Challenges in Petrochemicals: The Business Cycle and Beyond

Remarks by Stephen D. Pryor
President, ExxonMobil Chemical Company
Petrotech 2010 Conference
Manama, Kingdom of Bahrain
May 23, 2010

Thank you. Your Excellencies and distinguished guests. I am honored to be here this evening to help kick off Petrotech 2010. This event is a great opportunity for us to stay abreast of developments in refining and petrochemicals and to exchange knowledge about best practices. In particular, I want to commend the emphasis on safety and other aspects of operational excellence which ExxonMobil views as foundational to sustained success.

We have come together at an interesting time for the petrochemical business. Over the past year, we’ve seen a rebound in demand for petrochemicals led by growth in Asia and the economic recovery underway in the United States. Beyond that, there is every reason to be confident about the long-term prospects for our industry.

ExxonMobil projects that the mature economies of the OECD will grow by over 50 percent by 2030, while non-OECD countries will grow at more than three times that pace. The wealth creation and improved living standards those numbers represent will be enabled by the energy and petrochemical industries.

In his widely acclaimed history of the global petroleum business, The Prize, Daniel Yergin characterized plastics and chemicals as “the bricks and mortar of contemporary civilization.” He’s absolutely right. It is no exaggeration to say that the modern world simply couldn’t exist without the products of modern chemistry. Today, this $3 trillion a year industry touches 96 percent of all manufactured goods, and virtually every facet of modern life.

Moreover, if the benefits of the modern world are to be extended to the 1.5 billion people who lack regular access to electricity and clean water, then the chemical industry must help lead the way.

From improved packaging for food and durable plastics for housing and infrastructure, to battery separator film for cell phones and computers, the products of modern chemistry are transforming the lives and livelihood of people across the developing world.

The importance of petrochemicals to the world economy points to strong growth prospects for our industry. We expect demand for primary petrochemicals to grow at an average rate of 2 percent above global GDP, or roughly 5 percent per year over the next decade.

The future is particularly bright here in the Middle East. Thanks to an endowment of advantaged feedstocks, favorable logistics, world-class manufacturing facilities, and supportive government policies, the region has emerged as the epicenter of the global petrochemical trade. Within a decade, the Middle East will account for three-quarters of global exports of the three highest volume petrochemicals.

As I said a moment ago, this is an interesting time in our business. While the long-term prospects are bright, our industry faces several near-term challenges:

• We are in the midst of an unparalleled wave of new chemical capacity coming online in the Middle East and Asia. This will outpace near-term growth in demand, exerting downward pressure on profitability.
• In addition, as we’ve seen over the last two years, increased volatility will remain a feature of the landscape, exacerbated by depleted inventories across the supply chain as well as underlying volatility in feed and energy costs.
• Project costs are still well above long-term trends and are expected to remain high in the immediate future.
• And international capital markets are expected to be more selective in financing new projects than in the last decade.

These are not new challenges, but are endemic to our highly cyclical industry.

This underscores the importance of a long-term approach to the business that looks through the cyclical peaks and valleys and steers a steady course. At ExxonMobil, our long-term approach is built on an ongoing commitment to Best-in-Class operations; the relentless pursuit of efficiency; and a steely discipline with regard to investment and growth — all supported by a commitment to proprietary technology.

Looking beyond the recurring challenges of the business cycle, I would like to discuss two long-term issues that demand our attention and active engagement.

The first is feedstock supply, and the related issue of energy efficiency, which together underpin the cost competitiveness of our products. The second is free trade, which enables us to efficiently market our products.

With regard to feedstock supply, a number of trends bear watching. To start, we project fuels demand growth over the next decade of 1 percent per year will lag petrochemical growth of 5 percent per year. This disparity can cause constraints in the availability of refinery based chemical feedstocks.

In addition, accessible supplies of advantaged Middle East ethane may be more constrained in the future. And while bio chemical feedstocks will grow rapidly from a small base, we do not expect them to play a significant role in the chemical mix for decades to come.

How can the industry benefit from this changing landscape? By increasing feedstock flexibility. At ExxonMobil, we work continuously to enhance feedstock flexibility. For example, over the last several years our manufacturing facilities have approved nearly 300 new steam cracker feedstocks.

When investing in new manufacturing capacity, feedstock flexibility and integration with refining or upstream operations are of paramount importance. For example, our major expansion at ExxonMobil’s integrated Singapore complex will feature unique heavy feed flexibility, while our Fujian complex in China — a joint venture with Saudi Aramco, Sinopec, and Fujian Province — is that country’s first fully integrated refining/chemical/marketing venture.

In addition, we maintain ongoing research programs to develop new low-cost chemical feedstocks — from the heaviest resids to the lightest gas-based feeds. And we are undertaking a major research effort to produce biofuels from algae, with potential application to chemicals.

Related to the feedstock challenge is the imperative of improving energy efficiency. Energy efficiency conserves precious hydrocarbon resources while mitigating greenhouse gas and other emissions.

In ExxonMobil’s refining and chemical operations, we are on track to meet a target we set in 2002 for a 10-percent improvement in energy efficiency by 2012. We’ve also stepped up research and investment in energy efficiency, focused on steam cracking and aromatics, our most energy-intensive operations.

But energy efficiency isn’t just about operational improvements. We work to develop new products that improve consumer use of energy as well. For example, the specialty polymers and fluids we supply to the automotive industry — for lightweight plastic parts, tires, and synthetic lubricants — can improve fuel efficiency by nearly ten percent.

The importance of improving energy efficiency is highlighted in ExxonMobil’s long-term Energy Outlook, which we update annually. We expect that global energy demand will rise by 35 percent between 2005 and 2030, a figure that takes into account expected efficiency gains. Energy efficiency represents the world’s largest prospective source of new energy supply over the next 20 years. Without gains in energy efficiency, global demand would grow not by the 35 percent currently projected, but would nearly double.

I’d now like to turn to the issue of free trade. As I noted in my remarks at the GPCA conference in Dubai, we are seeing an increase in dumping charges and tariffs being leveled against some producers. This is an obvious concern for exporters in the Middle East given their expanding role in the global petrochemical trade. Trade barriers also have negative consequences for consumers, as well as for the economies they are intended to protect.

In addition to explicit protectionism, trade barriers can take more subtle forms. For instance, well-intentioned regulations governing carbon emissions or product safety can have the unintended effect of creating de facto trade barriers.

As stewards of an industry built on open access to markets around the world, we must vigorously promote free trade and guard against policies that would encroach on it.

In closing, I want to reemphasize our belief in the industry’s bright future, particularly in the Middle East. The region’s growing prominence in petrochemicals is altogether fitting: Modern chemistry can trace it roots back to an 8^th century scientist from the Middle East named Jābir ibn Hayyān. Jābir is known as the Father of Chemistry. Not only did he discover many chemical elements and substances, he pioneered the application of scientific analysis to bridge the gap between the superstitions of alchemy and the analytical rigors of chemistry.

Thirteen centuries later, his intellectual descendents in the Middle East are leading our industry to new heights, delivering the benefits of modern chemistry to billions of people around the world. We at ExxonMobil, with more than 60 years of successful partnerships in the Middle East, are proud to join you in those efforts.