Economic Impacts and Market Challenges for the Methane to Derivatives Petrochemical Sub-Sector

ECONOMIC IMPACTS AND MARKET CHALLENGES FOR THE METHANE TO DERIVATIVES PETROCHEMICAL SUB-SECTOR

19th Annual Stakeholder Event Alberta's Industrial Heartland Association Canadian Energy Research Institute

Overview Founded in 1975, the Canadian Energy Research Institute (CERI) is an independent, registered charitable organization specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors. Our mission is to provide relevant, independent, and objective economic research of energy and environmental issues to benefit business, government, academia and the public. CERI publications include: • Market specific studies • Geopolitical analyses • Commodity reports (crude oil, electricity and natural gas) In addition, CERI hosts an annual Petrochemicals Conference, and Energy Forum. Canadian Energy Research Institute CERI receives financial support from its core funders which include Natural Resources Canada, Alberta Energy and the Canadian Association of Petroleum Producers. In addition, the institute benefits from funds provided by donors which include: • Alberta’s Industrial Heartland • Chemistry Industry Association of Canada • Government of Saskatchewan • Ivey Foundation • University of Calgary CERI also receives in-kind support from the following contributors: • Alberta Energy Regulator • Advisian Worley Parsons Group • Petroleum Services Association of Canada • Lithuanian Energy Institute • Deloitte Canada Ltd. Presentation Outline

NATURAL GAS MARKET OUTLOOK

PETROCHEMICAL INDUSTRY

METHANE-DERIVED PRODUCTS

ECONOMIC AND ENVIRONMENTAL ANALYSIS

ECONOMIC IMPACTS

CONCLUSIONS Natural Gas supply and demand forecasts

Canadian natural 25000 gas production forecast 20000

Industrial use, oil 15000 sands, power generation, LNG, mmcfd 10000 chemicals and petrochemicals 5000 production 0 2005 2010 2015 2020 2025 2030 2035 Pipeline Exports LNG Exports Supply Demand Global Petrochemical Outlook Petrochemicals markets and emerging trends

Source: IHS Chemical 2016 North America Petrochemical Outlook Low cost feedstock advantage leading to investments in chemicals and derivatives Methanol Outlook Methanol demand is forecast to grow at 4% globally compound annual growth rate (CAGR)

Source: Argus 2017 METHANE DERIVATIVES & EMERGING TECHNOLOGIES

Acetic Acid

Formaldehyde

Methyl tert-butyl ether (MTBE)

Dimethyl ether (DME) Credit potential? Hydrogen (H2) Methylamine

Methanol Methanol to Olefins (MeOH) (MTO) Methanol to Propylene CO2 (MTP) Methanol to Gasoline (MTG) Methane Synthesis Gas METHYL (CH4) (Syngas) METHACRYLATE (MMA)

Natural Gas Ammonia Urea (N.G)

NaturalLiquified gas Fischer-Tropsch Petroleumliquids Gas Process (NGLs)(LPG) Economic Assessment 1. Assessment of 9 technologies: Methanol, Hydrogen, MTP, MTO, MTG, Ammonia, Urea, Formaldehyde and Fischer Tropsch Gasoline 2. Key Assumptions 3. Life Cycle Costs (LCC): NPV of CAPEX (ISBL- inside battery limits and OSBL – Outside Battery Limits), Natural Gas costs, taxes, etc. 4. Jurisdictional competitiveness comparison: AB, ON, USGC 5. Discounted NPV and Internal Rate of Return (IRR) 6. Direct and indirect economic impacts: GDP, Employment 7. Scenarios: Tax incentives Provincial CO2 Tax Assumptions

Canada ($/t-CO2): 20 (2019), 30 (2020), 40 (2021), 50 (2022->)

Alberta ($/t-CO2): 30 (2019), 30 (2020), 40 (2021), 50 (2022->)

Ontario: Mid-range CO2 Price Forecast (ICF Study for ON Energy Board) Price Assumptions

Derivative prices are kept constant

Where available 2016 are used

Natural Gas Price Assumption USGC AIH Sarnia Average 2016 Prices Henry, AECO and Dawn Natural Gas (US$/ MMBTU) 2.34 1.56 2.38 Hubs Prices Results: IRR for 9 Methane Derivatives

Methanol, FTS and Hydrogen meet the 10% expected rate of return

The economics is sensitive to natural gas and product prices

Applying the new US Corporate Tax Code improves the IRR of Hydrogen and Methanol by 1.7% and 1.5%, respectively. For methanol, this is a benefit of US$ 39 Million on NPV bases Methanol NPV Jurisdictional Comparison

Gone Hydrogen NPV Jurisdictional Comparison

Gone

Higher Exemption limit MTO NPV Jurisdictional Comparison

Gone Methanol: Life Cycle Costs Make-up

Now 12%-14% Methanol: Corporate Tax Rebates Scenarios

Provincial Tax Rebate MeOH Could Increase IRR by: 18% 17% 1.1% in AB 16%

0.9% in ON 15%

14%

IRR% AIH Corporate Tax Rebate 13% Sarnia Could Increase IRR by: 12% 2.3% in AB 11% 10% 2% in ON 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% Scenario I Scenario II Economic Impacts Input-Output Modeling Results for a Methanol Plant in AB and ON

Direct and indirect impacts on GDP at provincial and federal levels Changed due to US tax change

Significant economic impacts at provincial and national levels compared to the total capital invested (TCI) Concluding Remarks

• New capacity for ethylene, propylene and methanol followed energy and demand growth dynamics • Results show that some opportunities exists for methane derivatives sub-sector in Alberta. This is driven principally by 10-15% low feedstock prices, OPEX and corporate taxes.

• CO2 taxes based on the Carbon Competitive Incentive (Output- Based Allocation) seems to sustain economic competitiveness against the USGC. • However, the new US Tax Code will likely make USGC the most competitive jurisdiction. For example, it improves the IRR of Hydrogen and Methanol by 1.7% and 1.5%, respectively. Thank You for Your Time

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UPCOMING STUDIES: An Economic Assessment of Electricity Generating Options

Economic Impacts and Market Challenges for the Allan Fogwill | President & CEO Methane to Derivatives Petrochemical Sub-Sector 403.220.2367 UPCOMING CONFERENCE: [email protected] Petrochemical Conference: June 10-12 2018, Kananaskis, AB