
Raw material cost driven
Phase I – Industries using natural gas as primary
feedstock have global cost competitiveness; new US
factories built or in progress
Phase II – Downstream products require significant
processing facilities investment and lead time – in
the middle of the first wave build-out
Phase III – U.S. material cost advantage will enable
traditional manufacturing to return to the North
America as about 65% of the cost of manufactured
product is material cost and the U.S. has a very
efficient workforce
Phase II - Downstream Products:
Petrochemicals, Resins
Phase I - Gas & Power-intensive Industries:
Fertilizer, Methanol, DRI pellets
Shale Gas Phased Impact To U.S. Industrial
Renaissance
Source: Townsend Solutions
563
2,111
1,236
846
-
500
1,000
1,500
2,000
2,500
Brazil USA China S. Arabia
Plastic Converters Productivity
Comparison
(Annual kg/employee)

Natural gas remains oversupplied in U.S.
due to horizontal shale production growth
▪ E&P companies have driven phenomenal efficiency gains
in past five years with new technology and productivity
▪ Natural gas is also a by product of crude production
Natural gas demand will grow due to:
▪ Coal-fired generation plant retirements
▪ More industrial use – fertilizer, methanol feedstock
▪ Pipeline exports to Mexico and Canada
▪ LNG export overseas – just ramping up
Pricing has remained stable despite demand
growth – sustainable for the future XX years
Source: EIA Short Term Energy Outlook November 2017
US Shale Gas (Natural Gas)
Background and Future
Source: EIA Drilling Productivity Report Nov 2017

Growing Demand for U.S. NGLs Will Outstrip
Supply In Coming Year
U.S. “liquids” shale plays currently
have an abundance of NGLs, especially
ethane and propane
▪ Production rose by 1 MMbd over past five years
driving widespread ethane rejection
▪ “Richest” NGL shale plays include Marcellus wet,
Utica, Eagle Ford wet, and booming Permian
▪ NGL oversupply has led to low price NGLs in U.S.
▪ Gas processing, fractionation, and pipeline
infrastructure in place, but more needed
▪ Gas processors will likely decrease ethane rejection
by ~300 Mb/d as demand grows over next five
years
Current ethane oversupply will be
reduced due to:
▪ Growing domestic petchem demand though 2020
▪ Growing exports - will reach peak in 2019
▪ Ethane supply/demand balance will tighten and will
begin to tap into ethane rejection volumes
▪ Volatile pricing expected as market adjusts to rising
supply, demand and regional imbalances
Sources: EIA, RBN, Jacobs Consultancy’s Hodson Report, November 2017
U.S. Ethane Demand Forecast

II. Industrial Build-Out Impact

Abundant feedstock, structural cost
advantages, and domestic market growth
driving U.S. petrochemical industry
expansion
Rate of expansion growth will be
challenged by:
▪ Volatility of market prices – some based on oil prices
▪ Lack of EPC capacity
▪ Shortage of craft labor resources in the U.S. Gulf Coast
▪ Increasing regulatory hurdles and delays
First wave build-out has taken longer than
initial announced schedules (of course…)
▪ 2nd wave will continue growth early next decade
U.S. chemical industry is entering a historic
period with incredible growth opportunities
and challenges
U.S. Chemical Industry Build-Out
Above 15 - advantages gas
to oil as a feedstock
15

Shale Gas Industrial Investment Forecast
As of December 2017
The North American
petrochemical industry will invest
~$145B in industrial facilities as a
result of shale gas by 2025
50
projects
Product Category Breakdown
All Announced Industrial Projects in SHIELD
SHIELD Investment Forecast Through 2025
➢ Total Announced - $255B
➢ Commissioned since 2011 - $51.1B of investment
➢ Likely start up by the end of 2019 - $45.1B of
investment
➢ 2nd Wave – Likely start-up between 2020 and 2025 -
$48.5B of investment
➢ Not Likely - $109.9B of announced investment
Ethylene and
Derivatives
$76.1B
Ammonia and
Derivatives
$65.8B
Polymers and
Resins
$37.2B
Methanol and
Derivatives
$34.0B
Propylene and
Derivatives
$18.8B
Gas Processing
and
Fractionation
$8.9B
Gas to Liquids
$7.0B
Other
$6.8B
shieldbyplg.com

Output from New Shale Gas-Related
Projects
51 MMTPA in New Output Over
the Next Three Years
Source: SHIELD by PLG, December 2017
Investment by State with Product
Volume
Texas and Louisiana dominates project
investments
Processed gas, ethylene, methanol,
and resins account for >80% of
product volume output

Increases in Outbound Logistics From
Likely Projects
Project
Start Year
Truck
Shipments
Annually
Rail
Shipments
Annually
(Carloads)
Railcar Fleet Required
Total Hopper Tank
2017 258,200 53,200 9,000 8,000 1,000
2018 78,800 34,600 5,900 3,600 2,300
2019 10,600 41,400 5,800 2,200 3,600
2020 24,300 23,200 4,000 3,900 100
Total 371,900 152,400 24,700 17,700 7,000
These forecasts are based on initial product moves from the production
facilities – products/by-products can be moved multiple times downstream

Projected Rail Volume Impacts from
Shale Gas-Related Industrial Expansion
New Rail Carload Growth From Likely Projects, by Product, Through 2025
AnnualCarloads
Resins will drive largest
volume growth
Although rail impacts from
shale gas-related
expansion will provide
less of a “rush” than CBR,
the growth will be:
▪ Steady
▪ Sustainable for the long-term
▪ Spread across diverse sectors
of the economy
Main rail concern will be
centered around the
Houston area
▪ Existing congestion will be
increased by these
petrochemical expansions
▪ Limited opportunity to increase
infrastructure capacity
0
50000
100000
150000
200000
250000
300000
350000
Additional Annual
Outbound Rail
Shipments
(Carloads) added
from projects
commissioned
2020-2025
Additional Annual
Outbound Rail
Shipments
(Carloads) added
from projects
commissioned
2017-2019
Annual Outbound
Rail Shipments
(Carloads) added
from projects
commissioned
2011-2017

III. Polyethylene Expansion Update

Townsend Solutions and PLG are leading authorities on the global polyethylene value chain, and
have collaborated to produce this comprehensive 110 page report containing the most relevant
data and real-world analysis including:
• Global Supply, Demand and Capacity Forecast (2017-2026)
• Regional Total Delivered Cost Comparisons
• Regional Trade Flow Forecasts
• International & Domestic Logistics Impact
• U.S. Export Packaging Expansion Forecast
For more information:
Taylor Robinson
trobinson@plgconsulting.com
+1 (508) 982 1319
Go to: www.polyethylenereport.com
Peter Callais
petercallais@townsendsolutions.com
+1 (281) 873-8733
North American Polyethylene –The
Global Impact

North American Supply/Demand Forecasts
U.S. competitiveness and supply growth will enable export growth to faster-growing
regions
▪ Slow, steady demand growth since 2009 downturn with consumption growing at a steady but lower pace
(~3% per year for the next 10 years)
▪ North America will quickly shift from very tight supply to large oversupply with ~7 MM tons coming online
from 2017-2020.
▪ North American exports will grow from a current 2.5 MM tons to a minimum 6.7 MM tons over the forecast
period

Domestic PE Consumption By State
Current
polyethylene
production hub
Future polyethylene
production hub
U.S. polyethylene consumption driven by converter locations:
▪ ~40% of polyethylene is consumed in eastern Midwest and Northeast
▪ ~25% of polyethylene is consumed in Gulf Coast and Southeast
Future Northeast crackers/polyethylene plants will have logistical advantage to large
Midwest and Northeast converter markets; Southeast will become a battleground

North American PE Expansion Plans
(2017-2026)
Great majority of the new polyethylene facilities are integrated with new world scale crackers
▪ North America has never experienced such a dramatic polyethylene capacity growth (31%) in a three year period and that
amount of capacity growth cannot all be used domestically
▪ Developing export markets will be a critical relief valve for the new North American capacity
Source:
Townsend
Solutions &
PLG’s SHIELD
Producers considering
“Third Wave” PE
plants include:
▪ TOTAL/Borealis
▪ Formosa
▪ Williams
▪ Badlands
▪ Braskem
▪ Exxon/SABIC
▪ Nova/Borealis
These projects
represent an
additional ~5 MTPA of
potential polyethylene
capacity during the
2024-2026 timeframe
Extent of “Third Wave” PE capacity growth for North America
will be determined by cracker-build decisions, demand growth,
and global export competitiveness

Major Global PE Trade Flows – 2015 and
Future
By 2025, North America will be a major PE export with >1M MTA being exported to
Central/South America, Western Europe, Africa, China, and India
Source: Townsend Solutions
▪ Over 70% of global PE usage is produced domestically within region/country
▪ However, PE is a global business with six of the top ten global PE suppliers having production presence in multiple regions
since footprint in different markets is critical for global customers.
▪ Today, the cross region trade flows (~30% of total usage) of polyethylene are dominated by the Middle Eastern product
with over 40% global market share

Forecasted N.A. PE Export Volume
New export market entry this decade will enable further growth next decade as
emerging markets grow without sufficient domestic supply
2,705 2,714 2,498 2,682 2,789
4,055
5,111
5,870
6,691 6,691 6,873
517
1,611
2,414 2,649
1,738
1,052
901
682
1,620
1,773
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
KTPA
Incremental
Opportunity
Base Case
▪ North America export volume will likely triple over the next decade and will grow to be at least 19% of the global trade
volume in 2026
▪ During the coming large capacity expansion, there is opportunity for North America to capture incremental (light blue in
graph) export volumes but it will have to come at the expense of other region’s domestic volumes or import competitors.
▪ As North American producers will be entering new markets, it will be difficult to quickly displace incumbent suppliers and
will require aggressive strategies to leverage their competitive total delivered cost.
Source: Townsend Solutions, PLG Consutling

PE Global Logistics Flows – North
American Export
Supply Chain Observations
▪ Most U.S. PE producers rely on third party packagers at off-site,
independent facilities and ship their product via rail to those
facilities
▪ A railcar with PE typically makes ~five turns per year between
production site, storage yard, and packaging facility
▪ Once packaged, the product can move directly to the dock or to
an intermodal ramp where it is railed to another port location
▪ Currently, a great majority of polyethylene is exported from Port of
Houston. Due to potential logistics constraints, packaging facilities
are being expanded in Dallas, TX, Savannah, GA, New Orleans
and Charleston, SC to mitigate Houston constraints.
*Note: ExxonMobil has in-
house packaging
capabilities.

U.S. PE Packaging Market Currently
Focused in Houston Area
Adequate packaging capacity will be available for first wave of export growth through the end of the
decade – more facilities will be needed for second wave including the Northeast
Production Facilities (Green stars)
▪ A large concentration is focused in the
Southeast Houston area
▪ There is another concentration southwest of
the Houston area (Victoria, Freeport)
▪ Louisiana has several existing and new
facilities coming online
▪ Most of these facilities pictured will utilize
Houston packaging locations for base load
Packaging Facilities
▪ The majority of facilities are located in the
Southeast Houston petrochemical corridor
▪ There are nine established companies
providing packaging services. Some have
multiple locations in Houston.
Houston Ports
▪ There are two main container ports in the
Houston area – Barbours Cut and Bayport
Container Terminal
▪ The ports are also located in Southeast
Houston areaSource: PLG analysis
Houston Area Plants, Ports and Packaging Facilities

Logistical Growth Challenges
Mode Domestic Market Export Markets
Rail Houston area rail congestion (inbound and
outbound) - Houston rail network is limited by
availability of land for significant expansion
Intra-Houston area rail congestion – moving pellets a
short distance to the packaging facilities is challenging
Domestic growth will be gradual and existing
networks can grow incrementally
High cost to move pellets from Houston area to East
Coast packaging facilities
Expected annual rate increases Same as Domestic
Trucking Federal ELD requirement from December 18,
2017 will further tighten driver/tractor capacity
Same as Domestic
Driver shortage expected to reach 50,000
nationally by year end
Same as Domestic
Busy oilfield draws truckers away from drayage
due to higher pay – will apply pressure from a
capacity and cost perspective
Same as Domestic
Localized traffic congestion due to large volumes
expected to be moved between Houston area
packaging facilities to the Port of Houston or
intermodal terminals
Marine N/A Limited sailings from the Port of Houston requires
alternative port options
As capacity tightens, rates will continue to increase

Logistical Export Growth Challenges
Houston port
▪ The Port of Houston (POH) is the most economical and logical port location for Houston-
area resin production. POH continues to make significant infrastructure investments to
increase capacity and improve efficiency
▪ However, Port of Houston historically has a import/export imbalance and experiences
container shortages which limits capacity and forces products to find alternative departure
ports. Repositioning of containers from other locations is costly.
▪ Port of Houston also has limited sailings for certain destinations adding to export challenges,
especially for Asian destinations.
Packaging locations
▪ Houston area is the most economical and efficient location for packaging Houston-area
production
▪ More than adequate packaging/warehousing capacity is being developed in the Houston
area with steady state shipping. But due to the erratic nature of export market and
production, wild swings in volume could result in temporary packaging capacity shortages.
▪ However, due to the container shortage and limited sailings from Houston, other packaging
locations will be developed to alleviate the bottleneck. Sites being developed include:
― Dallas/Ft. Worth and Freeport, TX
― Savannah, GA
― Charleston, SC
― New Orleans/Baton Rouge, LA
Port of Houston will remain a great majority of PE export volume, but alternatives under
development

PE Expansion Summary
Feedstock (Upstream)
▪ Shale gas provides abundant and competitive feedstock
Processing and pipelines (Midstream)
▪ Due to rapid, regional growth in feedstock, there will be changing and
sometimes significant processing/pipeline capacity issues causing
significantly fluctuating feedstock pricing
Production capacity
▪ First wave of growth will ramp up this decade with second and third wave
coming next decade -- Appalachia will join the growth story
Logistics
▪ Rail will continue to dominate initial movements of product from production
facilities (>90%) with inherent challenges especially in the busy Houston
corridor
▪ Export supply chain will garner most attention with 3X growth causing
numerous “growing pains” that will highlight numerous improvement
opportunities
▪ Houston will be a major export location, but other locations will be enabled
by efficient product movements, packaging locations and access to frequent
export sailings
U.S. PE upstream, midstream, and production capacity growth enabled by a complex
logistics-intensive supply chain domestically and internationally – poised for growth
challenges and new options

Thank You!
For follow up questions and information, please contact:
Taylor Robinson
President
PLG Consulting
+1 (508) 982-1319 | trobinson@plgconsulting.com
Looking Forward To Your Questions!

Petrochemical Supply Chain and Logistics 2017

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