Speech Oct. 30, 2014 Chemicals: At the crossroads of energy markets Stephen D. Pryor President, ExxonMobil Chemical Company Oil and Money Conference London, England When I began my career with Mobil in the early ‘70s, chemicals was a fast growing but still relatively small regional business. For a global energy company, it was viewed as a final upgrading step at the end of the energy value chain. A lot has changed since then. Global demand for chemicals has grown at twice the rate of overall energy demand, driven by rising prosperity and the expanding role of chemicals in the products of everyday life. Today, the global chemical industry consumes about 13 percent of global oil demand, 9 percent of natural gas and over 40 percent of natural gas liquids. To put that in perspective, the amount of energy consumed by the chemical industry is equal to the energy consumed by all the world’s cars and other light-duty vehicles. Moreover, while energy demand for light-duty vehicles will be essentially flat through 2040, demand for ethylene, the largest petrochemical, will more than double. But rising demand is only one reason why any discussion of global energy trends would be incomplete without chemicals. The other is feedstock flexibility. Petrochemicals are produced from both oil- and gas-based feedstocks, and feed slates can be changed over time in response to economics. And there has been no bigger change in chemical feedstocks than the shift happening right now from oil- to gas-based feeds as a result of unconventional energy in North America. This shift is affecting the entire energy market – from natural gas and gas liquids to refining and even crude oil. So the chemical industry isn’t really at the end of the value chain. It is, in fact, at the crossroads of major energy markets. Today, I would like to explain how growth in unconventional energy has upended the $4 trillion global chemical industry; how these changes in chemicals are, in turn, reverberating across energy markets; and how chemicals is just one part of a rising tide of North American energy production. U.S. chemical industry revitalized It's safe to say that George Mitchell and the other pioneers of shale technologies weren't focused on chemicals at the time, but no manufacturing industry has benefitted more from the growth in unconventional energy than U.S. chemical producers. Unconventional energy has been a double blessing for U.S. chemical producers. It has both lowered energy costs and provided an abundant new source of ethane and other natural gas liquids for use as chemical feedstocks. Ethane is used to produce ethylene, the largest petrochemical building block for products such as plastic packaging and PVC pipe. Access to low-cost ethane from shale gas – and, increasingly, from tight oil – has given U.S. ethylene producers a tremendous advantage. In Europe, Asia and Latin America, most chemical plants are configured to process naphtha, which is tied to the cost of crude oil. Until recently, U.S. ethylene producers used naphtha for about one-quarter of their feedstock, but that has plummeted as producers lighten their feed slates to capture ethane’s cost advantage. How big is this cost advantage? Ethylene production costs in the United States are about one-quarter of the costs in most other regions, based on year-to-date differentials between the value of crude oil and U.S. natural gas. In less than a decade, the U.S. has gone from being the highest cost producing region to a low-cost producer, comparable to the Middle East. This cost advantage has revitalized the U.S. chemical industry. All told, more than 125 billion dollars’ worth of new chemical projects, equivalent to more than 40 percent of the U.S. industry’s fixed assets, have been announced, much of it destined for export markets. These investments include ExxonMobil's multi-billion dollar Houston-area chemical expansion, due to start-up in 2017. Good news for gas markets The shift to gas-based feedstocks is being felt across the energy value chain in North America. The largest impact of the U.S. chemical renaissance will be on natural gas producers. I had the opportunity to speak last year at the annual conference of the Marcellus Shale Coalition in Pennsylvania. And, I emphasized the magnitude of announced chemical industry investments and how they incentivize investment in natural gas and midstream infrastructure. The chemical industry provides a value-added market for natural gas liquids, particularly ethane, which has no alternative disposition other than as chemical feedstock. The rub is, today, North American ethane crackers are running full, so a lot of ethane is being left in the gas stream and sold as natural gas. However, there are limits to how much ethane can be left in natural gas. This means that North American gas producers could eventually face constraints on gas production without significant expansion of ethane demand – from U.S. chemical producers as well as from exporters of ethane. This is especially important today as gas producers are targeting liquid-rich plays. The U.S. Energy Information Administration sees domestic gas production growing by more than 50 percent through 2040. Achieving that level of growth will not be possible without expanding all the markets for natural gas and gas liquids, including chemicals and LNG. It’s fitting that the Oil and Money Conference put chemicals and LNG together on the same panel, because in many ways, LNG and chemicals are two sides of the same coin. Both are value-added outlets for natural gas production. Both are export opportunities to meet growing demand in developing countries, with global trade in these products doubling by 2025. And, both are key enablers of the continued growth in U.S. natural gas and the mid-stream infrastructure that supplies it. Challenge for oil markets I’ll now briefly explain the impact of the chemical renaissance on the oil side. Generally speaking, unconventional energy has been a boon for U.S. refiners, depending on their location and their ability to process advantaged tight oil. But as U.S. chemical producers shift away from naphtha feedstock in favor of ethane, U.S. refiners are losing a key domestic market for their naphtha production, which is contributing to a growing naphtha surplus. The growing surplus – not just of naphtha but of North American tight oil, natural gas, gas liquids and refined products – is causing U.S. refiners to rethink every aspect of their operations, including exports. Growing exports of U.S. refinery products are, in turn, pressuring higher-cost refiners around the world. And for oil producers, the growing naphtha surplus may erode the value of tight oil, which can be rich in naphtha content. The need for an integrated approach This is what I meant when I said that chemicals stands at the crossroads of energy markets. The U.S. chemical renaissance is impacting the fortunes of other parts of the energy market – good news for U.S. gas producers and a challenge for U.S. refiners. And the impact will increasingly reverberate across energy markets around the world as new chemical capacity comes on stream. What are the implications of these changes? I’d like to highlight two. First, no matter where you sit on the energy value chain, you should consider the increasingly complex interplay between chemicals and oil and gas markets. For ExxonMobil, we believe our integrated perspective is a distinct competitive advantage, which has contributed to our industry-leading returns in both chemicals and the downstream. And, in planning major investments, we maintain a wide aperture with respect to future scenarios for these energy and feedstock markets. Energy policy for the new era The second point is the important implication for policymakers. The chemical renaissance is part of a much larger energy story. Unconventional resources are ushering in a new era of U.S. energy abundance. The U.S. Energy Information Administration projects that total domestic liquids production including crude, condensate and natural gas liquids will be up nearly 40 percent from 2012 to 2020. U.S. natural gas production will increase by over 20 percent, and the American Chemistry Council projects U.S. chemical production will grow by one-third. The shale revolution is putting the U.S. in a position to become an energy exporter. More broadly, it is an engine for economic revival and job creation, with more benefits to come. But that won't happen unless policymakers take their foot off the brake and embrace the opportunity at hand. My home state of Texas is a great example of how government can create a pro-business environment where companies like mine can responsibly invest. Texas recently surpassed 3 million barrels a day in oil production; if it were a country, it would be the eighth largest producer in the world. Texas is also the largest U.S. gas producer, largest chemical producer and largest producer of refined products. And not surprisingly, Texas leads the nation in job creation. And these are good paying jobs. In the Texas petrochemical industry, the average wage is $100,000 a year. So how do you create a pro-business environment? It begins with timely permitting of the facilities needed to safely produce, deliver and export all forms of energy and chemical products. This permitting – from drilling and midstream, to manufacturing and export facilities – must be based on sound science. But timely permitting is not enough. To encourage investment in the United States, companies need to be able to reach export markets where most of the demand growth will occur. For that, we need free trade. The restrictions currently governing exports of oil and natural gas came out of an era of scarcity, but today run counter to America’s best interest in this new era of growing energy abundance. Economists and leaders from across the political spectrum agree that free trade would lead to increased investment, production and more jobs. For example, former U.S. Treasury Secretary Larry Summers, who worked in both the Clinton and Obama administrations, gave a powerful speech last month laying out why he believes the U.S. should liberalize oil exports. He said that the merits are as clear for this issue as for any significant public policy issue that he has ever encountered. He went on to say the current restrictions run counter to America’s long history of “allegiance to free trade.” Conclusion In conclusion, the challenge for the energy industry and for policy makers is to act wisely and expeditiously by embracing free trade and lifting outdated restrictions on exports of oil and gas. The chemical industry, which stands at the crossroads of energy markets, has pivoted boldly to seize this opportunity. In doing so, it is pointing to the path that will revitalize America’s economy and strengthen ties with trading partners. Perhaps it is not surprising that policymakers are having trouble keeping up with the sweeping changes in the North American energy market over the last five years. Major shifts in energy markets usually occur over decades. We’ve got to make the most of this historic opportunity because energy and chemicals are too important – too important to people, jobs, and economies -- not just in North America, but to America’s trading partners, especially in the developing world, where imports of energy and chemicals play a critical role in raising living standards and driving economic growth. Policymakers have shown that they can act quickly on energy matters. Shortly after I began my career, in response to the 1973 Arab oil embargo, the United States enacted the oil-export ban, created the Strategic Petroleum Reserve and imposed a 55-mile-per-hour speed limit to conserve energy – all within a two-year period. We’ve shown we can act with urgency when there is a threat. Now we must act with the same resolve to capture this historic opportunity to transform America’s energy future and revitalize the economy. Thank you very much.