Comparative Petrochemical

Plant Economics in North America

CERI 2015 Petrochemical

Conference
June 7-9, 2015

Ian.Morrison@stantec.com
P.Eng, MBA, M.Eng

Introduction
Project funded by

Original data Dec 2012

Key variables updated May 2015

Agenda
1.
2.
3.
4.
5.
6.

Motivation
Model Approach
Results
Impacts
Competitive Actions
Summary

Motivation

Provide accurate, defensible

and repeatable information
and representative cash flows
to demonstrate the various
pros and cons of
petrochemical plant investment
in Alberta?

Capital Investment In Canada

$450
$400
$350

Billions

$300
$250
$200
$150
$100
$50
$-

Rest of Canada

Canada Housing (Ex-Alberta

Alberta Oil & Gas

Alberta

Perception
Vs
Reality
Perception is that Alberta is not competitive compared to GC due to

high capital cost

Oil Sands over runs 61% to 107% (These projects are still profitable at these
escalated CAPEX amounts)

Theory predicts oil sands over runs: mining, schedule driven, new technology

Not true for Alberta Petrochemical Projects

Dow Chemical LHC-1 Project 15% under budget

Historical data for Alberta projects indicates petrochemical projects are typically within
2% to 10% over sanctioned cost

Escalation

Feed Stock
type

Regulatory
Regimes
Complexity
New
Technology

Ownership

Project
Planning
prior to
Sanction
60-85%

Model Approach

Is Alberta competitive?

Approach
Life cycle cost of
petrochemical plant
(methanol)
Apples to apples comparison
Locations: AIH, USGC, RMWB
Verifiable & objective
Economic model for investors

Why Methanol?
Globally traded
Many uses:

Fuel/biofuel/diluent
Feedstock
Plastics/fibres

World-class sized plant

Proven technology
Reference plants

Why Methanol?

Plant Description
Methanol Plant
~ US$1B
4-year build
Capacity 300 MMg/year

Natural gas feedstock

Clean and level site
2CH4 + 3H2O => 2CH3OH + 2H2 + H2O

Assumptions
1. Revenue: Tide-water world market prices
1.
2.
3.

US$1.66/gal
Incremental supply has no impact on price
Unit train rail distribution to Vancouver

1.
2.
3.
4.
5.

Real model
$0.80 Cdn/USA
WACC 8.9%
D/E 1.63
Terminal values profit in perpetuity

2. Economic model ~100 variables

3. Class V Capital Cost

4. Market price natural gas feedstock
5. Standard Government tax treatment

Assumptions

Conservative constant real price of $1.66 / gal used in model

equivalent to $550/MT

Capital Cost Estimate

Inside Battery
Limits (ISBL)

USGC
Standard
Factor

USGC
US$ MM

AIH
US$ MM

RMWB
US$ MM

Owner's
Costs

7%

$29

$29

$29

Independent of location
(same owner)

Equipment

20%

$81

$82

$83

Equipment purchased
globally

Materials

19%

$77

$78

$79

Materials and bulks

sourced globally

Engineering

16%

$67

$67

$67

Globally sourced for ISBL

(local for OSBL)

Construction

37%

$173

$203

$345

$427

$459

$602

Total

$814

$860

$1,075

%USGC

100%

106%

133%

ISBL Total

Notes

Construction is local &

stick-built

OSBL+ISBL+ Working
Capital + Other Soft

Overheated Market Consideration

Hot market

Rates go up
and
Productivity goes down

Market heat scale=

Unemployment
Job Vacancies

Market Heat Productivity Impact

7 = Cold Market, 20% bonus
3 = Neutral
(Compass Intl Standard)
1= Hot Market, 25% penalty

Market Heat Productivity Impact

Year

Market Heat
USGC

AIH

2012

2.4

0.6

2014

1.8

1.1

2015

1.9

1.7

Results

So does Alberta stack up?

Updated 2015 Numbers!!

Cumulative NPV
GC

AIH

RMWB

NPV

$1,225

$1,589

$1,225

IRR

21.4%

23.3%

18.6%

Net Present Value $US MM

$1,500

$1,000

Aberta Industrial
Heartland

NPV (US$ MM)

$500

$0

Gulf Coast

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

($500)

($1,000)

($1,500)

Execution Year

RMWB

Differences
NPV Differential $US MM
Gulf Coast versus Alberta Industrial Heart Land

Sensitivity
NPV Top Sensitivities:
1. Cost of Capital
2. Natural Gas Cost
3. Tax Rates
4. Operating Rates
5. Winter Productivity

Impacts

What are the key differences?

1. Tax
2. Product Distribution
3. Natural Gas Price
4. Construction Labour Costs

Notional Project Tax Rates

Alberta 25%
Louisiana 43%
Stable, balanced- Ability to negotiate
budget
Massive deficit
governments
governments
$ 29-66MM annually
$312MM NPV
impact

Distribution Costs

AIH
Unit train to tide water
$24MM annually
$150MM NPV Impact

USCG
Free!

Natural Gas Price

$0.69 /MMBTU differential
$19MM annually
$118MM NPV

$10

US$ / MMBtu

$8

$6

$4

$2

$2025+

2024

Spread USD/MMBTU

2023

Alberta Plant Gate (AIH)

2022

Henry Hub Nymex (GC)

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

Year

Construction Costs
AIH Penalty Versus GC
Productivity 12% (Winter Work)
- Winter 35% for 1/3rd of build = 12%

Hot Market 3%
Remote Factor = 0%
Exchange rate = (19%)
= 16% construction cost penalty
6% Capital cost penalty

$44 MM

5
1.
2.
3.
4.
5.

Risk Sensitivities
WACC higher favours USGC
Gas price volatility favours AIH
Falling C$ - favours AIH
Interest rates higher favours USGC
Market heat favours AIH
Year

Market Heat
USGC

AIH

2012

2.4

0.6

2014

1.8

1.1

2015

1.9

1.7

Competitive Actions

So what do we do?

Competitive Actions
Local consumption of methanol to
mitigate shipping price advantage
Fuel
Diluent
Chemical production

Winter construction
Modularization

Tailored planning

Understanding & adapting to local contracting

conditions and labour supply constraints
Political support for value added industries

6. Summary
AIH
Lower taxes
Feedstock price
Feedstock
availability
Weak Cdn$
Winter construction
Market Access

USGC
Lower Capital Cost
Tidewater
Extreme weather
Feedstock
competition

Alberta Is Competitive
With USGC
Alberta Industrial Heartland:
Marginally higher capital cost but higher
project profits