ASC Raws0606 final 041906

Slide1: 

Crude Oil and Natural Gas Drivers Behind Adhesive Raw Material Impacts Jay Jackson Eastman Chemical Company April 19, 2006

Slide2: 

Transportation, Industrial & Heating Fuels Refining Naphtha Gas Oil 7% Petrochem Methane (Fuel Gas) 95% Gas Processing Ethane, Propane Natural Gasoline, Butane 5% U.S. Petrochemicals Usage 93% 58% Imported

Slide3: 

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

Slide4: 

'90-'99 Avg = $19.7/bbl '00-'03 Avg = $28.3/bbl '04 Avg = $41.4/bbl '05 Avg = $56.7/bbl CMAI Data Why the upward trend? Apr '06 ~ $70/bbl Aug '05 – peaked over $70/bbl Cost increases in the U.S. economy Each $10/bbl increase in oil = $80 B/yr Chemical Industry = $2.6 B/yr

Slide5: 

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

Slide6: 

(yet with low per capita consumption) 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 China's crude oil consumption has grown dramatically 1/3 of global population

Slide7: 

Global Capacity ~86.5 MM bbls/day Global Production ~85 MM bbls/day Current Excess Capacity = 1.5 MM bbls/day OPEC - major producing region Capacity = ~35 MM bbls/day Production = ~34 MM bbls/day 2006-2010 - Supply is expected to increase 2010 Excess Capacity = 3.5 MM bbls/day ~40 Major projects over the next 5 years 15 OPEC & 25 non-OPEC Saudi Arabia – large program U.S. – recovery from Hurricane damage Former Soviet Union countries – continue to increase production Canadian Tar Sands – continue to be developed Crude Oil Production

Slide8: 

'90-'99 Avg = $2.07/mmbtu '00-'03 Avg = $4.27/mmbtu '04 Avg = $6.12/mmbtu '05 Avg = $8.29/mmbtu CMAI Data Apr '06 ~ $8/mmbtu U.S. Natural Gas Spot deals Sept '05 ~ $20/mmbtu Higher costs of ethylene feedstocks Higher conversion costs – energy Cost increases in the U.S. economy Each $1/mmbtu increase in natural gas = $23 B/yr Chemical Industry = $3.7 B/yr

Slide10: 

Impact of Crude Oil and Natural Gas on the Adhesives Market Natural Gas Gas Separation Unit Refinery Crude Oil Steam Cracker Pygas Benzene Aliphatics (Crude C5 Splitter) Ethane Propane Butane Naphtha Gas Oil Propylene Ethylene Xylene Toluene Aromatics Dicyclopentadiene Isoprene Raffinate Piperylenes C9 Resin Oil HC Resins Methanol Acetic Acid VAM EVA Crude C4 Olefins Styrene

Real Life Polymer Example – SIS Polymers: 

Real Life Polymer Example – 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 Recovered Crude C5’s SIS Ethylene Benzene Styrene DeWitt & Company Purified Isoprene Steam Cracker

Slide12: 

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

Slide13: 

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

Slide14: 

CMAI Data Relationship of Crude Oil to Adhesive Raw Material Products U.S. Data Gasoline impacts the costs of numerous downstream products. Aromatics and aliphatics – gasoline pool Alternative value 97.8% correlation

Slide15: 

Katrina and Rita 3Q2005 Impact of Initial Damages Current Assessment of Recovery Lingering Impact on Prices Forward Look Hurricanes Rocked the Petrochemical Industry in 2005:

Slide16: 

Impact of Hurricanes Katrina, Rita, and Ivan Impact on Crude Oil and Natural Gas Infrastructure Katrina (Cat 5) went through the eastern 1/3 Rita (Cat 5) went through the western 2/3 Wilma (Cat 5) hit Yucatan and Florida

Slide17: 

Katrina (Aug '05): 90% - Gulf Crude Oil Production Shut-in 75% - Gulf Natural Gas Production Shut-in 8.5% - US Refinery Capacity Shut-in Rita (Sept '05): 100% - Gulf Crude Oil Production Shut-in 80% - Gulf Natural Gas Production Shut-in 16 - Refineries in the Gulf Region Shut-in Initial Impact of Hurricanes

Slide18: 

Damage Caused by Hurricanes Katrina and Rita: Platforms: 115 Destroyed 52 Significantly Damaged Rigs: 8 destroyed 19 with extensive damage 19 set adrift Pipelines: 183 Damaged 42 of the 64 Large Diameter Pipelines Out of Service Current Assessment of Damage and Losses April 2006

Slide19: 

Current Assessment of Damage and Losses April 2006 100% Gulf oil production shut in by the two storms 1.5 M bbls/day – Total annual Gulf crude oil production 310K bbls/day – remains shut in (~20%) 94% Gulf gas production shut in by the two storms 10 BCF/day – total annual Gulf natural gas production 1.1 BCF/day – remains shut in (~11%) Repair of damaged crude oil and natural gas production cannot be completed before the 2006 hurricane season begins April 5, 2006 – 2006 predicted to be another active hurricane season 17 named storms 9 hurricanes 5 intense storms

Slide20: 

Forward Look – Raw Materials and Energy Significant infrastructure damage from hurricanes Has affected supply & prices of raw materials and energy for months Disclaimer Can't forecast natural disaster impacts Forward look based on information from multiple consultants and government sources Crude Oil: Prices above $70/bbl Record closing price on April 19th June price is currently $74/bbl Average from 1990-1999 was $19.70/bbl 2006 – likely to remain high Comments from DOE-EIA Crude Oil 2006 avg = $65/bbl estimate 2007 avg = $61/bbl estimate

Slide21: 

Forward Look – Raw Materials and Energy Crude Oil - Current Issues Bearish Factors High Inventories – Strong imports, mild US winter Bullish Factors Tight Supply/Demand Heavy U.S. refinery maintenance season Some work deferred after hurricanes Geopolitical Issues Venezuela ~ 2.8 MM bbls/day Political Tensions – Chavez threats Jail diplomats, close U.S. refineries (Citgo), stop oil exports to the U.S. Nigeria ~ 2.7 MM bbls/day – Africa's largest oil producing country Internal political unrest Damage to oil facilities and infrastructure, kidnapped workers Iran ~ 4.2 MM bbls/day exports Political issues – nuclear program Saudi Arabia ~ 11.1 MM bbls/day Terrorist targets? Not enough excess capacity in to make up for potential losses How high could crude go?

Slide22: 

Forward Look – Raw Materials and Energy Natural Gas: Prices – $8/mmbtu Average from 1990-1999 was $2.07/mmbtu High Inventories - warm winter 2006 – continued high price Jan'07 options currently around $12/mmbtu Comments from DOE-EIA Natural Gas 2006 avg = $8.87/mmbtu estimate 2007 avg = $8.70/mmbtu estimate Benzene: April settlement – $2.80/gal Price likely to remain volatile Supply/demand Crude oil movement

Slide23: 

Unleaded Gasoline Prices increased significantly after hurricanes ~$2.25/gal Fell due to imports and inventories April 18, 2006 - Back up to $2.23/gal Average from 1990-1999 was $0.596/gal U.S. Gasoline reformulation issues MTBE being removed Ethanol and toluene/xylene filling the gaps Transportation concerns Mandated sulfur reductions Potential to decrease U.S. gasoline production & increase imports 2006 prices likely to remain high Follow crude oil pricing Will impact other chemicals Logistics and Transportation Still an issue Forward Look – Raw Materials and Energy

Closing Summary: 

Closing Summary Cost Increases in the U.S. economy Each $10/bbl increase in oil = $80 B/yr Each $1/mmbtu increase in natural gas = $23.7 B/yr Basic raw materials and energy Inventories average or above average But… prices continue to be volatile Several chemical intermediates are tight Need to know supply chain and any weak links Impacted by raw materials, energy and production capabilities Producers are getting squeezed Hurricane season could cause problems again Security of supply for chemical intermediates and adhesive raw materials is likely to be key for the foreseeable future

Slide25: 

Thank you Jay Jackson Procurement Manager Eastman Chemical Company Kingsport, TN Work: (423) 229-1999 Email: jjackson@eastman.com