Thank you and thanks to IHS for inviting me to speak here today.
Over the past three decades, this conference has earned its reputation as a premier gathering for insights into the petrochemical industry’s future.
A focus on the future requires us to look beyond the volatility that we’ve seen in the energy and petrochemical markets over the last 18 months. Crude is down; naphtha is down; the North American ethylene advantage is down.
But have any of the fundamentals changed? At ExxonMobil, we don’t believe so.
Petrochemicals is subject to cycles that all commodity businesses go through. To plan for these inevitable cycles, we assess the full range of economic scenarios that our investment decisions must withstand. Our major investments must be based on advantages versus the rest of industry. This enables us to mitigate the impact of bottom-of-cycle conditions as well as maximize returns at the top of the cycle, thereby ensuring a satisfactory return for the shareholder.
We based our investment to construct a third steam cracker at Baytown on two simple long-term beliefs. First, the growth in petrochemical demand remains robust. And, second, the North American resource base, driven by unconventional oil and gas, is abundant.
Chemical demand outlook is positive
Let’s start with our confidence in demand. We continue to see a world in which global living standards improve and demand for chemical products continues to grow.
A main driver of this growth is population. From now to 2040, the global population is expected to rise from about 7 billion people to about 9 billion.
More important to our business, however, are rising incomes. Even conservative estimates say the number of people earning enough to be considered middle class will more than double, from just over 2 billion people today to nearly 5 billion by 2030.
This middle-class growth will continue to drive consumption of chemicals.
We see global demand for chemicals rising by nearly 45 percent, or about 4 percent per year, over the next decade. That’s significantly faster than projected growth in global GDP, and faster than overall energy demand.
Asia Pacific leads growth
Two-thirds of this growth will come from Asia Pacific, with the majority of that growth in China and India. These two countries alone are forecast to see a threefold rise in per-capita income through 2040. Their growing, urbanized middle classes will drive higher demand for products made from petrochemicals – everything from packaged goods to automobiles to appliances.
But it’s not just China and India.
We are gearing up to meet the needs of other developing countries whose rising populations and living standards will require significantly more petrochemicals in coming decades. These include Brazil, Mexico, South Africa, Nigeria, Turkey, Saudi Arabia and Indonesia.
Developed countries will see much lower growth. In general, the increased need for chemicals there will be more focused on the penetration of new materials supporting the development of advanced products and innovations.
The role of sustainability
Beyond population and living standards, there is a third factor driving petrochemical demand – and that is sustainability.
Now, more than ever, the world is looking for affordable, sustainable and safe products.
Many of these products are made from chemicals – products like insulation that reduces the amount of energy needed to heat and cool homes, lightweight packaging that extends the life of food and reduces the energy needed for shipping, and advanced plastics that make cars safer and more fuel-efficient.
According to a study by McKinsey, over their lifecycle these chemical products save twice the amount of greenhouse gases that they create.
Sustainability will remain a driving force behind demand for chemicals.
The North American opportunity
So how can chemical producers meet this growing product demand?
It starts with access to competitive feedstock and energy. Today, thanks to shale and other unconventional oil and gas, North America has one of the largest resource bases in the world. That’s why we have seen nearly $160 billion in announced capacity investments, including ExxonMobil’s expansion at Baytown, about 25 miles from here.
Until recently, U.S. petrochemical producers were enjoying a shale gas cost advantage compared to regions that ran mostly oil-based naphtha feedstock that was at an all-time high. Of course the 70-percent decline in Brent over the past 18 months has reduced that advantage.
Will some producers in North America start to rethink their investments? If they were banking on that advantage lasting for the long-term, then maybe they will.
But for ExxonMobil, nothing has changed. We designed our Baytown expansion to be resilient over a wide range of feedstock and energy scenarios.
Baytown and the toolkit
So how can chemical companies succeed despite the ups and downs of energy markets they can’t control? For us, it is all based on ensuring we retain an advantage over competition that enables us to outperform across the business cycles. It is an objective that we relentlessly pursue.
Key to our investment decision at Baytown is a toolkit of advantages that we have developed over many years.
It starts with integration
At ExxonMobil, we have long understood the value of a diversified, integrated business that is robust to industry cycles. We optimize our integrated businesses across the entire value chain.
Our chemical facilities are highly integrated with our refineries around the world or have access to attractive upstream feedstocks, such as ethane.
Our refining and chemical facilities share an unwavering focus on operational excellence and increased efficiency. At our large, integrated manufacturing platforms we pursue efficiencies enabled by interconnected facilities, harmonized operating practices and sophisticated modeling to optimize all streams on a day-to-day and even hour-to-hour basis.
Our expansion at Baytown includes installation of the largest production units in operation today. The site, which is already the largest refining and petrochemical complex in the U.S., is very efficient and will get even more so.
We believe that we have attracted, trained and retained the most skilled workers in our industry. This is critical as our optimization tools become more complex and more technical. Locally, we committed $1.5 million to Houston-area community colleges to create a new workforce training program for good-paying, in-demand, skilled positions in the chemical industry.
In the U.S. our crackers produce a significantly higher percentage of ethylene from ethane than the industry average.
But we can’t bank on North American ethane or any other single feedstock remaining cost-advantaged forever. Even as we expand ethane steam cracking capacity at Baytown, we continue to enhance our ability to run liquid feeds from our integrated refineries and even crack crude oil directly.
Another advantage in our toolkit is a portfolio of performance products unique to industry that creates additional value for us and for our customers.
Our expansion here in Texas includes the addition of two of the largest polyethylene reactors in the world at our Mont Belvieu Plastics Plant. This new capacity is not focused on commodity products, but on high-value performance polyethylene.
After years of technology and market development, we are already the leader in single-site catalysis metallocene polyethylene, and we’re rapidly extending that family of products which serve the packaging industry – particularly food packaging.
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.
Today, we’re adding new products for film applications that extend the performance and processing attributes of our polyethylene portfolio. And we’re working with our customers who manufacture films for packaging applications and targeting prospects in new applications that require very tough, damage-resistant films.
Not only do these performance polyethylenes bring new value to our customers but they are pivotal in our drive to ensure our investments are robust across the industry cycles.
A global supply chain
We also recognize that all of our investments – from Baytown to Singapore – are individual links in a petrochemical supply chain that is growing more global by the day.
A supply chain is more than putting a container on a ship. Meeting demand growth requires sophisticated logistics tools and a global organization to optimize cost and provide exceptional service to customers.
Moving products across the world is a significant cost component. Ten years ago, the volume of chemicals traded between regions represented only about 10 percent of the global production. Today it’s about 15 percent. And after this wave of crackers on the Gulf Coast, that will be up to 20 percent. It’s a big change.
Over the past several years, we have accelerated our program to build a world-class global supply organization and equip them with a sophisticated tool set. We’ve invested in an advanced enterprise IT system to get faster delivery at a lower cost. This technology has enabled us to optimize our system, not just on an annual but a daily basis. And now we can see our transaction right to our customer’s door.
The need for a world-class supply chain is nothing new to companies like Amazon and McDonald’s. And it will become increasingly important to the petrochemical industry as it continues to globalize. So will working more closely with our customers in developing countries.
Serving global markets and customers directly
That’s why we have established the leading commercial and technical organization across the developing world.
This on-the-ground presence enables us to work directly with our customers to develop the innovative, sustainable products their customers seek.
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.
When you are this integrated with your customers, you are better able to create additional value, and enjoy long-term relationships that can help mitigate market volatility.
So to sum up, we believe the only way to ensure these major investments will be financially robust across the industry cycles is to ensure the projects are advantaged across the entire value chain. Our toolkit contains advantages of integration on the operating and the feed side; differentiated products; a sophisticated and global supply chain; and people on the ground in the high growth developing economies to deliver the support our customers require.
In our industry, where opportunities abound, we must deal with volatility as the norm, not the exception.
As we look to the future, the advantages we capture today will inform the investment decisions we make tomorrow.
Thank you for your time and attention.