Diversified Usage of Renewable Energy in Iceland

analysis of alternative energy intensive sectors

Investum | August 2009 Formáli

Forsaga Síðasta hálfan annan áratug hefur hlutdeild Auk þessara fjögurra iðngreina var Investum falið að áliðnaðar í raforkunotkun landsins vaxið mikið og skoða möguleika þess að þróa iðngarð á Íslandi notar iðnaðurinn nú yfir 60% af allri raforku sem sem hýst gæti efnaiðnað, s.s. þann sem hér er til framleidd er hér á landi. Áhugi orkusamfélagsins á umfjöllunar, en slíkir garðar hafa rutt sér til rúms fjölbreyttari hópi kaupenda hefur aukist með hækkun víða í Evrópu og aukið hagkvæmni minni þessa hlutfalls. Því er mikilvægt að íslensk rekstrareininga. Til viðbótar þessu var Investum falið stjórnvöld séu vakandi fyrir þeim möguleikum sem að afla upplýsinga um hvað fyrirsjáanlegar bjóðast við uppbyggingu annarrar tegundar breytingar á viðskiptum með útblásturskvóta í orkufreks iðnaðar en hér er fyrir. Evrópu hefðu á samkeppnishæfni orku- og stóriðjufyrirtækja á Íslandi. Gunnar Tryggvason Sigurður Hrafn Kiernan Í febrúarmánuði 2009 fólu Fjárfestingastofa Íslands og Þróunarfélag Keflavíkurflugvallar (Kadeco) Tilgangur þessara rannsókna er fyrst og fremst sá ráðgjafafyrirtækinu Investum að gera úttekt á fjórum að koma auga á atvinnugreinar sem gætu haft hag iðngreinum sem ekki eru stundaðar á Íslandi en af því að vera staðsettar á Íslandi en hafa ekki verið teljast orkufrekar og því hugsanlega fýsilegar til skoðaðar með það í huga nýlega. Nýta á uppbyggingar hérlendis. Ekki þótti ástæða til að niðurstöðurnar, ef þær reynast jákvæðar, til að afla kanna frekar greinar sem nýlega hafa verið til erlenda fjárfestingar í þessar iðngreinar. Til að skoðunnar (ylrækt eða gagnaver) eða eru þegar í halda kostnaði í lágmarki var ákveðið að hvorki yrði uppyggingu (álþynnuiðnað) og var sjónum því beint keypt ráðgjafarvinna erlendra sérfræðinga á hverju að greinum sem engar nýlegar greinagerðir eru til sviði né heldur dýrar skýrslur. Ákveðið var að um. niðurstöður yrðu settar fram á glæruformi með texta á ensku til að auðvelda beina nýtingu þeirra í Júlía Egilsdóttir Guðmundur Björn Árnason Eftirfarandi fjórar iðngreinar urðu fyrir valinu: kynningargögnum Fjárfestingastofu og Kadeco. ¾ klór-alkalí framleiðsla ¾ natríum klórat framleiðsla F.h. Investum ehf, ¾ framleiðsla iðnaðargasa ¾ framleiðsla liþíum málms Iðnaðarferlar þessara greina hafa lítinn eða engan ______útblástur gróðurhúsalofttegunda í för með sér og Gunnar Tryggvason munu því ekki kalla á frekari útblásturskvóta fyrir forstöðumaður orku- og innviðasviðs Ísland verði af uppbyggingu þeirra hér.

2 Contents

1 Chlor-Alkali 2 Sodium Chlorate 3 Lithium 4 Chemical Clusters

2 Investum | August 2009 Chlor-Alkali Conclusions and Recommendations

Conclusions ¾ Several studies on chemical industries involving chlorine production have been done in Iceland the past 4 decades ¾ The process of producing chlorine and caustic soda is highly electrical energy intensive (>3,500

kWe / ton chlorine and >50% of cash cost) which makes Iceland an interesting site for such operation ¾ Furthermore some process implementations are also thermal energy heat intensive which makes direct use of geothermal steam attractive ¾ Chlor Alkali plant forms the backbone of most chemical parks as majority of chemical processes involves chlor handling in one way or another ¾ Due to shift in regulations, around 30% of European chlor alkali capacity have to be converted to new technology in the next 10 years ¾ The market consensus on growth in chlorine demand indicates 2%-3% YoY long term, but short term decline ¾ Stand alone chlor alkali plant in Iceland would have to ship the main product, chlorine gas in a liquid form (-35°C) to a European downstream user. Due to the high dependence of electricity such solution might be economically viable, but impractical as chlorine transport on sea has been abandoned in Europe due to safety reasons ¾ Production of organic chemicals would require import of ethylene or other types of intermediates which dilutes the percentage of electricity in the cash cost to less than 20% and makes Iceland as a location less attractive

5 Conclusions and Recommendations Cont.

Conclusions cont. ¾ However if oil prices surge again, the production of acetylene from calcium carbide as organic source could be attractive in Iceland ¾ The ‘by-product’ caustic soda is easily shippable as a solution or dry to Europe. There remains an undersupply of the product in Europe ¾ Modular small scale chlor alkali plants have become available on the market recently ¾ This study reveals that niche chlor derivatives using materials available in Iceland such as aluminium and silica and even sulfur can be very attractive ¾ If such plant will be build in Iceland export of chlorine in cylinders and drums in marginal quantities could become economically viable

Recommendations ¾ Consider a industrial park concept having chlor alkali plant as backbone operation ¾ Approach producers of niche chlorine derivatives such as: ¾ Packaged chlorine ¾ Aluminium chlorides ¾ Silicones ¾ Co-operate with industrial experts like Prochemics to asses the feasibility of small scale modular chlor alkali plant in Iceland

6 Index

¾ Conclusions and Recommendations ¾ Industry Overview ¾ ...a short chemistry lesson ¾ What is Chlor Alkali? ¾ Production Cost & Prices ¾ Chlorine Production Cost in Different Regions ¾ Product Sectors ¾ Chlor Alkali Plant Output – where does it go? (2) ¾ World Chlorine and Caustic Producers ¾ Chlor Alkali Plants in Europe ¾ Chlor-Alkali Industry in Europe by Process ¾ The Membrane Cell ¾ Potential Projects in Iceland ¾ Appendixes

7 ...a short chemistry lesson

Elements: ¾ Na: Sodium (Natrium) - metal ¾ K: Pottasium (Kali) - metal ¾ Cl: Chlorine - gas

Compounds: ¾ NaCl: Sodium Chloride, or table salt

¾ NaClO2: Sodium Chlorite

¾ NaClO3: Sodium Chlorate

¾ NaClO4: Sodium Perchlorate ¾ KCl Potassium Chloride

¾ KClO3: Potassium Chlorate

¾ NaOH: Caustic Soda / Sodium Hydroxide

¾ Na2CO3 Sodium Carbonade / Soda Ash ¾ KOH Caustic Potash

8 What is Chlor Alkali?

¾ Chlorine (Cl) is produced by electrolyses of salt (NaCl) ¾ Specific power consumption ranges from 2,500 to 3,500 kWh/kg of chlorine depending on the production method used ¾ Sodium chlorate is a co product of electrolysis ¾ The main co product Sodium/Natrium (Na) is turned into caustic soda (NaOH) ¾ It takes 1,700 kg of salt to produce 1,000 kg of chlorine and 1,100 kg of caustic soda ¾ The business typically refers to 1 ECU (Electrochemical Unit) as 1,000 kg of chlorine and 1,100 kg of caustic soda

Safewater Chemical’s chlor alkali project in Abu Dhabi Modern Chlor Alkali Membrane cell room

9 Production Cost & Prices

¾ Compared to production of metals via electrolysis the production of chlorine does not require much electric energy per weight, i.e. 2,500-3,500 kWh per ton chlorine or whereas aluminium electrolysis uses about 14,500 kWh per ton of product ¾ But due to the low cost of raw material (salt) and rather simple process the cost of electricity as a percentage of total cash cost is higher than in any of the bigger chemical industries ¾ Electricity is a significant cost element in chlor-alkali production, estimated to account for 60% of the variable costs of production and approximately 40% of total production cost 1) ¾ Due to the high electrical prices in Europe, Prochemics, a chemical industry consulting company states that there will be no incentive to build new plants in Europe or to invest in the Caustic Soda North America Spot Prices 3) conversion from mercury cell plant to membrane plant technology, as well as conduct major expensive modernizations 2) ¾ The collapse of caustic soda prices over the past few months has impelled chlor-alkali producers to idle plants and reduce production capacity, and downstream industries such as polyvinyl chloride (PVC) have reported shortages of chlorine as a result USD pershort ton

‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09

1) Source: “The viability of importing packaged chlorine from Europe“, UK competition Commission, 2008 2) Source: “Impact of Electricity on the Competitiveness of the European Chlor-Alkali Industry“, PROCHEMICS Ltd., October 2007 3) Bank of America & Merrill Lynch , 08.06.2009, Dow Chemical analysis 10 The Chlorine Production Cost in Different Regions1)

¾ Production cost varies greatly from region to region manly due to the cost of electrical energy

US GULF SAUDI REGION EUROPE CHINA RUSSIA COAST ARABIA Raw Materials: €/MT €/MT €/MT €/MT €/MT Net Raw Materials 81.3 73.9 83.9 77.9 83.9 Utility Costs: Net Utility Costs 253.7 183.9 66.7 129.8 72.5 Net Variable Costs 335.0 257.8 150.5 207.6 156.4 Operations & Maint. Costs: Net Operations & Maintenance 37.2 31.1 31.9 19.1 38.3 Plant Gate Cost 528.1 418.9 324.1 319.6 368.1 Corp. G&A 13.8 13.8 13.8 13.8 13.8 Total Production Cost (ECU) 541.9 432.7 337.9 333.4 381.9 Total Cash Cost (ECU) 421.2 332.2 227.3 260.0 246.1

Cl2 Production Cost (excl. NaOH) 239.3 130.2 35.3 30.8 79.3 ¾ It can be seen that European cash costs (assuming old, fully depreciated plants) will be still higher than the production costs in other regions (which take into account the capital costs of new plants), there will be no incentive to build new membrane plant technology, as well as conduct major expensive modernizations ¾ Due to high electricity prices in Europe the industry faces tough competition from low electricity price regions of the world ¾ Chlor Alkali producers in Europe have pointed out that this can lead to carbon leakage i.e.

relocation to countries without capped CO2 emission

1) Source: “Impact of Electricity on the Competitiveness of the European Chlor-Alkali Industry“, PROCHEMICS Ltd., October 2007 11 Product Sectors ¾ Chlorine chemistry is used in over 50% of all industrial chemical processes ¾ Including 90% of pharmaceuticals and 96% of crop protection chemicals ¾ It is a basic manufacturing chemical and thus affects numerous other industries

¾ Chlorine chemistry is not only important for today's economy, but also plays a key role in enabling future innovations, thus contributing to economic growth. Innovative uses of chlorine chemistry include producing: • ultra-pure silicon, the basic material of the photovoltaic cell • super-strength polyaramide fibers, used to replace asbestos in brake linings and to reinforce fiber optic cables • silicon chips, essential to microprocessors that drive computers • titanium metal and aluminum for lightweight aircraft fuselages • epoxy resins used in satellites, cars and planes

Source: www.worldchlorine.com * Based on 2005 consumption data 12 Chlor Alkali Plant Output – where does it go?

European chlorine applications in 2007 (10.71 million tonnes)

Source: www.eurochlor.org 13 Chlor Alkali Plant Output – where does it go?

European caustic soda applications in 2007 (10.01 million tones)

Source: www.eurochlor.org 14 World Chlorine and Caustic Producers

Capacity Share Capacity Share Rank Chlorine Producer (-000- short tons) % of total Caustic Producer (-000- short tons) % of total 1 Dow 6.002 8% Dow 6.602 8% 2 Oxy 2.897 4% Oxy 2.918 3% 3 Olin 1.827 2% PPG 1.949 2% 4 PPG 1.772 2% Olin 1.917 2% 5 Bayer 1.735 2% FPC 1.727 2% 6 FPC 1.570 2% Bayer 1.452 2% 7 TOSOH 1.260 2% TOSOH 1.386 2% 8 INEOS Chlor Vinyls 1.253 2% INEOS Chlor Vinyls 1.379 2% 9 Akzo Nobel Chem 1.100 1% Akzo Nobel Chem 1.210 1% 10 Solvin 955 1% Solvin 1.050 1%

Source: Deutsche Bank Securities Inc. 15 Chlor-Alkali Plants in Europe

Total (thereof mercury)

European Chlor-Alkali Producers

Company 000 tonnes

Dow 1.835

INEOS ChlorVinyls 1.296

Bayer 1.290

AkzoNobel 1.087

Solvay 904

SolVin 868

Arkema 781

Ercros 466

Tessenderlo Chemie 460

Vinnolit 392

Source: www.eurochlor.org 16 Chlor-Alkali Industry in Europe by Process

Three main electrolytic production technologies ¾ Mercury cell ¾ For many years, the mercury cell has been a significant source of environmental pollution, and authorities want the industry to convert to other technologies ¾ More than forty mercury-cell chlor-alkali plants (MCCAPs) are still operating in Europe

¾ Diaphragm cell ¾ Potential exposure of employees to asbestos and releases to the environment ¾ Efforts are being made to replace asbestos with other diaphragm material

¾ Membrane cell Types of plants in operaion in Europe (% of total capacity) ¾ Has been developed to a high degree of sophistication since 1975 ¾ Has ecological advantages over the two older processes ¾ Has become the most economically advantageous process in resent years

M = membrane; Hg = mercury; D = diaphragm

Source: www.eurochlor.org, www.zeromercury.org 17 The Membrane Cell

¾ The membrane cell technology has become the most widely accepted global production process. This technology is the most energy efficient (power is the largest component of cost of production) and least polluting. However, the capital costs for membrane technology based plants are high

¾ The European Parliament in its March 2006 resolution on the EU Mercury Strategy called for a phase out of the mercury cell chlor-alkali industry by 2010 1)

¾ The shift of technologies is in line with the European chlor- alkali sector’s voluntary agreement to phase out all installed mercury chlor-alkali capacity by 2020

¾ We assume a potential project in Iceland will deploy the membrane cell technology and the necessary investment for those companies still using the mercury technology brings an opportunity for Iceland

Basic membrane cell

1) Source: Zero Mercury , IPPC Directive toothless on mercury phase-out 18 18 Index

¾ Conclusions and Recommendations ¾ Industry Overview ¾ Potential Project in Iceland ¾ Production Cost of Chlorine ¾ Chlorine Derivatives from Project in Iceland ¾ A: Ship Bulk Chlorine to Europe (3) ¾ B: Chlorine as an Intermediate to Manufacture non-Chlorinated Products ¾ C: Inorganic Chlorine derivatives (3) ¾ D: Use of Chlorine in Organic Chemistry (2) ¾ Acetylene - are there Lessons to be learned for Iceland ¾ A fully intergrated Icelandic VCM or PVC Project ¾ Smaller Chlor-Alkali Solutions for Iceland ¾ Appendixes

19 Production Cost of Chlorine

¾ Electricity is estimated to account for 60% of the variable costs of production and appr. 40% of total production cost 1) ¾ In a study done for Eurochlor in October 2007 by the Swiss consultant company Prochemics concluded that due to high electricity prices in Europe: 2) ”there will be no incentive to build new plants in Europe or to invest in the conversion for mercury cell plant technology to membrane plant technology...” 450 ¾ Since then power prices in Impact of Electricity Costs on Chlorine Production Costs in Europe (2007) Europe have risen even 400 further

350 Cost (€/mt) 2 Cl 300 Europe Chlorine Cost Euro- 250 pean Future Case 200 Chlorine Cost Euro- pean Current Case 150 Iceland USA * Assumptions: Russia 100 , ¾ Membrane cell technology China ¾ Plant Capacity: 500 kt/a Cl 50 Saudi Arabia *) Investum estimates ¾ Operating rate: 100% 0 ¾ Salt Price: 30 €/t 10 20 30 40 50 60 70 80 90 100 110 120 ¾ Caustic soda price: 275 €/t European European Electricity Cost (€/MWh) Current Future Case Case

1) Source: “BOC and Ineos Chlor“, UK Competition Commission, December 2008 2) Source: “Impact of Electricity on the Competitiveness of the European Chlor-Alkali Industry“, PROCHEMICS Ltd., October 2007 20 Chlorine Derivatives from Project in Iceland

What will we do with the chlorine? A: Ship bulk chlorine to Europe

¾ Chlorine (Cl2) is a hazardous gas at standard temperature and pressure (STP) ¾ It can be stored and transported in pressurized vessel or liquefied by cooling below -35°C ¾ Transportation of chlorine is done widely in the US but has been reduced significantly in Europe due to safety reasons B: Chlorine as an Intermediate to manufacture non chlorinated products ¾ Lithium ¾ Polysilicon C: Inorganic chlorine derivatives ¾ Silicones

¾ Aluminium chloride (AlCl3) D: Organic chemistry - PVC (Polyvinyl Chloride) ¾ Ethylene route ¾ Acetylene through Calcium Carbide

1) Source: www.worldchlorine.com * Based on 2005 consumption data 21 A: Ship Bulk Chlorine to Europe

Transportation of Chlorine in Europe 1) ¾ In 2007 about 6% of the 10.7 million tones of Chlorine in Europe where transported from producers ¾ This is significantly less than 1996 when 15% of west Europen chlorine production was transported ¾ A large proportion of the chlorine transported, by rail or road tanker, goes to small users who do not require sufficient quantities to make on- site chlorine production feasible ¾ In almost 60 years, there has not been a single fatal accident in Europe Chlorine Transport by train involving bulk transport of chlorine

Several factors are leading towards the elimination of storage and transportation of liquid chlorine. Chief among these are: 2) ¾Regulatory and legislative pressures regarding the control of major accident scenarios for chlorine storage and shipment ¾Economic pressures to eliminate, if possible, the high energy consumption needed to liquefy chlorine

1) Source: Eurochlor Website www.eurochlor.org/tranportation 2) Source: www.pvc.org 22 A: Ship bulk chlorine to Europe Cont.

The industry has taken practical steps to minimise chlorine transport such as: ¾ Encouraging new industrial users to locate facilities close to chlorine production plants ¾ Using sodium hypochlorite, rather than chlorine, in applications such as swimming pool disinfection ¾ Converting chlorine into ethylene dichloride (EDC) for shipment to PVC producer Brief cost / benefit analysis ¾ As an example, would it be viable to produce Chlorine in Iceland and ship it in liquefied form to the PVC plant in Stenungsund in Sweden and thus replace the mercury chlorine plant there? ¾ Size of plant 210,000 t/a Chlorine ¾ The shipping cost is derived from very old data and compared with cost of ammonia transportation cost

Advantage of produce in Iceland 1) Disadvantage of produce in Iceland 2) Power cost saving: 18.4 m USD/a Capital at 10% RoI: 0.6 m USD/a Liquefacation energy: 1.0 m USD/a ‘Lost’ Production: 0.8 m USD/a Revaporisation energy: 0.3 m USD/a Transportation : 3) 11.6 m USD/a Total: 14.3 m USD/a

¾ Notably the power cost savings would hardly justify the transportation cost

1) Difference in electrical power prices: 25 USD/MWh, Specific electrical consumption: 3,5 MWh per ton chloride 2) Source: “Modern Chlor Alkali Technologi”, Vol 8, Chapter 21 3) Source: BATTELLE, “A Techno –Economic study of the market of magnesium chloride and utilization ..in Iceland”, 1971, with US CPI corrections 23 A: Ship Bulk Chlorine to Europe Cont.

Transportation of chlorine by sea ¾ The last regular bulk chlorine transport on sea in Europe was to the DuPont’s plant at Maydown, Northern Ireland from a chlorine plant in Spain and from ICI’s chlorine plant in Runcorn, near Liverpool 1) ¾ This transport discontinued when DuPont closed down its chlorine consuming plant in Maydown in the 90’s ¾ Shipping bulk chlorine from Iceland to Europe is therefore not considered viable given the opposition to chlorine transport ¾ In a recent study the UK Competition Commission did not examine bulk chlorine imports from Europe as evidence suggested that this would face considerable regulatory barriers 2) ¾ According to Eurochlor there is one company shipping 22 ton ISO containers with liquefied chlorine on seawater in Europe, but in marginal quantities 3)

1) Source: Telephone talks with Ian White, Otpimax Consulting 2) Source: The UK Competition Commission, 2008, “BOC and Ineos Chlor”, page 79 3) Source: Telephone call with Jean Dubel, Eurochlor 24 B: Chlorine as an Intermediate to Manufacture non-Chlorinated Products

Polysilicon production ¾ The electronic industry demands silicon with extremely high purity. The so called Siemens process

uses trichlorosilane (HSiCl3) as intermediate to purify silicon by distillation to a impurity level less than -9 10 whereas other similar processes use silicon tetrachloride (SiCl4) ¾ The growth in solar industry has increased polysilicon demand in recent years and couple of companies have seen Iceland as a potential site ¾ Last February Wacker Polysilicon one of the world’s most established polysilicon producers introduced it’s plan to build it’s next production facility in Tennessee on the basis of several advantages the site is offering including “over the fence supply of chlorine” 1)

Insulation

Waste gases Elec. energy

HSiCl3+H2

1) Source: FinanzNachrichten, “WACKER plans to set up new polysilicon...”, 26.02.2009 25 C: Inorganic Chlorine Derivatives – Aluminium Chloride

Manufacturing

¾ Anhydrous aluminium chloride (AlCl3) - is produced primarily by the gaseous chlorination of molten aluminum, there are several slightly different processes

¾ Hydrous aluminium chloride - Commercial-purity hydrous AlCl3 is produced by dissolving anhydrous AlCl3 in dilute hydrochloric acid ¾ Polyaluminum chloride - Aluminum chloride solutions can be used to make polyaluminum chloride (PAC), also known as aluminum chloride hydroxide, basic aluminum chloride, polybasic aluminum chloride, aluminum hydroxychloride, aluminum oxychloride and aluminum chlorohydrate

Uses ¾ Anhydrous aluminum chloride: Most widely used as a Friedel-Crafts catalyst in numerous reactions, particularly in the manufacture of petrochemicals ¾ Hydrous aluminum chloride: A significant part was consumed in the production of antiperspirants, with smaller volumes consumed for the production of alumina trihydrate gels for antacid use ¾ Polyaluminum chloride: Major uses are in water treatment and in internal sizing in paper production. In water treatment, PAC is used for purifying surface water, sewage and wastewater from chemical industries; in backwater purification in the steel industry; in effluent purification in the pulp and paper industry; and for water purification in swimming pools. A smaller use of PAC is in oil separation in refineries. The consumption of PAC has increased significantly since

the early 90’s Polyaluminium Chloride appearance is yellow powder

Source: Prochemics Ltd, “Iceland’s objectives in the Chemical Industry”, letter to Investum dated April 17th 2009 26 C: Inorganic Chlorine Derivatives – Silicones

Manufacturing ¾ Silicon metal is reacted with methyl chloride to form a mixture of methylchlorosilanes. These products are then separated by distillation and used for the manufacturing of silicone fluids, elastomers or resins; as well as organosilanes, which are high value specialties

Uses ¾ Silicone fluids are used in a broad variety of applications, such as in the electrical and electronics industries, in the building industry, in cosmetics, paints and coatings and others ¾ Silicone elastomers are mainly used as general purpose and special purpose sealants and rubbers ¾ Silicone resins are mainly used in protective coatings, in electrical and electronic applications and for insulation applications

Silicon Fluid (lubrication)

Source: Prochemics Ltd, “Iceland’s objectives in the Chemical Industry”, letter to Investum dated April 17th 2009 27 C: Smaller Chlor-Alkali Solutions – Packaged Chlorine

Chlorine gas for end users ¾ Packaged chlorine is sold in drums (1,000 Kg) and cylinders (70 Kg) ¾ Main users are water treatment services and swimming pools ¾ At least two companies import and distribute packaged chlorine in Iceland

Packaged chlorine business in the UK 1) ¾ In 2008 the UK Competition Commission issued a report on the anticipated acquisition by BOC Ltd of the packaged chlorine business of Ineos Chlor Ltd. ¾ The reason was the potential risk of monopoly situation if imported chlorine from Europe would not be competitive due to transportation cost ¾ In the study BOC and Ineos Chlor stated that the major input cost in the manufacture of chlorine was energy, which was cheaper in Europe than in the UK ¾ The main parties stated that ‘production cost advantages associated with the manufacture of packaged chlorine in Western Europe offset additional transport costs and make this activity economically viable’ and, further that the ‘transportation of packaged chlorine presents no particularly difficulty’ Some suppliers of package chlorine in Europe:

Brenntag GmbH www.brenntag.de MSSA S.A.S. www.metauxspeciaux.fr C&S Chlorgas GmbH www.chlorgas.de Gerling Holz www.ghc.com Air Products & Chem.Inc. www.airproducts.com BOC Ltd www.boc-gases.com

1) Source: UK Competition Commission, 2008, “BOC and Ineos Chlor” 28 D: Use of Chlorine in Organic Chemistry

Ethylene 1) ¾ Using Chlorine in organic chemistry processes requires hydro carbon input in one way or another

¾ Most common is the introduction of ethylene (C2H4) gas in the downstream process, such as VCM / PVC production ¾ Ethylene is produced in the petrochemical industry by steam cracking and would therefore have to be shipped into Iceland with pressurized vessels or liquid gas tankers and stored as cooled liquid

Other possible sources of hydrocarbons ¾ Gas mining and export of LNG started in the Snöhvit area in N-Norway in 2007, LNG tankers pass Icelandic waters on their way to N-America 2) ¾ Using this gas would require high investments in terminal construction that would hardly be justified ¾ Yet due to the current development in “Biomass to liquid” cracking Iceland could have opportunity in providing hydrocarbon for downstream chlorine industry with this new method using fat from seafood

1) Source: Harriman Chemsult, Outlook for the international PVC Market, June 2005 2) Source: Snöhvit homepage 29 D: Use of Chlorine in Organic Chemistry Cont.

Acetylene

¾ Another source of hydrocarbon is Acetylene (HC2H) a colorless gas ¾ Until 1950 Acetylene was the main source of organic chemicals in the chemical industry but has since then be replaced by Ethylene due to lower cost

¾ Acetylene is normally prepared by the hydrolysis of calcium carbide (CaC2) ¾ Calcium carbide is produced from limestone with high temperatures in electric arc furnaces, a process

that has already come to question in Iceland due to its power intensity 3,500 kWh/ton CaC2 ¾ Producing organic chlor derivatives from acetylene could be an option in Iceland if oil prices surge again China and Acetylene 1) ¾ One of the misinterpretations of the development of the Chinese industry has been the belief that the acetylene route is a) an old technology and b) that is places limitations on plant capacity ¾ Both these myths have been dispelled. The majority of new expansions in China are acetylene-based and the size of new acetylene plants is now well into the 200,000 -300,000 ton/year scale ¾ The Western model of integrated cracker-vinyl plants has not really evolved in China because of the success of the acetylene route and the reluctance of olefin producers to get involved with chlor-alkali ¾ Harriman Chemsult estimates that China cost of PVC from carbide was Limestone and Calcium Carbonate RMB 5,695/t (688 USD/t) ¾ Benchmark PVC import prices in Asia in May 2009 are 710 USD/t CFR 2)

1) Source: Harriman Chemsult Outlook for the international PVC Market, June 2005 2) Source: ICIS.com, “(PVC) Prices and Pricing Information”, May 2009 30 Acetylene - are there Lessons to be learned for Iceland

PVC production from Acetylene ¾ The specific el. energy consumption of the Acetylene [USD/ton] Cash production cost of VCM in China 2) route is around 5,300 kWh/ton PVC ¾ Based on power el. energy prices of 65 USD/MWh in China the el. cost of one ton PVC is around 340 USD Chlorine Other Cost costs 1) if the acetylene route is used Cl + H2 Cost ¾ This is in line with production cost in NW-China 2) according to Tecnon Orbichem Cl + H2 Cost

Cash Cost Ethylene CaC CaC [USD/ton] Dependence on Crude Oil Price 2) 2 2 Cost Cost Cost

HCPE cash cost from cash ethylene ex naphtha cracker E. China NW. China E. China PVC cash cost from cash Ethylene CaC2 CaC2 ethylene ex naphtha cracker plus cash chlorine = ECU /2.1 Iceland and Acetylene A ¾ Icelandic Chlor Alkali project could source hydrocarbons B through the acetylene route by importing limestone or using 90% calcium carbonate rich shell sand 3) A= Production cost of PVC from calcium carbide in E- ¾ Such sand is currently used as calcium originator by China (excl VAT) Icelandic Cement and earlier by fertilizer plant B= Production cost of PVC from calcium carbide in NW- China plus Rmb 599/ton freight cost (excl VAT) ¾ The cost would be considerably lower than China and competitive with Ethylene if Oil prices remain high

Crude Oil Price [USD/bbl] ¾ According to Tecnon Orbichem such acetylene has break even point with Ethylene at 35 USD/bbl

1) Source: CBI China, Higher production prices due to electricity price increase, 22.07.2008 2) Source: Tecnon Orbichem , The world chemical Industry Focuses on Asia, 2008 3) Source: Icelandic Cement, homepage 31 A fully intergrated Icelandic VCM or PVC Project

Ethylene ¾ A fully integrated chlor-alkali VCM or PVC project in Iceland would either have to rely on imported Ethylene or produce Acetylene via Calcium Carbide production ¾ Instead of importing salt it could be feasible to prepare the brine from seawater with evaporation ¾ For smaller projects a production of caustic soda in dry form could be attractive

Limestone

Arc. Furnace Arc. Furnace El. energy

Calcium Carbite

Acetylene plant Acetylene plant Water Steam El.energy Ethelyne

OR Acetylene NaCl brine Chlorine Brine preparation Chlor Alkali VCM or PVC VCM or PVC Electrolysis Plant Sea Dry water Caustic Liquid Caustic Soda Soda solution Evaporation Plant

Steam

32 Smaller Chlor-Alkali Solutions for Iceland 1)

¾ Chemical industry which combine intensive use of electricity /steam with raw materials which may already be available in Iceland or which can be easily imported ¾ A key to develop these industries would be the use of smaller electrolysis plants which can operate economically with lower production capacities ¾ Prochemics Ltd. understands that such technologies, based on standard modular plants, have recently become available, and could supply some of the more special industries that are suggested here, and which to not require large quantities of chlorine ¾ A further advantage of these modular plants, is that capacity can be expanded as needed by adding modules

Products which could meet the specification for a production plant in Iceland are: ¾ Caustic soda ¾ Aluminium Chlorides 1) ¾ Silicons 1) ¾ Packaged Chlorine*

* Investum

1) Source: Prochemics Ltd, “Iceland’s objectives in the Chemical Industry”, letter to Investum dated April 17th 2009 33 Index

¾ Conclusions and recommendations ¾ Industry overview ¾ Potential project in Iceland ¾ Appendixes

34 Earlier Chlorine related Studies in Iceland

Following studies involving chlor-alkali or sodium chlorate projects in Iceland have been conducted earlier: What By When Languague Natrium metal MIL 199x Icelandic Sodium Chlorate MIL Sjóefnavinnsla Rannsóknarráð Ríkissins 1972

Following studies of Projects in Iceland involving chlorine have been conducted:

What By When Languague Magnesium Chloride BATELLE 1971 English Titanium Chloride UNIDO 1973 English Zirkonium ITÍ Saltverksmiðja á Reykjanesi Baldur Líndal 1980 Icelandic

35 Investum | August 2009 Sodium Chlorate Conclusions and Recommendations

Conclusions ¾ The pulp and paper industry has chosen Sodium Chlorate instead of elementary chlorine for better quality paper ¾ Sodium Chlorate is highly electricity intensive process, both in terms of specific energy consumption (5,200 kWh/ton) and especially in terms of energy cost as % of cash cost (>60%) ¾ The industry is moving production from places where electricity prices have surged ¾ The product is easily shippable in containers ¾ Without any doubt a Sodium Chlorate production in Iceland would be very compatible on the international market ¾ Salt is the main raw material which can be shipped in or sourced locally (evaporation of sea water) ¾ The European and N-American market are saturated and no project under development ¾ European producers are currently curbing production due to difficult market ¾ It is unlikely that the main producers or new entrants start to look for new sites

Recommendations ¾ Keep in contact with the main producers and have them informed about development of a chemical park if that starts to evolve

37 Index

¾ Conclusions and Recommendations ¾ Industry Overview ¾ ...a short chemistry lesson ¾ What is Sodium Chlorate? ¾ Sodium Chlorate Production ¾ Market Trends ¾ Market Trends and Transport ¾ Production ¾ Sodium Chlorate Prices in America ¾ Eka Chemicals ¾ Plant in Focus Magog - Canada ¾ Potential Project in Iceland

38 ...a short chemistry lesson

Elements: ¾ Na: Sodium (Natrium) - metal ¾ Cl: Chloride - gas

Compounds: ¾ NaCl: Sodium Chloride, or table salt

¾ NaClO2: Sodium Chlorite

¾ NaClO3: Sodium Chlorate

¾ NaClO4: Sodium Perchlorate

¾ KClO3: Potassium Chlorate

¾ NaOH: Caustic Soda / Sodium Hydroxide

¾ Na2CO3 Sodium Carbonade / Soda Ash

39 What is Sodium Chlorate?

Appearance:

¾ In it’s purest form Sodium Chlorate (NaClO3) is a white crystal

Usage: ¾ Pulp bleaching – used as the raw material for the production of chlorine dioxide. Up to 95% of all sodium chlorate produced worldwide goes into the pulp and paper industry ¾ Weed killer ¾ Chemical oxygen generation, such as an energy oxygen generation in commercial aircrafts ¾ Other minor uses: Production of potassium chlorate and sodium chlorite

Market: ¾ The growing demand for elemental chlorine-free (ECF) chemical pulp bleaching drives the sodium chlorate market ¾ But after tremendous growth during the switch from chlorine bleaching to the elemental chlorine free (EFC) bleaching process the global markets for Sodium Chlorate have matured

Source: www.madehow.com/Volume-6/Sodium-Chlorite.html 40 Sodium Chlorate Production

¾ Production of sodium chlorate is by the electrolysis of sodium chloride (salt) solution ¾ The process is electricity intensive and uses around 5,200 kWh per ton produced 1)

Process: 2) Technology providers: ¾ The process is similar to Chlor Alkali production ¾ Aker Solutions, Norway (Canada branch) ¾ Technology is similar to a diaphragm cell but ¾ Technip, France without a separator ¾ Uhde, Germany

Salt Primary Brine Secondary Hydrogen Storage Purificaton Purification Handling

Sodium Chlorate Electolysis Crystalization & Crystal Product Drying Handling

Mother Liquor

AC Power Supply DC Rectification

Chlorate cell room with M25 Chemetics cells (Courtesy of Aker Chemetics)

1) Source: Electrochemistry Encyclopedia, http://electrochem.cwru.edu/encycl/art-b01-brine.htm 2) Source: Aker Solutions, Sodium Chlorate Technology 41 Market Trends

¾ The pulp and paper industry has for the last decades been seeking a replacement material for elementary chlorine ¾ In 1998, Environmental Protection Agency ruled that chlorine, which had come under attack because of concerns about dioxins and organic halides in pulp mill effluents, could be replaced with chlorine dioxide. The choice of elemental chlorine free (ECF) bleaching over total chlorine-free (TCF) bleaching, boosted the demand for sodium chlorate, a precursor for the production of chlorine dioxide. The deadline for implementing the environmentally friendly technology was eventually set for April 2001 1) ¾ Sodium Chlorate and Hydrogen Peroxide have been competing in popularity ¾ The cost of producing Hydrogen Peroxide has reduced faster than Sodium Chlorate but can not replace it in higher brightness paper products

¾ World largest producers: % of world Name HQ production EKA Chemicals Sweden 28% Canexus Canada 17% ERCO Canada 14% Kemira Finland 14% Others 27% ¾ Having completely replaced chlorine in pulp bleaching, chlorate is now growing at only the same rate as the pulp industry ¾ Nevertheless the sodium chlorate industry in N-America has identified SE-Asia as potential growth for their export

1) Source: The Innocation Group 42 Market Trends and transport

European market news: ¾ Due to factors such as the energy cost, the labor cost, the freight cost and the appreciation of local currencies to US dollar, the output of sodium chlorate in European markets has reduced (some production lines have already discontinued product ion). There is a supply shortage of the product 1) ¾ AkzoNobel’s Eka Chemicals says it will permanently close a sodium chlorate plant at Mo i Rana, Norway due to weak market demand and high energy costs. Production will be reallocated to other plants, the company says. Eka said in January 2009 that it would temporarily stop sodium chlorate production at the site 1) ¾ Due to the high electricity consumption Sodium Chlorate producers have been relocating to places where electricity cost is low 1) ¾ Sodium Chlorate is shipped in 1 ton big bags or 20-30 ton ISO containers 2) ¾ When unloading from the ISO container Sodium Chlorate is dissolute in warm water which is circulated through the container and piped to the paper mill 2) ¾ Possibly a shipping company would impose a maximum limit on the quantity of sodium chlorate that can be transported by a single ship 2)

Superior Plus

1) Source: Superior Plus, Specialty Chemicals, 2008 2) Talks with Erich Hinze and e-mail from Adrew Barr , Aker Solutions 43 Production

¾ N-America is the world largest market for Sodium Chlorate (>50% in 2007) 1)

Sizes of Sodium Chlorate plants in N-America 2) [000 ton/a]

1) Source: www.sriconsulting.com/CEH/Public/Reports/732.1000/ 2) Source: The Inocation Group website 44 Sodium Chlorate Prices in America 1)

Sodium Chlorate Prices ¾ Sodium Chlorate prices have remained high despite of USD per net ton difficult market in the pulp and paper industry – see chart on the right ¾ Barclays estimates similar prices throughout 2009, 2010 and 2011 i.e. USD 447 per ton

¾ On the other hand Citibank comments on European prices: 2) “Hydrogen peroxide prices will probably be weak this year due to the demise of pulp demand. The same applies to sodium chlorate.” ¾ Apparently the cost of producing sodium chloride has almost kept constant while other consumables of the paper and forest industry have dropped in cost- see bar chart on the left

1) Source: Barkleys Capital, 21.April 2009, “Paper and Forest Products” 2) Source: Citi, 18.Jan.2009, “The Quidnunc – Fundamental Focus – Annual” 45 Eka Chemicals

¾ Eka Chemicals is one of the world's leading manufacturers of bleaching and performance chemicals for the pulp and paper industry. Eka Chemicals has 2,700 employees worldwide and production at 40 sites in 18 countries ¾ Eka Chemicals, headquartered in Sweden, is a business unit within Akzo Nobel ¾ Eka Chemicals is the world's largest producer of sodium chlorate. Eka Chemicals has plants in Canada, the US, Brazil, Chile, France, Finland, Norway and Sweden

Percentage of sales by product group Operations (EUR million)

2004 2005 2006 2007 2008 Sales 980 893 963 990 1,005 Investments8865464572 Employees 3,070 2,907 2,856 2,703 2,718

¾ The European Commission (EC) has been investigating the Chlorate market in Europe due to fears of oligopoly. Based on its finding EC fined in 2008 a group of Sodium Chlorate producers, including EKA Chemicals for market sharing and price fixing activities

Source: www.eka.com 46 Plant in Focus Magog - Canada

The Magog Plant: ¾ Eka Chemicals operates a plant in a Industrial park near Magog, a town with 23,000 citizens in Canada ¾ Began operation in 1979 with 20,000 ton/a capacity ¾ Produces now 157,000 ton/a of Sodium Chlorate ¾ By-production of 9,200 ton/a of hydrogen – sold partially to BOC Gaz and released to the atmosphere ¾ Number of employees is 60 ¾ The power required is 90 MW ¾ Purchase annually electricity for CAD 30m ¾ This results in power prices of USD 32/MWh (specific consumption 5,200 kWh/ton)

¾ Typically, specific investment cost of a Sodium Chlorate plant is believed to be around USD 1,000 per annual ton in capacity

¾ Based on 25 USD/kWh lower electricity price in Iceland than Europe and 60 USD/ton additional shipping cost of product, an Icelandic plant could favor a additional 16% margin from sale price (USD 450/ton)

Source: www.eka.com 47 Index

¾ Conclusions and Recommendations ¾ Industry Overview ¾ Potential Project in Iceland ¾ Potential Sodium Chlorate Project in Iceland

48 Potential Sodium Chlorate Project in Iceland

¾ Plant size: 50,000 t/a ¾ Investment: 70 m USD ¾ Power needs: 30 MW ¾ Revenue: 20 m USD/a ¾ Employees: 20-30 ¾ By-product: hydrogen, appr. 3,000 t/a

¾ Such plant could benefit from being located closed to the Reykjanes geothermal power plant for this two main reasons: ¾ Available process heat and steam ¾ Potential salt production in later stages

49 Investum | August 2009 Lithium Conclusions and Recommendations

Conclusions ¾ World lithium demand is expected to grow around three fold in ten years ¾ Lithium Metal Production is a small niche and an interesting option for Iceland ¾ The production of Lithium Metal from Lithium Chloride requires much electrical energy per weight, i.e. 35,000 kWh/ton Lithium whereas aluminium electrolysis uses about 14,500 kWh /ton of product ¾ Some of the raw material needed for Lithium Metal production could be produced in Iceland ¾ Lithium exist in geothermal brine and volcanic rocks in Iceland ¾ The raw material Potassium Chloride (KCl) used in the electrolysis appears in geothermal brines in Reykjanes containing 41% KCl ¾ With the existence of a Chlor-Alkali plant, Lithium Chloride (LiCl) could be produced locally from imported Lithium Carbonate by using chlorine ¾ Production of Lithium-aluminium alloy containing up to 7.5% lithium could be an interesting end product to produce

51 Conclusions and Recommendations Cont.

Recommendations ¾ Compare a project in Iceland to key projects coming up ¾ Look into the feasibility of mining KCl salt from Reykjanes ¾ Introduce Iceland to potential producers of Lithium ¾ Contact Rio Tinto as they are exploring Lithium mining in Serbia

Recommended Reports ¾ Up to date market and industry information is not available freely as the Lithium market is small and not publicly traded. Investum recommends the following reports for in deep detailed information ¾ The Lithium Industry, Metal Bulletin research, 2009, Price $5,995 ¾ Roskill, The Economics of Lithium, 11th edition 2009; Price $5,000

52 Index

¾ Conclusions and Recommendations ¾ Industry Overview ¾ ...a short chemistry lesson ¾ What is Lithium? ¾ Major Applications for Lithium (2) ¾ Demand (3) ¾ The Processing of Lithium ¾ Lithium Companies ¾ Mining (3) ¾ Lithium Metal Production ¾ Potential Project in Iceland ¾ Appendixes

53 ...a short chemistry lesson

Physical Information [Li]

Atomic Number 3

Relative Atomic Mass 6,941

Melting Point/K 453

Boiling Point/K 1,620

Density/kg m-3 534

54 What is Lithium?

¾ Lithium (Li) has a silvery appearance but quickly becomes covered by a film of black oxide when exposed to air ¾ Lithium is easily deformed, highly reactive, and has a lower melting and boiling point than most metals. The properties and chemistry of Lithium are modified further due to its small atomic radius ¾ Lithium belongs to a group of elements called the alkali metals, the most reactive of all elements ¾ Lithium possesses a low coefficient of thermal expansion and the highest specific heat capacity of any solid element and is therefore useful in heat transfer applications ¾ Lithium has a high electrochemical potential, its low atomic mass gives a high charge (and power) to weight ratio ¾ Lithium chloride is one of the most water absorbent materials known Lithium in nature ¾ Due to its high reactivity it only appears naturally on Earth in the form of compounds ¾ Lithium is a comparatively rare element, although it is found in many rocks and some brines, but always in very low concentrations and seldom in magnitude of commercial value. Estimates for crustal content range from 20 to 70 ppm by weight 1) ¾ Seawater contains an estimated 230 billion tons of lithium, though at a low concentration of 0.1 to 0.2 ppm 2) ¾ The most important unexplored deposit of lithium is in the Salar de Uyuni area of Bolivia 3) ¾ The most important exploited deposit of lithium is in the Salar de Atacama of Chile 4)

1) Source: Essay:Analysis of the Element Lithium , Green, Thomas, June 2006 "Analysis of the Element Lithium". 2) Source: The Trouble With Lithium 2" (PDF). Meridian International Research. May 28, 2008. Retrieved on 2008-07-07 3) Source: Bolivia holds key to electric car future", BBC, November 9, 2008 4) Source: Peter Ehren, Independent Lithium Consultant in Chile , June 2009 55 Major Applications for Lithium

¾ The use of lithium compounds in ceramics, glass, and primary aluminum production represented more than 60% of estimated domestic consumption. Other major end uses for lithium were in the manufacture of lubricants and greases and in the production of synthetic rubber 1) ¾ An increasing popularity for the last 10 years, used in laptops, cameras, cell phones etc. In the coming years it will expand to the hybrid and electrical vehicles ¾ The annual output of these products contains about 21,800 tons of lithium

Applications ¾ Electrical and electronic uses: ¾ Lithium batteries: disposable batteries that have lithium metal or lithium compounds as an anode ¾ Lithium niobate is used extensively in telecommunication products, such as in most mobile phones and optical modulators ¾ Chemical uses: ¾ Lithium chloride and lithium bromide are used as desiccants ¾ Lithium metal is used in the preparation of organo-lithium compounds

1) Source: SQM 2007 56 Major Applications for Lithium Cont.

¾ General engineering: ¾ Lithium is used as a flux to promote the fusing of metals during welding and soldering ¾ Alloys of the metal with aluminium, cadmium, copper and manganese are used to make high performance aircraft parts ¾ Optics: ¾ Lithium is used in glasses and ceramics and non-linear optics applications ¾ Rocketry: ¾ Metallic lithium and its complex hydrides are used as high energy additives to rocket propellants ¾ Lithium peroxide, lithium nitrate, lithium chlorate and lithium perchlorate are used as oxidizers in both rocket propellants and oxygen candles to supply submarines and space capsules with oxygen ¾ Nuclear applications: ¾ Lithium deuteride is used as a fusion material in nuclear weapons ¾ Lithium fluoride is used in liquid-fluoride nuclear reactors ¾ Lithium is used to produce tritium in nuclear reactors ¾ Other uses: ¾ Lithium stearate (soap) has the ability to thicken oils and so is used commercially to manufacture lubricating greases ¾ Lithium hydroxide and lithium peroxide are used in confined areas, such as aboard spacecraft and submarines for air purification ¾ Lithium compounds can be used to make red fireworks and flares ¾ A block of solid lithium is used in torpedoes, which generates enormous quantities of heat, which is used to generate steam from seawater. The steam propels the torpedo

57 Demand

The demand of Lithium is expanding because of: 1) ¾ The USA´s determination to reduce its dependence of oil ¾ The Chinese government has announced an 880 million Yuan investment to support electric vehicle cars 2) ¾ A global drive to reduce carbon emissions from automotives and the pending auto electrification ¾ The rise of new portable electronic devices such as laptops, music players and phones that employ lithium batteries ¾ Current demand for lithium, measured as Lithium Carbonate Equivalent (LCE), is around 120,000 ton/annum

1) Source: Report:The Lithium Industry, Metal Bulletin research, 2009 2) Source: Sterling Group Ventures, Inc 58 Demand Cont.

¾ Lithium consumption experienced growth of >8% yearly between 2003 and 2007 ¾ Prices responded accordingly, with lithium carbonate rising from USD 2,000/ton in 2004 to just under USD 5,500/ton in 2008, reflecting the higher costs involved in the mineral conversion process and the raw materials required ¾ World lithium demand is expected to grow around three fold in ten years driven by secondary (rechargeable) batteries and Electric Vehicle (EV) batteries ¾ Current LCE demand is expected to rise to around 250,000 to 300,000 tons/year in 2020 driven by secondary (rechargeable) batteries and Electric Vehicle (EV) batteries 2) ¾ The main drivers for growth in the next ten years will be the battery sector and Li alloy production 1)

1) Source: TRU Group – Lithium Supply & Markets Conference, Chile 2009 2) Source: Lithium Market outlook &Offtake Update, ASX Media Release, 3 March 2009, http://www.galaxyresources.com.au/documents/GXY24LithiumMarketOutlookOfftakeUpdate.pdf 59 Demand Cont.

¾ The largest consuming region is Asia, followed by North America and the EU. Three countries – the USA, Japan and China – are together estimated to account for nearly half of world consumption 1) ¾ The figure shows estimated consumption of lithium by leading countries 2005 2) ¾ Growth has been led by demand for lithium carbonate in secondary batteries, while glass and frits and lubricants have also been expanding markets

¾ Expansion in consumption of lithium ion batteries has been bolstered by falling prices as production volumes increase

Table 1) : Average values of Japanese production of secondary batteries by type 2000-2005 (Yen000/unit) Year Lithium ion Nickel-metal hydride Nickel-cadmium 2000 616 114 112 2001 542 117 109 2002 440 119 116 2003 390 135 114 2004 353 201 108 2005 312 240 110

1) Source: Roskill report, 2006 http://www.roskill.com/reports/lithium 2) Source: USGS, Roskill’s Letter from Japan, SQM and Trade statistics 60 The Processing of Lithium

¾ Today the world extracts lithium from two types of resources—brines and minerals to produce lithium carbonate, lithium hydroxide, lithium chloride, lithium metal, and the other lithium-containing products

Lithium Resources Minerals Brines Clays Sea Water Lithium resources Lithium equivalent in brines tons Argentina 3,010,000 Lithium Bolivia 5,500,000 Reserves Minerals Brines Chile 6,220,000 Potential Icelandic Project China 3,950,600 Israel 2,000000 Lithium Chloride Lithium Chloride Concentrates USA 2,597,600 Lithium Lithium Carbonate Products Total 23,278,200 Lithium Metal

Lithium Hydroxide ¾ The price of the lithium mineral Butil compounds produced is extremely Lithium difficult to estimate because of the

large number of compounds used Glazes and Greases, Aluminum, Synthetic Rubber, in a wide variety of end uses and Frits Lubricants, Continuous Casting Polymers and Batteries and Powder, Secondary Organic Derivates the great variability of the prices Major Inorganic Batteries, for the different compounds Applications Derivates Pharmacuticals, Glazes and Frits Alloy Pharmaceuticals Dehumidifier Systems and Primary Batteries

Source: The lithium industry: Its recent evolution and future prospects, Arlene Ebensperger, Philip Maxwell and Christian Moscoso Resources Policy, 2005, vol. 30, issue 3, pages 218-231 61 Lithium Companies

Lithium Brine Miners

Companies Country Web page

SQM Chile http://www.sqm.com/ Chemetall Chile http://www.chemetalllithium.com/ FMC Lithium Argentina http://www.fmclithium.com/

Lithium Metal Producers

Companies Country Raw Material Comments Web page

FMC Lithium USA and UK LiCl Tolling with DuPont in USA http://www.fmclithium.com/ Chemetall USA and Germany LiCl http://www.chemetalllithium.com The only manufacturer of pure lithium TVEL Russia Li CO http://www.tvel.ru/en/ 2 3 materials in Russia

Qinghai Lithium China Spodumene Spodumene to Li2CO3 to LiCl http://www.cniecxj.com/ Xinyu Ganfeng China Li2CO3 and LiCl http://www.ganfenglithium.com/ China Energy China http://en.cel-li.com/ Lithium Co., Ltd Kunming Yongnian China Unknown Honjo Chemical Japan LiCl http://www.honjo-chem.co.jp/

62 Mining

¾ Lithium is separated from other elements in igneous mineral or as lithium salt extracted from the water of mineral springs, brine pools, and brine deposits ¾ Nearly half the world's known reserves are in South America throughout the Andes mountain chain 2) ¾ The richest lithium source currently being harvested is the Salar de Atacama basin in the Atacama desert in Chile. The following corporations produces Lithium Carbonate or Lithium Cloride from Brines: 3) ¾ SQM (Chile) 30,000 tonnes ( installed cap. 40,000-48,000) ¾ Chemetall (Chile and USA) 23,000 tonnes and expanding

¾ FMC Corporation (Argentina) 16,500 tonnes ( Li2CO3+ LiCl) ¾ Chemetall and SQM both obtain lithium product from Salar de Atacama and are responsible for approx. 60% of the world production market of lithium carbonate, lithium hydroxide and lithium chloride

Major Producing Countries of Lithium % of world production 4) Chile 43% Australia 25% Argentina 13% China 6% USA 4%

1) FMC estimate, 2009 2) Source: Simon Romero, "In Bolivia, a Tight Grip on the Next Big Resource," New York Times, Feb. 2, 2009 3) Source: FMC Corporation, 2003 4) Source: Based on USGS (2008), Sernageomin (2006), Roskill (2006) 63 Mining Cont.

¾ In the graph to the left the historical Chilean Export data is resumed and described 1) ¾ Currently he major lithium brine producers in South America are planning capacity expansions and the potential for increased production and improved product quality from brine-based lithium 2) ¾ The graph to the right shows historical Lithium Carbonate Prices. The price drop in 1996 is due to the production growth in Chile. The Price increase in 2003 and onwards is due to the consumption growth of >8% yearly. Today the price of Lithium Carbonate is around USD 6,000/ton (USD 3/pound)

Chilean export of Lithium Carbonate Historical prices of Lithium Carbonate 7 Current Dollars 2008 Dollars

6

5

4

3

Dollars per pound 2

1

0 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008

1) Source: Peter Ehren, Independent Lithium Consultant in Chile , May 2009 2) Source: Roskill report, 2006 http://www.roskill.com/reports/lithium 64 Mining Cont.

¾ The graph shows world production of primary lithium by leading producer in tons of lithium 1) ¾ Production of primary lithium comprises ¾ Lithium minerals directly produced from hard rock minerals (Australia, Canada, Portugal, Zimbabwe) ¾ Lithium minerals converted to lithium compounds (Brazil, China) ¾ Lithium carbonate and chloride produced from brines (Argentina, Chile, USA) ¾ Rio Tinto Plc is entering into the Lithium industry by exploring lithium carbonate production from its jadarite deposit in Serbia 2) Lithium equivalent production in different Countries 20.000

18.000

16.000

14.000

12.000

10.000 Ton 8.000

6.000

4.000

2.000

0 2000 2001 2002 2003 2004 2005e

Argentina Australia Chile China Others

1) Source: Roskill report, 2006 http://www.roskill.com/reports/lithium 2) Source: Industrial Minerals, Article: Rio Tinto turns to Lithium, 25 November 2008; www.indmin.com 65 Lithium Metal Production

¾ 4-5,000 tons of lithium metal is produced annually and is growing rapidly 1) ¾ First Lithium Chloride is produced by heating up Lithium Carbonate and Hydrochloric acid. At high temperatures the Hydrochloric acid will react with the lithium atoms

¾ LiCO2 + HCl ---> LiCL + HCO2 ¾ Lithium is then purified by electrolysis of a molten lithium chloride (LiCl)-potassium A) chloride (KCl) mixture in specially designed cells, with the molten metal collecting in the top and being periodically withdrawn and cooled as ingots 2) Lithium Chloride ¾ As the melting point for LiCl is high (614°C) KCl is used to lower the melting point 1) ¾ LiCl-KCl eutectic with 44.3% LiCl melts at 352°C ¾ The salt mixture in the industry contains about 50% LiCl, which allows electrolysis to be carried out at 400-460°C ¾ Li metal is then produced by the following equations: ¾ Cathode: Li+ + e- => Li - - ¾ Anode: Cl => ½ Cl2 + e

¾ Total: 2LiCl => 2Li + Cl2 Potassium Chloride

¾ The production of Lithium from Lithium Chloride (LiCl) via electrolysis requires much electric energy per weight, i.e. 35,000 kWh/ton 3) Lithium whereas aluminium electrolysis uses about 14,500 kWh /ton of product ¾ Most of the ingots are then converted into a wide variety of other shapes and forms, including thin sheets, pellets, powder, etc., for each specific use ¾ The purity is mostly 99.5% but higher purity grades are available for the production of lithium primary batteries ¾ Some lithium is alloyed into lithium-aluminium containing up to 7.5% lithium ¾ No green house gas emission due to the absence of Carbon anode

A): Potasium Chloride = Kalium chloride

1) Source: Peter Ehren, Independent Lithium Consultant in Chile , May 2009 2) Source: Donald E. Garrett ,Handbook of lithium and natural calcium chloride, page 197 3) Source: Orkufrek iðnferli, áfangaskýrsla, Iðntæknistofnun Íslands, 1982 66 Index

¾ Conclusions and Recommendations ¾ Industry Overview ¾ Potential Project in Iceland ¾ Lithium Metal Production in Iceland (3) ¾ Extract Lithium from Geothermal ¾ Case Study - Extract Lithium in Iceland ¾ Pros and Cons of Producing Lithium in Iceland ¾ Appendixes

67 Lithium Metal Production in Iceland

Electrolysis cell Feasible production size in Iceland 1) ¾ A preliminary estimate for a feasible project size would be a 3 stage expansion plan of 250 ton of lithium metal annually each stage ¾ The power required is 8-24 MW ¾ The production facility would need 50-75 employees 2)

Production possibilities ¾ Lithium Metal with high Purity as: ¾ Lithium Ingots ¾ Pellets ¾ Foils ¾ Lithium Alloys with: ¾ aluminium ¾ cadmium ¾ copper ¾ manganese ¾ Huge development possibilities

1) Source: Peter Ehren, May 2009 2) Source: Investum estimate 68 Lithium Metal Production in Iceland Cont.

¾ The raw material needed are: 1) ¾ Lithium Chloride (LiCl) ¾ Potassium Chloride (KCl), to lower the melting point.

¾ Caustic Soda (NaOH) or Calcium Carbonate (CaCO3) is required to neutralize the chlorine gas produced during the lithium production ¾ Electricity

¾ With the existence of a Chlor Alkali plant in Iceland it could be feasible to Lithium Carbonate

import Lithium Carbonate (Li2CO3 ) and produce Lithium Chloride (LiCl) and Caustic Soda on site 1) ¾ The market price for Lithium Carbonate was USD 5-6,000/ton in 2008 ¾ Potassium Chloride (KCl) appears in geothermal brines in Reykjanes. Salt with 41% KCl content was produced there in the nineties 2) Environmental and Transport Issues: ¾ There are no restrictions regarding shipment of raw material needed for the

production Caustic Soda ¾ Lithium Carbonates and Lithium Chloride are shipped in containers ¾ The only way to transport Lithium Metal from Iceland is by sea as air transport of Lithium is restricted to small amounts ¾ The lithium metal production does not produce waste products. The by- products are: ¾ Chlorine gas ¾ Sodium hypochlorite also known as bleach (NaClO)

¾ Calcium hypocloririte also known as bleaching powder (Ca(ClO)2) Potassium ¾ Calcium Chlorite (Ca(ClO2)2) Carbonate

1) Source: Peter Ehren, Emails, May-June 2009 2) Source: Skýrsla: Framleiðsla á natríumskertum matvælum, page 6, Matvælarannsóknir, Keldnaholi, December 1999 69 Lithium Metal Production in Iceland Cont.

Production cost and feasibility: ¾ Cost of Lithium Carbonate is USD 5/kg ¾ The cost of 6 kg Lithium Carbonate is USD 30 but about 6 kg of Lithium Carbonate is needed to produce 1 kg Lithium ¾ The market price of Lithium is USD 58/kg for industrial grade or USD 64-70/kg for battery grade 1) ¾ The added value is about USD 30/kg without taking into account the production cost, other raw material needed and electricity

1) Source: Asian Metal, 12 January 2009; www.asianmetal.com 70 Extract Lithium from Geothermal

¾ Today, while brine deposits remain the most cost effective means of extracting lithium reserves, there is a vast amount of research into developing technologies that could exploit lithium from other types of deposits such as geothermal brines. Should they succeed, they could seriously compete with the brine producers 1) ¾ Geothermal waters have had intimate and lengthy contact with the layers of the earth’s crust that they flow through, resulting in dissolution of minerals and metals from the rocks, and solution into the hot water 2) ¾ Suitable sites need to have a high concentration of lithium in the brine stream to be efficient ¾ Simbol Mining, a Texas based company, focuses on mining lithium from the brine streams of natural and artificial geothermal hotspots ¾ According to Simbol Mining their brine steam technology to extract lithium is more cost effective than other mining options

1) Source: Report:The Lithium Industry, Metal Bulletin research, 2009 2) Source: http://www.ioes.saga-u.ac.jp/ioes-study/li/lithium/occurence.html 71 Case Study - Extract Lithium in Iceland

Test samples in Geothermal waters: 1) ¾ About 20 geothermal waters were sampled in Iceland in October 2007 and June 2008 for measurement of lithium isotopes ¾ The samples came from Svartsengi, Reykjanes, Nesjavellir, Krafla and Námufjall ¾ These studies showed Li concentrations of 0.085-5.8 ppm whereas Reykjanes and Svartsengi had the highest concentration ¾ For comparison: ¾ The usual lithium concentration in the common surface water is about 0.010 ppm ¾ The geothermal field in Salton Sea, southern California, has shown concentrations of 200 ppm 2)

Test samples in Hekla in 2008: 2) Concentration range Water source 2) Country ¾ Seventeen lava eruption samples in ppm where investigated from the Hekla Drinking (surface) 0.002 - 0.017 Czech Republic central volcano Drinking (groundwater) 0.0047 - 0.020 Czech Republic ¾ Lithium concentrations in the Geothermal 0.085-5.8 Iceland analyzed samples range from 2.9 to Drinking (mineral) 0.1 – 13 Czech Republic 42 ppm Lithium Mineral 3-6 Romania It remains to be seen if Lithium Mineral 4.87-8.00 USA mining in Iceland could be Volcanic 10-46 Turkey feasible although these tests do Volcanic 2.9-42 Hekla, Iceland not indicate a high Lithium brine Volcanic 0.1-44.2 Mexico or rock concentration in Iceland Geothermal 200 Salton Sea, USA

1) Source: Lithium isotopes in Geothermal Fluids in Iceland; Research done by BRGM ,France and ISOR, Iceland 2) Source: Jan A. Schuessler, Ronny Schoenberg and Olgeir Sigmarsson; Iron and lithium isotope systematics of the Hekla volcano, Iceland, July 2008 72 Pros and Cons of Producing Lithium in Iceland

Pros: ¾ Very electrical energy Intensive ¾ Possible mining of raw material needed ¾ Suitable project size and a growing market ¾ Possibility to produce Aluminium-Lithium alloys ¾ Being part of European Economical Area could attract Investors ¾ Due to small scale size transportation to and from Iceland would be done by containers and is not a problem

Cons: ¾ No Chlor-Alkali plant in Iceland ¾ Lack of local off takers ¾ Little chemical knowledge locally

Source: Peter Ehren, May 2009 73 Index

¾ Conclusions and Recommendations ¾ Industry Overview ¾ Potential Project in Iceland ¾ Appendixes

74 Main Advisor

PETER EHREN, Independent Lithium Consultant in Chile

¾ Work Experience • Ehren-González Limitada • Independent Consultant 2007 - • SQM, Chile • Process manager Project Engineering • Head of R&D department of Lithium and brine technology ¾ Lithium Expertise • Peter Ehren has more than 12 years experience in the Lithium industry. He started his interest in the lithium business during his master s thesis at Technical University of the Delft where he investigated for BHP Minerals in Reno the recovery of lithium from geothermal brine (Salton Sea) • He has consulted in a variety of lithium and potash topics such as, process simulations, lithium applications, world lithium supply analysis, lithium export data, lithium prices, cost simulations for a variety of lithium minerals and brine deposits and research and development of Salars • During his professional carrier he obtained in depth knowledge of the lithium carbonate and lithium hydroxide process. He was responsible for the R&D of a variety of lithium products, where under lithium chloride production. He visited 3 lithium metal plants, 3 spodumene production processes, and 3 lithium carbonate/hydroxide plants from spodumene, Chinese Tanjinair Salt lakes and 2 butyl lithium plants • He was responsible for R&D for lithium recovery from high magnesium and high sulfate brines • He is an expert in solar evaporation and phase chemistry systems • He has diplomat in business administration, which has been very helpful in project evaluation, supply analysis and operation costs estimations

75 Investum | August 2009 Chemical Clusters Conclusions and Recommendations

Conclusions ¾ The chemical industry in Europe is suffering from high cost ¾ To increase it competitiveness the industry has deliberately taken steps toward clustering ¾ Most chemical clusters are based on raw material supply including hydrocarbons ¾ Electricity and steam are one of the most important raw material in the chemical industry ¾ A potential Icelandic cluster based on green electricity and steam at competitive prices and located closed to good port facility is likely to attract inorganic chemical industries ¾ In recent years companies specialized in owning and operating chemical parks have emerged ¾ Such company in a public private partnership with Icelandic authorities could be key to a successful FDI policy for Iceland

Recommendations ¾ Get advised by ECSPP on what cluster operators in Europe are most likely to be interested in a potential Icelandic development ¾ Put together information package on potential cluster possibilities (i.e. sites, energy, country, people, industry sectors viewing Iceland already) and present to cluster operators in Europe/USA ¾ Present a ‘green chemical park project’ to selected group of operators ¾ Do further research on possible EU support scheme and eventually prepare an application to fund a full blown feasibility study

77 Index

¾ Conclusions and Recommendations ¾ Industry Overview ¾ What are Chemical Clusters? ¾ Chemical Clusters ¾ Current Situation of European Chemical Industry Clusters ¾ Major Chemical Clusters in Europe ¾ The Concept and Players ¾ Key Attributes and Performance Criteria of Successful Clusters ¾ Chemical Park Delfzijl – the Netherlands ¾ Chemical Park Stenungsund – Sweden (2) ¾ Kokola Industrial Park – Finland ¾ EU Support Schemes ¾ Power Supply and Prices ¾ Steam Supply and Prices (2) ¾ Energy Production, ongoing Projects and Developments (2) ¾ ECSPP ¾ Potential Project in Iceland

78 What are Chemical Clusters?

Industrial Parks ¾ An area zoned and planned for the purpose of industrial development ¾ Usually located outside the main residential area of a city and normally provided with adequate transportation access, including roads and railroad ¾ Residents of Industrial Parks benefit from the use of common infrastructure

Chemical Parks / Cluster ¾ Chemical Clusters are one type of industrial parks that focus on facility provision and services for chemical companies ¾ In addition of benefiting from common infrastructure of a industrial park clustering allows chemical companies to exchange chemicals that are of little value to one but of more value to another ¾ An example of such is when sodium chlorate producers sells the byproduct hydrogen to a fertilizer producer or chlor-alkali producers delivers hydrochloride acid to a polysilicon producer

79 Chemical Clusters

¾ By clustering around a particular site, chemical companies can achieve the following advantages: • upstream integration into feedstock • downstream integration into specialty chemicals or customer sectors • shared services for utilities • access to transportation and logistical capabilities • share best practices in health, safety and the environment ¾ When it comes to integrated chemical clusters, Europe is the world champion. Even as the global manufacturing base shifts eastward to the Middle East and Asia, Europe has consolidated its production into a number of efficient chemical sites with integration advantages 1)

¾ For foreign investors, there are certain 2) advantages to investing in chemical Agglomeration of Swedish industries parks as opposed to establishing their own chemical sites. These include: 3) • reduced costs and risks • reduced culture barriers • accessible resources • synergies in environmental protection

1) Source: ICIS Chemical Business, 5/5/2008, Vol. 273 Issue 18 2) Source: Swedish Clusters, CIND, Uppsala University, 2003 3) Source: Chemical Industry Parks in China, Gunter Festel and Yong Geng 80 Current Situation of European Chemical Industry Clusters

¾ The EU is still the world’s largest chemicals producer with a market share of 29% and chemical sales at 476 € billion in 2006 ¾ Although chemical sales in the EU are still growing, the growth rate is slower than in other regions of the world - particularly Asia ¾ The recent EPCA Study on Chemical Industry Clusters showed that clusters play an important role in improving the supply chain competitiveness of the chemical industry ¾ Europe has over 300 chemical production sites, the majority of which are located in clusters ¾ Most of these clusters have evolved historically around either a raw material source, or as a supplier to the downstream industry ¾ As the raw material supply and the downstream industries have evolved, so these clusters have adapted to these changes ¾ There are a few examples of “on-purpose” clusters which have been developed more recently ¾ In general Europe’s chemical industry clusters are highly integrated along the product value chains and benefit from competitive infrastructure, utilities and services

Source: ECSPP and CEFIC, Improving Competitiveness of European Chemical Industry Clusters 81 Major Chemical Clusters in Europe

Source: ECSPP and CEFIC, Improving Competitiveness of European Chemical Industry Clusters 82 The Concept and Players

¾Investors develop their business model and outsource all other business processes ¾In chemical parks investors can focus on their core business

Capital, financial management Management processes Controlling, HR, resources

Core processes Customers

Technical Analytics Energies Logistics PR services Support processes Environmental Planning Real estate Infrastructure Safety Protection

Operators: Website: Operating in: Currenta www.currenta.de DE InfraServ Höchst www.infraserv.com DE ChemSite www.chemsite.de DE NUON Industripark management www.nuon‐ipm.de NL, DE ValuePark www.dow.com/valuepark/index_e.htm DE Emmtec www.emmtec.nl NL Nepic www.nepic.co.uk UK

Source: Invest in Germany, Chemical Parks in Germany, 2007 83 Key Attributes and Performance Criteria of Successful Clusters 1)

¾ Investment environment; role and support of the authorities in providing incentives and support in the development of infrastructure or attracting investment ¾ Availability of land ¾ Raw material and feedstock supplies at competitive prices ¾ Energy and utilities at competitive prices ¾ Relative proximity and easy access to most important customers ¾ Availability of efficient services (logistics, finance, IT, packaging, security, marketing, promotion etc.) ¾ Availability of labour (skilled and unskilled) at competitive prices ¾ Efficient logistics infrastructure ¾ Low-risk and stable business climate and stable regulatory environment ¾ Good schooling and educational facilities 2) ¾ Co-siting & partnering opportunities Not important = 1, Very important = 4

1) Source: ECSPP and CEFIC, Improving Competitiveness of European Chemical Industry Clusters 2) Source: Festel Capital, Zukunftsaussichten für Industrieparks und infrastrukturedienstleister in Deutschland, May 2006 84 Chemical Park Delfzijl - the Netherlands

¾ The Chemical Park Delfzijl is a unique co-operation between companies that exchange raw materials and share supplies, with attention for safety, quality, people, and environment ¾ The Chemical Park Delfzijl is a sustainably developed industrial area for chemical related companies, connected to each other like a chain ¾ The following companies are settled at the business park ¾ Akzo Nobel – salt, chlorine, caustic soda, hydrogen, monochloric acidic acid ¾ Teijin Aramid – aramid polymer, hydrochloric acid ¾ Bio MCN – methanol ¾ Delamine – ethylene amines, ammonia ¾ Delesto – electricity to Essent, utilities, steam ¾ Lubrizol Advanced Materials Resin BV – synthetic resin (CPVC) ¾ Brunner Mond – soda, calcium chloride ¾ Kemax – calcium chloride ¾ Dynea – formaldehyde resins ¾ North Water – treatment plant for salty waste water

Source: www.groningen-seaports.com 85 Chemical Park Stenungsund - Sweden

¾ The Chemical cluster in Stenungsund consists of the following 6 different companies all dependent on each other:

¾ AGA Gas – produces oxygen, nitrogen, CO2 and argon from air. The gases are transported through pipes to other industries ¾ AkzoNobel – 470 employees in research, development, sale and marketing, administration and production. They produce etenoxid from ethanol, oxygen and ammoniac ¾ Borealis – 1100 employees and the biggest employer in the industrial cluster produces polyethylene. Borealis has one polyethylene plant (PE), one cracker for ethylene and propylene production, and Innovation Centre focusing on R&D for infrastructure markets. The cracker plant is one of the most flexible in Europe, using naphtha, ethane, propane and butane as feedstock ¾ INEOS – 329 employees producing PVC through a Chlor Alkali production ¾ Perstorp Oxo – 936 employees producing among others Oxo alcohols and plasticizers mainly from crude oil and natural gas derivatives ¾ Vattenfall – 25 employees running a reserve power plant able to produce 800 MW

Source: http://www.stenungsund.se/ 86 Chemical Park Stenungsund – Sweden Cont.

Source: http://www.stenungsund.se/ 87 Kokkola Industrial Park - Finland

¾ Kokkola Industrial Park is an inorganic production site in Scandinavia ¾ As strongly developing site, new space for industrial activities has been created, and tight network of connections, infrastructure (pipelines, railways, roads) and services easy establishing and maintaining the chemical production at the site ¾ Kokkola Industrial Park has diverse chemical production, metallurgy and supportive activities: base chemical production, intermediates, fine chemicals, specialty chemicals, zinc metallurgy, OMG, petrochemicals and several other production and activities i.e. feed phosphates, gases, electricity, heat and services ¾ The following companies are settled at the industrial park ¾ Oy AirLiquide Ab/ Polargas ¾ Fortum Power and Heat Oy KemFine Ltd ¾ Boliden Kokkola Oy ¾ Neste Oil Corporation, Terminal of Kokkola ¾ Kemira Oyj ¾ Tetra Chemicals Europe Oy ¾ Kemira GrowHow Oy ¾ Woikoski ¾ Maintpartner Oy ¾ Oy Hacklin Ltd ¾ Oy M. Rauanheimo ¾ OnePoint Oy ¾ Nordkalk Corporation ¾ Port of Kokkola ¾ OMG Kokkola Chemicals Oy ¾ Pohjolan voima, Kokkolan Voima Oy

Source: www.kip.fi 88 EU Support Schemes

¾ The European Union offers a lot of different support mechanism in various sectors ¾ The aim of the European co-operation projects is to exchange experience and to transfer successful solution from one country to another ¾ Some of these programs could be beneficial for the development of a “Green Chemical Park” in Iceland, given that Iceland as a EFTA member qualifies through the European Economical treaty

The following support schemes can be attractive for chemical park developments 1), some may even apply for Iceland:

¾ Interreg IVC: Helps regions within the EU to share solutions (www.interreg4c.net) „the program provides funding for all regions of Europe plus Switzerland and Norway“ ¾ Interreg IVB North West Europe Programme: The aim is to find innovative ways to make the most of territorial assets and tackle shared problems of Member States (www.nweurope.eu ) „the fund will be used to co-finance projects that maximize the diversity of NWE‘s territorial assets by tackling common challenges through transnational cooperation“ ¾ The 7th Framework Program: ..bundles all research-related EU initiatives together under a common roof playing a crucial role in reaching the goals of growth, competitiveness and employment: (www.cordis.europa.eu/fp7) ¾ The competitiveness and innovation framework programme (CIP):The Competitiveness and Innovation Framework Programme (CIP) aims to encourage the competitiveness of European enterprises. With small and medium-sized enterprises (SMEs) as its main target, the programme supports innovation activities (including eco-innovation), provides better access to finance and delivers business support services in the regions (http://ec.europa.eu/cip/index_en.htm )

1) Source: Cluster Mittel Deutschland, www.cluster-chemie-kunststoffe.de 89 Power Supply and Prices

¾ Bilateral contracts for large consumers: 1) ƒ Long term contracts, typically 20 years ƒ Fixed prices with US CPI indexing ƒ ...or prices linked to product prices, such as LME – i.e. risk sharing ¾ Price estimation: 20 to 35 USD/MWh 3)

German baseload year futures as of 23.06.2009 [USD/MWh] 2)

Expected price span in Iceland

1) Source: PPA: Power Purchase Agreement 2) Source: European Electricity Exchange, Investum estimates 3) Source: National Energy Authority 90 Steam Supply and Prices

Industrial steam supply ¾ Steam is widely used as an energy transport medium, distributing heat and power in many industrial applications ¾ The amount of money spent generating steam is very large; equaling to about 40% of the fuel burned by the process industry 1) ¾ One of the key attributes in chemical clusters is the supply of industrial steam ¾ Steam is often delivered at various temperatures depending on customer's demand and the suppliers capability ¾ Typically industrial steam is delivered in three different forms: ¾ Low pressure 3 Barg ¾ Medium pressure 12 Barg USD/t 2) ¾ High pressure 20 Barg Cost of raising steam

Steam cost and prices in different places in the world ¾ According to Morgan Stanley equity research the GCL-Poly Energy Holding Ltd average revenue from steam sales in China in 2008 was 21 USD/ton 1) ¾ The cost of raising steam using different fuel sources is presented in the graph below

1) Source: I MIL 1995, “Lowest Energy Prices - in Europe for new contracts” 2) Source: Process Engineering, Jan/Feb 2007, “Steam: not a free ride” 91 Steam Supply and Prices Cont.

Steam prices in Iceland ¾ No transparent market for geothermal steam has evolved in Iceland so far ¾ There are though some indicators towards steam price that could be expected in a bilateral contract with the Icelandic geothermal energy suppliers: ¾ The diatomite plant at Myvatn that was in operation until 2004 paid 1 USD/ton steam ¾ The national Energy Authority issued prices in 1992: 2.5 USD/ton as shown in the bar chart below 1) Basic cost of industrial steam 2) ¾ The power company Hitaveita Sudurnesja offered 30 following prices in a leaflet from 1995: 25 25+ ¾ Steam at 20 barg: 4 USD/ton 20 ¾ Steam at 6 barg: 3 USD/ton 15 12.2 ¾ Investum’s calculation derived from cost of electricity 10 from geothermal power plant indicate cost of 2.5 7.3 5 USD/ton 2.5 0 Electricity: Fuel oil Coal Geothermal Types of steam in Iceland ¾ Geothermal steam fields in Iceland are typically operated at 10-12 Barg pressure ¾ Some wells, especially in the Reykjanes field deliver higher pressure or up to 18 barg ¾ This is sufficient to meet requirements of customers demanding both LP and MP class of steam ¾ The possibility of boosting this steam with a MP steam driven turbine has been studied 3)

1) Source: MIL 1995, “Lowest Energy Prices - in Europe for new contracts” 2) Source: Process Engineering, Jan/Feb, “Steam: not a free ride” 3) Source: Teitur Gunnarsson, Mannvit, verbal 92 Energy Production, ongoing Projects and Developments

¾ Landsvirkjun (www.lv.is ) • Type: Hydro power plants (cascade) • Capacity: 345 MW (80+82+53+130) • Site: Thjorsá river, S-Iceland • Start-up: 2011-2013

¾ Landsvirkjun and others (www.lv.is ) • Type: Geothermal power plants • Capacity: 380 MW (250+60+70) • Site: Þeistareikir, Gjástykki, Krafla (extension), NE-Iceland • Start-up: 2013-2014

¾ Orkuveita Reykjavíkur (www.or.is) • Type: Geothermal power plants • Capacity: 315 MW (135+90+90) • Site: Hverahlíð, Bitra and Hellisheiði (extension), S-Iceland • Start-up: 2010-2015

93 Energy Production, ongoing Projects and Developments Con.

¾ Hitaveita Sudurnesja (www.hs.is ) • Type: Geothermal power plants • Capacity: 140 MW (50+90) • Site: Reykjanes peninsula • Start-up: 2011-2014

¾ Smaller private developers • Type: Hydro Power plants • Capacity: 270 MW (170+30+70) • Site: different • Start-up: 2011-2016

¾ IDDP (www.iddp.is ) • Type: Enhanced geothermal power • Capacity: 3x40 MW • Site: Krafla, Nesjavellir & Reykjanes • Start-up: 2011-2013

94 ECSPP

¾ ECSPP stands for “European Chemical Site Promotion Platform” (www.ecspp.org) ¾ ECSPP promotes Chemical Investment in Europe ¾ Members are owners and operators of most of the largest chemical parks and sites in Europe ¾ The members have shared concerns about: • What role Europe will play in the global chemical business 20 years from now? • Why Europe today seems to be less attractive for new grass-roots chemical investment? • Whether the chemical investment community is well enough informed about Europe's unique advantages? • How Europe can regain favor in the minds of chemical investors?

95 Index

¾ Conclusions and Recommendations ¾ Industry Overview ¾ Potential Project in Iceland ¾ Industrial Park in Iceland – next steps

96 Industrial Park in Iceland – next steps

¾ Based on a petrochemical free processes ¾ Electricity and steam intensive industries ¾ Small scale chlor-alkali plant as back bone plant Power needs [MW] Other industries: from to Chlor Alkali 8 200 Sodium Chlorate 8 50 Fertilizers 20 50 Polysilicon 20 100 Lithium metal 8 50 Carbon Fiber 5 20 Methanol 10 100 Aluminium foils 20 100 Dimethly Ether 10 100 Total: 109 770 Technon Orbichem suggest the first steps in development of a chemical park in Iceland would be: 1) ¾ Define Chemical park philosophy ¾ Define Production of the cluster etc .to take the best combined advantage of limitless local energy and power, sea going access (for feedstock), feedstock supplies ¾ Identify potential producers and investors ¾ Supply and price of feedstock and bio-alternatives - i.e. bio ethanol ¾ Identify trading partners - i.e. Europe, Americas, Asia

1) Source: Technon Orbichem, email 4.6.2009 97