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Speech

March 5, 2013

The American Downstream Shale Gas Advantage

Stephen D Pryor

Stephen D. Pryor President, ExxonMobil Chemical Company

IHS CERAWeek 2013

I’m pleased to be here to discuss the impact of shale gas on the chemical industry. In a nutshell, shale gas has up-ended supply economics and reversed the declining fortunes of the industry in North America.

When I addressed this conference two years ago, I outlined ExxonMobil’s model for integrating refining and chemicals. It’s a model we’ve honed over many years that has produced industry-leading returns for both of these businesses over the last decade.

Today, we’re building on that model — making it even more robust -- by expanding integration with our Upstream business to capitalize on growing supplies of unconventional gas.

I will discuss ExxonMobil’s plans in this area against the backdrop of the renaissance under way in American chemistry. But first, let me describe the enormity of America’s new energy advantage underpinning this renaissance. I’ll also discuss the importance of free markets and free trade to realize its vast potential.

The Benefits to the U.S.

The world is on the cusp of a new age of unconventional energy. The prospective impact is unlike anything we’ve seen in this country since the dawning of the age of oil, some 150 years ago in Pennsylvania’s Marcellus Shale region. Both ages were ushered in by innovative technology developed by entrepreneurs investing private capital in a free market.

Thanks to the development of shale gas, natural gas production in the United States has rebounded and is at its highest level in almost 40 years. Proven reserves have grown close to 50 percent since 2005. The American Gas Association says that the U.S. has about a century’s worth of supply, with prolific new resources coming on line.

Even more impressive is the progress in unconventional oil. U.S. crude production increased nearly 800 thousand barrels per day in 2012, or 14 percent, the largest increase in annual output seen since the first oil well was drilled in 1859.

Growing production means we’re importing less crude oil and liquid fuel. We’ve reduced imports from 60 percent of U.S. demand in 2005 to an average of 40 percent last year. The U.S. Energy Information Administration expects a further drop to 32 percent next year, and we see real prospects for further declines by the end of the decade. That is the power of American ingenuity operating in a free market.

The technological revolution that has unleashed this tremendous increased production has turned traditional thinking about America’s energy future on its head. Our policy debates have shifted from discussions of scarcity to discussions of American energy abundance and the profound benefits it can deliver for the economy and the environment.

The benefits for the economy start with jobs. Unconventional oil and natural gas activity created 9 percent of new U.S. jobs in 2011 and now supports over 1.7 million jobs. That is projected to grow to 3 million jobs by the end of the decade.

Beyond that, Citigroup estimates that annual real GDP in the U.S. will increase 2 to 3 percent by the end of the decade as a result of new oil and gas production and related economic activity. That equates to a contribution of up to $600 billion per year to the economy.

Contributing to this surge in GDP is the revival of American industry fueled by lower cost energy. No industry will benefit more than American chemistry.

The environmental benefits associated with rising use of natural gas are also significant. Since 2007, energy-related CO2 emissions in the U.S. have decreased more than 10 percent, to their lowest levels in nearly two decades, due in large part to the substitution of natural gas for coal in electricity generation.

What’s truly remarkable is the impact on water. Producing electricity from shale gas uses less than half the water required by coal, a tremendous environmental and sustainability benefit for this country and prospectively for the world.

For all of these reasons, Daniel Yergin described unconventional oil and gas as the most important energy innovation of the 21st century.

The Benefits to the Chemical Industry

Let me now turn to the chemical industry renaissance, fueled by unconventional gas and gas liquids.

American chemistry is a $760 billion industry, supplying products which touch 96 percent of manufactured goods.

Just five years ago, American chemical production was in steady decline due largely to the rising price of natural gas. The U.S. was on the verge of becoming a net importer.

Growing supplies of shale gas and gas liquids have changed all that.

North American chemical manufacturers now have a major cost advantage over competitors around the world that rely on more expensive, oil-based feedstocks.

This has boosted profitability and enabled the industry to regain its position as America’s largest exporter. It has also stimulated new investment in the chemical business, including by ExxonMobil.

For the first time in more than a decade, major capacity additions have been announced that convert ethane, a natural gas liquid, to ethylene, the largest petrochemical building block.

According to a recent study by the Federal Reserve, these represent a capacity increase of 33 percent by 2017, which is the equivalent of six to eight new world-scale steam crackers. On top of that are smaller debottleneck projects already completed, equivalent to at least one steam cracker.

While all announced projects may not materialize, the U.S. industry is clearly poised to expand its position as a leading petrochemical producer. And with 85 percent of global demand growth projected to occur in emerging markets, this is great news for U.S. exports.

Unique ExxonMobil Project

ExxonMobil, as the largest U.S. chemical manufacturer and natural gas producer, is developing a unique project that builds on our proven integration model. In addition to capitalizing on shale gas, it will be sustained over the ups and downs of the business cycle by advantages in integration, scale and premium products.

ExxonMobil Chemical has filed permits for a multibillion-dollar expansion in the Greater Houston area at our Baytown site, already the country’s largest integrated refining-chemical producing sites. Feedstock and energy supplies will be coordinated with ExxonMobil’s Upstream business.

The project will convert ethylene from a new world-scale steam cracker to premium polyethylene products to serve growing markets around the world. State-of-the art environmental technology will enable the expansion to operate within existing permitted emission limits. And the premium polyethylene that will be produced provides major sustainability benefits to our customers, such as stronger, lighter, lower-cost packaging solutions with reduced environmental impact.

The project will be a win-win for ExxonMobil and Texas, a pro-business state which has attracted more ExxonMobil investment than anywhere in the country, and where we are the state’s largest taxpayer.

The Greater Houston area would see significant economic benefits. The project is estimated to provide 10,000 jobs at the peak of construction. The multiplier effect of new economic activity created by the facilities will add 3,800 other jobs in the area and increase regional economic activity by $870 million per year.

We’re encouraged by the response to our state permit application from the Texas Commission on Environmental Quality, and we’re working with the EPA on the federal permit.

The bright future we now see for American chemistry is just one example of the game-changing impact from the rapid development of America’s unconventional resources.

Free Markets, Free Trade

But with this historic opportunity for America comes obstacles. One of the most self-defeating is the threat of regulatory over-reach that would interfere with free trade in natural gas and impede investment.

There have been calls by a few in industry and government to restrict the export of liquefied natural gas, based on perceived risks to the economy. These opponents of exports want government to block LNG projects that might cause gas prices to rise above an artificial price ceiling, thereby reducing the domestic cost advantage.

This proposed government interference in the market is tantamount to introducing price controls on natural gas.

It represents a selective and very harmful departure from free market and free trade principles to one that threatens government control on supply, and indirectly, price.

The protectionist plea for government limits on exports seems to assume that energy supply and demand is a zero-sum game -- but that’s not the way free markets work.

Increased demand for gas due to LNG exports would likely encourage increased supply. Conversely, if government arbitrarily restricts demand and attempts to cap prices, supply would likely shrink.

These fundamentals of supply and demand were borne out by decades of U.S. experience with federal price controls on natural gas in 1970s and 80s. Government interference in the free market had unintended consequences -- falling production, supply shortages equaling one quarter of demand, price spikes and diminished economic opportunity.

In 1977, former U.S. Treasury Secretary William Simon spoke out with great indignation about the acute supply shortage caused by federal price controls. He asked: “Had anything been learned at all?” His question resonates today.

The point is this: protectionism and market controls shrink the economic pie; free markets and free trade expand it.

That wisdom is well understood when it comes to our major exports of chemicals, cars and agricultural products — and so it should be with energy products as well.

A case in point is the proposed development of a world-class LNG export project here in Texas at an ExxonMobil joint venture. The $10 billion investment would generate an estimated $31 billion in economic gains across the U.S. over the life of the project. It would create 45,000 direct and indirect jobs nationwide during the estimated five-year construction period and 3,800 permanent, mostly indirect jobs. These benefits are impressive by any measure.

So, why should the government discriminate between LNG investments to liquefy gas and chemical investments to solidify gas into plastic pellets? Both would produce value-added, American-made products. Both would create thousands of high-paying jobs. Both would grow the economy U.S. gas resources are enormous. We should do both.

That conclusion is supported by a comprehensive 230-page study commissioned by the Department of Energy, which found that in all scenarios, LNG exports would provide net economic benefits to U.S. consumers and the economy, and would not lead to significant increases in the price of natural gas.

Studies by a wide spectrum of leading organizations, including Brookings, the Baker Institute, and IHS — our conference host -- also find gains in GDP, jobs and production with LNG exports, and no significant price impacts.

Conclusion

Let me wrap up by offering this challenge.

We’re looking at a paradigm shift flowing from the new age of unconventional oil and natural gas. We need to go beyond viewing this opportunity through a narrow or nationalistic lens.

Unconventional oil and gas will help us create a brighter, cleaner, more secure energy future. They will help us build economic opportunity — here and around the world.

But this historic moment is also a reminder of something we know very well in the American chemistry community.

Businesses and investors are the true sources of innovation and job creation. We create value and compete every day to bring better products to more consumers, more economically, more safely, and more responsibly.

At this moment, we need government leaders and policies that also trust our long history of driving advancement and opportunity. And it falls to us to tell the extraordinary story of unconventional oil and gas in a way that inspires a renewed confidence in the power of business and free markets to build a better world.

Thank you for your kind attention.

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