Speech Nov. 18, 2015 Full Integration -- A Recipe for Success in the Modern Chemical Industry Neil Chapman President, ExxonMobil Chemical Company 10th Annual Gulf Petrochemicals and Chemicals Association Forum Dubai, United Arab Emirates It is my pleasure to be here today as we celebrate the 10th anniversary of the GPCA forum. The members of the Gulf Petrochemicals and Chemicals Association play a key role in meeting the needs of our robust, dynamic – and increasingly globalized – petrochemical industry. The concept of a global petrochemicals market was born here in the Middle East more than 40 years ago. At that time the region embarked on a visionary plan to capitalize on its vast supply of natural gas and natural gas liquids by making chemicals for export. Prior to that time, petrochemicals was mostly a local business, centered on refiners upgrading oil-based molecules. Today, the Middle East accounts for 80 percent of the world’s interregional chemical exports. And gas liquids – such as ethane, propane and butane – are increasing in their share of chemical feedstocks. Of course, in our industry, change is the norm. At the first GPCA forum 10 years ago, no one anticipated that the United States was about to emerge as a hotspot for chemicals investment. But today, we see the U.S. pursuing a model similar to what the Middle East did decades ago, capitalizing on domestic natural gas supplies by building capacity to serve overseas growth. While the United States has a long way to go before it might rival the Middle East, change in our industry isn’t always measured in years and decades. As recent twists in the oil market have made clear, the economics of petrochemicals can be transformed in a matter of months. Today, I'd like to talk about our outlook for the global chemical industry in light of the changes it is undergoing. And I will explain why ExxonMobil believes that – now more than ever – integration can be key to success in our industry. Chemicals outlook strong on middle-class growth Let me begin with the global outlook for chemicals. Chemical manufacturers make long-term investments in their facilities, and the long-term view for chemicals remains very positive. Globally, demand for chemicals is expected to rise by 50 percent over the next 10 years, or about 4 percent a year on average. Demand for some specialty or differentiated chemicals will grow even faster. All of this growth in chemicals demand will come from non-OECD countries; two-thirds of the growth will be in Asia. What's driving this rise in demand? It's the fact that plastics and other petrochemical products are integral to modern living standards – and, happily, the world is about to see the largest collective rise in living standards in history. According to The Brookings Institution, the number of people who earn enough to be considered middle class will rise by more than 2.5 billion from 2010 to 2030. Most of these newly minted members of the middle class will be in China and India, where per-capita income is projected to more than triple through 2040. Here in the Middle East, the middle class is expected to grow by more than 20 million from 2010 to 2030. Just as we saw in developed nations during the previous century, the rise of a global middle class will create new demands for products made from chemicals – everything from appliances to homebuilding materials to cars. To get a sense of the scale of how these changes will impact demand for chemicals, consider the following: The average new car is about 50 percent plastic by volume but only 10 percent of the weight. And by 2040, there will be 800 million more cars on the world's roads – double what there is today. Uncertainty and change are ever-present I am not suggesting that this upswing in global living standards means it will be easy to succeed in the chemical industry. It is important to remember that the projected 4 percent annual growth in chemical demand is an average – calculated over a long period of time. So, some years will see much see less growth than others. In addition, as we know, the profitability of chemical producers depends on a host of global and regional variables – including industry supply and demand, the cost of oil and gas feedstocks, and the spread between the two. Then there are advances in technology – like shale gas – that can come out of the blue. So, how do chemical makers maintain their competitive edge in these dynamic conditions? How can investors be confident of a satisfactory return over the long term? Now more than ever, the key can be integration – integration across the entire length of the chemical value chain. It means integration with feedstock sources, including oil, gas, coal or refineries to maximize advantage. At the other end of the value chain, it means working closely with customers to develop products for their applications that create additional value and enhance sustainability. Integration needs to be a win-win. At the beginning of the value chain, it is about finding a win for both feedstock and chemical production. At the other end of the chain, it is creating a win for both the customer and chemical producer. Let me first discuss feedstock. In search of advantaged feedstock From coke-gas processing in Germany – to naphtha cracking in the U.S. Gulf Coast – to ethane cracking in the Middle East, the history of the chemical industry has always been defined by the search for abundant, economic feedstock. Most recently, we have seen a 150-billion-dollar wave of announced capacity expansions in the United States to take advantage of the vast new supplies of hydrocarbons from shale deposits. North America natural gas production has risen by 45 percent over the past six years – and is projected to grow by another 40 percent through 2040. Even at today's lower crude prices, the United States is still advantaged, with unconventional resources providing a long-term source of competitive energy and feedstock, including natural gas liquids and condensate. The value of integration Access to advantaged feedstock remains the cornerstone of success in petrochemicals. Integration with feedstock production can help companies create a competitive edge. For example, ExxonMobil’s position as the largest U.S. natural gas producer and the relationship that the chemical business has with our upstream has supported our strategy in North America. Our U.S. facilities run a high percentage of gas-based feedstock, and we will expand that capacity with the 2017 startup of the world-scale ethane steam cracker we’re adding in Texas. This plant will be fully integrated into our existing Baytown refining and chemical plant infrastructure. Elsewhere, because ExxonMobil is such a large global player in the upstream, we are able to identify an ongoing pipeline of advantaged gas opportunities around the world. NGL feedstock growing While naphtha has been our industry's primary steam-cracker feed for decades, ExxonMobil projects that by 2040, NGLs will be roughly equal with naphtha as a chemical feedstock. Rising North American production is one reason, but there is a broader phenomenon at work. Globally, natural gas production is rising two-and-half times faster than oil production, driven in part by strong demand for gas as a cleaner alternative to coal for electricity generation. From 2014 to 2040, global natural gas production is project to rise 50 percent, while oil will likely increase by about 20 percent. Of course the areas where natural gas production is increasing the most are not necessarily the same areas where demand for chemicals is growing the most. Chemical demand is growing fastest in developing countries, while supply additions remain centered in lower-cost production regions such North America and here in the Middle East. As a result, we can expect to see continued growth in interregional chemical trading. Ten years ago, the volume of chemicals traded between regions represented only about 5 percent of global production. Today, it has grown to 10 percent, and we expect that by 2020, it will approach 20 percent. Access to advantaged feedstock is a critical component to driving this change. The need for flexibility But producers have to be cautious, as economics can change rapidly. Until recently, U.S. producers not only had the benefit of low-cost energy and feedstock from shale, but high crude prices meant ethane and other NGLs were at a steep discount to the oil-based feedstocks used in other parts of the world. Such cost advantages rarely last. Energy markets are volatile and feedstock costs can go up as well as down. With the drop in crude prices last year, liquids crackers in Europe and Asia saw reduced costs. While U.S. chemical producers continue to have an advantage from gas-based feedstock, we can all look back and clearly remember the consequences from the substantial rise in natural gas prices in the 1970s and 80s. Each investor must test their plans across a range of feedstock scenarios. That's why even as ExxonMobil expanded chemical capacity in the U.S. Gulf Coast to take advantage of shale, we continued to enhance our ability to run liquid feeds including naphtha and heavier gas oils processed in our integrated refineries. Integration with refining We are further developing advanced technologies to extract value from refinery streams to produce petrochemicals. We call it "molecule management" – which is a way of saying that we look to optimize the value of each and every molecule across our fuels, lubes and chemicals businesses. Two years ago we announced another step forward in the evolution of chemicals. Our Singapore plant has the ability to make chemicals directly from crude oil. This crude cracker, a first for our industry, gives us even greater flexibility in our choice of feedstock. It was the result of a long-term technical program and would simply not be possible without being closely integrated with our Singapore refineries. Middle East petrochemical producers are increasingly looking at refining complexes for product diversification. Many of the new refineries built in this region are integrated with petrochemical production. According to one industry consultant, within the next five years about one-third of the incremental feedstock for petrochemical production in this region will be derived from refining operations. Let me turn now to the other end of the value chain, and discuss the value of integration on the customer level. Focus on customers Innovation remains a driving force in our industry. Customers and converters want to bring more sustainable solutions to society. Chemical producers can help them do that by improving the performance and value of our products. Those who are closely integrated with their customers are better able to create this additional value, and enjoy long-term relationships which can clearly mitigate some of the market’s volatility. Over the past century, the spirit of innovation has delivered thousands of chemical products that touch nearly every aspect of modern life. But today, the demand for more sustainable products is accelerating. Meeting this demand will require an unwavering focus on innovation and sustained investment in technology through the ups and downs of the business cycle. And, to maximize long-term returns on that investment, technology goals must be driven by business objectives that reflect the evolving needs of the customers we serve. Innovation is not just about breakthrough products. Increasingly, chemical makers work with machinery companies, whose sophisticated equipment allows more options to combine materials in blends and multi-layers or both. These new solutions for specific applications bring value to customers, consumers and society. Take, for example, polyethylene, the world’s most widely used plastic. Our innovations have enabled customers to make heavy-duty shipping bags 40 percent thinner while also improving product strength and ease of processing. This decrease in material use benefits the entire value chain – by reducing packaging weight, shipping costs, energy consumption, emissions and waste. We’re adding new products for film applications that extend the performance and processing attributes of our polyethylene portfolio. We’re working with our existing customers who manufacture films for packaging applications and targeting prospects in new applications that require very tough, damage-resistant films. This illustrates how disciplined product development delivers big gains in sustainability over time. We know that customers in developing economies are hungry for innovation. They want new ideas to grow their businesses quickly. Close integration with our customers enables us to develop those advanced solutions for their businesses and they can take them to their customers. Conclusion So, let me conclude by saying that this is a great time to be a part of the petrochemical industry. We are all playing a major role in creating better lives for billions of people, and making products that enable the progress of humanity – just as we have for the past 100 years and more. Demand for our products remains strong. But to maintain an edge in our fast-changing, competitive industry, integration along the entire petrochemical value chain can be key. Integration is not a buzzword. Integration really is about knowing how to gain an advantage in the use of feedstock, and in knowing our customers' businesses well enough to deliver the solutions they require. This knowledge lets us plan ahead, take action, and be much more than a raw material supplier. Integration is the win-win that lets chemical and feedstock producers get the most value out of every molecule. It helps both weather volatility in supply and demand. Integration enables chemical makers to offer more sustainable solutions to customers, which translates to higher returns on investment for both. Integration can ensure a continued great future in our industry. Thank you very much.