October 6, 2010

Canadian Plastics Resin Outlook 2010 Conference

Outlook for Polyolefins

James Virosco Manager Special of Projects, Strategy Michelle Gutierrez Senior Analyst

Agenda

Overview of Nexant North American Natural gas Drilling Technology North American Natural Gas Liquids Nexants PE and PP Outlook

Overview Overview of of Nexant Nexant

Nexant is a global consulting firm specializing in the Petroleum and Chemicals industry
We focus on the global petrochemical, chemical, polymer and specialty chemical industries working with companies at the corporate and divisional levels, as well as with a broad range of financial institutions and investors We apply industry relevant content, methodologies/ processes and tools to assist clients in achieving desired strategic and transaction-related results We conduct engagements with an integrated client/consultant team approach to ensure consensus on results and implementation
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MARKET AND COMPETITION

Financial Financial Services Services Strategic Strategic Planning Planning Technology Technology
Evaluations Evaluations

Commercial Commercial Analysis Analysis

INDUSTRY AND TECHNOLOGY

The Chemicals consulting group was largely formed through the acquisition of Chem Systems in 2001

Chem Systems established and recognized:

More than 40 years of service

Capabilities:
General management consulting capabilities augmented by deep industry content knowledge and expertise Broad services over entire spectrum of chemical and related industries Highly experienced personnel

Combination with Nexant strengthens our service offerings:

Complete coverage of the supply chain Commitment to web-delivered products and services Strong, complementary traditions

Nexants Petroleum and Chemicals services span upstream down through polymers and specialties
Energy Technology and Management Energy Solutions (Software)

Energy & Chemicals Consulting

Before 2001

Nexant
UPSTREAM OIL & GAS

ChemSystems

DOWNSTREAM OIL

PETROCHEMICALS

POLYMERS

SPECIALTIES

Nexant
After 2001

We are positioned to support clients globally, with over 150 professionals worldwide

London Houston White Plains, NY Bangkok

Duesseldorf

Tokyo

San Francisco

Washington

Seoul Beijing Delhi

Main Offices Project Offices Representative Offices Buenos Aires Singapore

Shanghai

North North American American Natural Natural Gas Gas

Three categories of unconventional gas are being exploited shale and tight gas, and coal bed methane gas hydrates are in the R&D stage
Shale Gas
Gas produced from matrices and natural fractures of extremely low permeability shale formations that are frequently both source rock and reservoir trap

Tight Gas
Gas produced from very low permeability sandstone and limestone formations where it was trapped after migrating from the source rock

Coal Bed Methane

Gas produced from coal seams where it is stored as adsorbed gas and dissolved in water that is found in the natural fractures of the seams

A fourth category is still in the R&D stage: Gas Hydrates

Gas trapped in solid ice-like crystals of carbon dioxide and methane that can trap 164 volumes of methane per volume of solid hydrate The clathrate crystals form in the pore spaces of sandstone sediments, creating seals that can trap additional volumes of migrating gas in underlying free gas zones

North Americas shale gas plays cover a broad geography

North America Shale Gas Reserves

Principal shale gas plays are located throughout most of North America and hold very large gas resources
U.S. plays: GIIP = 522 982 TCF Canada plays: GIIP > 1250 TCF

Shale gas production in North America is dominated by the United States, with approximately 95% of the combined total gas production
Source: Canadian Discovery GIIP = Gas Initially In Place

U.S. plays :

~ 8.0 BCFD

Canada plays: ~ 0.4 BCFD

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U.S. conventional and unconventional gas plays have a high degree of overlap

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The U.S. Energy Information Administration (EIA) 2010 Outlook reflects the importance of shale gas to future U.S. gas supply
U.S. Gas Supply EIA 2010 Outlook
(Billion Cubic Meters)

In this scenario, the EIA includes Tight Gas as a conventional gas supply source The indigenous gas supply continues to be stable in the long term Unconventional gas production, which includes Shale Gas and CBM, will reach 208 BCM (7.4 TCF) in 2030, offsetting the decline in conventional gas and reducing gas imports At the end of the forecast period, approximately 33% of U.S. gas supply will come from unconventional gas sources

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Nexant forecasts U.S. shale gas production will reach 7.5 TCF
U.S. Shale Gas Production Forecast by Play (TCF)
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The Barnett play will reach a peak production plateau of 2.2 TCF in the 2015 The Marcellus, Fayetteville, and Haynesville plays will be the main growth areas from 2015 to 2025 The Marcellus and Rocky Mountain plays will be the main growth areas from 2025 to 2030 Several plays, not shown, will produce over the forecast period; however, these areas either have limited reserves or will be constrained by low gas price The discovery of more attractive plays will displace or defer the expansion of the higher cost areas of existing plays

G as Pro d u ctio n - T C F

7 6 5 4 3 2 1 0 2007 Barrett Atrim Hilliard-Baxter 2008 2009 Haynesville Fayeteville Lewis-Mancos 2015 2020 Marcellus Woodford Others 2025 Utica Barnett-Woodford 2030

XLS: C:\ Document s and Set t ings\ jservello\ My Document s\ June 2008\ Linde\ Draf t Report \ May 5 2010\ US

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Gas production from Canada shale gas plays reaches 2.6 TCF
Canada Shale Gas Production Forecast

3 3 G a s P ro d u c t io n - T C F 2 2 1 1 0 2007 2008 2009 2015 2020 2025 Horn River Montney Utica 2030

Commercial shale gas production is just commencing in Canada, and there is little experience to draw upon except through analogy with U.S. plays and extensive Canadian tight gas operations Large shale plays have been identified with characteristics similar to U.S. plays The Horn River and Montney shale gas plays in British Colombia will be the main growth areas, reaching a combined production of 2.3 TCF (6.3 BCFD) in 2030 The Utica shale gas play in Quebec will reach 0.3 TCF (0.8 BCFD) in 2030

XLS: C:\ Document s and Set t ings\ jservello\ My Document s\ June 2008\ Linde\ Draf t Report \ May 12, 2010\ US

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Drilling Drilling Technology Technology

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Horizontal drilling and fracture stimulation breakthroughs have made shale gas exploitation economically viable
Horizontal Drilling Technology As shale gas reservoirs are extensive in the lateral dimension, horizontal drilling and fracture stimulation of wells that intersect the reservoirs parallel to the bedding plane exposes more reservoir to the wellbore Traditional directional drilling takes some 2,000 feet to bend to horizontal, while modern technology can make a 90 degree turn from in a few feet The lateral lengths can extend over thousands of feet, increasing the drainage radius of the wells and reducing the number of wells required

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Multilateral wells increase the production rates of individual wells by contacting even more of the reservoir
Multilateral Drilling

Multilateral configurations range from two wellbore branches to an array of branches in horizontal fan arrangement (pinnate) Through the application of multilateral drilling technology, the wells can effectively drain segments of the reservoirs that would otherwise require numerous additional wells, thus mitigating the environmental impact and footprint

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Fracture stimulations are widely used in the industry to improve the production performance of oil & gas wells
Fracture Stimulation Treatments

Modern technology has permitted the application of massive fractures required for tight gas and shale gas development Two properties increase the ability of formations to fracture:
Presence of hard minerals like silica that crack like glass Internal pore pressure that creates or helps to propagate fractures

Fracture fluids are the fluids used to fracture the formation and to transport proppants that will keep the fractures open to gas flow

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Some new developments in shale gas fracturing technology are promising

Simo fracs: Two or more adjacent wells are fractured simultaneously to expose the formation to more pressure, creating a more extensive network of fractures

Staged fracs: The shale formation is fracced in discreet sequential intervals, allowing the operators to adjust the fracture design according to responses

Numerical simulation: Models that predict fractures propagation, allowing sufficient time to engineer the fracture program to achieve the desired results

Digital applications: Monitoring in real time the hydraulic fracture propagation by employing micro-seismic arrays to ensure that the fractures achieve the designed length and do not extend into adjacent strata

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North North American American Natural Natural Gas Gas Liquids Liquids

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Nexants oil price scenarios in constant dollars are: High $110 /bbl Medium $70 /bbl Low $45 /bbl. Oil settled in at an approximate average of $62 /bbl for 2009
Brent Crude

180 160 140 120 100 80 60 40 20 0 1980 1990

History

$/bbl

2000
Medium

2010
High

2020
Low

2030

Spot Brent FOB Sullom Voe oil prices averaged US$77/bbl in Q1 2010 and US$81/bbl in Q2 2010
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Due to growing supplies of unconventional sources, US natural gas prices have fallen below crude oil equivalent
20 18 16 14 12 10 8 6 4 2 0 1990 2000
U.S. Natural Gas

Henry Hub $/mmbtu

2010
Medium Low

2020

2030

History High Crude Oil Equivalent (Medium)

USGC natural gas spot prices averaged US$5.1/MMBtu in Q1 2010 and US$4.1/MMBtu in Q2 2010
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This has resulted in a strong incentive to extract ethane from cheap natural gas U. S. Ethane and Natural Gas Pricing US $ per MMBtu
14 12 10 8 6 4 2 0 2005 2006 2007 Natural Gas 2008 Ethane 2009 2010 YTD*

*Prices are average January-August 2010

plus higher gas production has boosted U.S. ethane production

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Ethane has steadily increased as the feedstock of choice for ethylene, displacing C5+ liquids
U.S. Feedstocks for Ethylene
70 60 % o f to ta l fe e d s to c k u s a g e 50 40 30 20 10 0 2005 2006 Ethane 2007 Propane C5+ 2008 2009

North American ethylene crackers are going Light driven by cheap feedstock availability 75 % of all U.S. based crackers are now light feedstock capable Light means lighter feedstocks such as ethane, propane, and E/P mixes

NPRA Petrochemical Production Survey data

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Reduced prices have resulted in improved ethane and propane derived ethylene margins relative to naphtha
Ethylene Variable Cost Margin

150 100 50
$/ton

0 -50 -100 -150 1990 1993 1996 1999 2002 2005 2008 2011

Ethane

Propane

Standard Naphtha

restoring some degree of cost advantage to the USGC

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PE PE and and PP PP Outlook Outlook

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Global economic growth was negative for the first time in over forty years in 2009. However, Nexant forecasts a return to more traditional growth levels; no double dip is foreseen
GDP History and Outlook

20% 15% 10% 5% 0% -5% -10% 1980

World
2010 Data is estimated

1990
North America

2000

2010
Western Europe

2020
China

2030
Japan

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Nexants outlook calls for a margin trough in 2010-2012 followed by profitability recovery

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Significant changes are anticipated in global polyethylene net trade

PE NET TRADE 2000-2025 (Thousand tons per year)

20000 15000 N et T rad e (tho usan d to ns) 10000 5000 0 -5000

-10000 -15000
W estern E urope C entral/Eastern Eu rope N orth A m erica Sou th A m erica M iddle E ast Africa Japan A sia

POPS2009_ER_FR_Sec_1

2000

2005

2010

2015

2020

2025

The Middle East has become the major exporting region of PE. By 2015, the region is set to have net exports of over 11 million tons/year, rising to over 16 million tons/year by 2025 In contrast, Asia Pacific under the same scenario is set to be importing over 11 million tons/year by 2025 Western Europe will see net PE imports rise to just under 3 million tons by 2025 North America, currently with a significant export position is also forecast to move to become a net importer by 2015

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Changes are also forecast in global polypropylene net trade

PP NET TRADE 2000-2025 (Thousand tons per year)

5000 4000 N et T rade (thousan d tons) 3000 2000 1000 0

-1000 -2000 -3000

N orth Am erica South Am erica W estern Europe C entral/Eastern Europe M iddle East Africa Japan Asia

The Middle East has become the major exporting region of PE in the world North America and Western Europe will move to net import positions as older units are closed and demand recovers As refinery investment grows in South America, the region is also expected to grow its polypropylene net trade position

POPS2009_ER_FR_Sec_1

2000

2005

2010

2015

2020
30

2025

Lighter North American cracking feedstocks will have long term implications on the polyolefins industry and even other polymers and petrochemicals

Polyethylene
Cost advantage should result in increased production, forestalling the need for imports

Polypropylene
Lower cracker by-product production should result in reduced propylene supplies resulting in somewhat higher propylene and PP pricing

Polystyrene
Volumes suffered in the past decade, partly due to less expensive polypropylene. Rising polypropylene prices should stimulate polystyrene demand

Butadiene Derivatives
Lighter feedstocks result in reduced supplies and higher pricing

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