Crude Oil and Natural Gas

1
Crude Oil and Natural Gas Drivers Behind
Adhesive Raw Material Impacts
Jay Jackson Eastman Chemical Company April 19,
2006
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U.S. Petrochemicals Usage
Transportation, Industrial Heating Fuels
93
Petrochem
Refining
Naphtha Gas Oil
58 Imported
7
Methane (Fuel Gas)
95
Ethane, Propane Natural Gasoline, Butane
Gas Processing
5
3
From One Barrel of Oil
U.S. Data
Petrochemical Feedstocks 7
Gasoline, Diesel and Jet Fuel 66
Industrial and Home 27
Data from www.eia.gov modified to better fit
categories

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Apr '06 70/bbl

• Cost increases in the U.S. economy
• Each 10/bbl increase in oil 80 B/yr
• Chemical Industry 2.6 B/yr

Aug '05 peaked over 70/bbl
'05 Avg 56.7/bbl
'04 Avg 41.4/bbl
'00-'03 Avg 28.3/bbl
'90-'99 Avg 19.7/bbl
Why the upward trend?
CMAI Data
5
Global Demand for Oil Has Accelerated
Global Economic Recovery
Significant growth in China
demand growth, rolling 4 qtr avg, mb/d,
Demand growth of industrialized countries is 1
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China's crude oil consumption has grown
dramatically
(yet with low per capita consumption)
1/3 of global population
Oil demand, MM bpd
Oil demand, bbls per capita per year

• China is now 2nd largest user of crude oil
  globally
• 10 years ago net exporter
• Today import 40 of demand
• Projected demand growth of 7.5 per year
• 18 MM bpd in 15 years
• India relatively small demand
• Projected demand growth of 5.5 per year

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Crude Oil Production

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

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Spot deals Sept '05 20/mmbtu

• Higher costs of ethylene feedstocks
• Higher conversion costs energy
• Cost increases in the U.S. economy
• Each 1/mmbtu increase in natural gas 23 B/yr
• Chemical Industry 3.7 B/yr

Apr '06 8/mmbtu
'05 Avg 8.29/mmbtu
'04 Avg 6.12/mmbtu
'00-'03 Avg 4.27/mmbtu
'90-'99 Avg 2.07/mmbtu
CMAI Data
U.S. Natural Gas
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Impact of Crude Oil and Natural Gas on the
Adhesives Market
Acetic Acid
VAM
EVA
Toluene
Xylene
Methanol
Benzene
Ethylene
Gas
Aromatics
HC Resins
Natural
Separation
Gas
Unit
Steam
Pygas
Ethane Propane Butane Naphtha Gas Oil
Styrene
Cracker
C9 Resin Oil
Aliphatics (Crude C5 Splitter)
Crude C4 Olefins
Isoprene
Crude
Refinery
Dicyclopentadiene
Oil
Propylene
Piperylenes
Raffinate
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Real Life Polymer Example SIS Polymers
Recovered Crude C5s
SIS
Purified Isoprene
Steam Cracker
Styrene
Ethylene
Benzene

• Supply chain shows shortages and potential
  shortages
• Large number of SIS producers with adequate
  capacity
• In spite of sufficient SIS capacity the upstream
  supply creates a shortage

DeWitt Company
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Relationship of Crude Oil to Adhesive Raw
Material Products
Strong demand from China
Benzene has historically traded at 2x crude when
supply and demand have been in balance.
'05 Avg 2.90/gal
'04 Avg 2.88/gal
'00-'03 Avg 1.28/gal
'90-'99 Avg 1.05/gal
CMAI Data
U.S. Data
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Relationship of Crude Oil to Adhesive Raw
Material Products
Increase following benzene
Styrene price typically changes by 1 c/lb for
every 10 c/gal change in Benzene price
Tight supply/demand
CMAI Data
U.S. Data
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Relationship of Crude Oil to Adhesive Raw
Material Products

• Gasoline impacts the costs of numerous downstream
  products.
• Aromatics and aliphatics gasoline pool
• Alternative value

97.8 correlation
CMAI Data
U.S. Data
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Hurricanes Rocked the Petrochemical Industry in
2005

• Katrina and Rita 3Q2005
• Impact of Initial Damages
• Current Assessment of Recovery
• Lingering Impact on Prices
• Forward Look

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Impact of Hurricanes Katrina, Rita, and Ivan

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

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Initial Impact of Hurricanes

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

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Current Assessment of Damage and Losses April 2006

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

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Current Assessment of Damage and Losses April 2006

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

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Forward Look Raw Materials and Energy

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

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Forward Look Raw Materials and Energy

• Crude Oil - Current Issues
• Bearish Factors
• High Inventories Strong imports, mild US winter
• Bullish Factors
• Tight Supply/Demand
• Heavy U.S. refinery maintenance season
• Some work deferred after hurricanes
• Geopolitical Issues
• Venezuela 2.8 MM bbls/day
• Political Tensions Chavez threats
• Jail diplomats, close U.S. refineries (Citgo),
  stop oil exports to the U.S.
• Nigeria 2.7 MM bbls/day Africa's largest oil
  producing country
• Internal political unrest
• Damage to oil facilities and infrastructure,
  kidnapped workers
• Iran 4.2 MM bbls/day exports
• Political issues nuclear program
• Saudi Arabia 11.1 MM bbls/day
• Terrorist targets?

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Forward Look Raw Materials and Energy

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

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Forward Look Raw Materials and Energy

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

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Closing Summary

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

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Thank you Jay Jackson Procurement
Manager Eastman Chemical Company Kingsport,
TN Work [phone] Email jjackson_at_eastman.co
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