10-12B/A 1 d1012ba.htm AMENDMENT NO. 3 TO FORM 10 Amendment No. 3 to Form 10
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Index to Financial Statements

As filed with the Securities and Exchange Commission on August 25, 2010

File No. 001-34726

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3

to

Form 10

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(B) OR 12(G) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

 

LYONDELLBASELL INDUSTRIES N.V.

(Exact name of registrant as specified in its charter)

 

 

 

The Netherlands   98-0646235

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Weena 737

3013AM Rotterdam

The Netherlands

31 10 275 5500

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

 

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Registered

 

Name of Each Exchange on Which Such
Class will be Registered

Class A ordinary shares

  New York Stock Exchange

Class B ordinary shares

  New York Stock Exchange

Securities to be registered pursuant to Section 12(g) of the Act:

None.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨   Accelerated filer  ¨
Non-accelerated filer  þ (Do not check if a smaller reporting company)   Smaller reporting company  ¨

 

 

 


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LyondellBasell Industries N.V. was formed on October 15, 2009 to serve as the parent holding company for certain subsidiaries of LyondellBasell Industries AF S.C.A. (“LyondellBasell AF”) after completion of proceedings under chapter 11 (“Chapter 11”) of title 11 of the United States Bankruptcy Code (the “U.S. Bankruptcy Code”). LyondellBasell AF and 93 of its subsidiaries were debtors (the “Debtors”) in jointly administered bankruptcy cases (the “Bankruptcy Cases”) in the United States Bankruptcy Court in the Southern District of New York (the “Bankruptcy Court”). Additional subsidiaries of LyondellBasell AF were not involved in the Bankruptcy Cases. On April 23, 2010, the Bankruptcy Court approved our Third Amended and Restated Plan of Reorganization (the “Plan of Reorganization”) and we emerged from bankruptcy on April 30, 2010 (the date of our emergence from bankruptcy being the “Emergence Date”).

Prior to the Emergence Date, LyondellBasell Industries N.V. had not conducted any business operations. Accordingly, unless otherwise noted or suggested by context, all historical financial information and data and accompanying financial statements and corresponding notes, as contained in this Registration Statement, reflect the actual historical consolidated results of operations and financial condition of LyondellBasell AF for the periods presented and do not give effect to the Plan of Reorganization or any of the transactions contemplated thereby or the adoption of “fresh-start” accounting. Thus, such financial information may not be representative of our performance or financial condition after the Emergence Date. Except with respect to such historical financial information and data and accompanying financial statements and corresponding notes or as otherwise noted or suggested by the context, all other information contained in this Registration Statement relates to LyondellBasell Industries N.V. and its subsidiaries following the Emergence Date. When we use the terms “LyondellBasell Industries N.V.,” “we,” “us,” “our” or similar words in this Registration Statement, unless the context otherwise requires, we are referring to LyondellBasell Industries N.V. and its subsidiaries following emergence from the Bankruptcy Cases. For more information on the Bankruptcy Cases, see “Item 8. Legal Proceedings—Bankruptcy Cases and Reorganization.”

As of the Emergence Date, LyondellBasell AF’s equity interests in its indirect subsidiaries terminated and LyondellBasell Industries N.V. now owns and operates, directly and indirectly, substantially the same business as LyondellBasell AF owned and operated prior to emergence from the Bankruptcy Cases. References herein to “our” historical consolidated financial information (or data derived therefrom) should be read to refer to the historical financial information of LyondellBasell AF.

Since the Emergence Date, there has been a limited market for our securities. LyondellBasell Industries N.V.’s class A ordinary shares and class B ordinary shares have been quoted on Pink OTC Market’s electronic quotation and trading system under the symbols “LALLF” and “LALBF,” respectively, since emergence. We have applied for listing of our class A ordinary shares and our class B ordinary shares on the New York Stock Exchange (“NYSE”).

In reviewing this Registration Statement, you should carefully consider the matters described in the section entitled “Risk Factors” beginning on page 45 of this Registration Statement.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of any of the securities of LyondellBasell Industries N.V. or determined whether this Registration Statement is truthful or complete. Any representation to the contrary is a criminal offense.

This Registration Statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

 

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WHERE YOU CAN FIND MORE INFORMATION

Statements contained in this Registration Statement as to the contents of any contract or document referred to are not necessarily complete and in each instance, if the contract or document is filed as an exhibit to this Registration Statement, we refer you to the copy of the contract or other document filed as an exhibit to this Registration Statement. Each such statement is qualified in all respects by reference to the applicable document.

After the SEC declares this Registration Statement effective, we will file annual, quarterly and special reports, proxy statements and other information with the SEC. We intend to furnish our stockholders with annual reports containing combined financial statements audited by an independent registered public accounting firm. This Registration Statement is, and any of these future filings with the SEC will be, available to the public over the Internet on the SEC’s web site at http://www.sec.gov. You may read and copy any filed document at the SEC’s public reference rooms in Washington, D.C. at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information.

We maintain an internet site at http://www.lyondellbasell.com. Our web site and the information contained on that site, or connected to that site, are not a part of, or incorporated by reference into, this Registration Statement.

You should rely only on the information contained in this Registration Statement or to which we have referred you. We have not authorized any person to provide you with different information or to make any representation not contained in this Registration Statement.

INDUSTRY AND MARKET DATA

This Registration Statement includes industry data that we obtained from periodic industry publications, including Chemical Marketing Associates, Incorporated (“CMAI”); Turner, Mason & Company; Platts (a reporting service of The McGraw-Hill Companies); SRI Consulting (“SRI”); Tecnon Orbicom; PIRA Energy Group; Chemical Market Resources; DeWitt & Company, Inc. (“DeWitt”); Oil and Gas Journal; Bloomberg L.P. (“Bloomberg”); Energy Information Administration (“EIA”); and internal company reports and estimates. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. Additionally, the industry sources that we reference request or require that, if we reproduce the information they provide, we inform readers that they make no warranty, express or implied, as to the accuracy or completeness of, nor assume any liability for, such information. We believe that the industry data we obtained from industry publications is reliable and is the data commonly and regularly used for analysis of our industry. However, we have made no independent verification of the accuracy of this data.

 

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Table of Contents

 

Item 1.

   Business    1

Item 1A.

   Risk Factors    45

Item 2.

   Financial Information    63

Item 3.

   Properties    111

Item 4.

   Security Ownership of Certain Beneficial Owners and Management    114

Item 5.

   Directors and Executive Officers    118

Item 6.

   Executive Compensation    123

Item 7.

   Certain Relationships and Related Transactions, and Director Independence    154

Item 8.

   Legal Proceedings    155

Item 9.

  

Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

   159

Item 10.

   Recent Sales of Unregistered Securities    161

Item 11.

   Description of Registrant’s Securities to be Registered    162

Item 12.

   Indemnification of Directors and Officers    171

Item 13.

   Financial Statements and Supplementary Data    172

Item 14.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    172

Item 15.

   Financial Statements and Exhibits    173

This Registration Statement is being filed to register the class A ordinary shares and class B ordinary shares that were issued in connection with the Plan of Reorganization. It is not and is not to be construed as an inducement or encouragement to buy or sell any of our securities. You should be aware of certain risks relating to our business and ownership of our class A or class B ordinary shares, which are described under the heading “Item 1A.—Risk Factors.”

You should not assume that the information contained in this Registration Statement is accurate as of any date other than the date set forth on the cover. Changes to the information contained in this Registration Statement may occur after that date, and we undertake no obligation to update the information, except in the normal course of our public disclosure obligations and practices.

All industry and statistical information included in this Registration Statement, other than information derived from our financial and accounting records, is presented as of December 31, 2009 unless otherwise indicated. Unless otherwise indicated, financial information and information derived from our accounting records which are presented as “current” are as of December 31, 2009.

 

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CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this Registration Statement are “forward-looking statements” within the meaning of the U.S. federal securities laws. Forward-looking statements can be identified by words such as “estimate,” “believe,” “expect,” “anticipate,” “plan,” “may,” “should,” “budget” or other words that convey the uncertainty of future events or outcomes. Many of these forward-looking statements have been based on expectations and assumptions about future events that may prove to be inaccurate. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Our actual results (including the results of our joint ventures) could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to:

 

   

our ability to comply with debt covenants and service our substantial debt,

 

   

availability of cash and access to capital markets,

 

   

the business cyclicality of the chemical, polymers and refining industries,

 

   

the availability, cost and price volatility of raw materials and utilities, particularly the cost of oil and natural gas,

 

   

competitive product and pricing pressures,

 

   

uncertainties associated with the U.S. and worldwide capital markets and economies,

 

   

operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime, supplier disruptions, labor shortages, strikes, work stoppages or other labor difficulties, transportation interruptions, spills and releases and other environmental risks),

 

   

the supply/demand balances for our and our joint ventures’ products, and the related effects of industry production capacities and operating rates,

 

   

our ability to achieve expected cost savings and other synergies,

 

   

legal and environmental proceedings,

 

   

tax rulings, consequences or proceedings,

 

   

technological developments, and our ability to develop new products and process technologies,

 

   

current and potential governmental regulatory actions in the U.S. and in other countries, including potential climate change regulation,

 

   

political unrest and terrorist acts, and

 

   

risks and uncertainties posed by international operations, including foreign currency fluctuations.

Any of these factors, or a combination of these factors, could materially affect our future results of operations (including those of our joint ventures) and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of future performance, and our actual results and future developments (including those of our joint ventures) may differ materially from those projected in the forward-looking statements. Our management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

All forward-looking statements in this Registration Statement are qualified in their entirety by the cautionary statements contained in this section and elsewhere in this Registration Statement. See “Item 1. Business,” “Item 1A. Risk Factors” and “Item 2. Financial Information—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information about factors that may affect our

 

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businesses and operating results (including those of our joint ventures). Use caution and common sense when considering these forward-looking statements. We do not intend to update these statements unless applicable securities laws require us to do so.

In addition, this Registration Statement contains summaries of contracts and other documents. The summaries of contracts and documents that are filed as exhibits to this Registration Statement may not contain all of the information that is important to an investor and reference is made to the actual contract or document for a more complete understanding of what is discussed in this Registration Statement regarding the contract or document involved.

 

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ITEM 1. BUSINESS

LyondellBasell Industries N.V. is a public company with limited liability (naamloze vennootschap) incorporated under Dutch law by deed of incorporation dated October 15, 2009.

LyondellBasell Industries N.V. was formed to serve as the parent holding company for certain subsidiaries of LyondellBasell AF after completion of the Bankruptcy Cases. LyondellBasell AF and 93 of its subsidiaries were Debtors in jointly administered Bankruptcy Cases in the Bankruptcy Court. As of the Emergence Date, LyondellBasell AF’s equity interests in its indirect subsidiaries terminated and LyondellBasell Industries N.V. now owns and operates, directly and indirectly, substantially the same business as LyondellBasell AF owned and operated prior to emergence from the Bankruptcy Cases, which business includes subsidiaries of LyondellBasell AF that were not involved in the Bankruptcy Cases.

LyondellBasell Industries N.V. is the successor to the combination in December 2007 of Lyondell Chemical Company (“Lyondell Chemical”) and Basell AF S.C.A. (“Basell”), which created one of the world’s largest private petrochemical companies with significant worldwide scale and leading product positions.

Overview

We are the world’s third largest independent chemical company based on revenues and an industry leader in many of our product lines. We are the world’s largest producer of polypropylene and polypropylene compounds (“PP compounds”) and a top worldwide producer of propylene oxide (“PO”), polyethylene (“PE”), ethylene and propylene. Additionally, we are a leading provider of technology licenses and a supplier of catalysts for polyolefin production. Our refinery in Houston, Texas (the “Houston Refinery”) is among North America’s largest full conversion refineries capable of processing significant quantities of heavy, high-sulfur crude oil. We participate in the full petrochemical value chain, from refining to specialized end uses of petrochemical products, and we believe that our vertically integrated facilities, broad product portfolio, manufacturing flexibility, superior technology base and operational excellence allow us to extract value across the full value chain.

We have the size and scale to compete worldwide:

 

   

For the year ended December 31, 2009, our revenues were $30.8 billion.

 

   

As of December 31, 2009, our total assets were $27.8 billion.

We are geographically diverse:

 

   

As of December 31, 2009, we manufactured products at 59 sites in 18 countries (including those operated through joint ventures).

 

   

We sell products in more than 100 countries.

 

   

For the year ended December 31, 2009, 54% of our revenues was generated from sales in North America, 35% from sales in Europe and 11% from sales in the rest of the world.

 

   

We participate in 16 significant manufacturing joint ventures, 11 of which are outside of Western Europe and the U.S., primarily in regions that have cost-advantaged raw materials or high growth rates, including Asia, the Middle East and Eastern Europe.

We have leading positions in our key products:

 

   

As of December 31, 2009, we are the worldwide rated capacity leader in polypropylene, PP compounds, polyolefin licensing, polypropylene catalysts and oxyfuels.

 

   

As of December 31, 2009, we ranked second, third, fourth and fourth in worldwide capacity in propylene oxide, PE, ethylene and propylene, respectively.

 

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Our products are used in a broad range of applications and in products that people use every day, and have been increasingly in demand in developing markets:

 

   

Key end uses for our products include: rigid and flexible packaging, transportation fuels (gasoline and diesel), containers, plastic pipe, detergents, cosmetics, electronics, appliances, automotive parts, paints and coatings, furnishings, construction and building materials and many other industrial and consumer goods applications.

 

   

The diverse end-market uses for our products help to reduce volatility of demand for our products, and a majority of our revenues in 2009 was derived from sales of products utilized in consumable products (including fuels).

Our businesses and asset portfolio provide diversification and flexibility:

Our business portfolio of refining and oxyfuels, olefins and polyolefins, intermediate and derivative chemicals, and technology provides diversification and flexibility. Despite the current economic conditions generally and in our industry, parts of our businesses have performed in line with historical norms:

 

   

In 2009, the oxygenated fuels products within our refining and oxyfuels segment showed margins which were consistent with recent years, due in part to the significant differential between gasoline prices and butane costs, coupled with increasing worldwide biofuels demand.

 

   

The continued enhancement of feedstock flexibility in our North American olefin plants allowed us to improve the competitiveness of these assets in the current market conditions where natural gas liquids (“NGLs”) pricing has been much lower than most crude-oil-based feedstocks, partially offsetting the weak overall profit environment for producers using crude-oil-based feedstocks.

 

   

In our olefins and polyolefins segments, our North American PE business has benefitted from strong export demand driven by the Asian economy, competitors’ project delays and relatively lower NGLs cost-based ethylene.

 

   

The PO business within our intermediates and derivatives segment demonstrated results in 2009 consistent with recent years.

Competitive Strengths

We believe that our key competitive strengths are:

 

   

Leading Positions in Worldwide Segments. We are the world’s third largest independent chemical company based on revenues and an industry leader in many of our product lines. We are the world’s largest producer of polypropylene, PP compounds and oxyfuels and a top worldwide producer of PO, PE, ethylene and propylene. Additionally, we are a leading provider of technology licenses and a supplier of catalysts for polyolefin production. Our Houston Refinery is among North America’s largest full conversion refineries capable of processing significant quantities of heavy, high-sulfur crude oil.

 

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Worldwide Position by Product

 

Products

   Worldwide Rated Capacity    Worldwide Position
     (million lbs per year, unless noted)     

Refining and Oxyfuels

     

Oxyfuels (bbl/day)

   75,000    #1

Olefins and Polyolefins

     

Polypropylene

   12,100    #1

Polyethylene

   10,800    #3

Ethylene

   14,400    #4

Propylene

   8,800    #4

PP Compounds

   2,300    #1

Intermediates and Derivatives

     

Propylene Oxide

   2,500    #2

Technology

     

Polyolefin Licensing

      #1

Polypropylene Catalysts

      #1

 

Sources: CMAI, Chemical Market Resources, DeWitt and LyondellBasell AF’s internal data.

Note: Capacities and worldwide capacity position are as of December 31, 2009, except for Technology worldwide capacity position, which is as of December 31, 2008, and include our pro rata share of joint ventures.

 

   

Geographic Diversity. Our worldwide manufacturing, sales and marketing network enables us to serve the needs of both local and worldwide customers. As of December 31, 2009, we operated (including through our joint venture network) 59 manufacturing sites in 18 countries. For the year ended December 31, 2009, 54% of our revenues was generated from sales in North America, 35% from sales in Europe and 11% from sales in the rest of the world. We market and sell our products in more than 100 countries, providing the opportunity to develop new markets for our products in higher-growth regions. We have worldwide exposure to many different economies as a result of our historical strength in Europe and the United States and our worldwide joint venture network. Our technology licensing platform has enabled us to make a number of investments in high-growth regions to broaden our worldwide reach.

Worldwide Network

LOGO

 

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     North America    Europe    Rest of World    Total

Manufacturing Facilities(1)

   23    19    17    59

Employees(2)

   6,120    7,750    990    14,860

Revenues (millions)(3)

   16,566    10,931    3,331    30,828

 

(1) As of December 31, 2009. Includes joint ventures and wholly owned manufacturing facilities.
(2) Approximate as of December 31, 2009.
(3) Revenues for the year ended December 31, 2009 based on delivery location.

 

   

Participation in High-Growth, Low-Cost Markets through Joint Venture Relationships. We have pursued a strategy of leveraging our leading technology positions and worldwide marketing network to gain access to growing markets and low cost raw materials and feedstocks through the development of joint ventures. We participate in 16 significant manufacturing joint ventures in 11 countries throughout the world, most of which are in regions that have cost-advantaged feedstock or higher growth rates, including Asia, the Middle East and Eastern Europe, which have shown average annual GDP growth rates of 7% (outside of Japan), 5% and 4%, respectively, from 2005 through 2009. On a 100% basis, our joint ventures have 8.1 billion pounds of polypropylene capacity and 2.7 billion pounds of PE capacity. In 2007, 2008 and 2009 we received cash dividends from these joint ventures of $148 million, $98 million and $26 million, respectively, in addition to benefitting from profits relating to licensing revenue, catalyst sales and marketing joint venture products. Since late 2008, we have begun production at two new Saudi Arabian joint ventures; expanded production at two joint ventures in Saudi Arabia and Mexico; started-up a new joint venture in China; and are adding capacity at another joint venture in Thailand. Our equity stakes allow us to participate in higher growth regions of the world without the significant expense of constructing wholly owned facilities.

 

   

Portfolio of Differentiated Products, Which Provides Premium Margins. We believe that our PP compounds, Catalloy process resins, polybutene-1 (“PB-1”), PO and intermediate products and our technology business help mitigate our exposure to the olefin and polyolefin cycles. The cycles for PO and its derivatives have historically tended to follow more independent supply and demand patterns than olefins and polyolefins. We also believe our technology and catalyst businesses further reduce the impact of petrochemical cycles on our operating results and provide a foundation for us to realize premium profit margins.

 

   

Significant Achievable Cost Savings in Process. From June 30, 2008 through the end of 2009, we reduced our workforce by approximately 2,370 employees and approximately 1,650 contractors. Additionally, since the end of 2007, we have significantly rationalized our asset footprint by shutting down underperforming assets with 4 billion pounds of annual capacity of polymers and chemicals. Management expects additional fixed cost savings by reducing staff, rationalizing our worldwide asset base, restructuring our contracts and realizing savings in procurement and logistics. Our senior management continues to focus on streamlining our worldwide fixed cost infrastructure.

 

   

We Operate One of the Largest High-Complexity Refineries in North America. We believe that our Houston Refinery is among the more flexible of major North American refineries with the ability to process 268,000 barrels per day of a wide array of feedstock grades, including heavy, high-sulfur crude oil. These grades of crude oil are more difficult to refine into gasoline than other high value fuel products, but have historically been less costly to purchase, giving us a cost advantage over many of our competitors. Processing heavy, high-sulfur crude oil in significant quantities requires a high-complexity refinery, which differentiates our Houston Refinery from the majority of competing facilities in the U.S. We have entered into a crude supply agreement with PDVSA Petróleo S.A. (“PDVSA Oil”) to buy crude at market-based pricing for the majority of our supply. Our Houston Refinery also benefits from its strategic location near various North American pipeline systems and a major port on the Gulf of Mexico, with its proximity to Venezuela and Mexico, which are among the largest producers of heavy, high-sulfur crude oil.

 

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Integrated Portfolio Structure. We participate in the full petrochemical value chain, from refining to specialized end uses of petrochemical products. We extract value from optimization across the refining and oxyfuels, olefins and polyolefins and intermediates and derivatives businesses. We operate several major integrated olefin and olefin derivative sites, which provide cost efficiencies through shared services and infrastructure, economies of scale and optimization. Additionally, oxygenated fuel products produced from chemical assets offer further integration benefits with the fuels business. We utilize our flexibility by leveraging a portfolio of mixed feedstock crackers across the U.S. to reduce our exposure to volatility in feedstock prices, enabling us to process lower cost feedstocks. On a worldwide basis, we produce in excess of 100% of our ethylene requirements and approximately 50% of our propylene requirements.

World Scale Diversified & Vertically Integrated Portfolio Structure

LOGO

 

   

Superior Technology Platform. We are a technology-driven company that invests in research and development to maintain our leadership position, which we believe provides us with a significant competitive advantage. We estimate that approximately 43% of polypropylene and 35% of PE worldwide licensed capacity from 2003 through 2009 use our technologies. We believe that we are the global technologies leader in polyolefins. These proprietary technologies provide us with a cost-advantaged, market-preferred position.

 

Technology Portfolio
Polyolefins    Offering of complete polyolefin technology portfolio; proven processes with competitive capital and operating costs
Propylene Oxide    Proprietary technology basis for >30% of worldwide production
Propylene Oxide Derivatives    Environmentally advantaged solvents
Catalysts    Differentiated product portfolio at competitive use cost; ongoing innovation to enhance performance

 

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We are a technological leader in the manufacture of PO, using our proprietary propylene oxide/styrene monomer (“PO/SM”) and propylene oxide/tertiary butyl alcohol (“PO/TBA”) processes. We continue to increase our expertise in the production of butanediol from PO. As of March 1, 2010, approximately 960 of our employees are engaged in research and development activities.

 

   

Focused, Experienced Management Team. We are led by James L. Gallogly. Mr. Gallogly was appointed as Chief Executive Officer in May 2009. Mr. Gallogly has over 29 years of operating and leadership experience in chemical, refining and related industries. He formerly worked at ConocoPhillips, most recently serving as executive vice president of exploration & production from October 2008 to May 2009. For the preceding two years, he was executive vice president of refining, marketing and transportation. He was president and chief executive officer of Chevron Phillips Chemical Company from 2000 to 2006 and served as a member of its Board of Directors. Mr. Gallogly is supported by a senior management team that has extensive operational and financial experience in the chemical, polymers and refining industries. Our senior management team is focused on managing through this current cyclical trough by implementing extensive fixed cost reduction measures, optimal asset utilization and initiatives to increase operational reliability. For more information on our executive officers, see “Item 5. Directors and Executive Officers—Executive Officers.”

 

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Our Strategy

Our principal focus is on reducing our cost structure, improving operations and revenues and realizing the synergies from the December 2007 combination of Lyondell Chemical and Basell. Our efforts are directed by the following key business strategies:

 

   

Operational Excellence. Operational excellence, which includes a commitment to safety, environmental stewardship, and improved reliability, is key to our future success. We believe optimal operations can be achieved through a systematic application of standards and improved maintenance procedures, which is also expected to result in improved personnel and process safety and environmental performance. We continue to set new, stricter operational excellence targets for each of our facilities based on industry benchmarks.

 

   

Cost Reduction / Revenue Enhancement. We are pursuing cost reductions across our system with specific goals, based in large part on benchmarks of industry leading performance. We believe that our worldwide manufacturing scale provides the opportunity to minimize costs per unit, a critical operational measure for petrochemical and refining companies. We will continue to focus on upgrading our customer and product mix to realize premium pricing. By leveraging our leading technological platform, worldwide presence, strong customer relationships and reliability and quality, we also intend to increase our sales of value-added, differentiated products.

 

   

Capital Discipline. Additionally, we remain focused on disciplined capital allocation. We intend to optimize our capital spending to address projects required to enhance reliability and maintain the overall asset portfolio. This includes key maintenance and repair activities (“turnarounds”) in each segment, necessary regulatory and maintenance spending, as well as a limited number of high return debottlenecking and energy reduction projects.

 

   

Portfolio Management. We will also carefully manage our portfolio as demonstrated by the recent closure of certain underperforming assets. We continue to evaluate our asset portfolio and may initiate further rationalization, depending on market conditions.

 

   

Performance-Driven Culture. The benchmarking, goal setting and results measurement previously described as part of the cost reduction and revenue enhancement efforts are central to the new performance driven, accountability culture that we are instilling. We believe we have outstanding people and assets, and with the right performance expectations, can rapidly increase our competitiveness. We have reshaped the management team to initiate a refocused effort around these basic strategic elements.

 

   

Technology-Driven Growth. Our strong, industry leading technologies provide us with a platform for future growth. We intend to continue to improve our operations in the mature, highly sophisticated markets in Europe and North America, and, as our financial condition improves, we plan to grow in quickly developing markets like Asia and regions with access to low cost feedstocks.

 

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Segments

As of December 31, 2009, we began reporting our results of operations based on five business segments through which our operations are managed. These are our reportable segments:

 

   

Refining and Oxyfuels. Our Refining and Oxyfuels segment refines heavy, high-sulfur crude oil in the U.S. Gulf Coast, refines light and medium weight crude oil in southern France and produces oxyfuels at several of our olefin and PO units. Our Houston Refinery is among North America’s largest full conversion refineries capable of processing significant quantities of heavy, high-sulfur crude oil. Our refinery in Berre, France (the “Berre Refinery”) processes light to medium weight crude oils, and provides raw material and site integration benefits to our olefin and polyolefin business in Europe. We are also a significant manufacturer of oxygenated fuels at several facilities within the U.S. and Europe. For the year ended December 31, 2009, our Refining and Oxyfuels segment generated $10,831 million of revenues (excluding inter-segment revenue).

 

   

Olefins and Polyolefins—Americas (“O&P—Americas”). Our O&P—Americas segment produces and markets polyolefins, ethylene and ethylene co-products. We are the largest polypropylene producer, the largest producer of light olefins (ethylene and propylene) and the third largest producer of PE in North America. In addition, we produce significant quantities of high-value specialty products such as Catalloy process resins. For the year ended December 31, 2009, our O&P—Americas segment generated $6,728 million of revenues (excluding inter-segment revenue).

 

   

Olefins and Polyolefins—Europe, Asia, International (“O&P—EAI”). Our O&P—EAI segment produces and markets olefins (ethylene and ethylene co-products) and polyolefins. We are the largest producer of polypropylene and PE in Europe. We are also the largest worldwide producer of PP compounds, a high-value specialty product (global marketing of which is managed in our O&P—EAI segment). We also produce significant quantities of other high-value specialty products such as Catalloy process resins and PB-1. For the year ended December 31, 2009, our O&P—EAI segment generated $9,047 million of revenues (excluding inter-segment revenue).

 

   

Intermediates and Derivatives (“I&D”). Our I&D segment produces and markets PO and its co-products and derivatives, acetyls, ethylene oxide and its derivatives, and flavor and fragrance chemicals. PO co-products include styrene monomer (“SM”) and C4 chemicals (tertiary butyl alcohol (“TBA”), oxyfuels (which is managed in our Refining and Oxyfuels segment), isobutylene and tertiary butyl hydroperoxide (“TBHP”)), and PO derivatives include propylene glycol (“PG”), propylene glycol ethers (“PGE”) and butanediol (“BDO”). We believe that our proprietary PO and acetyls production process technologies provide us with a cost advantaged position for these products and their derivatives. For the year ended December 31, 2009, our I&D segment generated $3,777 million of revenues (excluding inter-segment revenue).

 

   

Technology. Our Technology segment develops and licenses industry leading polyolefin process technologies and provides associated engineering and other services. Our Technology segment further develops, manufactures and sells polyolefin catalysts. We market our process technologies and our polyolefin catalysts to external customers and also use them for our own manufacturing operations. For the year ended December 31, 2009, our Technology segment generated $436 million of revenues (excluding inter-segment revenue).

 

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The following chart sets forth our business segments and key products:

 

Refining and Oxyfuels            

 

O&P—Americas

and

O&P—EAI

 

I&D

  

Technology

Gasoline

Ultra low sulfur diesel

Jet fuel

Lube oils

Gasoline blending

components

–  Methyl tertiary butyl ether (MTBE)

–  Ethyl tertiary butyl ether (ETBE)

 

Alkylate

Vacuum Gas Oil (VGO)

 

Polyolefins

–  Polypropylene

–  High density polyethylene (HDPE)

–  Low density polyethylene (LDPE)

–  Linear low density polyethylene (LLDPE)

–  Propylene-based compounds, materials and alloys (PP compounds)*

–  Catalloy process resins

–  Polybutene-1 (PB-1)*

 

Ethylene and co-products

–  Ethylene

–  Propylene

–  Butadiene

–  Benzene

–  Toluene

 

Ethylene derivatives

–  Ethanol

 

Propylene oxide,
co-products and derivatives

–  Propylene oxide (PO)

–  Styrene monomer (SM)

–  Tertiary butyl alcohol (TBA)

–  Isobutylene

–  Tertiary butyl
hydro-peroxide (TBHP)

–  Propylene glycol (PG)

–  Propylene glycol ethers (PGE)

–  Butanediol (BDO)

 

Acetyls

–  Vinyl acetate monomer (VAM)

–  Acetic acid

–  Methanol

 

Ethylene derivatives

–  Ethylene oxide (EO)

–  Ethylene glycol (EG)

–  EO derivatives

Flavor and fragrance chemicals

  

Polypropylene process technologies

–  Spheripol

–  Spherizone

–  Metocene

 

Polyethylene process technologies

–  Lupotech

–  Spherilene

–  Hostalen

 

Polyolefin catalysts

–  Avant

 

Selected chemical technologies

 

* O&P—EAI only.

 

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Our Corporate and Capital Structure

LyondellBasell Industries N.V. is a public company with limited liability (naamloze vennootschap) incorporated under Dutch law by deed of incorporation dated October 15, 2009. LyondellBasell Industries N.V. was formed to serve as the parent holding company for the remaining subsidiaries of LyondellBasell AF after completion of the Bankruptcy Cases. LyondellBasell AF and 93 of its direct and indirect subsidiaries were Debtors in jointly administered Bankruptcy Cases in the Bankruptcy Court.

Upon the consummation of the Plan of Reorganization, LyondellBasell Industries N.V. became the successor to the combination in December 2007 of Lyondell Chemical and Basell, which created one of the world’s largest private petrochemical companies with significant worldwide scale and leading product positions. Prior to the combination of Lyondell Chemical and Basell, Lyondell Chemical was the third-largest independent, publicly-traded chemical company in North America. It was a leading worldwide manufacturer of chemicals and plastics, a refiner of heavy crude oil and producer of fuel products. Since its spin-off from Atlantic Richfield Company (“ARCO”) in 1985, Lyondell Chemical had grown by strategic acquisitions of, among other assets, certain businesses and/or subsidiaries of ARCO, Millennium Chemicals Inc. (“Millennium Chemicals”), and Occidental Chemical Corporation, a subsidiary of Occidental Petroleum Corporation, as well as the non-Lyondell Chemical shares of joint ventures such as Equistar Chemicals, LP and Houston Refining LP, formerly known as Lyondell-CITGO Refining LP, which owned the Houston Refinery. Prior to the combination of Lyondell Chemical and Basell, Basell was the largest producer of polypropylene and advanced polyolefin products, a leading supplier of PE and catalysts, and the industry leader in licensing polypropylene processes. Basell was formed in September 2000 when BASF AG (“BASF”) and Shell Chemical Company (“Shell”) combined their respective polypropylene businesses with their then-existing PE joint venture.

 

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Refining and Oxyfuels Segment

Overview

Our Refining and Oxyfuels segment refines heavy, high-sulfur crude oil in the U.S. Gulf Coast, refines light and medium weight crude oil in southern France and produces gasoline blending components at several of our olefin and PO units. In 2009, our Refining and Oxyfuels segment generated operating revenues of $10.8 billion (excluding inter-segment revenue).

The Houston Refinery, which is located on the Houston Ship Channel in Houston, Texas, has a heavy, high-sulfur crude oil processing capacity of approximately 268,000 barrels per day on a calendar day basis (normal operating basis), or approximately 292,000 barrels per day on a stream day basis (maximum achievable over a 24 hour period). The Houston Refinery has a Nelson Complexity Index of 11.4. The Houston Refinery is a full conversion refinery designed to refine heavy (16 to 18 degrees API), high-sulfur crude oil. This crude oil is more viscous and dense than traditional crude oil and contains higher concentrations of sulfur and heavy metals, making it more difficult to refine into gasoline and other high-value fuel products. However, this crude oil has historically been less costly to purchase than light, low-sulfur crude oil. Processing heavy, high-sulfur crude oil in significant quantities requires a refinery with extensive coking, catalytic cracking, hydrotreating and desulfurization capabilities, i.e., a “complex refinery.” The Houston Refinery’s complexity enables it to operate in full conversion mode, producing a slate of products that consists primarily of high-value, refined fuel products. The Houston Refinery’s refined fuel products include gasoline (including blendstocks for oxygenate blending), jet fuel and ultra low sulfur diesel. The Houston Refinery’s products also include heating oil, lube oils (industrial lubricants, white oils and process oils), carbon black oil, refinery-grade propylene, petrochemical raw materials, sulfur, residual fuel and petroleum coke. Houston Refining LP became a wholly owned consolidated subsidiary on August 16, 2006.

In April 2008, we acquired the Berre Refinery and related businesses in France from Société des Pétroles Shell. The Berre Refinery is designed to run light to medium sulfur crude oil and has a current capacity of approximately 105,000 barrels per day. It produces naphtha, vacuum gas oil, liquefied petroleum gas, gasoline, aviation fuel, diesel, bitumen and heating oil. The Berre Refinery provides raw material and site integration benefits for our operations in France and supports our polyolefin business in Europe. The Berre Refinery also provides us with access to significant logistics assets, including pipeline access, storage terminals and harbor access to the Mediterranean Sea. The Berre Refinery has a Nelson Complexity Index of 6.7.

The Refining and Oxyfuels segment also includes gasoline blending components such as methyl tertiary butyl ether (“MTBE”), ethyl tertiary butyl ether (“ETBE”) and alkylate. MTBE and ETBE are produced as co-products of the PO and olefin production process at four sites located in Texas, France and The Netherlands. In the fourth quarter of 2009, we completed a project to convert one of our MTBE units at Channelview, Texas to ETBE production. We currently have three sites that can produce either MTBE or ETBE with a combined capacity to produce 59,000 barrels per day of MTBE or ETBE; the Company’s total capacity for MTBE or ETBE production is 75,000 barrels per day. Alkylate is produced at one facility located in Texas.

 

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The chart below shows our position and capacities in key Refining and Oxyfuels businesses:

LOGO

 

Sources: EIA; DeWitt; CMAI; LyondellBasell AF’s internal data

Note: Capacities are as of December 31, 2009. Positions are based on our wholly owned capacity and pro rata share of joint venture capacity.

(1) Thousands of barrels per day
(2) MTBE / ETBE split based on actual production at plants where there is swing capacity between the two fuels

The following table outlines:

 

   

the primary products of our Refining and Oxyfuels segment;

 

   

capacity as of December 31, 2009, unless otherwise noted; and

 

   

the primary uses for those products.

See “Item 3. Properties” for the locations where we produce the primary products of our Refining and Oxyfuels segment.

 

Key Products                                               

  

                 Capacity(1)                

  

Primary Uses

Houston Refinery:

     

Gasoline and components

   120,000 barrels per day    Automotive fuel

Ultra Low Sulfur Diesel

   95,000 barrels per day    Diesel fuel for cars and trucks

Jet Fuel

   25,000 barrels per day    Aviation fuel

Lube Oils

   4,000 barrels per day    Automotive and industrial engine and lube oils, railroad engine additives and white oils for food-grade applications

Berre Refinery:

     

Diesel

   42,000 barrels per day    Diesel fuel for cars and trucks

Cracker Feedstock

   27,000 barrels per day    Raw material for Olefin unit

Fuel Oil

   12,000 barrels per day    Heating fuel

Gasoline

   8,000 barrels per day    Automotive fuel

Bitumen

   7,000 barrels per day    Asphalt

 

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Key Products                                               

  

                 Capacity(1)                

  

Primary Uses

Gasoline Blending Components:

     

MTBE/ ETBE

   75,000 barrels per day(2)    MTBE is a high octane gasoline blending component; ETBE is an alternative gasoline blending component based on agriculturally produced ethanol

Alkylate

   22,000 barrels per day    Alkylate is a high octane gasoline blending component

 

(1) Only certain key products for the Houston Refinery and the Berre Refinery are identified. Thus, the sum of the capacities in this table will not equal either facility’s total capacity.
(2) Represents total combined MTBE and ETBE capacity.

Sales & Marketing / Customers

In 2009, no single Refining and Oxyfuels segment customer accounted for 10% or more of LyondellBasell AF’s total revenues.

In the U.S., we market and sell gasoline (including blendstocks for oxygenate blending), jet fuel, heating oil, ultra low sulfur diesel fuel, lube oils, coke and sulfur produced at the Houston Refinery. These products are sold in large commodity markets. The Houston Refinery evaluates and determines its optimal product output mix, based on market prices and conditions. As a result, we are subject to various risks associated with selling commodity products.

Gasoline sales accounted for 11% of LyondellBasell AF’s total revenues in 2009. The Houston Refinery’s products primarily are sold in bulk on the U.S. Gulf Coast to other refiners, marketers, distributors and wholesalers at market-related prices. Diesel fuel is produced to meet ultra low sulfur specifications for the on-road transportation market. Most of the Houston Refinery’s products are sold under contracts with a term of one year or less or are sold in the spot market. The Houston Refinery’s products generally are transported to customers via pipelines and terminals owned and operated by other parties. Products also are transported via rail car, barge, truck and ocean going vessel. In addition to sales of refined products produced by the Houston Refinery, we also sell refined products purchased or received on exchange from other parties. The exchange arrangements help optimize refinery supply operations and lower transportation costs. To meet market demands, we also from time to time purchase refined products manufactured by others for resale to our customers. However, purchased volumes have not historically had a significant impact on profitability.

In Europe, the Berre Refinery provides a significant portion of the raw materials requirements for our nearby steam cracker. The remaining products are sold into local markets under market-based sales agreements or in the spot market. Key customers of the Berre Refinery include other refiners, marketers and distributors, and its products are primarily transported via pipelines and other infrastructure assets owned by us.

MTBE and ETBE are derivatives of TBA, which is a co-product of the PO produced by our I&D segment. Production levels at the PO/TBA co-product production facilities primarily are determined by the demand for our PO and PO derivatives. Accordingly, the resulting production levels of the TBA derivatives (such as MTBE and ETBE) depend primarily on the demand for PO and PO derivatives and secondarily on the relative market demand for MTBE and ETBE, as well as the operational flexibility of our multiple production facilities in meeting this demand. Separately, MTBE and alkylate are also produced as derivatives of the ethylene co-products produced by our O&P—Americas segment. When necessary, we purchase MTBE for resale to satisfy customer demand for MTBE above our production levels. Volumes of MTBE purchased for resale can vary significantly from period to period. However, purchased volumes have not historically had a significant impact on profitability.

 

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We sell our MTBE and ETBE production under market-based sales agreements and in the spot market. We blend our alkylate into gasoline and also sell alkylate under short-term contracts and in the spot market. Sales of MTBE and ETBE together, and alkylate each accounted for less than 10% of LyondellBasell AF’s total revenues in 2009.

Substantially all refiners and blenders have discontinued the use of MTBE in the U.S., partly as a result of U.S. federal governmental initiatives to increase use of bio-ethanol in gasoline as well as some state legislation to reduce or effectively ban the use of MTBE. However, MTBE/ETBE demand for gasoline blending remains strong within the remaining worldwide market. Accordingly, we are marketing MTBE and ETBE produced in the U.S. for use outside of the U.S. Our European-based MTBE/ETBE plants generally have the flexibility to produce either MTBE or ETBE to accommodate market needs. We produce ETBE in Europe to address Europe’s demand for bio-based fuels.

Recently Japan opted to use ETBE principally as a means of meeting its carbon dioxide reduction commitments under the Kyoto Protocol. We and a partnership representing Japanese refiners have signed a supply contract, which will source a significant portion of Japan’s bio-fuels needs. As a result, we converted our Channelview facility to produce ETBE in the fourth quarter of 2009.

Sales of our MTBE, ETBE and alkylate are made by our marketing and sales personnel, and through distributors and independent agents located in the Americas, Europe, the Middle East, Africa and the Asia Pacific region. We have centralized certain sales and order fulfillment functions in regional customer service centers located in Houston, Texas, Rotterdam, The Netherlands and Hong Kong, China. We also have long-term contracts for distribution and logistics to ensure reliable and efficient supply to our customers. MTBE, ETBE and alkylate are transported by barge, ocean going vessel and tank truck.

Raw Materials

Most of the crude oil used as a raw material for the Houston Refinery is purchased under a crude supply agreement with PDVSA Oil, an affiliate of Petróleos de Venezuela S.A., the national oil company of Venezuela. The contract currently provides for the purchase and supply of 215,000 barrels per day of heavy, high-sulfur crude oil through July 31, 2011. The contract incorporates market-based pricing, which is determined using a formula reflecting published market indices. The pricing formula is designed to be consistent with published prices for similar grades of crude oil.

There are risks associated with reliance on PDVSA Oil for supplies of crude oil and with enforcing the provisions of contracts with companies such as PDVSA Oil that are non-U.S. commercial affiliates of a sovereign nation. For example, currently and from time to time in the past, PDVSA Oil has declared itself in a force majeure situation and has reduced deliveries of crude oil purportedly based on announced production cuts by the Organization of the Petroleum Exporting Countries (“OPEC”). Additionally, it has recently imposed certain credit terms that have effectively shortened the time the Houston Refinery has to pay for crude oil purchased under the contract. Any modification, breach or termination of the crude oil contract, or any interruption in this source of crude oil on its current terms, could adversely affect us. Our crude oil contract with PDVSA Oil is subject to the risk of enforcing contracts against non-U.S. commercial affiliates of a sovereign nation, political, force majeure and other risks.

Most of the crude oil used as a raw material for the Berre Refinery is sourced from North Africa and the Middle East region, Russia and the Caspian Sea region and West Africa.

We purchase our ethanol requirements for the production of ETBE from regional producers and importers in Europe at market-related prices. Additionally, we have entered into a supply contract with a Brazilian ethanol producer to supply a significant portion of the ethanol used for the manufacture of ETBE at our Channelview

 

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facility. For further discussion regarding the raw materials requirements for the production of MTBE, ETBE and alkylate, see “—Intermediates and Derivatives—Raw Materials.”

Industry Dynamics / Competition

The markets for fuel products tend to be volatile as well as cyclical as a result of the changing global economy and changing crude oil and refined product prices. Crude oil prices are impacted by worldwide political events, the economics of exploration and production and refined products demand. Prices and demand for fuel products are influenced by seasonal and short-term factors such as weather and driving patterns, as well as by longer term issues such as the economy, energy conservation and alternative fuels. Industry fuel products supply is dependent on short-term industry operating capabilities and on long-term refining capacity.

With a throughput capacity of approximately 268,000 barrels per day (on a calendar day basis), we believe that the Houston Refinery is among North America’s largest full conversion refineries capable of processing significant quantities of heavy, high-sulfur crude oil.

In North America, we compete for the purchase of heavy, high-sulfur crude oil based on price and quality. Although most of our crude oil supplies are secured under contract with PDVSA Oil, supply disruptions could impact the availability and pricing for heavy, high-sulfur crudes. We compete in gasoline and distillate markets as a bulk supplier of fungible products satisfying industry and government specifications. Competition is based on price and location. Our refining competitors are major integrated oil companies, refineries owned or controlled by foreign governments and independent domestic refiners. Based on published data, as of January 2009, there were 150 operable crude oil refineries in the U.S., and total U.S. refinery capacity was approximately 17.8 million barrels per day.

During 2009, the Houston Refinery processed an average of approximately 244,000 barrels per day of crude oil, representing approximately 1% of all U.S. crude processing capacity.

The differential in price between a representative barrel of benchmark refined petroleum products, such as gasoline or heating oil, and a barrel of benchmark crude oil is known as the “crack spread.” The Maya 2-1-1 crack spread, based on two common industry benchmarks, the West Texas Intermediate (“WTI”), 2-1-1 crack spread and the WTI-Maya differential, represents the differential between one barrel of U.S. Gulf Coast 87 Octane Conventional Gasoline and one barrel of U.S. Gulf Coast No. 2 Heating Oil (high-sulfur diesel), on one hand, and the first month futures price of two barrels of Maya crude oil set by Petroleos Mexicanos (“Pemex”), on the other hand. The Berre Refinery refining spreads generally track the 4-1-2-1 Ural reported benchmark spread. This spread is calculated by adding the price of one barrel of gasoline to the price of two barrels of diesel and one barrel of #6 fuel oil and subtracting the price of four barrels of Mediterranean crude oil. The Berre Refinery provides a significant portion of the raw materials for our nearby olefin cracker. While these benchmark refining spreads are generally indicative of the level of profitability at both the Houston Refinery and the Berre Refinery, there are many other factors specific to each refinery that influence operating results.

We believe that we are the largest producer of MTBE/ETBE worldwide. We compete for sales of MTBE and ETBE with independent MTBE producers worldwide and independent ETBE producers mainly in Europe. The most significant MTBE competitor is Saudi Basic Industries Corp. (“SABIC”), and the most significant ETBE competitors are Repsol, Total, Neste and Braskem. MTBE and ETBE face competition from products such as ethanol and other octane components. Legislative and other actions have eliminated substantially all U.S. demand for MTBE. Therefore, we have been selling our U.S.-produced MTBE and ETBE for use outside of the U.S. We compete with other refiners and olefin manufacturers for sales of alkylate that we do not internally blend into gasoline.

 

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Olefins and Polyolefins Segments Generally

We are the world’s largest producer of polypropylene and PP compounds and a top worldwide producer of PE, ethylene and propylene. We manage our olefin and polyolefin business in two reportable segments, O&P—Americas and O&P—EAI.

 

   

O&P—Americas. Our O&P—Americas segment produces and markets olefins (ethylene and ethylene co-products) and polyolefins. We are the largest producer of polypropylene and light olefins (ethylene and propylene) and the third largest producer of PE in North America. In addition, we produce significant quantities of high-value specialty products such as Catalloy process resins.

 

   

O&P—EAI. Our O&P—EAI segment produces and markets olefins (ethylene and ethylene co-products) and polyolefins. We are the largest producer of polypropylene and PE in Europe and the largest worldwide producer of PP compounds, a high-value specialty product. We also produce significant quantities of other high-value specialty products such as Catalloy process resins and PB-1. Our O&P—EAI segment manages our worldwide PP compounds business, including our facilities in North and South America, manages our worldwide PB-1 business and manages our Catalloy process resins produced in Europe and Asia.

Polyolefins are thermoplastics and comprise approximately two-thirds of worldwide thermoplastics demand. Since their industrial commercialization, thermoplastics have found wide-ranging applications and continue to replace traditional materials such as metal, glass, paper and wood. Our products are used in consumer, automotive and industrial applications ranging from food and beverage packaging to house wares and construction materials. PE is the most widely used thermoplastic, measured on a production capacity basis. We produce high density polyethylene (“HDPE”), low density polyethylene (“LDPE”), linear low density polyethylene (“LLDPE”) and metallocene linear low density polyethylene. Polypropylene is the single largest polyolefin product produced worldwide, and we produce homopolymer, impact copolymer, random copolymer and metallocene polypropylene.

We specialize in several specialty product lines: PP compounds, Catalloy process resins and PB-1, focusing on specialty polyolefins and compounds that offer a wide range of performance characteristics superior to traditional polyolefins. Typical properties of such polyolefins include superior impact-stiffness balance, scratch resistance, soft touch and heat scalability. End uses include automotive and industrial products and materials. PP compounds consist of specialty products produced from blends of polyolefins and additives and are sold mainly to the automotive and white goods industries.

We are the only manufacturer of Catalloy process resins, which are our proprietary products. The Catalloy process resins business focuses on specialty polyolefins that offer a wide range of performance characteristics superior to traditional polyolefins. Catalloy process resins compete with a number of other materials, such as other polypropylene resins, flexible PVC, ethylene propylene rubber and acrylonitrile butadiene styrene (“ABS”), polycarbonate, metals and reinforced polyurethanes.

Sales of ethylene accounted for less than 10% of LyondellBasell AF’s total revenues in 2009. Sales of polypropylene accounted for approximately 13% of LyondellBasell AF’s total revenues in 2009. Sales of PE (HDPE, LDPE and LLDPE, collectively) accounted for 17% of LyondellBasell AF’s total revenues in 2009. Catalloy process resin sales accounted for less than 10% of LyondellBasell AF’s total revenues in 2009.

 

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The charts below show the combined position and annual capacity of our worldwide olefin and polymer businesses:

LOGO

 

Sources: CMAI; LyondellBasell AF’s internal data

Note: Capacities are as of December 31, 2009. Positions are based on wholly owned capacity and pro rata share of joint venture capacity.

LOGO

 

Sources: CMAI; LyondellBasell AF’s internal data

Note: Capacities are as of December 31, 2009. Positions are based on wholly owned capacity and pro rata share of joint venture capacity.

 

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Olefins and Polyolefins—Americas Segment

Overview

Our O&P—Americas segment produces and markets polyolefins, ethylene and ethylene co-products. We are the largest producer of polypropylene and light olefins (ethylene and propylene) and the third largest producer of PE in North America. In addition, we produce significant quantities of high-value specialty products such as Catalloy process resins. In 2009, our O&P—Americas segment generated operating revenues of $6.7 billion (excluding inter-segment revenue).

We currently produce ethylene at five sites in the U.S. The production of ethylene results in co-products such as propylene, butadiene and aromatics, which include benzene and toluene. Ethylene is the most significant petrochemical in terms of worldwide production volume and is the key building block for PE and a large number of other chemicals, plastics and synthetics. Ethylene and its co-products are fundamental to many segments of the economy, including the production of consumer products, packaging, housing and automotive components and other durable and nondurable goods.

We produce polyolefins (PE and polypropylene) at nine sites located in North America and one site located in South America. One of our joint ventures owns the polypropylene facility in Mexico.

Our O&P—Americas segment manufactures Catalloy process resins at two sites in North America.

The following table outlines:

 

   

the primary products of our O&P—Americas segment;

 

   

annual processing capacity as of December 31, 2009, unless otherwise noted; and

 

   

the primary uses for those products.

See “Item 3. Properties” for the locations where we produce the primary products of our O&P—Americas segment. Annual processing capacity as of December 31, 2009 was calculated by estimating the average number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than the capacities set forth below. Capacities shown include 100% of the capacity of joint venture facilities.

 

Product                                         

  

Annual Capacity

  

Primary Uses

Olefins:

     

Ethylene

   9.6 billion pounds(1)    Ethylene is used as a raw material to manufacture polyethylene, EO, ethanol, ethylene dichloride, styrene and VAM

Propylene

   5.5 billion  pounds(1) (2)    Propylene is used to produce polypropylene, acrylonitrile and propylene oxide

Butadiene

   1.1 billion pounds(1)    Butadiene is used to manufacture styrene-butadiene rubber and polybutadiene rubber, which are used in the manufacture of tires, hoses, gaskets and other rubber products. Butadiene is also used in the production of paints, adhesives, nylon clothing, carpets, paper coatings and engineered plastics

Aromatics:

     

Benzene

   195 million gallons(1)    Benzene is used to produce styrene, phenol and cyclohexane. These products are used in the production of nylon, plastics, synthetic rubber and polystyrene. Polystyrene is used in insulation, packaging and drink cups

 

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Product                                         

  

Annual Capacity

  

Primary Uses

Toluene

   40 million gallons(1)    Toluene is used as an octane enhancer in gasoline, as a chemical raw material for benzene and/or paraxylene production and as a core ingredient in toluene diisocyanate, a compound used in urethane production

Polyolefins:

     

Polypropylene

   4.4 billion pounds(3)    Polypropylene is primarily used to manufacture fibers for carpets, rugs and upholstery; house wares; medical products; automotive interior trim, fascia, running boards, battery cases, and bumpers; toys and sporting goods; fishing tackle boxes; and bottle caps and closures

High density polyethylene (HDPE)

   3.3 billion pounds    HDPE is used to manufacture grocery, merchandise and trash bags; food containers for items from frozen desserts to margarine; plastic caps and closures; liners for boxes of cereal and crackers; plastic drink cups and toys; dairy crates; bread trays; pails for items from paint to fresh fruits and vegetables; safety equipment, such as hard hats; house wrap for insulation; bottles for household and industrial chemicals and motor oil; milk, water, and juice bottles; large (rotomolded) tanks for storing liquids such as agricultural and lawn care chemicals; and pipe

Low density polyethylene (LDPE)

   1.3 billion pounds    LDPE is used to manufacture food packaging films; plastic bottles for packaging food and personal care items; dry cleaning bags; ice bags; pallet shrink wrap; heavy-duty bags for mulch and potting soil; boil-in-bag bags; coatings on flexible packaging products; and coatings on paper board such as milk cartons. Ethylene vinyl acetate is a specialized form of LDPE used in foamed sheets, bag-in-box bags, vacuum cleaner hoses, medical tubing, clear sheet protectors and flexible binders

Linear low density polyethylene (LLDPE)

   1.3 billion pounds    LLDPE is used to manufacture garbage and lawn-leaf bags; industrial can liners; house wares; lids for coffee cans and margarine tubs; dishpans, home plastic storage containers, and kitchen trash containers; large (rotomolded) toys like outdoor gym sets; drip irrigation tubing; wire and cable insulating resins and compounds used to insulate copper and fiber optic wiring, and film; shrink wrap for multi-packaging canned food, bag-in-box bags, produce bags, and pallet stretch wrap

Specialty Polyolefins:

     

Catalloy process resins

   600 million pounds    Catalloy process resins are used primarily in modifying polymer properties in film applications and molded products; for specialty films, geomembranes, and roofing materials; in bitumen modification for roofing and asphalt applications; and to manufacture automotive bumpers

Ethylene Derivatives:

     

Ethanol

   50 million gallons    Ethanol is used as a fuel and a fuel additive and in the production of solvents as well as household, medicinal and personal care products

 

(1) Excludes capacities from our Chocolate Bayou, Texas facility which was permanently shut down in early 2009, including 1.12 billion pounds of ethylene, 700 million pounds of propylene, 150 million pounds of butadiene, 105 million gallons of benzene and 26 million gallons of toluene.
(2) Includes (1) refinery-grade material from our U.S. refinery and (2) 1 billion pounds per year of capacity from the product flex unit at the Channelview facility, which can convert ethylene and other light petrochemicals into propylene.
(3) Includes 100% of 1.31 billion pounds of capacity of Indelpro A.A. de C.V. (“Indelpro”). See “—Joint Venture Relationships.” Excludes 800 million pounds of an off-take agreement with ConocoPhillips, which expired on December 31, 2009.

 

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Sales & Marketing / Customers

In 2009, no single external O&P—Americas segment customer accounted for 10% or more of LyondellBasell AF’s total revenues.

We currently produce ethylene at five sites in the U.S. Our ethylene production in the U.S. generally is consumed internally as a raw material in the production of derivatives and polymers, or is shipped by pipeline to customers. In North America, we are a net seller of ethylene.

We currently produce propylene at six sites in the U.S., which includes production from the Houston Refinery’s fluid catalytic cracker coproduct stream. We use propylene as a raw material for production of PO and polypropylene. The propylene production within the U.S. that is not consumed internally is generally sold under multi-year contracts. In North America, we are a net seller of propylene.

We currently produce butadiene or aromatics (benzene and toluene) at two sites in the U.S. We generally sell our butadiene under multi-year contracts. We use the benzene as a raw material for production of styrene; in the U.S., we are a net purchaser of benzene. Our Refining and Oxyfuels business uses the toluene to blend into gasoline. Of the toluene production that is not consumed internally, a majority is sold on a spot basis.

We at times purchase ethylene, propylene, benzene and butadiene for resale, when necessary, to satisfy customer demand for these products above production levels. Volumes of ethylene, propylene, benzene and butadiene purchased for resale can vary significantly from period to period. However, purchased volumes have not historically had a significant impact on profits.

In the U.S., most of the ethylene and propylene production of our Channelview, Corpus Christi and La Porte facilities is shipped via a pipeline system, which has connections to numerous U.S. Gulf Coast consumers. This pipeline system, some of which is owned and some of which is leased, extends from Corpus Christi to Mont Belvieu to Port Arthur, Texas, as well as into the Lake Charles, Louisiana area. In addition, exchange agreements with other ethylene and co-products producers allow access to customers who are not directly connected to this pipeline system. Some ethylene is shipped by rail car from Clinton, Iowa to Morris, Illinois and also to customers. A pipeline owned and operated by an unrelated party is used to transport ethylene from Morris, Illinois to Tuscola, Illinois and is used as a raw material in the production of ethanol. Some propylene is shipped by ocean going vessel. Butadiene, benzene, toluene and other products are distributed by pipeline, rail car, truck, barge or ocean going vessel.

We produce polypropylene at three sites in North America and one site in South America. One of the sites in North America (Mexico) is owned by a joint venture. See “—Joint Venture Relationships.” We manufacture PE using a variety of technologies at six sites in the U.S.

With respect to polypropylene and PE, our production is typically sold to an extensive base of established customers. Our polypropylene and PE product volumes are typically sold to customers under annual contracts or under customary terms and conditions without formal contracts. We sell polypropylene into our PP compounds business, which is managed worldwide by our O&P—EAI segment. We also have a facility in Ohio that produces performance polymer products, which include enhanced grades of PE. We believe that, over a business cycle, average selling prices and profit margins for specialty polymers tend to be higher than average selling prices and profit margins for higher-volume commodity PEs.

The majority of our polyolefin products sold in North America is sold through our sales organization. We have regional sales offices in various locations throughout the U.S. Polyolefins primarily are distributed in North America by rail car or truck.

 

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We manufacture Catalloy process resins at two sites in the U.S. We sell these products into certain specialty applications, including construction, packaging and automotive as well as into our PP compounds business, which is managed in our O&P—EAI segment. Catalloy process resins are transported generally by tank truck and rail car.

Joint Venture Relationships

The following table describes our O&P—Americas segment’s significant manufacturing joint venture relationships.

 

Name

  

Location

  

Other Parties

  

LyondellBasell
Ownership

  

Product

  

2009 Capacity (in
millions of pounds)

Indelpro

   Mexico    Alfa    49%    Polypropylene    1,310(1)

 

(1) Represents the joint venture’s total capacity and not our proportional capacity.

Our Indelpro joint venture in Mexico operates a manufacturing facility with an annual polypropylene capacity of 1.31 billion pounds. We own 49% of this joint venture, and the output of the asset is marketed by the joint venture. Indelpro’s annual capacity includes 770 million pounds produced from our Spherizone process technology. This joint venture provides us with equity distributions and revenues from technology licensing and catalyst sales, as well as geographical diversification.

In addition, we have a limited partnership with Sunoco with respect to our LaPorte, Texas facility. The partnership produces ethylene and propylene. Sunoco’s partnership interest entitles it to 500 million pounds of propylene annually. Our partnership interest entitles us to receive all remaining ethylene and propylene production, as well as other products produced.

Raw Materials

Raw material cost is the largest component of the total cost for the production of ethylene and its co-products. The primary raw materials used are heavy liquids and NGLs. Heavy liquids include crude oil-based naphtha and gas oil, as well as condensate, a very light crude oil resulting from natural gas production (collectively referred to as “heavy liquids”). NGLs include ethane, propane and butane. The use of heavy liquid raw materials results in the production of a significant amount of co-products such as propylene, butadiene, benzene and toluene, as well as gasoline blending components, while the use of NGLs results in the production of a smaller amount of co-products, such as propylene.

The flexibility for a plant to consume a wide range of raw materials has historically provided an advantage over plants that are restricted in their raw material processing capability. Facilities using heavy liquids historically have generated, on average, approximately four cents of additional variable margin per pound of ethylene produced compared to facilities restricted to using ethane. This margin advantage was based on an average of historical data over a period of years and is subject to fluctuations, which can be significant. The costs of producing ethylene from heavy liquids and NGLs can change, based on the relative values of crude oil and natural gas, as well as the relative values of the products generated through the use of those raw materials. For example, at certain of our U.S. ethylene facilities during 2008 and 2009, ethane had a cost advantage reflecting high crude oil prices as compared to NGLs. We have the capability to process significant quantities of either heavy liquids or NGLs, depending upon the relative economic advantage of the alternative raw materials. We estimate that in the U.S. we can process between 40% and 90% NGLs. Changes in the raw material feedstock will result in variances in production capacities among the products.

As described above, our management believes that our raw material flexibility in the U.S. is normally a key advantage in the production of ethylene and co-products. As a result, heavy liquids requirements for these businesses are sourced worldwide via a mix of contractual and spot arrangements. Spot market purchases are

 

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made in order to maintain raw material flexibility and to take advantage of raw material pricing opportunities. NGL requirements for these businesses are purchased via long term and spot contractual arrangements from a variety of sources. A portion of the heavy liquids requirements for these businesses are also obtained from our Refining and Oxyfuels segment. Heavy liquids generally are delivered by ship or barge, and NGLs are generally delivered via pipeline.

In North America, we also purchase large amounts of natural gas to be used for consumption (not as a raw material) in our business via market-based contractual arrangements with a variety of sources.

The principal raw materials used by our polyolefin business are ethylene and propylene. During 2009, our North American ethylene and propylene production exceeded the North American raw material requirements of our O&P—Americas segment. However, not all raw material requirements for ethylene and propylene in this region are sourced internally.

In North America, our Mexican joint venture, Indelpro, receives the majority of its chemical grade and refinery grade propylene needs from Pemex, the state owned oil company of Mexico, under a long-term contract. Our U.S. propylene requirements are produced internally and sourced by a few long-term contracts with third-party suppliers. Propylene not produced internally (on-site at the facility) is delivered via pipeline.

Substantially all of the ethylene and propylene used in our North American PE and polypropylene production is produced internally. Our polyolefin facilities generally can receive their olefins directly from our crackers via our pipeline system, pipelines owned by unrelated parties or on-site production. The PE plant at La Porte is connected by pipeline to facilities of unrelated parties and could receive substantially all of the ethylene via exchanges or purchases.

The raw materials for polyolefins and Catalloy process resins are, in general, commodity chemicals with numerous bulk suppliers and ready availability at competitive prices.

Industry Dynamics / Competition

With respect to olefins and polyolefins, competition is based on price, product quality, product delivery, reliability of supply, product performance and customer service. Industry consolidation in North America has led to fewer, although larger, competitors. Profitability is affected not only by supply and demand for olefins and polyolefins, but also by raw material costs and price competition among producers, which may intensify due to, among other things, the addition of new capacity. In general, demand is a function of worldwide economic growth, which fluctuates. It is not possible to accurately predict the changes in raw material costs, market conditions, capacity utilization and other factors that will affect industry profitability in the future. After a relatively strong start in 2008, demand in late 2008 fell rapidly as the global economies slid quickly into a deep recession. The relatively depressed conditions continued through 2009 and are expected to continue through 2010. We estimate that olefin operating rates in North America were approximately 81% in 2009, and are forecasted to rise to 91% in 2014, while PE and polypropylene operating rates were approximately 80% and 78%, respectively, in 2009, and are forecasted to rise to 89% and 91%, respectively, in 2014. Capacity share figures for us and our competitors, discussed below, are based on completed production facilities and, where appropriate, include our proportionate share of joint venture facilities and certain long-term supply arrangements.

Based on published rated production capacities, we were the second largest producer of ethylene in North America as of December 31, 2009. North American ethylene rated capacity at December 31, 2009 was approximately 74 billion pounds per year, with approximately 79% of that North American capacity located along the Gulf Coast. At December 31, 2009, our ethylene rated capacity in the U.S. was approximately 9.6 billion pounds per year, or approximately 13% of total North American ethylene production capacity. We compete in North America with other large marketers and producers for sales of ethylene and its co-products with Dow, ExxonMobil, International Petroleum Investment Company (“IPIC”), Shell, INEOS, ChevronPhillips, Texas Petrochemicals, Inc. and others.

 

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Based on published data regarding polypropylene capacity, we believe that, including our proportionate share of the joint venture, we are the largest producer of polypropylene in North America as of December 31, 2009, with a proportionate share capacity of 3.3 billion pounds, or approximately 17% of the total North American capacity. Our largest competitors for sales of polypropylene in North America are ExxonMobil, Total, Sunoco, Formosa Plastics Corporation and INEOS.

With respect to PE, we believe that we are the third largest producer of PE in North America as of December 31, 2009, with 5.8 billion pounds per year of capacity, or approximately 13% of North American capacity. Our largest competitors for sales of PE in North America are Dow, ExxonMobil, IPIC, Chevron Phillips, INEOS and Westlake.

 

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Olefins and Polyolefins—Europe, Asia, International Segment

Overview

Our O&P—EAI segment produces and markets olefins (ethylene and ethylene co-products) and polyolefins. We are the largest producer of polypropylene and PE in Europe and the largest worldwide producer of PP compounds, a high-value specialty product. We also produce significant quantities of other high-value specialty products such as Catalloy process resins and PB-1. Our O&P—EAI segment manages our worldwide PP compound business, including our facilities in North and South America, manages our worldwide PB-1 business and manages our Catalloy process resins produced in Europe and Asia. We have eight joint ventures located principally in regions with access to low cost feedstocks or access to growing markets. In 2009, our O&P—EAI segment generated operating revenues of $9.0 billion (excluding inter-segment revenue).

We currently produce ethylene at three sites in Europe and one joint venture site in the Middle East. The production of ethylene results in co-products such as propylene and butadiene. Ethylene is the most significant petrochemical in terms of worldwide production volume and is the key building block for PE and a large number of other chemicals, plastics and synthetics. Ethylene and its co-products are fundamental to many segments of the economy, including the production of consumer products, packaging, housing and automotive components and other durable and nondurable goods.

We produce polyolefins (polypropylene and PE) at 19 facilities internationally, including ten facilities located in Europe, four facilities located in Asia, three facilities located in the Middle East and two facilities located in Australia. In addition, we own a PE facility in Münchsmünster, Germany that is currently being rebuilt following a fire in 2005. Our joint ventures own one of the facilities in Europe, four of the facilities in Asia and three in the Middle East.

PP compounds consist of specialty products produced from blends of polyolefins and additives and are sold mainly to the automotive and white goods industries. We manufacture PP compounds at 15 facilities worldwide (a number of which are the same facilities as the polyolefin facilities described above), consisting of four facilities in Europe, five facilities in Asia, three in North America, two in South America and one facility in Australia. In February 2008, we acquired Solvay Engineered Polymers (“SEP”), a leading supplier of PP compounds in North America. The acquisition included two PP compounding sites in the U.S., one of which was closed after the acquisition. SEP’s primary products include Deflex TPOs, Sequel engineered polyolefins, and Indure engineered polyolefins. The acquisition of SEP complements our existing PP compounds business in North America.

Catalloy process resins are produced using a unique technology and three-step process allowing for very specific tailoring of the product properties that results in a superior range of resins compared to conventional polypropylene. We produce Catalloy process resins at two sites in the EAI region, including one site in The Netherlands and one site in Italy. The process is proprietary technology that is not licensed to third parties, and as a result, we are the only manufacturer of Catalloy process resins.

We produce PB-1 at one facility in Europe. We believe that we are the largest worldwide producer of PB-1, a unique family of highly flexible, strong and durable butene-based polymers. A majority of the current PB-1 we produce is used in pipe applications and for under-floor heating and thermo sanitary systems, where flexibility and creep resistance at high temperature are very important. PB-1 is being developed to target new opportunities in applications such as “easy-open” packaging (seal-peel film), construction, fibers and fabrics, compounds, adhesives and coatings.

The following table outlines:

 

   

the primary products of our O&P—EAI segment;

 

   

annual processing capacity as of December 31, 2009, unless otherwise noted; and

 

   

the primary uses for those products.

 

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See “Item 3. Properties” for the locations where we produce the primary products of our O&P—EAI segment. Annual processing capacity as of December 31, 2009 was calculated by estimating the average number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than the capacities set forth below. Capacities shown include 100% of the capacity of joint venture facilities.

 

Product                                         

  

Annual Capacity

  

Primary Uses

Olefins

     

Ethylene

   6.4 billion pounds(1)    Ethylene is used as a raw material to manufacture polyethylene, EO, ethanol, ethylene dichloride, styrene and VAM

Propylene

   5.4 billion pounds(1)(2)    Propylene is used to produce polypropylene, acrylonitrile and propylene oxide

Butadiene

   550 million pounds(1)    Butadiene is used to manufacture styrene-butadiene rubber and polybutadiene rubber, which are used in the manufacture of tires, hoses, gaskets and other rubber products. Butadiene is also used in the production of paints, adhesives, nylon clothing, carpets, paper coatings and engineered plastics

Polyolefins:

     

Polypropylene

   12.8 billion  pounds(3)(4)    Polypropylene is primarily used to manufacture fibers for carpets, rugs and upholstery; house wares; medical products; automotive interior trim, fascia, running boards, battery cases, and bumpers; toys and sporting goods; fishing tackle boxes; and bottle caps and closures

High density polyethylene (HDPE)

   4.0 billion pounds(4)(5)    HDPE is used to manufacture grocery, merchandise and trash bags; food containers for items from frozen desserts to margarine; plastic caps and closures; liners for boxes of cereal and crackers; plastic drink cups and toys; dairy crates; bread trays; pails for items from paint to fresh fruits and vegetables; safety equipment, such as hard hats; house wrap for insulation; bottles for household and industrial chemicals and motor oil; milk, water, and juice bottles; large (rotomolded) tanks for storing liquids such as agricultural and lawn care chemicals; and pipe

Low density polyethylene (LDPE)

   2.8 billion pounds(4)(6)    LDPE is used to manufacture food packaging films; plastic bottles for packaging food and personal care items; dry cleaning bags; ice bags; pallet shrink wrap; heavy-duty bags for mulch and potting soil; boil-in-bag bags; coatings on flexible packaging products; and coatings on paper board such as milk cartons. Ethylene vinyl acetate is a specialized form of LDPE used in foamed sheets, bag-in-box bags, vacuum cleaner hoses, medical tubing, clear sheet protectors and flexible binders

 

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Product                                         

  

Annual Capacity

  

Primary Uses

Specialty Polyolefins:

     

PP compounds

   2.4 billion pounds(7)    PP compounds are used to manufacture automotive interior and exterior trims, dashboards, bumpers and under-hood applications; base material for products and parts used in appliances; anti-corrosion coatings for steel piping; wire and cable

Catalloy process resins

   600 million pounds    Catalloy process resins are used primarily in modifying polymer properties in film applications and molded products; for specialty films, geomembranes, and roofing materials; in bitumen modification for roofing and asphalt applications; and to manufacture automotive bumpers

PB-1 resins

   110 million pounds    PB-1 resins are used in flexible pipes, resins for seal-peel film, film modification, hot melt and polyolefin modification applications, consumer packaging and adhesives

 

(1) Includes 100% of olefin capacity of SEPC (described below) in Saudi Arabia, which includes 2.2 billion pounds of ethylene and 630 million pounds of propylene. The facility, of which we own 25%, began initial production in the third quarter of 2008.
(2) Includes (1) refinery-grade material from our French refinery; (2) 100% of the 1.015 billion pounds of capacity of the propane dehydrogenation (“PDH”) plant owned by SPC, a polymers joint venture of which we own 25%; and (3) 1.015 billion pounds of capacity from Al-Waha joint venture (described below), of which we currently own 21%.
(3) Includes: (1) 100% of the 1.59 billion pounds of capacity at SPC; (2) 100% of the 800 million pounds of capacity of SunAllomer Ltd. (“SunAllomer”); (3) 100% of the 880 million pounds of capacity of Basell Orlen Polyolefins Sp. Z.o.o. (“Orlen”); (4) 100% of the 990 million pounds of capacity of HMC Polymers Company Ltd. (“HMC”); (5) 100% of the 1.545 billion pounds of capacity of PolyMirae Co. Ltd. (“PolyMirae”); (6) 100% of the 990 million pounds of capacity at Al Waha, which began operations during late 2009; and (7) 550 million pounds of capacity at our Terni, Italy location, which we announced in the first quarter 2010 we are shutting down. See “—Joint Venture Relationships.” Excludes one 240 million pound line located at our Wesseling, Germany site, which was shut down during 2009.
(4) Includes (1) 100% of 880 million pounds of capacity of LDPE manufacturing complex which commenced operations in the second quarter of 2009 that is owned by SEPC, a joint venture of which we own 25% and (2) 880 million pounds of HDPE capacity from SEPC, which began operations in late 2008. Excludes 410 million pounds of LDPE capacity at a site located in Carrington, UK, which was shut down during 2009.
(5) Includes 100% of the 705 million pounds of capacity of Orlen. See “— Joint Venture Relationships.” Excludes 705 million pounds of capacity at a site in Münchsmünster, Germany that is currently being rebuilt following a fire in 2005.
(6) Includes: 100% of the 240 million pounds of capacity of Orlen. Excludes 240 million pounds of capacity at a site located in Fos-sur-Mer, France, which was shut down during 2009. See “—Joint Venture Relationships.”
(7) Includes 100% of the 165 million pounds of capacity of PolyPacific Pty Ltd. (“PolyPacific Pty”), a joint venture of which we own 50%, and 110 million pounds of capacity of SunAllomer, a joint venture of which we own 50%.

 

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Sales & Marketing / Customers

In 2009, no single external O&P—EAI segment customer accounted for 10% or more of LyondellBasell AF’s total revenues.

We currently produce ethylene at one site in France, two sites in Germany, and one joint venture site in the Middle East. Our ethylene production in Germany and France is generally consumed internally as a raw material in the production of polymers. In Western Europe, we are essentially balanced in our ethylene supply and demand.

We currently produce propylene at our olefin plants, including one site in France, two sites in Germany and the three joint venture sites in the Middle East (SPC, Saudi Ethylene & PE Company Ltd. (“SEPC”) and the Al-Waha Petrochemicals Ltd. (“Al-Waha”) venture). In addition, we produce propylene at our Berre Refinery. We use propylene as a raw material for production of PO and polypropylene. In Europe, we are a net purchaser of propylene.

We currently produce butadiene at one site in France and one site in Germany. We generally sell our butadiene under multi-year contracts.

We at times purchase ethylene, propylene, benzene and butadiene for resale, when necessary, to satisfy customer demand for these products above production levels. Volumes of ethylene, propylene, benzene and butadiene purchased for resale can vary significantly from period to period. However, purchased volumes have not historically had a significant impact on profits.

European ethylene and propylene production is generally either fully integrated with, or is transported via pipeline to, our PE and polypropylene facilities in Europe.

We produce polypropylene at nine sites in Europe, four sites in Asia, two sites in Australia and two sites in the Middle East. All of the sites in Asia and the Middle East and one of the sites in Europe (Poland) are owned by a joint venture. See “—Joint Venture Relationships.”

We manufacture PE using a variety of technologies at four sites in Europe, including one joint venture facility in Poland, and at one joint venture site in the Middle East. Also, an HDPE facility in Münchsmünster, Germany is currently being rebuilt following a fire in 2005.

With respect to polypropylene and PE, our production is typically sold to an extensive base of established customers. Our polypropylene and PE product volumes are typically sold to customers under annual contracts or under customary terms and conditions without formal contracts. We believe that, over a business cycle, average selling prices and profit margins for specialty polymers tend to be higher than average selling prices and profit margins for higher-volume commodity polypropylenes.

For the O&P—EAI segment, we typically have exclusive marketing arrangements with our joint venture partners to sell and market polypropylene and PE outside the country where such a joint venture facility is located.

The majority of our polyolefin products sold in Europe is sold through our sales organization. We have three sales channels for polyolefins (Alastian, Direct Sales and Polyolefin Solutions) to distinguish between commodity and specialty business models and allow a focused approach to meet the needs of different buying requirements of our customers. The characteristics of these sales channels are as follows:

 

   

Alastian has a “no-frills” offering for a limited range of commoditized products. All terms of sales are standard, and extra services, including technical service and freight, are charged separately. Prices are posted, and all transactions are highly automated.

 

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Direct Sales offers a broad range of commoditized products and standard services via a direct local sales presence for those customers who value a traditional relationship and sales support.

 

   

Polyolefin Solutions focuses on high growth and high value application segments in the polyolefin market. Through its two business lines and key account management, it offers a full service range and reliable supply and runs a dedicated innovation project team that draws on the expertise and strength of our research and development organization.

Polyolefins primarily are distributed in Europe by rail car or truck.

We and our joint ventures manufacture PP compounds at five sites in Asia (two of which are owned by joint ventures), four sites in Europe, three sites in North America, two sites in South America and one joint venture site in Australia. We manufacture Catalloy process resins at one facility in Italy and one facility in The Netherlands. We also manufacture PB-1 at the facility in The Netherlands.

We sell these high-value specialty polymers into certain specialty applications, including construction and automotive. Advanced polyolefins are transported generally by truck and rail car.

Our marketing and sales force for O&P—EAI segment is involved in sales related activities, including direct sales and customer service. Our regional sales offices are located in various locations, including The Netherlands; China; India; and United Arab Emirates. We also operate through a worldwide network of local sales and representative offices in Europe, North America and the rest of the world (primarily in importing countries) and through an extensive network of commercial representatives in over 50 countries. Our joint ventures typically manage their domestic sales and marketing efforts independently, and we typically operate as their agent/distributor for exports.

Joint Venture Relationships

The following table describes our O&P—EAI segment’s significant manufacturing joint venture relationships.

 

Name

 

Location

 

Other Parties

  LyondellBasell
Ownership
   

Product

  2009 Capacity(1)
(in  millions of pounds)

SPC

  Al-Jubail Industrial   Tasnee   25   Polypropylene   1,590
 

City, Saudi Arabia

      Propylene   1,015

SEPC

  Al-Jubail Industrial   Tasnee, Sahara   25   Ethylene   2,200
  City, Saudi Arabia   Petrochemical     Propylene   630
   

Company

    HDPE   880
        LDPE   880

Al-Waha

  Al-Jubail Industrial   Sahara Petrochemical   21 %(2)    Polypropylene   990
  City, Saudi Arabia   Company and others     Propylene   1,015

HMC

  Thailand   PTT   29   Polypropylene   990

Basell Orlen Polyolefins

  Poland   Orlen   50   Polypropylene   880
        HDPE   705
        LDPE   240

Polypacific

  Australia, Malaysia   Mirlex Pty.   50   PP Compounding   165

SunAllomer

  Japan   Showa Denko,   50   Polypropylene   800
   

Nippon Oil

    PP Compounding   110

Polymirae

  South Korea   Dailem, SunAllomer   42 %(3)    Polypropylene   1,540

 

(1) Represents the joint venture’s total capacity and not our proportional capacity.
(2) Reflects our current ownership percentage. Assuming the joint venture pays dividends over time, we anticipate our ownership will increase to a maximum of 25%.
(3) Reflects our direct (35%) and indirect ownership through SunAllomer.

 

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We have five polypropylene joint ventures, one PE joint venture, one joint venture that produces both polypropylene and PE and one joint venture that only produces PP compounds. Of the eight joint ventures, four are in Asia, three are in the Middle East and one is in Eastern Europe. These joint ventures provide us with additional income streams from cash dividends, licensing revenues, catalyst sales and marketing fees from selling joint venture products, as well as geographical diversification and access to local market skills and expertise. We believe that our technological leadership has enabled us to establish joint ventures in cost advantaged locations and developing regions with higher growth, including the Asia Pacific region and the Middle East. We generally license our polyolefin process technologies and supply catalysts to our joint ventures.

Through our international joint ventures, we intend to leverage our capital and participate in a larger, more diversified mix of projects where the synergies between our worldwide position and the local joint venture party’s strengths can result in improved operations and financial returns. Some of our joint ventures source cost advantaged raw materials from their local shareholders. In the Middle East, our joint venture in Saudi Arabia, SPC, operates a PDH unit and a polypropylene manufacturing facility in Al-Jubail Industrial City with an annual polypropylene capacity of almost 1.6 billion pounds, which includes the 2009 capacity expansion. We own 25% of this joint venture and market approximately 70% of the polypropylene produced annually by the joint venture.

In 2006, we formed two new joint ventures in Saudi Arabia. The first of these, SEPC, is with Tasnee & Sahara Olefins Company (“TSOC”) and has a new integrated PE manufacturing complex operating in Al-Jubail Industrial City in Saudi Arabia. The ethylene cracker began production in the third quarter of 2008. One PE plant is based on our Hostalen process and produces HDPE, and the other is based on our Lupotech T technology and produces LDPE. The HDPE plant began operating in the fourth quarter of 2008 and the LDPE plant commenced operations in the second quarter of 2009. We own 25% of the joint venture, while the remaining 75% is owned by TSOC (which is owned by National Petrochemical Industrialization Company, also known as Tasnee Petrochemicals, our partner in its SPC joint venture, and Sahara Petrochemical Company, our partner in the Al-Waha joint venture).

Our second new joint venture in Saudi Arabia, Al-Waha, began initial production in the third quarter of 2009, operating polypropylene and PDH manufacturing plants in Al-Jubail Industrial City. We own 21% of the joint venture, with 75% owned by Sahara Petrochemical Company and a small percentage by another party. The JV uses our most advanced polypropylene technology, the Spherizone process. We initially are the exclusive marketer for polypropylene produced by the joint venture that is sold outside of Saudi Arabia.

HMC, our joint venture in Thailand with Thai state oil company PTT, operates a polypropylene plant with an annual capacity of 990 million pounds, and is constructing a new PDH plant with an annual capacity of 660 million pounds and a new polypropylene plant using our newest proprietary Spherizone technology with a capacity of 660 million pounds, both of which are expected to start up in 2010. We own 29% of this joint venture.

In Europe, our Orlen joint venture in Poland operates a polyolefin manufacturing facility with an annual polypropylene capacity of 880 million pounds and an annual PE capacity of 945 million pounds, including 705 million pounds of HDPE and 240 million pounds of LDPE. We own 50% of this joint venture and market all of the product sales outside of Poland.

We have a joint venture, PolyPacific Pty., which operates two PP compounding facilities, one in Australia and one in Malaysia, with annual PP compounding capacities of 110 million pounds and 55 million pounds, respectively. We own 50% of this joint venture, and the joint venture markets all of the PP compounds production.

In Japan, we have a joint venture, SunAllomer, which operates two polypropylene facilities with an annual capacity of 800 million pounds and a PP compounding facility with an annual PP compounding capacity of 110 million pounds. We own 50% of this joint venture and market a portion of the polypropylene.

 

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In South Korea, we have a joint venture, PolyMirae, which operates a polypropylene facility with an annual capacity of 1.54 billion pounds. We own 35% of this joint venture and another 7% via our participation in SunAllomer, which holds 15% of PolyMirae.

Raw Materials

Raw material cost is the largest component of the total cost for the production of ethylene and its co-products. The primary raw materials used in our European olefin facilities are heavy liquids and, for our Saudi joint venture facilities, NGLs. NGLs include ethane, propane and butane. The use of heavy liquid raw materials results in the production of a significant amount of co-products such as propylene, butadiene, and gasoline blending components, while the use of NGLs results in the production of a smaller amount of co-products, such as propylene.

The principal raw materials used by our polyolefin and Catalloy process resins businesses are propylene and ethylene. In Western Europe, we have the capacity to produce approximately 50% of the propylene requirements of our European polypropylene business and essentially all of the ethylene requirements of our European PE business. European propylene and ethylene requirements that are not produced internally are purchased pursuant to long-term contracts with third-party suppliers and are delivered via pipeline. Prices under these third-party contracts are market related and are negotiated monthly, and are generally based on published market indicators, normally with discounts.

In our wholly owned operations in Australia, greater than 90% of our propylene normally comes from third-party refinery grade propylene purchased under long-term contracts linked to Saudi or Singapore fuel markers and is processed at our integrated splitters located on each manufacturing site. Some of our international joint ventures receive propylene from their local shareholders under long-term contracts. The remaining supply for the joint ventures is purchased from local suppliers under long-term contracts and some spot purchases. For the new joint ventures, we aim to achieve integration of monomer and polymer production. For example, our first Saudi polyolefin joint venture, SPC, which commenced production in 2004, operates a PDH unit fed with competitively priced propane. The Al-Waha joint venture is based on the same structure, while the SEPC joint venture is based on an integrated complex, including a gas cracker utilizing cost advantaged Saudi Arabian propane and ethane.

The raw materials for polyolefins are, in general, commodity chemicals with numerous bulk suppliers and ready availability at competitive prices.

A significant portion of our raw materials for our PP compounds are polypropylene and other polymers (primarily Catalloy process resins). Our PP compounding facilities generally receive their polypropylene and other polymers directly from one of our wholly owned or joint venture facilities via truck or rail car. In addition, there are four sites (two in Europe, one in North America and one in South America) that have both polypropylene and PP compounding operations co-located, thereby minimizing product handling. PB-1 raw materials are sourced solely from external supply.

Industry Dynamics / Competition

After a relatively strong start in 2008, demand in late 2008 fell rapidly as the global economies slid quickly into a deep recession. The relatively depressed conditions continued through 2009 and are expected to continue into 2010. We estimate that ethylene operating rates for Europe were approximately 80% in 2009, and are forecasted to rise to 90% in 2014, while PE and polypropylene operating rates were each approximately 79% in 2009, and are forecasted to rise to 88% and 86%, respectively, in 2014. Capacity share figures for us and our competitors, discussed below, are based on completed production facilities and, where appropriate, include our proportionate share of joint venture facilities and certain long-term supply arrangements.

 

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Our ethylene rated capacity in Western Europe at December 31, 2009 was approximately 4.2 billion pounds per year, or approximately 8% of the 54 billion pounds per year of total Western Europe ethylene production capacity. Based on these published rated production capacities, we are the seventh largest producer of ethylene in Western Europe. In Western Europe, key ethylene competitors include INEOS, Dow, Polimeri Europa, Total S.A. (“Total”), SABIC, Shell, BASF and ExxonMobil.

Based on published data regarding polypropylene capacity, we believe that we are the largest producer of polypropylene in Western Europe as of December 31, 2009, with 5.4 billion pounds per year of capacity, or approximately 24% of the European capacity for polypropylene. Our largest competitors for sales of polypropylene are Polimeri Europa, Total, SABIC, INEOS and Dow.

With respect to PE, we believe that we are the largest producer of PE in Western Europe as of December 31, 2009, with 4.1 billion pounds per year of capacity, or approximately 12% of capacity for PE (HDPE and LDPE only), based on published data regarding PE capacity. Our largest competitors for sales of PE are INEOS, SABIC, Total, Polimeri Europe, Repsol, ExxonMobil and Dow.

We believe we are the largest PP compounds producer in the world with 2.3 billion pounds (which includes our proportionate share of joint ventures) of installed annual capacity as of December 31, 2009. Approximately 54% of our PP compounding capacity is in Europe, 20% is in North America, and 26% is in the rest of the world (including the capacity of our joint ventures). Our competitors for sales of PP compounds are SABIC, Borealis, ExxonMobil, Washington Penn, Mitsui, A. Schulman, Sumitomo Chemical Co., Ltd. (“Sumitomo”) and many other independent companies.

Our 110 million pound PB-1 capacity competes with a limited number of smaller polybutene producers, of which Mitsui is the largest. The unique balance of flexibility and toughness of PB-1 in this application makes it fit for the high end of the piping market. In the specialty area, PB-1 competes with a number of proprietary and sophisticated polymers, plastomers and elastomers, depending on the specific application.

 

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Intermediates and Derivatives Segment

Overview

Our I&D segment produces and markets PO and its co-products and derivatives, acetyls, ethylene oxide and its derivatives and flavor and fragrance chemicals. PO co-products include SM and C4 chemicals (TBA, oxyfuels (which is managed in the Refining and Oxyfuels segment), isobutylene and TBHP), and PO derivatives include PG, PGE and BDO. We believe that our proprietary PO and acetyls production process technologies provide us with a cost advantaged position for these products and their derivatives. In 2009, our I&D segment generated $3.8 billion of revenues (excluding inter-segment revenue).

Including joint venture facilities, we produce PO, its co-products and derivatives at two sites in Texas, two sites in The Netherlands, one in Japan and one in France. We produce our PO through two distinct technologies based on indirect oxidation processes that yield co-products. One process yields TBA as the co-product; the other process yields SM as the co-product. The two technologies are mutually exclusive, necessitating that a manufacturing facility be dedicated either to PO/TBA or to PO/SM. Isobutylene and TBHP are derivatives of TBA. MTBE and ETBE are other derivatives of TBA and are gasoline blending components reported in our Refining and Oxyfuels segment. PG, PGE and BDO are derivatives of PO. PG collectively refers to mono-propylene glycol (“MPG”), PG meeting U.S. pharmacopeia standards and several grades of dipropylene glycol (“DPG”) and tri-propylene glycol (“TPG”).

We also produce flavor and fragrance chemicals. Facilities in Georgia and Florida manufacture terpene-based fragrance ingredients and flavor ingredients, primarily for the oral care markets. We also supply products for use in a number of other applications, including chemical reaction agents, or initiators, for the rubber industry and solvents and cleaners, such as pine oil, for the hard surface cleaner markets.

The chart below shows our position and capacities in key I&D businesses:

LOGO

 

Sources: CMAI; LyondellBasell AF’s internal data

Note: Capacities are as of December 31, 2009. Positions are based on wholly owned capacity and pro rata share of joint venture capacity.

 

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The following table outlines:

 

   

the primary products of our I&D segment;

 

   

annual processing capacity as of December 31, 2009, unless otherwise noted; and

 

   

the primary uses for those products.

See “Item 3. Properties” for the locations where we produce the primary products of our I&D segment. Annual processing capacity as of December 31, 2009 was calculated by estimating the average number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than the capacities set forth below. Except as indicated, capacities shown include 100% of the capacity of joint venture facilities.

 

Product

 

          Annual Capacity           

 

Primary Uses

Propylene Oxide (PO)

  4.6 billion pounds(1)   PO is a key component of polyols, PG, PGE and BDO

PO Co-Products:

   

Styrene Monomer (SM)

  5.1 billion pounds(2)   SM is used to produce plastics, such as expandable polystyrene for packaging, foam cups and containers, insulation products and durables and engineering resins

TBA Derivative Isobutylene

  1.4 billion pounds(3)   Isobutylene is a derivative of TBA used in the manufacture of synthetic rubber as well as fuel and lubricant additives, such as MTBE and ETBE

PO Derivatives:

   

Propylene Glycol (PG)

  1.2 billion pounds(4)   PG is used to produce unsaturated polyester resins for bathroom fixtures and boat hulls; lower toxicity antifreeze, coolants and aircraft deicers; and cosmetics and cleaners

Propylene Glycol Ethers (PGE)

  545 million pounds(5)   PGE are used as solvents for paints, coatings, cleaners and a variety of electronics applications

Butanediol (BDO)

  395 million pounds   BDO is used in the manufacture of engineering resins, films, personal care products, pharmaceuticals, coatings, solvents and adhesives

Acetyls:

   

Vinyl Acetate Monomer (VAM)

  700 million pounds   VAM is a petrochemical product used to produce a variety of polymers products used in adhesives, water-based paint, textile coatings and paper coatings

Acetic Acid

  1.2 billion pounds   Acetic acid is a raw material used to produce VAM, terephthalic acid (used to produce polyester for textiles and plastic bottles), industrial solvents and a variety of other chemicals

Methanol

  190 million gallons(6)   Methanol is a raw material used to produce acetic acid, MTBE, formaldehyde and several other products

 

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Product

 

          Annual Capacity           

 

Primary Uses

Ethylene Derivatives:

   

Ethylene Oxide (EO)

  0.8 billion pounds EO equivalents; 400 million pounds as pure EO(7)   EO is used to produce surfactants, industrial cleaners, cosmetics, emulsifiers, paint, heat transfer fluids and ethylene glycol

Ethylene Glycol (EG)

  0.7 billion pounds(7)   EG is used to produce polyester fibers and film, polyethylene terephthalate resin, heat transfer fluids and automobile antifreeze

Other Ethylene Oxide Derivatives

  225 million pounds   EO derivatives include ethylene glycol ethers and ethanolamines, and are used to produce paint and coatings, polishes, solvents and chemical intermediates

Other:

   

Flavor and Fragrance Chemicals(8)

    Flavor and fragrance chemicals include terpene-based fragrance ingredients and flavor ingredients, primarily for the oral care markets, and also include products used in applications such as chemical reaction agents, or initiators, for the rubber industry and solvents and cleaners, such as pine oil, for the hard surface cleaner markets

 

(1) Includes (1) 100% of the 385 million pounds of capacity of Nihon Oxirane Co. Ltd. (“Nihon Oxirane”), a joint venture of which we own 40%; (2) 1.5 billion pounds of capacity that represents Bayer Corporation’s (“Bayer”) share of PO production from the Channelview PO/SM I plant and the Bayport, Texas PO/TBA plants under the U.S. PO manufacturing joint venture (the “U.S. PO Joint Venture”) between Lyondell Chemical and Bayer; and (3) 100% of the 690 million pounds of capacity of the Maasvlakte PO/SM plant, which is owned by the European PO manufacturing joint venture (the “European PO Joint Venture”) with Bayer, as to which Bayer has the right to 50% of the production. Our net proportionate interest in PO capacity is approximately 2.5 billion pounds. See “—Joint Venture Relationships.”
(2) Includes (1) approximately 700 million pounds of SM production from the Channelview PO/SM II plant that is committed to unrelated equity investors under processing agreements; (2) 100% of the 830 million pounds of capacity of Nihon Oxirane; and (3) 100% of the 1.5 billion pounds of capacity of the Maasvlakte PO/SM plant. Our net proportionate interest in SM capacity, which includes the European PO Joint Venture with Bayer, is approximately 3.2 billion pounds. See “—Joint Venture Relationships.”
(3) Represents total high-purity isobutylene capacity and purified isobutylene capacity.
(4) PG capacity includes 100% of the approximately 220 million pounds of capacity of Nihon Oxirane. Our net proportionate interest in PG capacity is approximately 1 billion pounds. The capacity stated is MPG capacity. Smaller quantities of DPG and TPG are co-produced with MPG. At our facilities in the U.S. and Europe, these DPG and TPG products are purified and marketed. See “—Joint Venture Relationships.”
(5) Includes 100% of the 110 million pounds associated with a marketing arrangement with Shiny Chemical Co., Ltd. (“Shiny”).
(6) Represents 100% of the methanol capacity at the La Porte, Texas facility, which is owned by La Porte Methanol Company, a partnership owned 85% by us and 15% by Linde AG (“Linde”).
(7) Excludes the Beaumont, Texas facility owned by PD Glycol, a 50/50 partnership between Equistar Chemicals LP and E. I. du Pont de Nemours and Company (“DuPont”). The PD Glycol facility has not operated since it was damaged by Hurricane Ike in 2008 and will not operate in the future.
(8) With respect to flavor and fragrance chemicals, we frequently work closely with customers in developing products to satisfy the specific requirements of those customers, and capacity varies accordingly.

 

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Sales & Marketing / Customers

In 2009, no single I&D segment customer accounted for 10% or more of LyondellBasell AF’s total revenues.

Including joint ventures, we produce PO, its co-products, and its derivatives at two sites in The Netherlands, two sites in the U.S., one site in France and one site in Japan. We estimate, based in part on published data, that worldwide demand for PO was approximately 13.3 billion pounds in 2009. More than 75% of that volume was consumed in the manufacture of three families of PO derivative products: polyols, glycols and glycol ethers. The remainder was consumed in the manufacture of performance products, including BDO and its derivatives.

We produce and deliver our PO and PO co-products through sales agreements, processing agreements and spot sales as well as product exchanges. We have a number of multi-year processing (or tolling) and sales agreements to mitigate the adverse impact of competitive factors and economic business cycles on demand for our PO. In addition, Bayer’s ownership interest in the U.S. PO Joint Venture, which operates four of the U.S. operating units, represents ownership of an in-kind portion of the PO production. Bayer also has the right to 50% of the production of one of the facilities in The Netherlands. See “—Joint Venture Relationships.” Our PO derivatives are sold through market-based sales contracts and spot sales. PO sold in the merchant market accounted for less than 10% of LyondellBasell AF’s total revenues in 2009.

Production levels at the PO/SM and PO/TBA co-product production facilities are primarily determined by the demand for PO and PO derivatives. The resulting production levels of co-product SM and TBA and its derivatives (isobutylene and TBHP), which are reported in the I&D segment, and MTBE and ETBE, (which are reported in the Refining and Oxyfuels segment) thus depend primarily on the demand for PO and PO derivatives and secondarily on the relative market demand for SM, isobutylene, MTBE and ETBE, as well as the operational flexibility of our multiple production facilities in meeting this demand. See “Item 1. Business—Refining and Oxyfuels Segment” for additional information about the production of MTBE and ETBE.

Based on published data, worldwide demand for SM in 2009 is estimated to have been approximately 52 billion pounds. SM accounted for less than 10% of LyondellBasell AF’s total revenues in 2009. We sell most of our SM production into the North American and European merchant markets and to Asian and South American export markets through long-term sales contracts and processing agreements. See “—Joint Venture Relationships.”

We purchase SM for resale, when necessary, to satisfy customer demand for this co-product above co-product production levels. Volumes of SM purchases made for resale can vary significantly from period to period. However, purchased volumes have not historically had a significant impact on profits.

Our I&D segment converts most of its TBA, which is produced as a co-product to the PO process, to isobutylene and sells some of the TBA into the market. Over half of the isobutylene from the I&D segment is reacted with methanol or ethanol to produce MTBE and ETBE, which is marketed by the Refining and Oxyfuels segment. The remaining isobutylene is converted and sold as high purity and purity grade isobutylene by the I&D segment. Isobutylene sales accounted for less than 10% of LyondellBasell AF’s total revenues in 2009.

Sales of our PO, its co-products, and its derivatives are made by us, Nihon Oxirane (a joint venture of which we own 40%) and their affiliates directly, and through distributors and independent agents located in the Americas, Europe, the Middle East, Africa and the Asia Pacific region. We have centralized certain sales and order fulfillment functions in regional customer service centers located in Houston, Texas, Rotterdam, The Netherlands, and Hong Kong, China. We also have long-term contracts for distribution and logistics to ensure reliable and efficient supply to our customers. PO, PG and SM are transported by barge, ocean going vessel, pipeline, rail car and tank truck. BDO is primarily transported by tank truck and rail car.

 

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Acetic acid and vinyl acetate monomer (“VAM”) are manufactured at a facility in La Porte, Texas, and are consumed internally, sold worldwide generally under multi-year contracts and sold on a spot basis. Acetic acid and VAM are shipped by barge, ocean going vessel, pipeline, rail car and tank truck. We have bulk storage arrangements in Europe and South America to better serve our customers’ requirements in those regions. Sales are made through a direct sales force, agents and distributors. Sales of acetyls, including VAM, collectively accounted for less than 10% of LyondellBasell AF’s total revenues in 2009.

We estimate based on published data that worldwide demand in 2009 for acetic acid and VAM was 20 billion pounds and 10 billion pounds, respectively.

Methanol is produced at a La Porte, Texas facility owned by La Porte Methanol Company, our 85%—owned joint venture with Linde. Each party to the joint venture receives its respective share of the methanol production. Our acetyls business uses the methanol as a raw material for acetic acid and also sells the methanol under annual contracts and on a spot basis to large U.S. customers. The product is shipped by barge and pipeline.

Ethyle oxide (“EO”) or EO equivalents, and EO’s primary derivative, ethylene gylcol (“EG”), are produced at a wholly owned facility located in Bayport, Texas. The Bayport facility also produces other derivatives of EO, principally glycol ethers and ethanolamines. A second facility, PD Glycol, was a 50/50 joint venture with DuPont and held an EO/EG asset in Beaumont, Texas. The plant has not operated since it was damaged during Hurricane Ike in September 2008 and will not operate in the future. By order dated August 11, 2009, the Bankruptcy Court approved an agreement between Equistar, PD Glycol and DuPont, which provided, among other things, that (i) certain agreements between Equistar Chemicals LP and PD Glycol are rejected; (ii) Equistar Chemicals LP’s general partnership interest in PD Glycol is converted into a limited partnership interest; and (iii) PD Glycol will be dissolved as expeditiously as commercially practicable.

EO and EG typically are sold under multi-year contracts, with market-based pricing. Glycol ethers and ethanolamines are sold primarily into the solvent and distributor markets at market prices. EO is shipped by rail car, and its derivatives are shipped by rail car, truck, isotank or ocean-going vessel. EO and EG sales accounted for less than 10% of LyondellBasell AF’s total revenues in 2009.

The vast majority of the ethylene derivative products are sold in North America and Asia, primarily through our sales organizations.

Joint Venture Relationships

The following table describes our I&D segment’s significant manufacturing joint venture relationships.

 

Name

  Location   Other Parties   LyondellBasell
Ownership
    Product   2009 Capacity (1)
(in millions of pounds unless noted)

U.S. PO Joint Venture

  Channelview, TX   Bayer        Propylene Oxide   1,500(3)
  Bayport, TX        

European PO Joint Venture

  Rotterdam,

The Netherlands

  Bayer   50   Propylene Oxide

Styrene Monomer

     690

1,480

PO/ SM II LP

  Channelview, TX   IPIC & BASF        Styrene Monomer     700(3)

Nihon Oxirane

  Chiba, Japan   Sumitomo   40   Propylene Oxide      385
        Styrene Monomer      830
        Propylene Glycol      220

Ningbo ZRCC LCC Ltd. (2)

  Ningbo, China   ZRCC   27   Propylene Oxide      600
        Styrene Monomer   1,300

La Porte Methanol

  La Porte, TX   Linde   85   Methanol   190 million gallons

 

(1) Unless otherwise noted, represents the joint venture’s total capacity and not our proportional capacity.
(2) Anticipated startup in mid-2010.
(3) Amount of off-take by other parties in the joint venture.

 

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On March 31, 2000, we contributed our Channelview, Texas, PO/SM I facility and our Bayport, Texas, PO/TBA facilities to the U.S. PO Joint Venture. Bayer’s ownership interest in the U.S. PO Joint Venture represented ownership of 1.5 billion pounds of PO production annually as of December 31, 2009. We take, in-kind, the remaining PO production and all co-product (SM and TBA) production from the U.S. PO Joint Venture. As part of the transaction, Lyondell Chemical and Bayer also formed a separate joint venture, the PO Technology Joint Venture, through which Bayer was granted a non-exclusive and non-transferable right to use certain of our proprietary PO technology in the U.S. PO Joint Venture. Under the terms of operating and logistics agreements, we operate the U.S. PO Joint Venture plants and arrange and coordinate the logistics of PO delivery from the plants. We do not share marketing or product sales with Bayer under the U.S. PO Joint Venture.

Lyondell Chemical and Bayer also formed a separate 50/50 joint venture, the European PO Joint Venture, for the construction and ownership of the Maasvlakte PO/SM plant near Rotterdam, The Netherlands, which began production in 2003. Each party takes in-kind 50% of the PO and SM production of the European PO Joint Venture.

Lyondell Chemical’s PO/SM II plant at the Channelview, Texas complex was created through a joint venture among Lyondell Chemical and unrelated equity investors. Lyondell Chemical retains a majority interest in the PO/SM II plant and is the operator of the plant. A portion of the SM output of the PO/SM II plant is committed to the unrelated equity investors under processing agreements. As of December 31, 2009, Lyondell Chemical had 700 million pounds of SM capacity committed to unrelated equity investors under these processing arrangements.

We have a 40% equity interest in Nihon Oxirane, a joint venture in Japan formed by Lyondell Chemical and Sumitomo. Since 1976, Nihon Oxirane has operated a PO/SM plant in Chiba, Japan. In 2005, Nihon Oxirane began production at its new PG plant in Chiba, Japan, with an annual PG capacity of 220 million pounds. Through the formation of Nihon Oxirane Company Asia (“NOCA”), we also will participate in marketing most of the PO capacity from a new 440 million pound facility constructed in Rabigh, Saudi Arabia by Sumitomo and Saudi Aramco, which began operations at the end of 2009. We have a 40% equity interest in NOCA.

During 2007, Lyondell Chemical announced the formation of a joint venture with Sinopec Zhenhai Refining & Chemical Co., Ltd. (“ZRCC”) for the construction of a world-scale PO/SM facility in Ningbo, China, construction of which was completed in 2010. The new facility has an annual PO production capacity of 600 million pounds and an annual SM production capacity of 1.3 billion pounds. Lyondell Chemical contributed a license right to its proprietary PO/SM technology in exchange for approximately 27% ownership of the venture. We will jointly market all the PO manufactured by the new facility with ZRCC.

We also have a multi-year processing agreement, entered into by Lyondell Chemical and Shiny, whereby we provide the raw materials used to produce the PGE at Shiny’s PGE plant in Tainan, Taiwan. Shiny’s PGE plant, which is based on our technology, commenced production during 2007.

Raw Materials

The primary raw materials used for the production of PO and its co-products and derivatives are propylene, mixed butane, ethylene and benzene. The market prices of these raw materials historically have been related to the price of crude oil and its principal refinery derivatives, NGLs and natural gas, as well as market conditions for these materials. These materials are received in bulk quantities via pipeline or ocean going vessels.

In the U.S., we obtain a large portion of our propylene, benzene and ethylene raw materials needed for the production of PO and its co-products and derivatives internally from our ethylene and ethylene co-products facilities. Raw materials for the non-U.S. production of PO and its co-products and derivatives primarily are obtained from unrelated parties. We consume a significant portion of our internally-produced PO in the production of PO derivatives.

 

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We consume large volumes of mixed butane for the production of PO and its co-products and derivatives. We have invested in facilities, or entered into processing agreements with unrelated parties, to convert the widely available commodity, normal butane, to isobutane. We also are a large consumer of oxygen for our PO/TBA plants.

The cost of raw materials generally is the largest component of total production cost for PO and its co-products and derivatives. Generally, the raw material requirements for these businesses are purchased at market-based prices from numerous suppliers in the U.S. and Europe with which we have established contractual relationships, as well as in the spot market. The raw materials for these businesses are, in general, commodity chemicals with ready availability at competitive prices. Historically, raw material availability has not been an issue. However, in order to enhance reliability and competitiveness of prices and rates for supplies of raw materials, industrial gas and other utilities, we have long-term agreements and other arrangements for a substantial portion of our production requirements.

The primary raw materials required for the production of acetic acid are carbon monoxide and methanol. We purchase the carbon monoxide from Linde pursuant to a long-term contract under which pricing is based primarily on cost of production. La Porte Methanol Company, our 85%-owned joint venture, supplies all of the methanol requirements for acetyls production. Natural gas is the primary raw material required for the production of methanol.

In addition to ethylene, acetic acid is a primary raw material for the production of VAM. For the production of VAM, we obtain our entire requirements for acetic acid and ethylene from our internal production. In 2009, we used a large percentage of our acetic acid production to produce VAM.

Industry Dynamics / Competition

With respect to PO, its co-products and derivatives, competition is based on a variety of factors, including product quality and price, reliability of supply, technical support, customer service and potential substitute materials. Profitability is affected by the worldwide level of demand along with price competition, which may intensify due to, among other things, new industry capacity. From 2010 to 2014, approximately 1.9 billion pounds of new industry PO capacity, or approximately 10% of 2009 worldwide PO capacity, is expected to be added, with approximately half of these additions in the Middle East and China. During this period, the average annual world demand growth is expected to be approximately 4%. However, demand is a function of worldwide economic growth, which fluctuates. The PO demand growth rate also could be impacted by further development of alternative bio-based PO derivatives. It is not possible to predict accurately the changes in raw material costs, market conditions and other factors that will affect industry profitability in the future. After a relatively strong start in 2008, demand in late 2008 fell rapidly as the global economies slid quickly into a deep recession. The relatively depressed conditions continued through 2009 and are expected to continue into 2010. Worldwide PO operating rates were approximately 70% during 2009, and our current forecast is that it will rise to 92% in 2014. Capacity share figures for us and our competitors, discussed below, are based on completed production facilities and, where appropriate, include the proportionate share of joint venture facilities and certain supply arrangements.

Based on published data regarding PO capacity, we believe that, including our share of Nihon Oxirane and the European PO Joint Venture, we are the second largest producer of PO worldwide, with approximately 13% of the total worldwide capacity for PO. Our major worldwide competitors for sales of PO and its derivatives are Dow and Shell.

Based on published data regarding SM capacity, we believe that we are one of the largest producers of SM worldwide, with approximately 5% of the total worldwide capacity for SM as of December 31, 2009. We compete worldwide for sales of SM with many marketers and producers, among which are BASF, Dow, Shell and Total.

We believe that we are the fourth and fifth largest producer of acetic acid and VAM, respectively, each with approximately 5% of the total worldwide capacity as of December 31, 2009. Our primary competitors include Celanese and BP for acetic acid and Celanese, ZRCC, Dow and DuPont for VAM.

 

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Technology Segment

Overview

Access to appropriate production process technology and catalysts is a key requirement for polyolefin and chemicals producers. Our Technology segment develops and licenses industry leading polyolefin process technologies and provides associated engineering and other services. Our Technology segment further develops, manufactures and sells polyolefin catalysts, providing polyolefin manufacturers with the capability to produce polyolefins. We market our process technologies and our polyolefin catalysts to external customers and also use them for our own manufacturing operations. Our ability to offer a complete PE and polypropylene technology portfolio enables polyolefin manufacturers to have a single provider for polyolefin processes technologies and catalyst systems. In 2009, our Technology segment generated operating revenues of $436 million (excluding inter-segment revenue).

Our process licenses are structured to provide a standard core technology, with individual customer needs met by adding customized modules that provide the required capabilities to produce the defined production grade slate and plant capacity. For licenses involving proven technologies, we typically receive the majority of our license fees in cash at or before the date of customer acceptance. For these licenses, we generally recognize revenue upon delivery of the process design package and the related license. Each license agreement includes long-term confidentiality provisions to protect the technology. In addition to the basic license agreement, a range of services can also be provided including project assistance, training, start-up assistance of the plant and possible supply of resins from our production for pre-marketing by the licensee. We may also offer marketing and sales services. In addition, licensees generally continue to purchase polyolefin catalysts that are consumed in the production process, generally under long-term catalyst supply agreements with us.

The chart below shows our position and installed capacity share in key polyolefin technology businesses:

LOGO

 

Source: LyondellBasell AF’s internal estimates

Note: Capacities are as of December 31, 2008.

Process Technology Licensing

We are a leading licensor of polyolefin process technologies. Our polypropylene licensing portfolio includes our Spheripol and the more recently introduced Spherizone process technologies and the Metocene technology. Our PE licensing process portfolio focuses on the Lupotech T (high pressure tubular process for LDPE

 

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production), the Lupotech A (autoclave process mainly for ethylene vinyl acetate (“EVA”) copolymers), Hostalen (slurry process for multimodal HDPE production), and Spherilene (gas phase process for LLDPE to HDPE production) processes, all of which cover a wide range of PE products for the worldwide market. We also license a portfolio of chemical process technologies in the fields of olefin recovery, olefin conversion, aromatics extraction and acetyls.

Since the formation of Basell in 2000 and through December 31, 2009, we have sold licenses representing approximately 25 million tons of polyolefin capacity, which represents more than 40% of worldwide capacity growth. In 2009, we entered into licensing agreements representing more than one million tons of polyolefin capacity. Process licenses accounted for less than 10% of LyondellBasell AF’s total revenues in 2009.

Our Technology segment also provides technology services to our licensees. Such services include training and start-up assistance, engineering services for process and product improvements and manufacturing troubleshooting.

Polypropylene Process Technology

We license several polypropylene process technologies, including Spheripol, Spherizone and Metocene.

Our Spheripol technology produces homopolymers and random copolymers in a single stage and impact copolymers in a multi-stage process. We believe that Spheripol is the most widely used polypropylene production process in the world.

Spherizone, our newest process, commercialized in 2002 and introduced for licensing in 2003, is able to produce higher quality polypropylene and a wider product grade range than existing processes at similar operating cost. The Spherizone process introduces a single reactor concept, in which bimodality is created within one single reactor operating at different conditions between the different zones inside the reactor. The final product is a result of an intimate mixing of the different property determining phases at a “macro molecular” level.

Metocene polypropylene technology was introduced for licensing in 2006. This technology is used in the production of polypropylene based on single-site catalyst systems. Metocene technology can be adapted to virtually any polypropylene process, and its versatility expands the end use product range of conventional polypropylene. In 2009, Polymirae became the first licensee to commence commercial production of Metocene.

Polyethylene Processes Technology

The different families of PE (HDPE, LDPE and LLDPE) require specialized process technologies for production, which are available through our broad PE process licensing portfolio. The portfolio includes Lupotech, Spherilene and Hostalen process technologies.

Lupotech T is a leading high pressure, tubular reactor process for the production of LDPE. This high pressure technology does not use a catalyst system typical for low pressure processes, but rather peroxide-initiators to polymerize ethylene and optionally vinyl acetate (VAM) for EVA-copolymers. By adjusting the temperature profile along the reactor and adding different peroxide mixtures, process conditions are modified to produce the desired products. The process produces the entire melt flow ratio and density range of LDPEs with low investment costs and low utilities and raw material demand.

Lupotech A is a high pressure autoclave process using peroxide mixture for polymerization and is mainly utilized for specialty LDPE and for the production of EVA copolymers with high VAM content.

 

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Spherilene is an advanced swing gas phase process for the production of LLDPE, MDPE and monomodal and bimodal HDPE. This process represents a highly flexible technology platform for production of grades from low-cost commodity to the most sophisticated high performance PE. The process provides easier and lower cost product grade change and reduces environmental impact.

Hostalen is a leading low-pressure slurry cascade process for the production of high-end multimodal HDPE. This is desirable because a different product structure can be produced in each stage of the polymerization process, yielding products that are tailored for sophisticated end use applications in three main application fields: pipe, blow molding and film.

Chemical Process Technologies

We also offer for licensing several chemical process technologies, including Vacido, Glacido, Isomplus and Superflex.

Vacido is a fixed-bed tubular process for the production of high-quality VAM, from acetic acid and ethylene. It utilizes a proprietary heterogeneous catalyst system.

Glacido is a process technology for manufacturing of acetic acid by carbonylation of methanol. It utilizes a Rhodium-based homogeneous catalyst system.

Isomplus is a skeletal isomerisation process to convert linear olefins into branched ones. A zeolite-based catalyst provides conversion of normal butenes and pentenes to isobutylene and isoamylene, respectively.

Superflex technology is a process for the production of propylene from less refined feedstock such as coker or fluid catalytic cracking unit light gasoline as well as mixed C4 and C5 streams. The process is based on a fluidized catalytic reactor.

We also offer process technology for recovery of butadiene, C5 chemicals and aromatics.

Polyolefin Catalysts

Under the Avant brand, we are a leading manufacturer and supplier of polyolefin catalysts. Polyolefin catalysts accounted for less than 10% of LyondellBasell AF’s total revenues in 2009. As a large polyolefin producer, approximately 30% of catalyst sales are inter-divisional. Polyolefin catalysts are packaged and shipped via road, sea or air to our customers.

We produce catalysts at two facilities in Germany, one facility in Italy and one facility in the U.S. Our polyolefin catalysts, which are consumed during the polyolefin production process and define the processing and mechanical properties of polyolefins, provide enhanced performance for our process technologies and are being developed to enhance performance when used in third-party process technologies. We also supply catalysts for producing sophisticated PEs.

One of our core competencies is our strength in the manufacturing and use of proprietary catalyst supports. Supports are a key ingredient in the production of high efficiency polyolefin catalysts that enhance process performance.

Our customers continually purchase polyolefin catalysts because they are consumed during the polyolefin production process. New licensees generally elect to enter into long-term catalyst supply agreements with us, as customers look primarily for top performance over an extended period of time and compatibility with the acquired technology. Our advanced catalysts provide enhanced performance for our process technologies and may also enhance performance when used in third-party processes.

 

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Sales & Marketing

In 2009, no single Technology segment customer accounted for 10% or more of LyondellBasell AF’s total revenues. We market our process technologies and catalysts to external customers and also use them for our own polyolefin manufacturing operations. Our ability to offer both PE and polypropylene technologies enables polyolefin manufacturers to have a single provider for polyolefin processes technologies and catalyst systems. We have a marketing and sales force dedicated to the Technology segment, including catalyst sales and customer technical support for licensees.

Industry Dynamics / Competition

We believe that competition in the polyolefin process licensing industry is based on the quality and efficiency of the process technology, product performance and product application, complemented by customer service and technical support. We are the leading licensor of polypropylene process technologies, and we believe we are the only licensor offering the full range of process technologies for production of all polypropylene and PE product families. Since the formation of Basell in 2000 through December 31, 2009, we have sold licenses representing approximately 25 million tons of capacity based on its six process technologies to polyolefin manufacturers. We estimate that approximately 43% of polypropylene and 35% of PE worldwide licensed capacity from 2003 through 2009 use our technologies. As of December 31, 2009, we estimate that over 200 polyolefin production lines use our licensed process technologies. Our major competitors in polypropylene technologies licensing are Dow Chemical, INEOS, Novelen Technology Holdings and Mitsui Chemicals. Our major competitors in PE technologies licensing are ChevronPhillips, INEOS, Mitsui Chemicals and Univation Technologies.

We are one of the world’s largest manufacturers and suppliers of polypropylene catalysts. We also supply catalysts for producing sophisticated PEs. Our major competitors in the worldwide catalyst business are Dow Chemical, BASF, Mitsui Chemicals, Toho Catalyst and WR Grace.

Research and Development

We develop and commercialize state-of-the-art chemicals and polyolefin process technologies, catalysts and products worldwide.

Our research and development activities are designed to improve our existing products and discover and commercialize new materials, catalysts and processes. These activities focus on product and application development, process development, catalyst development and fundamental polyolefin focused research.

We have four research and development facilities, each with a specific focus. Our facility in Frankfurt, Germany focuses on PE and metallocene catalysts. Our facility in Ferrara, Italy focuses on polypropylene, PB-1, PP compounds and Ziegler-Natta catalysts. Our facility in Cincinnati, Ohio focuses on polyolefin product and application development in North America. Our center in Newtown Square, Pennsylvania develops chemical catalysts and technologies.

Our financial performance and market position depend in substantial part on our ability to improve our existing products and discover and commercialize new materials, catalysts and processes. Our research and development activities are designed to deliver innovative and commercially relevant technologies at a competitive cost to our business segments. Our research and development is organized by core competence communities that manage and provide resources for projects, intellectual property and catalyst manufacturing. These include:

 

   

Catalyst systems: catalyst research to enhance our polyolefin polymer properties, catalyst and process performance, including Ziegler Natta, chromium and metallocene catalyst.

 

   

Manufacturing platforms: research to advance process development and pilot plant integration to industrialize technology with increased polymer properties.

 

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Product and application development: working directly with customers to provide new products with enhanced properties.

 

   

Processing testing and characterization: research to increase knowledge on polymers from production to processability.

 

   

Process design and support: research to reduce production and investment costs while improving processability.

 

   

Chemicals and fuels technologies: research to develop and improve catalysts for existing chemical processes and improve process unit operations.

We have core research and development projects that focus on initiatives in line with our strategic direction. These projects are closely aligned with our businesses and customers with a goal of commercialization of identified opportunities. Core projects currently include research and development in areas such as:

 

   

Polypropylene product development with emphasis on the newly implemented Spherizone process technology.

 

   

Next generation products from existing and in-development processes, using advanced catalyst technologies including metallocenes.

 

   

Enhanced catalyst and process opportunities to extend gas phase PE technology.

 

   

Enhanced catalysts and process opportunities for selected chemical technologies.

As of March 1, 2010, approximately 960 of our employees are directly engaged in research and development activities.

In addition to our research and development activities, we provide technical support to our customers. Our technical support centers are located in Bayreuth, Germany; Geelong, Australia; Lansing, Michigan; and Tarragona, Spain.

In 2009, 2008 and 2007, our research and development expenditures were $145 million, $194 million and $135 million, respectively. A portion of these expenses are related to technical support and customer service and are allocated primarily to the segments.

Intellectual Property

We maintain an extensive patent portfolio and continue to file new patent applications in the U.S. and other countries. As of December 31, 2009, we owned approximately 6,800 patents and patent applications worldwide. Our patents and trade secrets cover our processes, products and catalysts and are significant to our competitive position, particularly with regard to propylene oxide, intermediate chemicals, petrochemicals, flavor and fragrance chemicals, polymers and our process technologies such as Spheripol, Spherizone, Hostalen, Spherilene, Lupotech, Glacido, Vacido, Isomplus and Avant catalyst. We own globally registered and unregistered trademarks including the “LyondellBasell,” “Lyondell,” “Equistar” and “Houston Refining” trade names. While we believe that our intellectual property provides competitive advantages, we do not regard our businesses as being materially dependent upon any single patent, trade secret or trademark. Some of our heritage production capacity operates under licenses from third parties.

We rely on patent, copyright and trade secret laws of the U.S. and other countries to protect our investment in research and development, manufacturing and marketing. Our employees working on these technologies are required to enter into agreements, or are covered by other arrangements such as collective bargaining agreements, providing for confidentiality and the assignment of rights to inventions made by them while employed by us.

 

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Environmental Capital Expenditures

We (together with the industries in which we operate) are subject to extensive national, state, local and foreign environmental laws, regulations, directives, rules and ordinances concerning, and are required to have permits and licenses regulating, emissions to the air, discharges onto land or waters and the generation, handling, storage, transportation, treatment, disposal and remediation of hazardous substances and waste materials. In some cases, compliance with environmental, health and safety laws and regulations can only be achieved by capital expenditures. Regulatory-related capital expenditures at our facilities were $250 million, $202 million and $239 million in 2009, 2008 and 2007, respectively, and we estimate such expenditures to be approximately $233 million in 2010 and $229 million in 2011.

Our actual capital expenditures in 2009 include increased spending on projects related to air emission reductions, low sulfur fuels and wastewater management, principally at the U.S. Gulf Coast plants. Under the U.S. Clean Air Act Amendments (“Clean Air Act”), an eight-county gulf coast region in Texas was designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency (“EPA”). Emission reduction controls were installed at the Houston Refinery and each facility in the region to comply with the November 2007 deadline. Also under the Clean Air Act, the EPA adopted new standards for gasoline that required refiners to produce a low sulfur gasoline by 2006 and ultra low sulfur diesel by the end of 2009. The Houston Refinery met the 2006 low sulfur gasoline compliance target and complied with a requirement to produce 80% of on-road diesel fuel as ultra low sulfur diesel by June 2006.

Stricter environmental, safety and health laws, regulations and enforcement policies could result in increased environmental capital expenditures by us above current estimates. See “Item 1A. Risk Factors—Risks Relating to our Business—Our operations and assets are subject to extensive environmental, health and safety and other laws and regulations, which could result in material costs or liabilities.” For additional information regarding environmentally related capital expenditures, see “Item 2. Financial Information—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Liabilities for Environmental Remediation Costs.”

Employee Relations

As of December 31, 2009, we had approximately 14,860 full-time and part-time employees. Of these, approximately 6,120 (41%) were located in North America, approximately 7,750 (52%) were located in Europe and approximately 990 (7%) were in other locations.

As of December 31, 2009, approximately 930 of our employees located in North America are represented by labor unions. Approximately 50% of our unionized North American employees are covered by a collective bargaining agreement between Houston Refining LP and the United Steelworkers Union, which became effective on January 20, 2010 and expires on January 31, 2012.

The vast majority of our employees in Europe and South America are subject to staff council or works council coverage or collective bargaining agreements.

In addition to our own employees, we use the services of contractors in the routine conduct of our businesses. We believe our relations with our employees are good.

 

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ITEM 1A. RISK FACTORS

You should carefully consider the following risk factors. If any of the possible events described below occur, our business, financial condition or results of operations could be materially and adversely affected.

This Registration Statement also contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of the risks described below and elsewhere in this Registration Statement. See “Item 1. Business,” “Item 2. Financial Information—Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Forward-Looking Statements.”

Risks Relating to Our Bankruptcy Cases and Emergence

Our actual financial results may vary significantly from the projections that were filed with the Bankruptcy Court.

In connection with our disclosure statement relating to the Plan of Reorganization (the “Disclosure Statement”), and the hearing to consider confirmation of the Plan of Reorganization, we prepared projected financial information to demonstrate to the Bankruptcy Court the feasibility of the Plan of Reorganization and our ability to continue operations upon our emergence from the Bankruptcy Cases. This projected financial information has been prepared by, and is the responsibility of, management of LyondellBasell Industries N.V. PricewaterhouseCoopers LLP has neither examined, compiled nor performed any procedures with respect to the accompanying projected financial information and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this document relates to the historical financial information of LyondellBasell A.F. It does not extend to the projected financial information and should not be read to do so. These projections were prepared solely for the purpose of the Bankruptcy Cases and have not been, and will not be, updated on an ongoing basis. These projections are not included in this Registration Statement and have not been incorporated by reference into this Registration Statement and should not be relied upon in connection with the purchase or sale of ordinary shares. At the time they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance and with respect to prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections and/or valuation estimates may prove to be wrong in material respects. Actual results may vary significantly from those contemplated by the projections that were prepared in connection with the Disclosure Statement and the hearing to consider confirmation of the Plan of Reorganization. The projections have not been included in this Registration Statement, are not incorporated by reference in this Registration Statement and should not be relied upon in connection with the purchase or sale of ordinary shares.

Our financial condition and results of operations are not comparable to the financial condition or results of operations reflected in our historical financial statements.

Since April 30, 2010, we have been operating our business under a new capital structure. In addition, as required by fresh-start accounting, at April 30, 2010 our assets and liabilities were recorded at fair value, based on values determined in connection with the implementation of our Plan of Reorganization, which are significantly different than amounts in LyondellBasell AF’s historical financial statements. Accordingly, our financial condition and results of operations from and after the Emergence Date are not comparable to the financial condition or results of operations reflected in LyondellBasell AF’s historical financial statements included elsewhere in this Registration Statement.

The bankruptcy may have affected our relationship with key employees, suppliers, customers and others.

Our bankruptcy may have significantly harmed relationships we have with key customers, joint venture partners, suppliers, employees, hedging counterparties and others. Our ability to attract, motivate and retain key employees and managers also has been affected by the bankruptcy.

 

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Risks Relating to Our Indebtedness

We have a significant level of debt and we could incur additional debt in the future. Our debt could have significant consequences for our business and future prospects.

At June 30, 2010, we have approximately $7.3 billion of total consolidated debt, which represents approximately 42% of our total book capitalization. In addition, we have approximately $526 million of letters of credit outstanding.

Our debt and the limitations imposed on us by our financing arrangements could have significant consequences for our business and future prospects, including the following:

 

   

we may be required to dedicate a substantial portion, or all, of our cash flow from operations to payments of principal and interest on our debt;

 

   

we may not be able to obtain necessary financing in the future for working capital, capital expenditures, acquisitions, debt service requirements or other purposes and we may be required under the terms of those financing arrangements to use the proceeds of any financing we obtain to repay or prepay existing debt;

 

   

we may be exposed to risks inherent in interest rate fluctuations to the extent our borrowings are at variable rates of interest, which would result in higher interest expense in the event of increases in interest rates;

 

   

we could be more vulnerable during downturns in our business and be less able to take advantage of significant business opportunities and to react to changes in our business and in market or industry conditions; and

 

   

we may have a competitive disadvantage relative to our competitors that have less debt.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. Our future cash flows may be insufficient to meet all of our debt obligations and other commitments and any insufficiency could negatively impact our business. To the extent we are unable to repay our indebtedness as it becomes due or at maturity with cash on hand, we will need to refinance our debt, sell assets or repay the debt with the proceeds from equity offerings. Additional indebtedness or equity financing may not be available to us in the future for the refinancing or repayment of existing indebtedness, and we may not be able to complete asset sales in a timely manner sufficient to make such repayments. In that case, we would be unable to make principal and interest payments, and our continued viability would be threatened.

Our interest expense also could increase if interest rates increase because we have significant financings with variable rates, including our Senior Term Loan Facility, U.S. ABL Facility and European Securitization Facility.

We may not be able to generate sufficient cash to service our debt obligations; there can be no assurance that our post-emergence capital resources will be sufficient to meet our working capital requirements.

Our ability to meet our obligations will depend upon our financial and operating performance, which is subject to prevailing economic and competitive conditions and financial, business and other factors beyond our control. We may be unable to maintain a level of cash flows sufficient to permit us to meet our obligations. We have a significant level of debt, and we may incur additional debt in the future. Our debt could have significant consequences for our business and future business prospects.

We finance our ongoing working capital, capital expenditure, debt service and other funding requirements through a combination of cash and cash equivalents, cash flows from operations, borrowings under the U.S. ABL

 

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Facility, the European Securitization and other receivables securitization and financing arrangements. We will need to access the cash flow from our foreign subsidiaries on an efficient basis. At June 30, 2010, we had approximately $3.8 billion of cash and cash equivalents. We currently believe that our liquidity arrangements and cash on hand provide us with sufficient financing to meet our funding requirements, but we are subject to risks attendant to the cyclicality and volatility of our businesses which can materially impact our working capital needs. Among other things, we are subject to risks that our working capital requirements can spike with high oil prices.

If our cash flow from operations and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and we cannot assure you that we would be able to implement such alternative measures on satisfactory terms or at all. Our debt instruments may limit our ability to effect such actions as well.

Failure to comply with covenants or to pay principal of, and interest on, indebtedness when due could result in an acceleration of debt.

A breach of covenants of or the failure to pay principal and interest when due under our debt or other financing could result in a default or cross-default under all or some of those instruments. If any such default or cross-default occurs, the applicable lenders or noteholders may elect to declare all outstanding borrowings, together with accrued interest and other amounts payable thereunder, to be immediately due and payable. In such circumstances, such lenders or noteholders may also have the right to terminate any commitments they have to provide further borrowings, and the counterparties under securitization programs or facilities may be entitled to terminate further purchases of interests in accounts receivable and receive all collections from previously sold interests until they have collected on their interests in those receivables, thus reducing our liquidity. In addition, following such an event of default, lenders or noteholders may have the right to proceed against the collateral granted to them to secure the obligations, which in some cases may include available cash. If the obligations under any material financing arrangement were to be accelerated, it is likely that we would not have, or be able to obtain, sufficient funds to make these accelerated payments, and as a result we could be forced to again file for bankruptcy protection or liquidation.

Our debt or other financing arrangements contain a number of restrictive covenants that impose significant operating and financial restrictions on us. These include covenants restricting, among other things, our ability to: (i) incur, assume or permit to exist indebtedness or guarantees; (ii) incur, assume or permit to exist liens; (iii) make loans and investments; (iv) make external dividends or distributions; (v) engage in mergers, acquisitions, and other business combinations; (vi) prepay, redeem or purchase certain indebtedness; (vii) make dispositions of assets; (viii) engage in transactions with affiliates; and (ix) enter into or permit to exist contractual obligations limiting the ability of certain restricted subsidiaries to make distributions, repay intercompany indebtedness, make loans or sell or transfer any property, in each case to LyondellBasell Industries N.V. or any of its restricted subsidiaries. There also is a minimum fixed charge coverage ratio contained in our U.S. ABL Facility that is applicable if availability under the facility falls below certain levels. We currently are in compliance with all of our covenants; however, the ability to meet financial requirements can be affected by events beyond our control and, over time, these covenants may not be satisfied.

The current instability and uncertainty in the worldwide financial markets have created increased counterparty risk.

We have exposure to various financial institutions under commodity hedging contracts and the risk of counterparty default is currently higher in light of existing capital market and economic conditions. Reduced liquidity or financial losses resulting from exposure to the risk of counterparties could have a material adverse effect on our cash flow and financial condition.

 

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Our disclosure of our liquidity constraints and the Bankruptcy Cases reduced the availability of trade credit.

The public disclosure of our liquidity constraints and the Bankruptcy Cases impaired our ability to maintain normal credit terms with certain of our suppliers. As a result, we have been required to pay cash in advance to certain vendors and have experienced restrictions on the availability of trade credit, which further reduced our liquidity. We believe that since emergence from Chapter 11 on April 30, 2010, our ability to obtain and maintain normal credit terms has improved. However, it is possible that our trade credit will continue to be negatively effected by our having been in bankruptcy.

Risks Relating to Our Business

Disruptions in financial markets and the economic downturn continue to adversely affect our customers, and, therefore, our business.

Our results of operations have been and continue to be materially affected by adverse conditions in the financial markets and depressed economic conditions generally, both in the U.S. and elsewhere around the world. The economic downturn in the businesses and geographic areas in which we sell our products substantially reduced demand for our products and resulted in decreased sales volumes. Recently, concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit and the instability of financial and credit markets in the U.S. and worldwide have contributed to increased volatility and diminished expectations for the global economy and markets. These factors, combined with volatile raw material prices, declining business and consumer confidence, increased unemployment and continuing financial market fluctuations, precipitated a worldwide economic recession that could continue for an extended period of time. The recession adversely affected our business because of a reduction in worldwide demand for our products, in particular from our customers in industrial markets generally and specifically in the automotive and housing industries. As a result of the weaker business environment, we have shut down certain production facilities and performed impairment reviews of our remaining productive assets. These actions resulted in charges of $696 million for asset write-offs, primarily related to a lease rejection, and $228 million for impairment of the carrying value of our investments in certain joint ventures in 2009 and $5,207 million of asset impairments during 2008, including a $4,982 million write-off of all our remaining goodwill in 2008. Additional asset impairments could occur in future periods. Adverse changes in our future estimated operating results could result in non-cash impairment charges in the future related to our assets.

Moreover, many of our customers and suppliers rely on access to credit to adequately fund their operations. Disruptions in financial markets and economic slowdown may adversely impact the ability of our customers to finance the purchase of our products as well as the creditworthiness of those customers. These same factors may also impact the ability and willingness of suppliers to provide us with raw materials for our business.

The cyclicality and volatility of the industries in which we participate may cause significant fluctuations in our operating results.

Our business operations are subject to the cyclical and volatile nature of the supply-demand balance in the chemical and refining industries, and our future operating results are expected to continue to be affected by this cyclicality and volatility. These industries historically have experienced alternating periods of capacity shortages leading to tight supply conditions, causing prices and profit margins to increase, followed by periods when substantial capacity is added, resulting in oversupply, declining capacity utilization rates and declining prices and profit margins. In addition to changes in the supply and demand for products, the volatility these industries experience occurs as a result of changes in energy prices and changes in various other economic conditions around the world. The cyclicality and volatility of the chemical and refining industries results in significant fluctuations in profits and cash flow from period to period and over the business cycles.

The global economic and political environment continues to be uncertain, and a decline in demand could place further pressure on our results of operations. In addition, new capacity additions, especially in Asia and the

 

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Middle East, are expected to lead to another period of oversupply and low profitability. The timing and extent of any changes to currently prevailing market conditions is uncertain and supply and demand may be unbalanced at any time. As a consequence, we are unable to accurately predict the extent or duration of future industry cycles or their effect on our business, financial condition or results of operations, and can give no assurances as to any predictions made herein with respect to the timing, extent or duration of future industry cycles.

As a result of such industry cycles, we may be required to reduce production at or idle certain facilities for an extended period of time or exit a business because of an oversupply of a particular product and/or a lack of demand for that particular product, or high raw material prices, which makes production uneconomical. We may also reduce production at certain of our facilities because we have either fixed or minimum off-take arrangements with joint ventures or third parties with respect to other facilities. Any decision to permanently close facilities or exit a business would result in impairment and other charges to earnings. Temporary outages sometimes last for several quarters or, in certain cases, longer, and could cause us to incur costs, including the expenses of maintaining and restarting these facilities. In addition, even though we may need to reduce production, we may still be required to continue to purchase or pay for utilities or raw materials under take-or-pay supply agreements. It is possible that factors such as increases in raw material costs or lower demand in the future will cause us to reduce operating rates, idle facilities or exit uncompetitive businesses.

Costs and limitations on supply of raw materials and energy may result in increased operating expenses.

The costs of raw materials and energy represent a substantial portion of our operating expenses, and energy costs generally follow price trends of, and vary with the market conditions for, crude oil and natural gas. These price trends may be highly volatile and cyclical. In the past, raw material and energy costs have experienced significant fluctuations that adversely affected our business segments. Moreover, fluctuations in currency exchange rates can add to this volatility.

There have been, and will likely continue to be, periods of time when we are unable to pass raw material and energy cost increases on to customers quickly enough to avoid adverse impacts on our results of operations. Our results of operations have been impacted by the volatility of these costs. Customer consolidation also has made it more difficult to pass along cost increases to customers. Cost increases also may increase working capital needs, which could reduce our liquidity and cash flow. In addition, when raw material and energy costs increase rapidly and are passed along to customers as product price increases, the credit risks associated with certain customers can be compounded. To the extent we increase our product sales prices to reflect rising raw material and energy costs, demand for products may decrease as customers reduce their consumption or use substitute products, which may have an adverse impact on our results of operations. See “—We sell products in highly competitive global markets and face significant price pressures.”

In addition, higher North American and European natural gas prices relative to natural gas cost-advantaged regions, such as the Middle East, could diminish the ability of many chemical producers to compete internationally since the price of natural gas and NGLs affects a significant portion of the industry’s raw materials and energy sources. This environment may cause a reduction in our exports from North America and Europe, and has in the past reduced, and may in the future reduce, the competitiveness of U.S. and European producers. This Middle East production may increase the competition for product sales within North America and Europe with respect to product which could otherwise be sold in other geographic regions if not for such regions’ natural gas cost advantage. This may result in lower margins in North America and Europe in the future.

Furthermore, across our business, there are a limited number of suppliers for some of our raw materials and utilities and, in some cases, the number of sources for and availability of raw materials and utilities is specific to the particular geographic region in which a facility is located. It is also common in the chemical and refining industries for a facility to have a sole, dedicated source for its utilities, such as steam, electricity and gas. Having a sole or limited number of suppliers may result in our having limited negotiating power, particularly in the case of rising raw material costs. Alternatively, where we have multiple suppliers for a raw material or utility, these

 

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suppliers may not make up for the loss of a major supplier. Any new supply agreements we enter into may not have terms as favorable as those contained in our current supply agreements. For some of our products, the facilities or distribution channels of raw material suppliers and utilities suppliers and our production facilities form an integrated system. This is especially true in the U.S. Gulf Coast where the infrastructure of the chemical and refining industries is tightly integrated such that a major disruption of supply of a given commodity or utility can negatively affect numerous participants, including suppliers of other raw materials.

If one or more of our significant raw material or utility suppliers were unable to meet its obligations under present supply arrangements, raw materials become unavailable within the geographic area from which they are now sourced, or supplies are otherwise disrupted, our businesses could suffer reduced supplies or be forced to incur increased costs for our raw materials or utilities, which would have a direct negative impact on plant operations. For example, hurricanes have in the past negatively affected crude oil and natural gas supplies, as well as supplies of other raw materials, utilities (such as electricity and steam), and industrial gases contributing to increases in operating costs and, in some cases, disrupting production. In addition, hurricane-related disruption of vessel, barge, rail, truck and pipeline traffic in the U.S. Gulf Coast area would negatively affect shipments of raw materials and product.

In addition, with increased volatility in raw material costs, our suppliers could impose more onerous terms on us, resulting in shorter payment cycles and increasing our working capital requirements.

External factors beyond our control may cause fluctuations in demand for our products and in our prices and margins.

External factors beyond our control may cause volatility in the price of raw materials and other operating costs, as well as significant fluctuations in demand for our products, and can magnify the impact of economic cycles on our businesses. Examples of external factors include:

 

   

supply of and demand for crude oil and other raw materials;

 

   

changes in customer buying patterns and demand for our products;

 

   

general economic conditions;

 

   

domestic and international events and circumstances;

 

   

competitor actions;

 

   

governmental regulation; and

 

   

severe weather and natural disasters.

Also, we believe that worldwide events have had in recent years, and may continue to have, an impact on our businesses. We currently license our technology to customers in the Middle East and have three joint ventures in Saudi Arabia. We also have offices in Egypt, Dubai and Turkey and third-party commercial representatives throughout the Middle East. The uncertainty surrounding the continuing military action in Iraq and the threat of further armed hostilities or acts of terrorism may impact our businesses in the Middle East or elsewhere, or the businesses of our customers.

In addition, a number of our products are highly dependent on durable goods markets, such as the construction and automotive markets, which also are cyclical and impacted by many of the external factors referenced above. Many of our products are components of other chemical products that, in turn, are subject to the supply-demand balance of both the chemical and refining industries and general economic conditions. The recent volatility of prices for crude oil and natural gas resulted in more volatile raw material and utility costs as compared to prior years. The impact of the factors cited above and others beyond our control may once again contribute to a slowdown in the business cycle or impact economic recovery, reducing demand and lowering operating rates and, ultimately, reducing our profitability.

 

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Further, volatility in costs and pricing can result in commercial disputes with customers and suppliers with respect to interpretations of complex contractual arrangements. Significant adverse resolution of any such disputes also could reduce our profitability.

We sell products in highly competitive global markets and face significant price pressures.

We sell our products in highly competitive global markets. Due to the commodity nature of many of our products, competition in these markets is based primarily on price and to a lesser extent on product performance, product quality, product deliverability, reliability of supply and customer service. As a result, we generally are not able to protect our market position for these products by product differentiation and may not be able to pass on cost increases to our customers.

In addition, we face increased competition from companies that may have greater financial resources and different cost structures or strategic goals than us, such as large integrated oil companies (many of which also have chemical businesses), government-owned businesses, and companies that receive subsidies or other government incentives to produce certain products in a specified geographic region. Increased competition from these companies, especially in our ethylene and refining businesses, could limit our ability to increase product sales prices in response to raw material and other cost increases, or could cause us to reduce product sales prices to compete effectively, which could reduce our profitability. Competitors that have greater financial resources than us may be able to invest significant capital into their businesses, including expenditures for research and development. In addition, specialty products we produce may become commoditized over time.

As a result of these competitive pressures, increases in raw material and other costs may not necessarily correlate with changes in prices for our products, either in the direction of the price change or in magnitude. In addition, our ability to increase product sales prices, and the timing of those increases, are affected by the supply-demand balances for our products, as well as the capacity utilization rates for those products. Timing differences in pricing between rising raw material costs, which may change daily, and contract product prices, which in many cases are negotiated only monthly or less often, sometimes with an additional lag in effective dates for increases, may reduce our profitability. Even in periods during which raw material prices decline, we may suffer decreasing profits if raw material price reductions occur at a slower rate than decreases in the selling prices of our products.

Interruptions of operations at our facilities may result in liabilities or lower operating results.

We own and operate large-scale facilities, and our operating results are dependent on the continued operation of our various production facilities and the ability to complete construction and maintenance projects on schedule. Material operating interruptions at our facilities, including interruptions caused by the events described below, may materially reduce the productivity and profitability of a particular manufacturing facility, or our business as a whole, during and after the period of such operational difficulties. In the past, we had to shut down plants on the U.S. Gulf Coast, including the temporary shutdown of the Houston Refinery, as a result of hurricanes striking the upper Texas coast.

In addition, because the Houston Refinery is our only North American refining operation, an outage at the refinery could have a particularly negative impact on our operating results. Unlike our chemical and polymer production facilities, which may at times have sufficient excess capacity to mitigate the negative impact of lost production at another similar facility of ours, we do not have the ability to increase refining production elsewhere in the U.S. in an effort to mitigate the negative impact on operating results resulting from an outage at the Houston Refinery.

Although we take precautions to enhance the safety of our operations and minimize the risk of disruptions, our operations, along with the operations of other members of the chemical and refining industries, are subject to

 

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hazards inherent in chemical manufacturing and refining and the related storage and transportation of raw materials, products and wastes. These potential hazards include:

 

   

pipeline leaks and ruptures;

 

   

explosions;

 

   

fires;

 

   

severe weather and natural disasters;

 

   

mechanical failure;

 

   

unscheduled downtimes;

 

   

supplier disruptions;

 

   

labor shortages or other labor difficulties;

 

   

transportation interruptions;

 

   

remediation complications;

 

   

chemical and oil spills;

 

   

discharges or releases of toxic or hazardous substances or gases;

 

   

storage tank leaks;

 

   

other environmental risks; and

 

   

terrorist acts.

Some of these hazards may cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations, the shutdown of affected facilities and the imposition of civil or criminal penalties. Furthermore, except for claims that are addressed by the Plan of Reorganization, we also will continue to be subject to present and future claims with respect to workplace exposure, exposure of contractors on our premises as well as other persons located nearby, workers’ compensation and other matters.

We maintain property, business interruption, product, general liability, casualty and other types of insurance, including pollution and legal liability, that we believe are in accordance with customary industry practices, but we are not fully insured against all potential hazards incident to our business, including losses resulting from natural disasters, war risks or terrorist acts. Changes in insurance market conditions have caused, and may in the future cause, premiums and deductibles for certain insurance policies to increase substantially and, in some instances, for certain insurance to become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, we might not be able to finance the amount of the uninsured liability on terms acceptable to us or at all, and might be obligated to divert a significant portion of our cash flow from normal business operations.

Further, because a part of our business involves licensing polyolefin process technology, our licensees are exposed to similar risks involved in the manufacture and marketing of polyolefins. Hazardous incidents involving our licensees, if they do result or are perceived to result from use of our technologies, may harm our reputation, threaten our relationships with other licensees and/or lead to customer attrition and financial losses. Our policy of covering these risks through contractual limitations of liability and indemnities and through insurance may not always be effective. As a result, our financial condition and results of operation would be adversely affected, and other companies with competing technologies may have the opportunity to secure a competitive advantage.

 

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Our crude oil supply agreement with PDVSA Oil is subject to the risk of enforcing contracts against non-U.S. commercial affiliates of a sovereign nation and political, force majeure and other risks.

Our crude oil supply agreement with PDVSA Oil provides for the purchase and supply of 215,000 barrels per day of heavy, high sulfur crude oil (approximately 81% of the refining capacity at the Houston Refinery). The contract runs through July 31, 2011. There are risks associated with reliance on PDVSA Oil for supplies of crude oil and with enforcing the provisions of contracts with companies such as PDVSA Oil that are non-U.S. commercial affiliates of a sovereign nation. For example, currently and from time to time in the past, PDVSA Oil has declared itself in a force majeure situation and subsequently reduced deliveries of crude oil purportedly based on announced OPEC production cuts. All of the crude oil supplied by PDVSA Oil under the crude oil contract is produced in Venezuela, and it is impossible to predict how governmental policies may change under the current or any subsequent Venezuelan government. In addition, there are risks associated with enforcing judgments of U.S. courts against entities whose assets are located outside of the U.S. and whose management does not reside in the U.S. Any modification, breach or termination of the crude oil contract, or any interruption in this source of crude oil on its current terms, may adversely affect us, as alternative crude oil supplies with similar margins may not always be available for purchase and may require modifications to the Houston Refinery that may result in significant costs or down time. In addition, the Venezuelan government has in recent times taken control of assets of foreign firms. As these firms pursue international arbitration awards as a result of these takings, our crude supply from PDVSA Oil could be threatened or interrupted by any awards in favor of these foreign firms that contemplate confiscation of PDVSA Oil crude supplies.

Certain activities related to a project raise compliance issues under U.S. law.

We have identified an agreement related to a project in Kazakhstan under which a payment was made in late 2008 that raises compliance concerns under the U.S. Foreign Corrupt Practices Act (the “FCPA”). We have engaged outside counsel to investigate these activities, under the oversight of a special committee established by the Supervisory Board, and to evaluate internal controls and compliance policies and procedures. We made a voluntary disclosure of these matters to the U.S. Department of Justice in late 2009 and are cooperating fully with that agency. We cannot predict the ultimate outcome of this matter at this time or whether we will discover other matters raising compliance issues, including under other statutes. In this respect, we may not have conducted our business in compliance with the FCPA and may not have had policies and procedures in place adequate to ensure compliance. We cannot reasonably estimate any potential penalty that may arise from these matters. We are in the process of adopting and implementing more stringent policies and procedures designed to ensure compliance. We cannot predict the ultimate outcome of this matter at this time since our investigations are ongoing. Violations of these laws could result in criminal and civil liabilities and other forms of relief that could be material to us.

Our non-U.S. operations conduct business in countries subject to U.S. economic sanctions and certain activities raise compliance issues under U.S. law.

Certain of our non-U.S. subsidiaries conduct business in countries subject to U.S. economic sanctions, including Iran. U.S. laws and regulations prohibit U.S. persons from engaging in business activities, in whole or in part, with sanctioned countries, organizations and individuals. The U.S. Congress has adopted legislation that could, in certain circumstances, result in the imposition of sanctions on U.S. and non-U.S. entities doing business with Iran. We intend to comply with all applicable sanctions laws and regulations and are adopting certain more significant compliance policies and procedures.

In addition, our management has made the decision to cease all business with the government, entities and individuals in Iran and is working with regulatory authorities to implement its decision.

These business activities present a potential risk that could subject the company to civil and criminal penalties. In connection with our continuing review of compliance risks in this area, we made a voluntary disclosure of these matters to the U.S. Treasury Department and intend to continue cooperating fully with that

 

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agency. We cannot predict the ultimate outcome of this matter at this time because our investigations are ongoing. Violations of these laws could result in criminal and civil liabilities and other forms of relief that could be material to us.

We are addressing certain significant deficiencies with respect to our internal controls.

In connection with our ongoing internal control reviews during the second half of 2009, our management identified three significant deficiencies in our internal control process. These deficiencies related to (i) segregation of duties related to freight contracting at our Houston Refinery, (ii) supervision and training of our internal accounting staff with respect to recording of our equity investments in joint ventures and (iii) inadequate support for review and reconciliation of a consolidation entry. We are remediating these deficiencies through changes in personnel; improved training; changes from manual to automated controls; and implementation of additional control procedures. These deficiencies did not have a material impact on our financial results or operations; however, there can be no assurance that we will not identify internal control deficiencies in the future or that any such identified deficiencies will not have a material impact on our operating results or financial statements.

Our operations could be adversely affected by labor relations.

Approximately 930 of our employees located in North America and the vast majority of our employees located in Europe and South America are represented by labor unions and work councils. Our operations have been in the past, and may be in the future, significantly and adversely affected by strikes, work stoppages and other labor disputes. Approximately 50% of our unionized North American employees are covered by a collective bargaining agreement between Houston Refining LP and the United Steelworkers Union, which became effective on January 20, 2010 and expires on January 31, 2012.

Our operations and assets are subject to extensive environmental, health and safety and other laws and regulations, which could result in material costs or liabilities.

We cannot predict with certainty the extent of future liabilities and costs under environmental, health and safety and other laws and regulations and whether any such liabilities and costs will be material. We also may face liability for alleged personal injury or property damage due to exposure to chemicals or other hazardous substances at our current or former facilities or chemicals that we manufacture, handle or own. In addition, because our products are components of a variety of other end-use products, we, along with other members of the chemical industry, are inherently subject to potential claims related to those end-use products. Although claims of the types described above have not historically had a material impact on our operations, a substantial increase in the success of these types of claims could result in the expenditure of a significant amount of cash by us to pay claims, and could reduce our operating results.

We (together with the industries in which we operate) are subject to extensive national, regional, state and local environmental laws, regulations, directives, rules and ordinances concerning, and are required to have permits and licenses regulating, emissions to the air, discharges onto land or surface waters or into groundwater and the generation, handling, storage, transportation, treatment, disposal and remediation of hazardous substances and waste materials. Many of these laws and regulations provide for substantial fines and potential criminal sanctions for violations, and such permits and licenses are subject to renewal, modification and in some circumstances, revocation. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, some of these laws and regulations require us to meet specific financial responsibility requirements. We generally expect that regulatory controls worldwide will become increasingly more demanding, including lower ozone ambient air standards in the U.S. and additional requirements related to climate change in the U.S. and other areas of the world where we operate, but cannot accurately predict future developments, such as increasingly strict environmental laws, and inspection and enforcement policies, as well as higher compliance costs, which might affect the handling, manufacture, use, emission or disposal of products,

 

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other materials or hazardous and non-hazardous waste. Stricter environmental, safety and health laws, regulations and enforcement policies could result in increased costs and liabilities to us or limitations on our operations, and could subject our handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than at present.

For example, under the European Union (“EU”) Integrated Pollution Prevention and Control Directive (“IPPC”), EU Member State governments are to adopt rules and implement an environmental permitting program relating to air, water and waste for individual facilities. While the EU countries are at varying stages in their respective implementation of the IPPC permit program, we have submitted all necessary IPPC permit applications required to date, and in some cases received completed permits from the applicable government agency. However, we do not know with certainty what future IPPC permits will require, or the costs of compliance with the IPPC permit program. The EU also has passed legislation governing the registration, evaluation and authorization of chemicals (Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals, or “REACH”). Under REACH, we are required to register chemicals and gain authorization for the use of certain substances. As an importer of chemicals and materials from outside the EU, we are subject to additional registration obligations. Legislation or rulings similar to REACH may also be adopted outside the EU Member States, which could add to our obligations. Some risk of environmental costs and liabilities is inherent in our operations and products, and there is no assurance that material costs and liabilities will not be incurred.

Environmental laws may have a significant effect on the nature and scope of cleanup of contamination at current and former operating facilities and at other sites at which hazardous substances generated by our current or former subsidiaries were disposed, the costs of transportation and storage of raw materials and finished products and the costs of the storage and disposal of wastewater. In the U.S., the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (“CERCLA”) may impose joint and several liability for the costs of remedial investigations and cleanup actions, as well as damages to natural resources, on the entities that generated hazardous substances, arranged for disposal of the hazardous substances, transported to or selected the disposal sites and the past and present owners and operators of such sites. All such responsible parties (or any one of them, including us) may be required to bear all of such costs regardless of fault, the legality of the original disposal or ownership of the disposal site. Under the EU Environmental Liability Directive, EU Member States may require the remediation of soil and groundwater contamination in certain circumstances, under the “polluter pays principle.” The scope of events and circumstances that could trigger remediation requirements and the level of remediation required vary from Member State to Member State. Similar environmental laws and regulations that have been or may be enacted in other countries outside of the U.S. may impose similar liabilities and costs upon us.

We also have liabilities under the U.S. Resource Conservation and Recovery Act and various U.S. state and non-U.S. government regulations related to several current and former plant sites. Some of our manufacturing sites have an extended history of industrial chemical manufacturing and use, including on-site waste disposal. We are aware of soil, groundwater and surface water contamination at some of our sites, and we may find contamination at other sites in the future. It is anticipated that corrective measures will be necessary to comply with federal and state requirements with respect to some of these facilities. We also are responsible under applicable environmental laws for a portion of the remediation of certain off-site waste disposal facilities. Prior to the filing of the Bankruptcy Cases, we contributed funds to the cleanup of several waste sites throughout the U.S. under CERCLA. We also have been named as a Potentially Responsible Party (“PRP”) under CERCLA or similar laws at several other sites. Our policy is to accrue remediation expenses when it is probable that such efforts will be required and the related expenses can be reasonably estimated. Estimated costs for future environmental compliance and remediation are necessarily imprecise due to such factors as the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites, uncertainties relating to the choice and cost of remedial actions at various sites and the allocation of costs among the potentially responsible parties under applicable statutes. If actual expenditures exceed the amounts accrued, that could have an adverse effect on our results of

 

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operations and financial position. For further discussion regarding environmental matters and related accruals, see “Item 1. Business—Environmental Capital Expenditures,” Note 25 to the Consolidated Financial Statements of LyondellBasell AF for the year ended December 31, 2009 and Note 16 to the unaudited Consolidated Financial Statements of LyondellBasell N.V. for the quarter ended June 30, 2010.

In addition to the matters described above, we are subject to other material regulatory requirements that could result in higher operating costs, such as regulatory requirements relating to the security of our facilities, and the transportation, exportation or registration of our products. Although we have compliance programs and other processes intended to ensure compliance with all such regulations, we are subject to the risk that our compliance with such regulations could be challenged. Non-compliance with certain of these regulations could result in the incurrence of additional costs, penalties or assessments that could be material.

We may incur substantial costs to comply with, and demand for our products may be reduced by, climate change legislation and regulatory initiatives.

There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (“GHG”) reduction. These proposed or promulgated laws apply or could apply in countries where we have interests or may have interests in the future. After the international meetings in Copenhagen, laws in this field continue to evolve and, while they are likely to be increasingly widespread and stringent, at this stage it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation.

Within the framework of EU emissions trading, we were allocated certain allowances of carbon dioxide per year for the affected plants of our European sites for the 2005 to 2007 period. For the second trading period (2008 to 2012), a number of our chemical plants are included in the Europe-wide trading system. We expect to incur additional costs as a result of the existing emissions trading scheme and could incur additional costs in relation to any future carbon or other greenhouse gas emission trading schemes. The costs could be higher to the extent that we decide to sell credits that we need in the future.

In the U.S., the EPA recently issued its final endangerment finding that is expected to lead to the agency promulgating federal GHG regulations and emissions limits under the Clean Air Act, even without Congressional action. The EPA has issued mandatory GHG reporting requirements which could lead to further obligations. The recent EPA action could be a precursor to further federal regulation of carbon dioxide emissions and other greenhouse gases, and may affect the outcome of other climate change lawsuits pending in United States federal courts in a manner unfavorable to our industry. In any event, some form of regulation is likely to be forthcoming at the United States federal level or the state level with respect to GHG emissions, and such regulation could result in the creation of additional costs in the form of taxes or required acquisition or trading of emission allowances.

Compliance with these or other changes in laws, regulations and obligations that create a GHG emissions trading scheme or GHG reduction policies generally could significantly increase our costs or reduce demand for products we produce. Depending on the nature of potential regulations and legislation, any future laws and regulations could result in increased compliance costs or additional operating restrictions, and could have a material adverse effect on our business and results of operations.

Legislative and other actions have eliminated substantially all U.S. demand for MTBE.

Substantially all refiners and blenders have discontinued the use of MTBE in the U.S., partly as a result of U.S. federal governmental initiatives to increase use of bio-ethanol in gasoline as well as some state legislation to reduce or ban the use of MTBE. Accordingly, we are marketing our U.S.-produced MTBE for use outside of the U.S. However, there are higher distribution costs and import duties associated with exporting MTBE outside the U.S., and the increased supply of MTBE may reduce profitability of MTBE in these export markets. Our U.S.-

 

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based and European-based MTBE plants generally have the flexibility to produce either MTBE or ETBE to accommodate market needs. We produce and sell ETBE to accommodate growing demand for bio-based fuels in Europe, Japan and elsewhere in the world. There is a risk that such markets may ban or stop the use of MTBE or ETBE. As a result, we may, in the future, be required to produce an alternative gasoline blending component to either MTBE or ETBE, the profit contribution of which may be significantly lower than that historically realized on MTBE or ETBE.

Our international operations are subject to exchange rate fluctuations, exchange controls, political risks and other risks relating to international operations.

We have substantial international operations, which are subject to the risks of doing business on a global level, including fluctuations in currency exchange rates, transportation delays and interruptions, war, terrorist activities, epidemics, pandemics, political and economic instability and disruptions, restrictions on the transfer of funds, the imposition of duties and tariffs, import and export controls, changes in governmental policies, labor unrest and current and changing regulatory environments. These events could reduce the demand for our products, decrease the prices at which we can sell our products, disrupt production or other operations, require substantial capital and other costs to comply, and/or increase security costs or insurance premiums, all of which could reduce our operating results. In addition, we obtain a substantial portion of our principal raw materials from international sources that are subject to these same risks. Our compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject could be challenged. Furthermore, these laws may be modified, the result of which may be to prevent or limit subsidiaries from transferring cash to us. For geographic data, see Note 29 to the Consolidated Financial Statements of LyondellBasell AF for the year ended December 31, 2009.

Furthermore, we may experience difficulty enforcing agreements in certain jurisdictions. In jurisdictions where bankruptcy laws and practices may vary, we may experience difficulty collecting receivables through the applicable legal systems. We are subject to certain existing, and may be subject to possible future, laws that limit or may limit our activities while some of our competitors may not be subject to such laws, which may adversely affect our competitiveness.

In addition, we generate revenues from export sales and operations that may be denominated in currencies other than the relevant functional currency. Exchange rates between these currencies and functional currencies in recent years have fluctuated significantly and may do so in the future. Future events, which may significantly increase or decrease the risk of future movement in currencies in which we conduct our business, cannot be predicted. We also may hedge certain revenues and costs using derivative instruments to minimize the impact of changes in the exchange rates of those currencies compared to the respective functional currencies. It is possible that fluctuations in exchange rates will result in reduced operating results.

Significant changes in pension fund investment performance or assumptions relating to pension costs may adversely affect the valuation of pension obligations, the funded status of pension plans, and our pension cost.

Our funding policy for pension plans is to accumulate plan assets that, over the long run, will approximate the present value of projected benefit obligations. Our pension cost is materially affected by the discount rate used to measure pension obligations, the level of plan assets available to fund those obligations at the measurement date and the expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets may result in corresponding increases and decreases in the valuation of plan assets, particularly equity securities, or in a change of the expected rate of return on plan assets. Any change in key actuarial assumptions, such as the discount rate, would impact the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following fiscal years. Certain of our current pension plans are underfunded. As of December 31, 2009, our pension plans were underfunded by $1,140 million. Any declines in the fair values of the pension plans assets could require additional payments by us in order to maintain specified funding levels.

 

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Our pension plans are subject to legislative and regulatory requirements of applicable jurisdictions, which could include, under certain circumstances, local governmental authority to terminate the plan. See Note 23 to the Consolidated Financial Statements of LyondellBasell AF for the year ended December 31, 2009 and Note 13 to the unaudited Consolidated Financial Statements of LyondellBasell N.V. for the quarter ended June 30, 2010.

Many of our businesses depend on our intellectual property. Our future success will depend in part on our ability to protect our intellectual property rights, and our inability to do so could reduce our ability to maintain our competitiveness and margins.

We have a significant worldwide patent portfolio of issued and pending patents. These patents, together with proprietary technical know-how, are significant to our competitive position, particularly with regard to PO, performance chemicals, petrochemicals, flavor and fragrance chemicals, and polymers, including process technologies such as Spheripol, Spherizone, Hostalen, Spherilene, Lupotech T and Lupotech G and Avant catalyst family technology rights. We rely on the patent, copyright and trade secret laws of the U.S. and other countries to protect our investment in research and development, manufacturing and marketing. However, we may be unable to prevent third parties from using our intellectual property without authorization. Proceedings to protect these rights could be costly and we may not prevail.

The protection afforded by patents varies from country to country and depends upon the type of patent and its scope of coverage. While a presumption of validity exists with respect to patents issued to us, our patents may be challenged, invalidated, circumvented or rendered unenforceable. In addition, if any pending patent application filed by us does not result in an issued patent, or if patents are issued to us, but such patents do not provide meaningful protection of our intellectual property, then our ability to exploit our intellectual property may be adversely affected. Furthermore, as patents expire, the products and processes described and claimed under those patents become generally available for use by competitors. Our continued growth strategy may also bring us to regions of the world where intellectual property protection may be limited and difficult to enforce. In addition, patent rights may not prevent our competitors from developing, using or selling products that are similar or functionally equivalent to our products. Moreover, our competitors or other third parties may obtain patents that restrict or preclude our ability to lawfully produce or sell our products in a competitive manner, which could result in significantly lower revenues, reduced profit margins or loss of market share.

We also rely upon unpatented proprietary know-how and continuing technological innovation and other trade secrets to develop and maintain our competitive position. While it is our policy to enter into confidentiality agreements with our employees and third parties to protect our intellectual property, these confidentiality agreements may be breached, may not provide meaningful protection for our trade secrets or proprietary know-how, or adequate remedies may not be available in the event of an unauthorized use or disclosure of our trade secrets and know-how. In addition, others could obtain knowledge of our trade secrets through independent development or other access by legal or illegal means.

The failure of our patents or confidentiality agreements to protect our processes, apparatuses, technology, trade secrets or proprietary know-how could result in significantly lower revenues, reduced profit margins and cash flows and/or loss of market share. Additionally, we may be subject to claims that our technology, patents or other intellectual property infringes on a third party’s intellectual property rights. Unfavorable resolution of these claims could either result in our being restricted from delivering the related service or result in a settlement that could be material to us.

The continued integration of the historical Lyondell Chemical businesses with the historical Basell businesses may be extremely time-consuming and the associated expected synergies and savings may not be realized.

The process of effectively integrating the historical Basell and Lyondell Chemical businesses into one business continues to require significant managerial and financial resources. The costs and time required to integrate these businesses into one organization could cause the interruption of, or a loss of momentum in, the

 

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activities of any one, or several, of the operations of the constituent entities. Furthermore, the combination of the Lyondell Chemical and Basell businesses has significantly increased our size and has also substantially increased the scope and complexity of our operations. There can be no assurance that we will be able to effectively manage the enlarged operation, or achieve the desired profitability from the combination of the Lyondell Chemical and Basell businesses. A failure to successfully integrate Lyondell Chemical with Basell’s legacy business operations within the expected time frame could adversely affect our business, financial condition and results of operations.

We have also undertaken significant and aggressive fixed cost reduction programs. Since the beginning of 2008, we have shut down or announced planned shutdowns of either units or entire facilities, including, in North America, three polypropylene sites, one olefin site, one ethylene glycol site, one PE site, one PP compounding site and one PP compounding unit and announced our intention to shutdown another polypropylene site. In Europe, we have closed one PE site, one PE unit and one polypropylene unit and announced our intention to shutdown another polypropylene site. We continue to evaluate our asset portfolio and may initiate further rationalization, depending on market conditions. Furthermore, we have expanded our cost reduction program to be broader and more substantial in anticipation of continued weak market conditions in olefins, polyolefins and refining. The key components of the program include reducing staff, rationalizing our worldwide asset base, restructuring our contracts and realizing savings in procurement and logistics. The full benefits of these programs may be difficult to realize and any short term synergies and savings realized may not be sustainable in the long term. Losses of key personnel pursuant to any employee reduction programs, could adversely affect our business, financial condition and results of operations.

Shared control or lack of control of joint ventures may delay decisions or actions regarding the joint ventures.

A portion of our operations currently are, and may in the future be, conducted through joint ventures, where control may be exercised by or shared with unaffiliated third parties. We cannot control the actions of our joint venture partners, including any nonperformance, default or bankruptcy of joint venture partners. The joint ventures that we do not control may also lack adequate internal controls systems.

In the event that any of our joint venture partners do not observe their joint venture obligations, it is possible that the affected joint venture would not be able to operate in accordance with our business plans or that we would be required to increase our level of commitment in order to give effect to such plans. As with any such joint venture arrangements, differences in views among the joint venture participants may result in delayed decisions or in failures to agree on major matters, potentially adversely affecting the business and operations of the joint ventures and in turn our business and operations.

Our results of operations could be adversely affected by litigation and other commitments and contingencies.

We face risks arising from various unasserted and asserted litigation matters, including, but not limited to, product liability, patent infringement, antitrust claims, and claims for third party property damage. We have also noted a nationwide trend in purported class actions against chemical manufacturers generally seeking relief such as medical monitoring, property damages, off-site remediation and punitive damages arising from alleged environmental torts without claiming present personal injuries. We have also noted a trend in public and private nuisance suits being filed on behalf of states, counties, cities and utilities alleging harm to the general public. Various factors or developments can lead to changes in current estimates of liabilities such as a final adverse judgment, significant settlement or changes in applicable law. A future adverse ruling or unfavorable development could result in future charges that could have a material adverse effect on us. An adverse outcome in any one or more of these matters could be material to our results of operations.

In the ordinary course of business, we may make certain commitments, including representations, warranties and indemnities relating to current and past operations, including those related to divested businesses and issue guarantees of third party obligations. If we were required to make payments as a result, they could exceed the amounts accrued, thereby adversely affecting our results of operations.

 

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A small number of investors own a substantial portion of our ordinary shares, and their interests in LyondellBasell Industries N.V. may conflict with your interests.

Based on current information available to us, LeverageSource (Delaware), LLC (an affiliate of Apollo Global Management, LLC (together with its affiliates, “Apollo”)), Ares Corporate Opportunities Fund III, L.P. (“Ares”) and AI International Chemicals S.a.r.l., as assigned by AI LBI Investments LLC, each an affiliate of Access Industries (“Access Industries” and, together with Apollo and Ares, the “Major Shareholders”) collectively own approximately 44.1% of our outstanding ordinary shares.

As long as the Major Shareholders and any other substantial shareholder own, directly or indirectly, a substantial portion of our outstanding shares, they will be able to exert significant control over us, including:

 

   

the composition of our board of directors and, through it, any determination with respect to our business;

 

   

direction and policies, including the appointment and removal of officers;

 

   

the determination of incentive compensation, which may affect our ability to retain key employees;

 

   

any determinations with respect to mergers or other business combinations;

 

   

our acquisition or disposition of assets;

 

   

our financing decisions and our capital raising activities;

 

   

the payment of dividends;

 

   

conduct in regulatory and legal proceedings; and

 

   

amendments to our articles of association.

Additionally, our Articles of Association state that our Supervisory Board will consist of at least nine members. Our Supervisory Board currently consists of eight members, three of whom were nominated by Apollo; one of whom was nominated by Access Industries; and one of whom was nominated by Ares. The remaining initial Supervisory Board members are independent. Until April 30, 2011 and thereafter for so long as the Major Shareholders own specified percentages of our ordinary shares, they will be entitled to nominate members of the Supervisory Board. See “Item 4. Security Ownership of Certain Beneficial Owners and Management.”

The Major Shareholders, in the event that they act collectively, also may have the ability to elect or remove and replace a majority of the members of our Supervisory Board without calling a meeting of the shareholders. The concentration of ownership may also make some transactions more difficult or impossible without their support or more likely with their support. The interests of any of the Major Shareholders, any other substantial shareholder or any of their respective affiliates could conflict with or differ from our interests or the interests of shareholders. For example, the concentration of ownership held by the Major Shareholders could delay, defer or prevent a change of control of our company or impede a merger, takeover or other business combination which may otherwise be favorable for us. The Major Shareholders, a substantial shareholder or any affiliate thereof may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

Risks Associated with Our Common Stock

The trading price of our ordinary shares may fluctuate and trading in the ordinary shares may be limited, which might lead to shareholders not being able to sell their ordinary shares at a reasonable price or at all.

Prior to the listing of our class A ordinary shares and our class B ordinary shares on the NYSE, there has been only a limited market for our ordinary shares. We cannot assure you that an active trading market in our

 

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ordinary shares will develop or be sustained. If such a market fails to develop or be sustained, this could adversely affect the liquidity and price of our ordinary shares, as well as increase their price volatility. Accordingly, we cannot assure investors of the liquidity of any such market, any ability to sell the ordinary shares or the prices that may be obtained for the ordinary shares.

The trading price of our ordinary shares may experience volatility and may fluctuate, depending upon many factors beyond our control. The trading price of our ordinary shares may be significantly affected by, among others the following factors: (i) our actual or anticipated operational results, (ii) the level of our debt, (iii) future issues of ordinary shares, (iv) changes in, or our failure to meet, securities analysts’ expectations, (v) general market conditions and the factors listed above under “—Risks Relating to Our Business.”

Uncertainty in enforcing U.S. judgments against The Netherlands corporations, directors and others could create difficulties for holders of our securities in enforcing any judgments obtained against us.

We are a company organized under the laws of The Netherlands and a significant portion of our assets are located outside the U.S. In addition, members of our Management and Supervisory Boards may be residents of countries other than the U.S. As a result, effecting service of process on each person may be difficult, and judgments of U.S. courts, including judgments against us or members of our Management or Supervisory Boards predicated on the civil liability provisions of the federal or state securities laws of the U.S., may be difficult to enforce. Because there is no treaty between certain countries and The Netherlands providing for the reciprocal recognition and enforcement of judgments, some countries’ judgments are not automatically enforceable in The Netherlands or in the United States, where the principal market for our shares is located. In addition, it is uncertain as to whether a court in one country would impose civil liability on us or on the members of our Management and Supervisory Boards in an original action brought against us or our management or supervisory directors in a court of competent jurisdiction in another country and predicated solely upon the securities laws of that other country.

We are subject to Dutch law and the rights of our ordinary shareholders may be different from those rights associated with companies governed by other laws.

As a result of being organized under the laws of The Netherlands, our corporate structure as well as the rights and obligations of our ordinary shareholders may be different from the rights and obligations of shareholders in companies incorporated in other jurisdictions. Resolutions of the general meeting of shareholders may be taken with majorities different from the majorities required for adoption of equivalent resolutions in, for example, Delaware companies. Additionally, like other Dutch companies, our articles of association and our board charter contain control-enhancing rights that may have the effect of preventing, discouraging or delaying a change of control.

In addition, Dutch law provides certain obligations on companies that are domiciled in The Netherlands and whose shares are admitted to trading on a “regulated market,” as well as on certain shareholders of such companies. The NYSE may qualify as a regulated market, in which case these laws will apply to us and to certain of our shareholders. Among other things, these laws may require shareholders to notify the Dutch financial markets regulator (Authoriteit Financiële Markten, or AFM) of their holding of ordinary shares and changes to their holding if they increase or decrease their shareholding over or below 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% and 95% of our ordinary shares and may require certain shareholders that acquire 30% or more of the voting rights attached to our ordinary shares, subject to certain exceptions, acting alone or in concert with others, to make an unconditional offer to all our shareholders. See “Item 11. Description of Registrant’s Securities to be Registered—Description of Certain Provisions of Dutch Law.”

 

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Risks Relating to Tax Matters

We have a risk of being classified as a controlled foreign corporation, which could adversely affect any 10% U.S. shareholder.

As a company incorporated in The Netherlands, we would be classified as a “controlled foreign corporation” for U.S. federal income tax purposes if:

 

   

any “United States person” (as defined in the U.S. Internal Revenue Code of 1986, as amended (the “U.S. Tax Code”)) possesses, directly, indirectly, or constructively, at least 10% of the combined voting power of all classes of our ordinary shares (each such person, a “10% U.S. shareholder”), and

 

   

the sum of the percentage ownership by all 10% U.S. shareholders exceeds 50% (by voting power or value) of our ordinary shares.

Because controlled foreign corporation status depends upon the identity of our shareholders and their respective stock ownership, there can be no assurance that LyondellBasell Industries N.V. will not be treated as a controlled foreign corporation for any taxable year. In the event that such a determination were made, all 10% U.S. shareholders would be subject to taxation under Subpart F of the U.S. Tax Code. The ultimate consequences of this determination are fact-specific to each 10% U.S. shareholder, but could include possible taxation of such 10% U.S. shareholder on a pro rata portion of our income, even in the absence of any distribution of such income.

Based on information currently available to us, including information about the Major Shareholders, we do not believe we are a controlled foreign corporation at this time.

U.S. anti-inversion rules may apply to LyondellBasell Industries N.V. resulting in certain adverse U.S. federal income tax consequences.

The United States Internal Revenue Service (“IRS”) could seek to apply section 7874 of the U.S. Tax Code to treat LyondellBasell Industries N.V. as a U.S. corporation for U.S. federal income tax purposes if, in connection with our emergence from the Bankruptcy Cases, the former creditors and shareholders of our top U.S. holding company and its direct and indirect subsidiaries (our “U.S. Group”) received at least 80% of the stock issued in our emergence from Chapter 11 by reason of holding claims against those entities. Application of the 80% test could result in significantly increased U.S. federal income tax liability to us.

Alternatively, the IRS could seek to impose U.S. federal income tax on our U.S. subsidiaries’ “inversion gain” if, in connection with our emergence from the Bankruptcy Cases, the former creditors and shareholders of our U.S. Group received at least 60%, but less than 80%, of the stock issued in our emergence from the Bankruptcy Cases by reason of holding such claims. Inversion gain generally includes gain from the transfer of stock or properties (other than inventory) and certain licensing income; tax on inversion gain generally cannot be offset by net operating losses, foreign tax credits or other tax attributes.

The 80% and 60% calculations are subject to certain adjustments. Although no assurance can be given that the IRS would not take a contrary position regarding section 7874’s application or that such position, if asserted, would not be sustained, we believe that the stock issued in connection with our emergence from the Bankruptcy Cases that is attributable to the value of claims against our companies outside the U.S. Group exceeds 40% of all stock issued for any claims against us, making section 7874 inapplicable to us under the numerical stock ownership tests described above. In addition, we believe that strong arguments can be made that section 7874 should not in any event apply to us because of the business activities that we and our affiliates conduct in The Netherlands.

 

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ITEM 2. FINANCIAL INFORMATION

Selected Financial Data

The following selected financial data of LyondellBasell AF should be read in conjunction with the audited Consolidated Financial Statements and the related notes for the year ended December 31, 2009 included elsewhere in this Registration Statement and “—Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. The selected financial data of LyondellBasell N.V. as of and for the two months ended June 30, 2010 and the Predecessor as of and for the four months ended April 30, 2010 and the six months ended June 30, 2009 were derived from the unaudited consolidated financial statements of LyondellBasell N.V. and LyondellBasell AF included elsewhere in this Registration Statement. Those financial statements were prepared from the books and records of LyondellBasell AF for periods prior to April 30, 2010 and of LyondellBasell N.V. after that date. As discussed elsewhere in this Registration Statement, as a result of LyondellBasell AF’s emergence from bankruptcy on April 30, 2010, LyondellBasell N.V. became the successor parent holding company of the subsidiaries of LyondellBasell AF and the reporting entity. Financial information is reported for LyondellBasell N.V, the successor, on a basis different from financial information of the predecessor, LyondellBasell AF, as a result of the application of fresh-start accounting. In the opinion of management, the unaudited consolidated financial statements include all adjustments necessary for a fair presentation of the financial information contained in those statements. The application of fresh-start accounting results in the Successor period not being comparable to the Predecessor period. Additionally, the historical results presented are not necessarily indicative of financial results to be achieved in future periods, and the results for any periods within the year are not necessarily indicative of results to be expected for the full year.

 

     Predecessor           Successor           Predecessor  
     Year ended December 31,           May 1-
June 30,
          January 1-
April 30,
    For the
six months ended
June 30.
 
     2009     2008     2007(a)     2006           2010           2010     2009  
    

(in millions)

                               

Results of Operations Data:

                        

Sales and other operating revenues

   $ 30,828      $ 50,706      $ 17,120      $ 13,175           $ 6,772           $ 13,467      $ 13,399   

Interest expense

     (1,795     (2,476     (353     (332          (132          (713     (934

Income (loss) from equity investments(b)

     (181     38        162        130             27             84        2   

Income (loss) from continuing operations(c)

     (2,866     (7,336     661        396             347             8,504        (1,370

Basic earnings per share

                  0.61            

Diluted earnings per share

                  0.58            

Unaudited pro forma basic earnings (loss) per share

     (5.08     (12.98     1.17        0.70                    15.19        (2.42

Unaudited pro forma diluted earnings (loss) per share

     (5.08     (12.98     1.17        0.70                    15.14        (2.42

Balance Sheet Data:

                        

Total assets

     27,761        28,651        39,728        9,549             24,289             27,958        28,175   

Short-term debt

     6,182        774        2,415        779             557             6,842        5,995   

Long-term debt(d)

     802        23,195        22,000        3,364             6,753             789        9,509   

Cash and cash equivalents

     558        858        560        830             3,753             817        746   

Accounts receivable

     3,287        2,585        4,165        2,041             3,533             3,771        3,273   

Inventories

     3,277        3,314        5,178        1,339             4,372             3,552        2,755   

Working capital

     4,436        3,237        5,019        1,900             5,379             4,972        3,764   

Liabilities subject to compromise

     22,494        —          —          —               —               21,945        12,019   

Cash Flow Data:

                        

Cash provided by (used in):

                        

Operating activities

     (787     1,090        1,180        1,034             1,104             (936     (862

Investing activities

     (611     (1,884     (11,899     (535          (109          (213     (262

Expenditures for property, plant and equipment

     (779     (1,000     (411     (263          (113          (226     (370

Financing activities

     1,101        1,083        10,416        (190          133             3,315        1,020   

 

(a)

Results of operations and cash flow data reflect the acquisition of Lyondell Chemical from December 21, 2007. Balance sheet data include Lyondell Chemical balances as of December 31, 2007. Results of

 

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operations and cash flow data for the year ended December 31, 2006 do not reflect Lyondell Chemical, and balance sheet data as of December 31, 2006 does not reflect Lyondell Chemical.

(b) Loss from equity investments for the year ended December 31, 2009 includes pre-tax charges of $228 million for impairment of the carrying value of our investments in certain joint ventures.
(c) Loss from continuing operations for the year ended December 31, 2009 included after-tax charges of $1,925 million related to reorganization items and $11 million for impairments of goodwill and other assets and $228 million for the impairment of the carrying value of our investments in certain joint ventures, partially offset by $78 million of involuntary conversion gains related to insurance proceeds for damages sustained in 2005 at a polymers plant in Münchsmünster, Germany. Loss from continuing operations for the year ended December 31, 2008 included after-tax charges of $4,982 million related to the impairment of goodwill, $816 million to adjust the value of inventory to market value and $146 million, primarily for impairment of the carrying value of the Berre Refinery, all of which were partially offset by $51 million of involuntary conversion gains related to insurance proceeds for damages sustained at the Münchsmünster polymers plant. Income from continuing operations for the year ended December 31, 2007 included after-tax benefits of $130 million from the $200 million break-up fee related to a proposed merger with the Huntsman group, partially offset by after tax-charges of $95 million related to the in-process research and development acquired in the acquisition of Lyondell Chemical, and $13 million related to asset impairments of the carrying value of a plant in Canada and capitalized engineering costs for a new polymers plant in Germany. Income from continuing operations for the year ended December 31, 2006 included after-tax asset impairment charges of $27 million primarily for goodwill related to a 2005 acquisition of an ethylene business in France. After-tax amounts included herein have been tax effected using the U.S. statutory rate of 35%. Income from continuing operations for the two months ended June 30, 2010 and the four months ended April 30, 2010, respectively, included an after-tax charge of $5 million and after-tax income of $8,537 million related to reorganization items. Loss from continuing operations for the six months ended June 30, 2009 also included an after-tax charge related to reorganization items of $697 million.
(d) Includes current maturities of long-term debt.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the information contained in the audited Consolidated Financial Statements for the year ended December 31, 2009 and the related notes thereto and the unaudited Consolidated Financial Statements for the three and six months ended June 30, 2010 and 2009 and the related notes thereto included elsewhere in this Registration Statement. This discussion contains forward-looking statements that involve risks and uncertainties, and actual results could differ materially from those discussed in the forward-looking statements as a result of numerous factors.

In reviewing the following discussion and analysis, certain points concerning the historical and future results of operations of LyondellBasell AF and LyondellBasell N.V. should be considered:

 

   

LyondellBasell AF acquired Lyondell Chemical on December 20, 2007. Operating results prior to such date in 2007 do not include the results of Lyondell Chemical. Some significant changes in operating results are due to the effects of the acquisition of Lyondell Chemical, rather than changes in the business performance of LyondellBasell AF’s predecessor, Basell. As a result, the financial information for 2008 is generally not comparable to 2007. Moreover, on January 6, 2009, April 24, 2009 and May 8, 2009, the Debtors filed voluntary petitions for relief under Chapter 11. The effects of operating the businesses of the Debtors as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court likely affected operations in ways that would make 2009 more difficult to compare with 2008.

 

   

As a result of its restructuring, LyondellBasell AF reassessed segment reporting based on its management structure. Based on this analysis, LyondellBasell AF concluded that management is focused on, and therefore reports results of operations of, the Refining and Oxyfuels segment; the O&P—Americas segment; the O&P—EAI segment; the I&D segment; and the Technology segment. See “—Segment Analysis” below for a description of our reportable segments.

 

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LyondellBasell AF’s consolidated operating results discussed below were determined using both the first-in, first-out (“FIFO”) and last in, first out (“LIFO”) methods of accounting to determine inventory cost. The LIFO method was used for certain U.S. inventories to maintain consistency with LyondellBasell AF’s U.S. federal income tax treatment of those inventories (see Note 2 to the Consolidated Financial Statements for the year ended December 31, 2009). Upon implementation of fresh-start accounting, LyondellBasell N.V. adopted the LIFO method of accounting for inventory. A discussion of our segment operating results is presented under “—Segment Analysis” below. For purposes of evaluating segment results, management reviewed LyondellBasell AF operating results determined using current cost, which approximates results using the LIFO method of accounting for inventory. Operating results for LyondellBasell N.V. are reviewed using the LIFO method.

 

   

In addition to comparisons of operating results with the same period in the prior year, certain “trailing quarter” comparisons of first quarter 2010 operating results to second quarter 2010 operating results have been included. The businesses in which we operate are highly cyclical and experience some seasonality. We believe trailing quarter comparisons may offer important insight into current business direction.

 

   

After tax amounts referred to in the discussion herein are tax effected using the U.S. statutory rate of 35%.

 

   

In connection with our emergence from Chapter 11 and the adoption of fresh-start accounting, the results of operations for the first six months of 2010 separately present the results of operations for LyondellBasell N.V. from May 1, 2010 to June 30, 2010, the Successor period, and the results of operations for LyondellBasell AF from January 1, 2010 to April 30, 2010, the Predecessor period. Although the Successor and Predecessor periods are distinct reporting periods for separate entities, the effects of emergence and fresh-start accounting did not have a material impact on the comparability of our results of operations between the periods, except as discussed below. Accordingly, references to the results of operations for the six months ended June 30, 2010 combine the two periods, unless references are made specifically to the “Predecessor” or “Successor” periods, in order to enhance the comparability of such information to the prior year. The “Combined” results of operations are “non-GAAP” because they include results for two separate entities prepared using different bases of accounting. As discussed, we believe that the Combined results assist in an understanding of the comparisons for the three and six month periods ended June 30, 2010 to the prior year periods. The separate Predecessor and Successor results of operations, which are the most comparable financial measures presented in accordance with U.S. generally accepted accounting principles, are included in the tables throughout this discussion and analysis.

References to industry benchmark prices or costs, including the weighted average cost of ethylene production, are generally to industry prices and costs reported by CMAI, except that references to industry benchmarks for refining and oxyfuels market margins are to industry prices reported by Platts and crude oil and natural gas benchmark price references are to Bloomberg.

As of the Emergence Date, LyondellBasell Industries N.V. became the owner and operator of substantially the same business LyondellBasell AF operated before the emergence. The discussion of financial information in this Item 2 relates to LyondellBasell AF prior to emergence and LyondellBasell N.V. thereafter. LyondellBasell AF was, and LyondellBasell N.V. is, a global manufacturer of chemicals and plastics, a refiner of crude oil, including heavy, high-sulfur crude oil, a significant producer of gasoline blending components and a licensor of technology processes. Management evaluates the business and results of operation through five reporting segments: Refining and Oxyfuels, O&P—Americas, O&P—EAI, I&D and Technology.

The performance of our business is driven by, among other things, global economic conditions generally and their impact on demand for our products, raw material and energy prices, and industry-specific issues, such as production capacity. Additionally, the business is subject to the cyclicality and volatility seen in the chemicals and refining industries generally. While the global financial crisis and recession, and other factors discussed below, contributed to the filing under Chapter 11, industry analysts believe many of our products are near or at their trough levels and forecast cyclical upside in the coming years. We saw some favorable developments in late

 

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2009 that may continue to be reflected in 2010 performance, such as continued delays in the construction of Middle Eastern and Asian production capacity which was expected to exacerbate current excess capacity issues, raw material pricing improvements and extensive government intervention globally. However, there can be no assurance that these positive developments will continue or that there will not be further adverse developments.

Emergence from Chapter 11 Proceedings

On January 6, 2009, certain of LyondellBasell AF’s U.S. subsidiaries and one of its European holding companies, Basell Germany Holdings GmbH (“Germany Holdings”), filed voluntary petitions for relief under Chapter 11 in the Bankruptcy Court. In addition, voluntary petitions for relief under Chapter 11 were filed by LyondellBasell AF and its general partner, LyondellBasell AF GP S.à r.l. on April 24, 2009 and by thirteen additional U.S. subsidiaries on May 8, 2009. All 94 of these Bankruptcy Cases were jointly administered under the caption “In re Lyondell Chemical Company, et al,” and the Debtors operated their businesses and managed their properties as “debtors in possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the U.S. Bankruptcy Code and orders of the Bankruptcy Court.

On April 23, 2010, the Bankruptcy Court confirmed LyondellBasell AF’s Plan of Reorganization and the Debtors emerged from chapter 11 protection on April 30, 2010 (the “Emergence Date”). As a result of our emergence from chapter 11 proceedings, certain prepetition liabilities against the Debtors were discharged to the extent set forth in the Plan of Reorganization and otherwise applicable law and the Debtors made distributions to their creditors in accordance with the terms of the Plan of Reorganization.

Plan of Reorganization—LyondellBasell N.V. became the successor parent holding company for the subsidiaries of LyondellBasell AF after completion of the Bankruptcy Cases. LyondellBasell AF, which was the predecessor parent holding company, is no longer part of the consolidated LyondellBasell group subsequent to the Emergence Date.

Under the Plan of Reorganization, the organizational structure of the Company in North America was simplified by the removal of 90 legal entities. The ultimate ownership of 49 of these entities (identified as Schedule III Debtors in the Plan of Reorganization) were transferred to a new owner, the Millennium Custodial Trust, a trust established for the benefit of certain creditors, and these entities are no longer part of LyondellBasell N.V. In addition, certain real properties owned by the Debtors, including the Schedule III Debtors, were transferred to the Environmental Custodial Trust, which now owns and is responsible for these properties. Any associated liabilities of the entities transferred to and owned by the Millennium Custodial Trust are the responsibility of those entities and claims regarding those entities will be resolved solely using their assets and the assets of the trust. In total, $250 million of cash was used to fund the two trusts, including approximately $80 million for the Millennium Custodial Trust and approximately $170 million for the Environmental Custodial Trust and to make certain direct payments to the Environmental Protection Agency and certain state environmental agencies.

Pursuant to the Plan of Reorganization, administrative and priority claims, as well as the new money debtor-in-possession (“DIP”) financing were repaid in full. The lenders of the DIP loans representing a dollar-for-dollar roll-up, or conversion, of previously outstanding senior secured loans (“Roll-up Notes”) received new notes in the same principal amount as the DIP Roll-up Notes. Holders of senior secured claims received Class A shares of LyondellBasell N.V. in exchange for their claims. Pursuant to the Amended Lender Litigation Settlement approved by the Bankruptcy Court on March 11, 2010, allowed general unsecured claims received a combination of cash and Class A shares of LyondellBasell N.V.

See “—Liquidity and Capital Resources” below for a discussion of the emergence financing.

Tax Impact of Reorganization—Under the plan, the Company’s pre-petition debt securities, revolving credit facility and other obligations were extinguished. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code of 1986, as amended (“IRC”), provides that a

 

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debtor in a bankruptcy case may exclude CODI from income but must reduce certain of its tax attributes by the amount of any CODI realized as a result of the consummation of a plan of reorganization. The amount of CODI realized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued. As a result of the market value of equity upon emergence from Chapter 11 bankruptcy proceedings, the estimated amount of CODI exceeded the estimated amount of our tax attributes by approximately $6,800 million. These estimates are subject to revision, as the actual reduction in tax attributes does not occur until the first day of our subsequent tax year (January 1, 2011).

As a result of attribute reduction, the Company does not expect to retain any U.S. net operating loss carryforwards, alternative minimum tax credits or capital loss carryforwards. In addition, we expect that most, if not all, of our tax basis in depreciable assets will be eliminated. Accordingly, it is expected that our liability for U.S. income taxes in future periods will reflect these adjustments and our estimated cash tax liabilities for the years following 2010 will be significantly higher than in 2009 or 2010.

IRC Sections 382 and 383 provide an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership. The Company’s emergence from Chapter 11 bankruptcy proceedings is considered a change in ownership for purposes of IRC Section 382. The limitation under the IRC is based on the value of the corporation as of the emergence date. The Company does not expect that the application of these limitations will have a material affect upon our U.S. federal income tax liabilities after 2010. Germany has similar provisions that preclude the use of certain tax attributes generated prior to a change of control. As of the emergence date, the Company had tax benefits associated with excess interest expense carryforwards in the amount of $16 million that were eliminated as a result of the emergence. The reversal of tax benefits associated with the loss of these carryforwards is reflected in the Predecessor period.

The Company’s current and future provisions for income taxes is significantly impacted by the initial recognition of, and changes in, valuation allowances in certain countries and are dependent upon future earnings and earnings sustainability in those jurisdictions. Consequently, our effective tax rate of 7.5% in the Successor period may not be indicative of our future effective tax rate.

The consummation of the Plan of Reorganization significantly de-levered our capital structure. As of the Emergence Date, LyondellBasell Industries N.V. had $7.2 billion of total consolidated debt and $2.7 billion of cash and cash equivalents.

Overview

As discussed above, results of operations presented in this Management’s Discussion and Analysis include those for LyondellBasell AF for the Predecessor periods occurring before April 30, 2010, the Emergence Date and for LyondellBasell N.V. for the Successor period occurring after the Emergence Date. For discussion and analysis purposes, the Predecessor and Successor periods have been combined in order to enhance the comparability of the three and six month periods ended June 30, 2010 to the prior year periods.

Three and Six Months Ended June 30, 2010 versus Three and Six Months Ended June 30, 2009

Global market conditions in the second quarter and first six months of 2010 continued to improve from the weak conditions experienced in late 2009. Industry operating rates and average sales prices generally improved during the course of the second quarter and first six months of 2010, and compared favorably to the 2009 periods. Demand improved in the durable goods sector of the global economy, including the automotive markets.

Improvement in the global economy experienced in the first quarter 2010 continued through the second quarter 2010. As a result, demand and operating rates were higher in the second quarter and first six months of 2010, compared to the same periods in 2009, which were characterized by weaker demand and generally lower

 

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operating rates. In addition, certain of LyondellBasell N.V.’s business segments benefited from planned and unplanned competitor operating disruptions.

Operating results in the second quarter and first six months of 2010, compared to the second quarter and first six months of 2009, generally reflected higher product margins and higher sales volumes. Reliable operations and the effect of industry supply disruptions resulted in significantly higher margins and higher sales volumes in the O&P-Americas business segment. The Refining and Oxyfuels business segment results were higher in the second quarter and first six months of 2010 primarily due to higher refining margins. Higher operating results in the O&P–EAI and the I&D business segments were a reflection of improvement in the durable goods markets, while lower licensing revenue in the Technology business translated into lower results for the 2010 period.

Year ended December 31, 2009 versus Year Ended December 31, 2008

Although global market conditions improved in 2009 compared to late 2008, market conditions for the full year 2009 were significantly weaker than in the prior year. Demand was particularly weak in durable goods market sectors, including housing and automotive markets. Similarly, while industry operating rates and sales volumes improved during the course of 2009 compared to the levels experienced in late 2008, for the full year 2009 they were below the levels experienced for the full year 2008, despite the significant decline in business activity late in 2008.

Refining margins were significantly lower in 2009 compared to 2008 as a result of weak demand for distillates, such as diesel and heating oil. Heavy crude oil refining margins were also negatively affected by a contraction in the differential between the price of light and heavy crude oil. After peaking at a record-setting level in mid-2008, prices for crude oil and NGLs on average were significantly lower in 2009. In 2009, chemical product margins also generally declined because of the weaker pricing environment and lower average sales prices. An exception was the U.S. PE market, which experienced strong export demand and higher product margins during the latter half of 2009.

LyondellBasell AF’s underlying operating results in 2009, compared to 2008, primarily reflected the negative effects of significantly lower product margins and sales volumes. These were partly offset by the benefits of lower fixed costs, strong margins for LyondellBasell AF’s propylene oxide and advanced polyolefin products and higher U.S. PE margins. A substantial portion of the lower product margins was due to refining operations, while the lower sales volumes were concentrated in the base chemicals and polymers products and reflected the weakness in demand. The lower fixed costs resulted from LyondellBasell AF’s aggressive cost reduction program.

Net income in 2009 also reflected charges related to LyondellBasell AF’s planned reorganization under Chapter 11, including professional fees, write-offs of plant asset values, contract rejection claims, employee severance costs and other costs associated with the Chapter 11 proceedings and plant closures. For a detailed description of reorganization charges, see “—Results of Operations” below.

Net income in 2008 included charges for asset impairments, reflecting declines in the value of inventory, goodwill and other intangible assets, as markets weakened and product sales prices and margins declined significantly at the end of 2008.

Year ended December 31, 2008 versus Year Ended December 31, 2007

Compared to 2007, the 2008 business environment for refiners and manufacturers of chemicals and polymers was marked by significant volatility in crude oil and raw material prices and, in the latter part of the year, a rapid deterioration in the global economy. During 2007, benchmark crude oil prices steadily rose to then-record levels in December 2007. During 2008, these benchmark crude oil prices continued to increase through

 

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June 2008, rising nearly 50%. Benchmark heavy crude refining margins benefited from strong demand for diesel fuel and the cost differential between light crude oil and heavy crude oil, while margins for fuels products, such as MTBE and ETBE, benefited from high gasoline prices. However, the significant escalation of crude oil and raw material prices put downward pressure on chemical and polymer product margins and upward pressure on working capital requirements.

The second half of 2008 was pivotal, marked by a number of significant events, including a fourth quarter contraction of the U.S. and Western European economies of 6.3% and 5.9%, respectively; a 70% decrease in crude oil prices; two U.S. Gulf Coast hurricanes; an extended maintenance turnaround at the Houston Refinery that was prolonged by a crane incident; and a crisis in the global financial markets. Demand in markets for LyondellBasell AF’s products was significantly lower in the fourth quarter 2008 as customers reduced inventories. At the same time, the rapid decline in crude oil and raw material prices negatively impacted inventory carrying values.

LyondellBasell AF had an operating loss in 2008 compared to a profit in 2007, despite the acquisition of Lyondell Chemical and the addition of fuels products to its product portfolio. The 2008 operating loss was primarily due to asset impairment losses, reflecting declines in the value of inventory, goodwill and other intangible assets as well as the significant decline in market conditions that led to substantial erosion of product profit margins, lower sales volumes and plant operating rates.

LyondellBasell AF’s operating loss in 2008 was also adversely affected by lost production at its Houston Refinery attributable to a major planned maintenance turnaround; a fluid catalytic cracker (“FCC”) unit upgrade and catalyst changes; unplanned maintenance on the Houston Refinery’s FCC unit; an incident involving a contractor company’s crane at the Houston Refinery in July 2008, which in turn lead to a re-scoping and time extension of the major maintenance turnaround; and finally, an approximately two- to three-week period in September 2008 when substantially all of LyondellBasell AF’s U.S. Gulf Coast operations were temporarily off-line as a result of Hurricane Ike.

Results of Operations

Three and Six Months Ended June 30, 2010 versus Three and Six Months Ended June 30, 2009

The discussion of the results of operations for the three months ended June 30, 2010 and 2009 presented in the table below is of the combined Successor and Predecessor results unless otherwise noted.

 

     Successor           Predecessor     Non-GAAP
Combined
    Predecessor  

Millions of dollars

   May 1
through
June 30,
2010
          April 1
through
April 30,
2010
    Three
months
ended
June 30,
2010
    Three
months
ended
June 30,
2009
 

Sales and other operating revenues

   $ 6,772           $ 3,712      $ 10,484      $ 7,499   

Cost of sales

     6,198             3,284        9,482        7,158   

Selling, general and administrative expenses

     129             91        220        227   

Research and development expenses

     23             14        37        25   
                                     

Operating income

     422             323        745        89   

Interest expense

     (132          (302     (434     (501

Interest income

     12             3        15        3   

Other income (expense), net

     54             (65     (11     71   

Income from equity investments

     27             29        56        22   

Reorganization items

     (8          7,803        7,795        (124

Provision for (benefit from) income taxes

     28             (705     (677     (87
                                     

Net income (loss)

   $ 347           $ 8,496      $ 8,843      $ (353
                                     

 

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The discussion of the results of operations for the six months ended June 30, 2010 and 2009 presented in the table below is of the combined Successor and Predecessor results unless otherwise noted.

 

     Successor           Predecessor     Non-GAAP
Combined
    Predecessor  

Millions of dollars

   May 1
through
June 30,
2010
          January 1
through
April 30,
2010
    Six months
ended
June 30,
2010
    Six months
ended
June 30,
2009
 

Sales and other operating revenues

   $ 6,772           $ 13,467      $ 20,239      $ 13,399   

Cost of sales

     6,198             12,414        18,612        12,950   

Selling, general and administrative expenses

     129             308        437        434   

Research and development expenses

     23             55        78        67   
                                     

Operating income (loss)

     422             690        1,112        (52

Interest expense

     (132          (713     (845     (934

Interest income

     12             5        17        11   

Other income (expense), net

     54             (265     (211     156   

Income from equity investments

     27             84        111        2   

Reorganization items

     (8          8,010        8,002        (1,072

Provision for (benefit from) income taxes

     28             (693     (665     (519
                                     

Net income (loss)

   $ 347           $ 8,504      $ 8,851      $ (1,370
                                     

Results Of Operations

Revenues—Revenues were $10,484 million in the second quarter 2010 compared to revenues of $7,499 million in the second quarter 2009 and $20,239 million in the first six months of 2010 compared to $13,399 in the first six months of 2009. The $2,985 million and $6,840 million increases in the second quarter and first six months of 2010 compared to the second quarter and first six months of 2009 were primarily due to higher demand and reflected the effect of higher average product sales prices and higher sales volumes in all but the refining and oxyfuels segment.

Cost of Sales—Cost of sales were $9,482 million in the second quarter 2010 compared to $7,158 million in the second quarter 2009 and $18,612 million in the first six months of 2010 compared to $12,950 million in the first six months of 2009. The Successor period includes a $333 million non-cash charge to adjust the value of inventory at June 30, 2010 to market value, which was lower than the April 30, 2010 value applied during fresh-start accounting. The Successor period also includes lower depreciation and amortization expense of $155 million resulting from the valuation of assets to fair value in fresh-start accounting. The Predecessor period included a charge of $23 million for plant closure and other costs related to a polypropylene plant in Terni, Italy (see Note 7 to the unaudited Consolidated Financial Statements of LyondellBasell N.V. for the period ended June 30, 2010.). Remaining increases in cost of sales for the second quarter and first six months of 2010 were primarily due to higher raw material and utility costs. The higher raw material costs reflect the effects of higher crude oil and natural gas liquids-based raw material prices.

R&D Expense—Research and development expenses were $37 million in the second quarter 2010 compared to $25 million in the second quarter 2009 and $78 million in the first six months of 2010 compared to $67 million in the first six months of 2009. The 2009 periods include the effect of a $12 million government subsidy.

Operating Income (Loss)—Operating income was $745 million in the second quarter 2010 compared to $89 million in the second quarter 2009 and operating income was $1,112 million in the first six months of 2010 compared to an operating loss of $52 million in the first six months of 2009. The increases of $656 million and $1,164 million in the second quarter and first six months of 2010, respectively reflect higher product margins and

 

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improved global market conditions in the second quarter and first six months of 2010 compared to the same 2009 periods when demand was very weak. These increases were partially offset by the impacts described above in cost of sales, as well as the negative effect of lost production and higher costs stemming from the unplanned outage related to the crude unit fire at the Houston refinery during the Successor period. In the first six months of 2010, the Predecessor period included a charge of $23 million for plant closure and other costs related to a polypropylene plant in Terni, Italy. Operating results for each of the business segments are reviewed further in the “Segment Analysis” section below.

Interest Expense—Interest expense was $434 million in the second quarter 2010 compared to $501 million in the second quarter 2009 and $845 million compared to $934 million in the first six months of 2010 and 2009, respectively. The lower interest expense reflected in the Successor period is primarily due to the discharge of approximately $9 billion of debt in accordance with the Plan of Reorganization upon our emergence from bankruptcy, upon which interest was accruing during the bankruptcy, partially offset by interest expense on the debt incurred as part of the emergence from bankruptcy. This net decrease was partially offset by higher interest expense in the Predecessor periods included in the second quarter and first six months of 2010, primarily related to the DIP financing and a charge of $153 million related to a terminated interest rate swap. Contractual interest expense for the Predecessor periods included in the second quarter and first six months of 2010 was $236 million and $914 million, respectively, compared to $693 million and $1,303 million for the second quarter and first six months of 2009, respectively.

Other Income (Expense), net—Other expense, net of $11 million in the second quarter 2010 compared to other income of $71 million in the second quarter 2009. Other expense, net of $211 million in the first six months of 2010 compared to other income of $156 million in the first six months of 2009. Other expense, net, in the second quarter and first six months of 2010 included foreign exchange losses of $14 million and $218 million, respectively. In the second quarter and first six months of 2009, other income, net, included foreign exchange gains of $74 million and $89 million, respectively. Other income, net, in the first six months of 2009 also included involuntary conversion gains of $72 million. These gains represented partial settlement of outstanding insurance claims related to damages sustained in 2005 at the polymers plant in Münchsmünster, Germany.

Reorganization Items—Income from reorganization items was $7,795 million and $8,002 million, respectively, in the second quarter and first six months of 2010, and reorganization items expense was $124 million and $1,072 million, respectively, in the second quarter and in the first six months of 2009. Income from reorganization items included gains totaling $13,617 million related to settlement of liabilities subject to compromise, deconsolidation of entities upon emergence, adjustments related to rejected contracts, and a reduction of environmental remediation liabilities. These gains were partially offset by a charge of $5,656 million related to the changes in net assets resulting from the application of fresh-start accounting and by several one-time emergence costs, including the success and other fees earned by certain professionals upon our emergence from bankruptcy, damages related to the rejection of executory contracts and plant closure costs. Reorganization items expense in the second quarter and first six months of 2009 included charges for asset write-offs associated with a lease rejection, contract termination charges and costs related primarily to the shutdown of our olefins plant at Chocolate Bayou, Texas and the long-term idling of the ethylene glycol facility in Beaumont, Texas; severance charges; professional fees; and a charge for the write off of deferred debt issuance costs related to the Senior Notes due 2015.

Income Tax—In the two months ended June 30, 2010 the Successor recorded a tax provision of $28 million, representing an effective tax rate of 7.5% on pre-tax income of $375 million. In the four months ended April 30, 2010, the Predecessor period reflects a tax benefit of $693 million, representing an effective tax rate of (8.9)% on pre-tax income of $7,811 million. In the first six months of 2009 we recorded a tax benefit of $519 million, representing an effective tax rate of 27.5% on a pre-tax loss of $1,889 million. The provision for the 2010 Successor period differs from the U.S. statutory rate of 35% primarily due to the fact that in several countries we generated either income or losses where we recorded no tax expense or benefit due to valuation allowances on our deferred tax assets in those countries. The tax provision for the Predecessor period included in

 

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the first six months of 2010 differs from the statutory rate primarily because a significant portion of the pre-tax gain from the discharge of pre-petition liabilities will not result in future tax liabilities, which was somewhat offset by restructuring charges for which no tax benefit was provided. The tax benefit recorded for the first six months of 2009 was lower than the statutory rate primarily due to restructuring costs for which no tax benefit was provided.

Net Income (Loss)—LyondellBasell N.V. and LyondellBasell A.F. had combined net income of $8,843 million in the second quarter 2010, while LyondellBasell A.F. had a loss of $353 million in the second quarter 2009. The following table summarizes the major components contributing to net income (loss):

 

     Successor           Predecessor     Non-GAAP
Combined
    Predecessor  

Millions of dollars

   May 1
through
June 30,
2010
          April 1
through
April 30,
2010
    Three
months
ended
June 30,
2010
    Three
months
ended
June 30,
2009
 

Operating income

   $ 422           $ 323      $ 745      $ 89   

Interest expense, net

     (120          (299     (419     (498

Other income (expense), net

     54             (65     (11     71   

Income from equity investments

     27             29        56        22   

Reorganization items

     (8          7,803        7,795        (124

Provision for (benefit from) income taxes

     28             (705     (677     (87
                                     

Net income (loss)

   $ 347           $ 8,496      $ 8,843      $ (353
                                     

LyondellBasell N.V. and LyondellBasell A.F. had combined net income (loss) of $8,851 million in the first six months of 2010, while LyondellBasell A.F. had a net loss of $1,370 million in the first six months of 2009.

     Successor          Predecessor     Non-GAAP
Combined
    Predecessor  

Millions of dollars

   May 1
through
June 30,
2010
         January 1
through
April 30,
2010
    Six months
ended
June 30,
2010
    Six months
ended
June 30,
2009
 

Operating income (loss)

   $ 422           $ 690      $ 1,112      $ (52

Interest expense, net

     (120          (708     (828     (923

Other income (expense), net

     54             (265     (211     156   

Income from equity investments

     27             84        111        2   

Reorganization items

     (8          8,010        8,002        (1,072

Provision for (benefit from) income taxes

     28             (693     (665     (519
                                     

Net income (loss)

   $ 347           $ 8,504      $ 8,851      $ (1,370
                                     

Year Ended December 31, 2009 versus Year Ended December 31, 2008 and Year Ended December 31, 2008 versus December 31, 2007

Revenues—LyondellBasell AF had revenues of $30,828 million in 2009 compared to revenues of $50,706 million in 2008 and $17,120 million in 2007. The $19,878 million decrease in 2009 compared to 2008 reflected the effect of significantly lower sales prices and sales volumes due to lower crude oil and natural gas prices and weaker demand. LyondellBasell AF’s revenues increased by $33,801 million, or 67%, in 2008 and $990 million, or 6%, in 2007 solely as a result of LyondellBasell AF’s acquisition of Lyondell Chemical in 2007 and the Berre Refinery in 2008. The remaining $775 million, or 5%, increase in 2008 revenues reflected higher average sales prices partially offset by the effect of lower sales volumes.

 

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Cost of Sales—LyondellBasell AF’s cost of sales were $29,372 million in 2009 compared to $48,780 million in 2008 and $15,196 in 2007. The $19,408 million decrease in 2009 compared to 2008 was primarily due to lower market prices for crude oil, crude oil-based and NGLs raw materials; lower fixed and variable costs; and lower sales volumes and operating rates, reflecting the weak demand. The increases in 2008 and 2007 reflected the acquisitions of Lyondell Chemical and the Berre Refinery, which added $34,313 million and $1,045 million, respectively, to cost of sales. The remaining increase of $316 million, or 2%, in 2008 primarily reflected higher raw material and energy costs compared to 2007.

SG&A Expenses—Selling, general and administrative expenses were $850 million in 2009 compared to $1,197 million in 2008 and $740 million in 2007. The $347 million decrease in 2009 compared to 2008 was primarily the result of LyondellBasell AF’s 2009 cost reduction program and a favorable effect from changes in currency exchange rates. Currency exchange rates had a favorable effect on costs of non-U.S. operations as the U.S. dollar strengthened versus the euro in 2009 compared to 2008. LyondellBasell AF’s SG&A expenses in 2008 included $564 million of expenses related solely to the Lyondell Chemical and the Berre Refinery acquisitions. Excluding SG&A costs of the acquired companies, SG&A decreased by $107 million in 2008 compared to 2007, primarily due to the favorable currency translation effects of a stronger U.S. dollar in 2008.

In-process Research and Development—LyondellBasell AF recognized a $95 million charge for in-process research and development (“IPR&D”) related to the December 20, 2007 acquisition of Lyondell Chemical. For a discussion of IPR&D, see Note 7 to the Consolidated Financial Statements of LyondellBasell A.F. for the year ended December 31, 2009.

Operating Income—LyondellBasell AF had operating income of $317 million in 2009 compared to an operating loss of $5,928 million in 2008 and operating income of $934 million in 2007. Results in 2009 compared to 2008 reflected the benefits of LyondellBasell AF’s cost reduction program, offset by the unfavorable effects of lower product margins, sales volumes, and currency exchange rates on non-U.S. operating income. Results in 2008 were impacted by charges of $4,982 million and $225 million, respectively, for impairment of goodwill related to the December 20, 2007 acquisition of Lyondell Chemical and the carrying value of the Berre Refinery; and a charge of $1,256 million to adjust LyondellBasell AF’s inventory to market value. The remainder of the decrease in operating income in 2008 was primarily due to lower product margins and the effect of lower sales volumes across all business segments compared to 2007. The declines in product margins and sales volumes in 2008 were attributable to the negative effects of Hurricane Ike and the refinery turnaround as well as to the higher cost of raw materials.

Interest Expense—Interest expense was $1,795 million in 2009 compared to $2,476 million in 2008 and $353 million in 2007. The decrease in interest expense in 2009 was primarily due to various debt instruments becoming subject to compromise as a result of the Chapter 11 filing. LyondellBasell AF’s contractual interest expense was $2,720 million for 2009, $2,476 million for 2008 and $353 million for 2007. The increase in interest expense in 2008 was primarily due to an increase in debt used to fund the acquisition of Lyondell Chemical in December 2007, including the $7,506 million of debt retained by Lyondell Chemical. Interest expense in 2008 also included a $55 million non-cash charge related to the termination of an interest rate swap.

Other Income, net—LyondellBasell AF had other income, net, of $325 million in 2009 compared to $113 million in 2008 and $127 million in 2007. In 2009 and 2008, LyondellBasell AF recognized involuntary conversion gains of $120 million and $79 million, respectively, representing partial insurance settlements of outstanding insurance claims related to damages sustained in 2005 at the polymers plant in Münchsmünster, Germany, and foreign exchange gains of $113 million and $20 million, respectively, as a result of changes in currency exchange rates. Other income, net, in 2009 also included benefits totaling $72 million resulting from indemnifications received from previous plant owner for employee benefit and environmental remediation costs related to plant closures and a $15 million gain related to settlement of a U.K. pension claim. Other income, net, in 2007 included the benefit from a $200 million break-up fee related to the proposed merger with Huntsman, partially offset by a $57 million charge related to a 2005 exit fee from a U.K. pension plan.

 

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Reorganization Items—LyondellBasell AF had reorganization items totaling $2,961 million in 2009, including charges for the write-off of assets associated with a lease rejection; damage claims related to certain executory contracts; the net write-off of unamortized debt issuance costs, premiums and discounts; environmental liabilities; professional fees associated with the Chapter 11 proceedings; shutdown costs related primarily to the shutdown of its olefins plant at Chocolate Bayou, Texas and its EG facility in Beaumont, Texas; as well as employee severance and other costs. For additional information on reorganization items, see Note 4 to the Consolidated Financial Statements of LyondellBasell AF for the year ended December 31, 2009.

Income Tax—LyondellBasell AF’s effective income tax rate for 2009 was 33%, resulting in a tax benefit of $1,411 million on a pretax loss of $4,277 million. The 2009 estimated annual effective income tax rate was lower than the statutory 35% rate primarily due to the effects of non-deductible costs partially related to the voluntary filings of petitions for relief under Chapter 11, and the provision of valuation allowances in jurisdictions where future tax benefits are not expected to be recognized. The negative rate impact was partially offset by the recognition of tax benefits related to a favorable tax ruling in The Netherlands. During 2008, LyondellBasell AF had a tax benefit of $848 million on a pretax loss of $8,184 million. The effective income tax rate of 10.4% in 2008 primarily reflected the effect of goodwill impairment charges, which are not deductible for tax purposes, and the provision of valuation allowances in jurisdictions where future tax benefits are not expected to be realized. The effective income tax rate of 29.7% in 2007 primarily reflected the effect of decreases in statutory and other tax rates in Germany and Italy partly offset by the effect of the purchased IPR&D charge, which was not deductible for tax purposes.

Income (loss) from Continuing Operations—LyondellBasell AF had a loss of $2,866 million in 2009 compared to a loss of $7,336 million in 2008 and income of $661 million in 2007. The following table summarizes the major components contributing to the income (loss) from continuing operations:

 

     For the twelve months ended
December 31,
 

Millions of dollars

   2009     2008     2007  

Operating income (loss)

   $ 317      $ (5,928   $ 934   

Income (loss) from equity investments

     (181     38        162   

Interest expense, net

     (1,777     (2,407     (283

Other income, net

     325        113        127   

Reorganization items

     (2,961     —          —     

Provision for (benefit from) income taxes

     (1,411     (848     279   
                        

Income (loss) from continuing operations

   $ (2,866   $ (7,336   $ 661   
                        

In 2009, the loss from equity investments for the O&P—EAI segment included charges of $228 million for impairment of the carrying value of LyondellBasell AF’s equity investments in certain joint ventures. See Note 11 to the Consolidated Financial Statements of LyondellBasell AF for the year ended December 31, 2009 for more information on equity investments in joint ventures.

 

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The table below summarizes some of the items of special note with regards to LyondellBasell AF’s income (loss) from continuing operations for the periods shown:

 

     For the twelve months ended
December 31,
 

Millions of dollars

   2009     2008     2007  

Pretax charges (benefits):

      

Impairments

   $ 245      $ 5,207      $ 20   

Reorganization items

     2,961        —       

Inventory valuation adjustment to market value

     127        1,256        —     

Huntsman breakage fee

     —          —          (200

Management fees

     —          —          100   

Purchased IPR&D

     —          —          95   

Benefit from employee pension and post-retirement plan amendments

     —          —          (48

Merger and acquisition costs

     —          —          46   

Interest rate swap termination—Structured Financing Transaction

     —          55        —     

Hurricane costs

     5        55        —     

Gains related to insurance settlements

     (120     (79     —     

Provisions for uncollectible accounts receivable

     18        47        (14
                        

Total pretax income effect

     3,236        6,541        (1

Tax effect of above items

     (1,133     (546     34   

Decrease in non-U.S. statutory tax rates

     —            (117
                        

Total

   $ 2,103      $ 5,995      $ (84
                        

Impairments in 2009 include an adjustment related to prior periods which increased LyondellBasell AF’s income from operations and net income for the three-month period ended December 31, 2009, by $65 million. The adjustment related to an overstatement of goodwill impairment in 2008.

Income (Loss) from Discontinued Operations, Net of Tax—LyondellBasell AF had income from discontinued operations of $1 million and $15 million, respectively, in 2009 and 2008 related to the sale of a toluene di-isocyanate business in September 2008.

 

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Segment Analysis

The following tables reflect selected financial information for our reportable segments for the periods indicated. Operating income (loss) is reported on a current cost basis for segment reporting.

 

     For the twelve months  ended
December 31,
 

Millions of dollars

   2009     2008     2007  
     (millions)  

Sales and other operating revenues:

      

Refining and Oxyfuels segment

   $ 12,078      $ 18,362      $ 478   

O&P—Americas segment

     8,614        16,412        2,817   

O&P—EAI segment

     9,401        13,489        13,145   

I&D segment

     3,778        6,218        429   

Technology segment

     543        583        497   

Other, including intersegment eliminations

     (3,586     (4,358     (246
                        

Total

   $ 30,828      $ 50,706      $ 17,120   
                        

Operating income (loss) (a):

      

Refining and Oxyfuels segment

   $ (357   $ (2,378   $ 21   

O&P—Americas segment

     169        (1,355     61   

O&P—EAI segment

     (2     220        934   

I&D segment

     250        (1,915     (42

Technology segment

     210        202        152   

Other, including intersegment eliminations

     18        (134     (248

Current cost adjustment

     29        (568     56   
                        

Total

   $ 317      $ (5,928   $ 934   
                        

Income (loss) from equity investments:

      

O&P—Americas segment

   $ 7      $ 6      $ 12   

O&P—EAI segment

     (172     34        150   

I&D segment

     (16     (2     —     
                        

Total

   $ (181   $ 38      $ 162   
                        

 

(a) Certain data for the twelve months ended December 31, 2009 and 2008 were revised. See Note 29 to the Consolidated Financial Statements of LyondellBasell AF for the year ended December 31, 2009.

 

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     Successor     Predecessor     Non-
GAAP
Combined
    Predecessor     Successor     Predecessor     Non-
GAAP
Combined
    Predecessor  

Millions of dollars

   May 1
through
June 30,
2010
    April 1
through
April 30,
2010
    Three
months
ended
June 30,
2010
    Three
months
ended
June 30,
2009
    May 1
through
June 30,
2010
    January 1
through
April 30,
2010
    Six
months
ended
June 30,
2010
    Six
months
ended
June 30,
2009
 

Sales and other operating revenues:

                    

Refining and Oxyfuels segment

   $ 2,403      $ 1,333      $ 3,736      $ 3,167      $ 2,403      $ 4,748      $ 7,151      $ 5,432   

O&P–Americas segment

     2,004        1,163        3,167        2,037        2,004           4,183        6,187        3,615   

O&P–EAI segment

     2,140        1,066        3,206        2,170        2,140        4,105        6,245        3,889   

I&D segment

     940        504        1,444        810        940        1,820        2,760        1,571   

Technology segment

     75        35        110        150        75        145        220        266   

Other, including intersegment eliminations

     (790     (389     (1,179     (835     (790     (1,534     (2,324     (1,374
                                                                

Total

   $ 6,772      $ 3,712      $ 10,484      $ 7,499      $ 6,772      $ 13,467      $ 20,239      $ 13,399   
                                                                

Operating income (loss):

                    

Refining and Oxyfuels segment

   $ 14      $ 29      $ 43      $ (80   $ 14      $ (99   $ (85   $ (124

O&P–Americas segment

     149        175        324        69        149        320        469        (32

O&P–EAI segment

     114        44        158        2        114        115        229        (72

I&D segment

     109        34        143        41        109        157        266        119   

Technology segment

     23        8        31        67        23        39        62        117   

Other, including intersegment eliminations

     13        18        31        (28     13        (41     (28     (37

Current cost adjustment

     —          15        15        18        —          199        199        (23
                                                                

Total

   $ 422      $ 323      $ 745      $ 89      $ 422      $ 690      $ 1,112      $ (52
                                                                

Income (loss) from equity investments:

                    

O&P–Americas segment

   $ 3      $ 1      $ 4      $ 2      $ 3      $ 5      $ 8      $ —     

O&P–EAI segment

     25        28        53        25        25        80        105        14   

I&D segment

     (1     —          (1     (5     (1     (1     (2     (12
                                                                

Total

   $ 27      $ 29      $ 56      $ 22      $ 27      $ 84      $ 111      $ 2   
                                                                

Refining and Oxyfuels Segment

Overview—The Refining and Oxyfuels segment produces refined petroleum products, including gasoline, ultra low sulfur diesel, jet fuel, aromatics, lubricants and oxygenated fuels, or oxyfuels, such as MTBE, ETBE and alkylate. Our full-conversion Houston Refinery processes heavy, high sulfur Venezuelan crude oil supplied

 

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under a contract with PDVSA Oil. Under the crude oil contract the refinery purchases 230,000 barrels per day of heavy, high sulfur crude oil, which constitutes approximately 86% of its rated crude oil refining capacity of 268,000 barrels per day. In early 2009, the Houston Refinery exercised an option to reduce the contractual volume to 215,000 barrels per day through July 31, 2011. The pricing under the crude oil contract is market-based. The Houston Refinery generally purchases the balance of its crude oil requirements on the spot market.

On April 1, 2008, LyondellBasell AF completed the purchase of the Berre Refinery. The Berre Refinery provides raw materials for one of LyondellBasell AF’s European sites that operates a world-scale steam cracker and polypropylene and PE plants, as well as a butadiene extraction unit at Berre l’Etang and a PE plant at nearby Fos sur Mer. The Berre Refinery’s products include naphtha, liquefied petroleum gas, gasoline, diesel and jet fuel, heating oil and bitumen.

Three and Six Months Ended June 30, 2010 versus Three and Six Months Ended June 30, 2009

In the second quarter and first six months of 2010, benchmark heavy crude refining margins averaged higher compared to the second quarter and first six months of 2009, primarily due to an increase in the differential between the cost of heavy and light crude oil.

Refining and Oxyfuels segment operating results in the second quarter and first six months of 2010 compared to the same 2009 periods primarily reflected higher benchmark refining margins and lower crude processing volumes for the Houston refinery. Crude processing volumes for the Berre refinery were also lower in the first six months of 2010 due to maintenance outages in the first quarter 2010. Houston refinery volumes were lower in the second quarter 2010 primarily due to a crude unit fire in May 2010 and were lower in the first six months of 2010 as a result of the crude unit fire and sulfur recovery constraints. Oxyfuels results in both 2010 periods were lower compared to a strong second quarter and first six months of 2009, primarily due to lower margins.

 

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The following table sets forth the Refining and Oxyfuels segment’s sales and other operating revenues, operating loss and sales volumes for certain gasoline blending components for the applicable three and six month periods:

 

    Successor       Predecessor   Non-GAAP
Combined
  Predecessor     Successor       Predecessor     Non-GAAP
Combined
    Predecessor  

Millions of dollars

  May 1
through
June 30,
2010
      April 1
through
April 30,
2010
  Three
months
ended
June 30,
2010
  Three
months
ended
June 30,
2009
    May 1
through
June 30,
2010
      January 1
through
April 30,
2010
    Six months
ended
June 30,
2010
    Six months
ended
June 30,
2009
 

Sales and other operating revenues

  $ 2,403       $ 1,333   $ 3,736   $ 3,167      $ 2,403       $ 4,748      $ 7,151      $ 5,432   

Operating income (loss)

    14         29     43     (80     14         (99     (85     (124

Sales Volumes, in millions

                       

Gasoline blending components – MTBE/ETBE (gallons)

    159         77     236     220        159         266        425        425   
                                                               

Crude processing rates (thousands of barrels per day):

                       

Houston Refining

    152         264     189     231        152         263        226        250   
                                                               

Berre Refinery

    106         83     99     93        106         75        86        90   
                                                               

Market margins –$ per barrel

                       

WTI – 2-1-1

    10.98         9.41     10.45     7.39        10.98         7.50        8.66        8.52   

WTI Maya

    8.80         11.01     9.54     4.58        8.80         9.46        9.24        4.52   
                                                               

Total

    19.78         20.42     19.99     11.97        19.78         16.96        17.90        13.04   
                                                               

Urals – 4-1-2-1

    7.53         6.93     7.33     5.69        7.53         6.17        6.62        6.32   
                                                               

Market margins – cents per gallon

                       

ETBE – NWE

    64.17         87.10     71.66     101.24        64.17         58.46        60.36        73.72   
                                                               

Revenues—Revenues for the second quarter 2010 increased by $569 million, or 18%, compared to the second quarter 2009, while revenues increased by $1,719 million, or 32%, in the first six months of 2010 compared to the first six months of 2009. The increases were primarily due to higher average sales prices at the Houston refinery, partly offset by the effect of lower sales volumes for refining and oxyfuels products. Crude processing rates for the Houston refinery were lower by 18% and 10%, respectively, in the second quarter and first six months of 2010, compared to the respective 2009 periods, primarily due to the crude unit fire in May 2010. The Berre refinery’s crude processing rates were 6% higher in the second quarter 2010 and 4% lower in the first six months 2010 compared to the same 2009 periods.

Operating Income (Loss)—Operating results for the second quarter 2010 increased $123 million compared to the second quarter 2009. For the first six months of 2010, operating results increased by $39 million compared to the first six months of 2009. Operating results for the Successor period were negatively impacted by a $132 million non-cash charge to adjust inventory at June 30, 2010 to market value, which was lower than the April 30, 2010 value applied during fresh-start accounting. The application of fresh-start accounting also resulted in lower depreciation and amortization expense of $80 million in the Successor period. Operating results in both 2010

 

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periods were negatively affected by the crude unit fire, resulting in lost production and $14 million of cash costs. Operating results in the second quarter and first six months of 2009 included benefits of $2 million and $50 million, respectively, from the settlement of hedging activity at the Houston refinery related to distillates. Apart from the effects of the crude unit fire and the 2009 settlement of distillate hedges, increases in the second quarter and first six months of 2010 primarily were primarily due to higher refinery product margins, partially offset by lower product margins for oxyfuels.

Second Quarter 2010 versus First Quarter 2010

The Refining and Oxyfuels segment had operating income of $43 million in the second quarter 2010 compared to an operating loss of $128 million in the first quarter 2010. Operating results for the Successor period includes the $132 million non-cash charge to adjust inventory to market value and $80 million of lower depreciation and amortization expense. The Successor period also includes the negative effects of lost production and $14 million of cash costs related to the Houston refinery crude unit fire. Underlying operating results increased primarily due to higher crude refining and oxyfuels margins. The effect of 28% lower crude processing rates in the second quarter 2010 resulting from the crude unit fire at the Houston refinery was mitigated by the purchase of intermediate streams, discounted cargos and favorable timing of transactions, all of which enabled downstream processing units to run closer to full capacity during the outage. Compared to first quarter 2010 crude processing rates, the second quarter rate at the Berre refinery increased by 36% as maintenance activities in the first quarter 2010 were completed.

Year Ended December 31, 2009 versus Year Ended December 31, 2008

Benchmark refining margins for 2009 were lower compared to 2008, generally reflecting the weaker global economy and consequent weaker demand for gasoline and distillate products, such as diesel and heating oil. The weaker demand resulted in lower prices for light crude oil, while OPEC-mandated production cuts resulted in lower supplies of heavy crude oil and lower price discounts relative to light crude oil. Both factors compressed the price differential between light and heavy crude oil. Benchmark margins for oxyfuels in 2009 were comparable to 2008.

Refining and Oxyfuels segment operating results in 2009 primarily reflected the effects of significantly lower U.S. refining margins compared to the same period in 2008. The operating results of the Berre Refinery, which was acquired on April 1, 2008, reflected the weak distillate markets in 2009. Operating results in 2009 benefited from higher margins for gasoline blending components and lower utility and fixed costs, but were negatively affected by outages of some of the Houston Refinery’s sulfur recovery units during the second quarter 2009 and of a crude unit during the fourth quarter 2009. As a result of LyondellBasell AF’s cost reduction program, fixed costs were significantly lower in 2009 compared to 2008.

In 2008, as further discussed below, operating results were negatively impacted by lost production at the Houston Refinery due to the effects of a hurricane and a scheduled maintenance turnaround of one of the Houston Refinery’s crude trains and coker units during the third quarter 2008 that was delayed by an incident involving a contractor’s crane and an unplanned second quarter 2008 outage of a FCC unit.

Year Ended December 31, 2008 versus Year Ended December 31, 2007

During 2008, the Refining and Oxyfuels segment comprises the refining and fuels businesses of Lyondell Chemical, acquired on December 20, 2007, and, beginning on April 1, 2008, the Berre Refinery.

Benchmark heavy crude refining margins in 2008 benefited from strong demand for diesel fuel and the cost differential between light crude oil and heavy crude oil, while margins for oxyfuels products, MTBE and ETBE, benefited from high gasoline prices.

 

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During 2008, the Refining and Oxyfuels segment benefited from strong margins for heavy crude at the Houston Refinery and for the segment’s oxyfuels products. The operating results for the Berre Refinery were break-even. Operating results were negatively affected by planned and unplanned outages at the Houston Refinery.

A maintenance turnaround at the Houston Refinery in 2008 was scheduled for one of the refinery’s crude trains and coker units. As a result of an incident in July 2008, involving a contractor company’s crane, and Hurricane Ike later in the third quarter 2008, the coker unit was not restarted until early December 2008. In addition, operating results in the 2008 period were negatively impacted by the unplanned outage of a fluid catalytic cracker unit and other operating units at the Houston Refinery, all of which resulted in lost production and additional maintenance costs.

The following table sets forth the Refining and Oxyfuels segment’s sales and other operating revenues, operating income and sales volumes for certain gasoline blending components for the applicable periods. The 2007 period reflects the acquired Lyondell Chemical refining and oxyfuels business beginning December 21, 2007.

 

     For the twelve months  ended
December 31,

Millions of dollars

   2009     2008     2007

Sales and other operating revenues

   $ 12,078      $ 18,362      $ 478

Operating income (loss)

     (357     (2,378     21

Sales volumes, in millions

      

Gasoline blending components—MTBE/ETBE (gallons)

     831        1,018        39
                      

Crude processing rates (thousands of barrels per day):

      

Houston Refining

     244        222        279
                      

Berre Refinery(1)

     86        102        —  
                      

 

(1) Berre Refinery purchased April 1, 2008

The following table shows market refining margins for the U.S. and Europe and ETBE margins in Northwest Europe (“NWE”). In the U.S., WTI, is a light crude oil, while “Maya” is a heavy crude oil. In Europe, “Urals—4-1-2-1” is a measure of West European refining margins.

 

     For the twelve months  ended
December 31,
     2009    2008    2007

Market margins—$ per barrel

        

WTI—2-1-1

   6.98    12.37    13.37

WTI Maya

   5.18    15.71    12.41
              

Total

   12.16    28.08    25.78
              

Urals—4-1-2-1

   5.57    10.98    8.67
              

Market margins—cents per gallon

        

ETBE—NWE

   68.86    68.61    53.33
              

Revenues—The Refining and Oxyfuels segment had revenues of $12,078 million in 2009 compared to revenues of $18,362 million in 2008 and $478 million in 2007. The decrease in revenues in 2009 from 2008 was primarily due to lower sales prices, partially offset by higher sales volumes at the Houston Refinery. The decrease in 2009 also was mitigated by the effect of a full year of operation of the Berre Refinery, which was

 

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acquired April 1, 2008. The 2007 period reflects the revenues of the acquired Lyondell Chemical refining and oxyfuels business beginning December 21, 2007.

Operating Income—The Refining and Oxyfuels segment had an operating loss of $357 million in 2009 compared to an operating loss of $2,378 million in 2008 and operating income of $21 million in 2007. Operating results in 2009 were negatively affected by lower crude refining margins, partially offset by lower utility costs due to lower natural gas prices and lower fixed costs. The latter reflected LyondellBasell AF’s cost reduction program. The lower refining margins were primarily attributable to U.S. refining markets, although margins were lower for both the Houston and Berre refineries.

In 2008, operating results were negatively impacted by scheduled maintenance turnarounds of crude and coker units and the related July 2008 crane incident at the Houston Refinery, as well as by operating disruptions related to Hurricane Ike by an estimated $205 million. In addition to the turnaround and hurricane effects, operating results were negatively affected by an estimated $220 million as a result of lost production due to unplanned maintenance at the Houston Refinery’s FCC and other operating units. Operating results were also negatively impacted by impairment charges against goodwill of $2,305 million and other assets of $218 million and inventory valuation adjustments of $442 million.

The 2007 period reflected the operating results of the acquired Lyondell Chemical refining and oxyfuels business from December 21, 2007.

Olefins and Polyolefins—Americas Segment

Overview—The O&P—Americas segment manufactures and markets olefins, including ethylene and its co-products, primarily propylene, butadiene and aromatics, which include benzene and toluene, as well as ethanol; and polyolefins, which include PE, comprising HDPE, LDPE and LLDPE, and polypropylene and Catalloy process resins. The manufacturing and marketing is generally in the Americas, which includes the U.S., Canada, Mexico and South America.

Three and Six Months Ended June 30, 2010 versus Three and Six Months Ended June 30, 2009

Market demand in the U.S. for ethylene was higher during the second quarter and first six months of 2010 resulting in higher industry operating rates compared to rates experienced during the second quarter and first six months of 2009. Ethylene margins were higher as benchmark sales prices increased significantly more than the benchmark weighted average cost of ethylene production. These margins were strengthened further by higher prices for co-products propylene and butadiene. Ethylene prices and margins peaked in March 2010 but remained at high levels compared to the first six months of 2009. Demand for polyolefins in the second quarter and first six months of 2010 was comparable to the second quarter and first six months of 2009 as export declines were offset by improved domestic demand.

The O&P-Americas segment operating results in the second quarter and first six months of 2010 primarily reflected strong demand and higher margins for ethylene, fueled by unplanned operating issues at competitor facilities. Higher monomer prices negatively affected margins for polyolefins in the first quarter 2010 periods but margins began to improve in the second quarter 2010 as monomer prices peaked and utility prices declined. Polypropylene results, which were relatively unchanged in the second quarter 2010, increased modestly in the first six months of 2010 compared to the same periods in 2009.

Ethylene Raw Materials—Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of movement of raw material and energy costs for ethylene and its co-products in the O&P–Americas segment. Ethylene and its co-products are produced from two major raw material groups:

 

   

crude oil-based liquids (“liquids” or “heavy liquids”), including naphthas, condensates, and gas oils, the prices of which are generally related to crude oil prices; and

 

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NGLs, principally ethane and propane, the prices of which are generally affected by natural gas prices.

Although the prices of these raw materials are generally related to crude oil and natural gas prices, during specific periods the relationships among these materials and benchmarks may vary significantly.

In the U.S., LyondellBasell N.V. has the ability to shift its ratio of raw materials used in the production of ethylene and its co-products to take advantage of the relative costs of heavy liquids and NGLs. During the second quarter and first six months of 2010, production economics for the industry continued to favor NGLs. During the second quarter 2010, approximately 65% of the Company’s U.S. ethylene production was from NGLs, predominantly ethane.

The following table shows the average U.S. benchmark prices for crude oil and natural gas for the applicable three- and six-month periods, as well as benchmark U.S. sales prices for ethylene and propylene, which LyondellBasell N.V. produces and sells or consumes internally. The benchmark weighted average cost of ethylene production, which is reduced by co-product revenues, is based on CMAI’s estimated ratio of heavy liquid raw materials and NGLs used in U.S. ethylene production and is subject to revision:

 

     Average Benchmark Price and Percent Change Versus
Prior Year Period Average
 
     For the three
months ended
June 30,
   Change     For the six
months ended
June 30,
   Change  
     2010    2009      2010    2009   

Crude oil – dollars per barrel

   78.05    59.79    31   78.46    51.68    52

Natural gas – dollars per million BTUs

   4.04    3.44    17   4.70    3.83    23

Weighted average cost of ethylene production – cents per pound

   26.75    24.63    9   30.57    24.23    26

United States – cents per pound

                

Polyethylene (high density)

   84.00    65.00    29   83.67    62.33    34

Ethylene

   45.58    31.50    45   48.96    31.50    55

Polypropylene

   89.83    58.50    54   88.83    55.00    62

Propylene – polymer grade

   63.33    32.00    98   62.42    28.42    120

 

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The following table sets forth the O&P–Americas segment’s sales and other operating revenues, operating income and selected product sales volumes:

 

    Successor        Predecessor   Non-GAAP
Combined
  Predecessor   Successor        Predecessor   Non-GAAP
Combined
  Predecessor  

Millions of dollars

  May 1
through
June 30,
2010
       April 1
through
April 30,
2010
  Three
months
ended
June 30,
2010
  Three
months
ended
June 30,
2009
  May 1
through
June 30,
2010
       January 1
through
April 30,
2010
  Six months
ended
June 30,
2010
  Six months
ended
June 30,
2009
 

Sales and other operating revenues

  $ 2,004       $ 1,163   $ 3,167   $ 2,037   $ 2,004       $ 4,183   $ 6,187   $ 3,615   

Operating income

    149         175     324     69     149         320     469     (32

Income from equity investments

    3         1     4     2     3         5     8     —     
   

Production Volumes, in millions of pounds

                       

Ethylene

    1,249         749     1,998     2,094     1,249         2,768     4,017     4,082   

Propylene

    513         264     777     731     513         1,019     1,532     1,407   
   

Sales Volumes, in millions of pounds

                       

Polypropylene

    449         221     670     656     449         836     1,285     1,197   

Polyethylene

    850         415     1,265     1,342     850         1,754     2,604     2,578   

Revenues—Revenues for the second quarter 2010 increased by $1,130 million, or 55%, compared to revenues in the second quarter 2009. For the first six months of 2010, revenues increased by $2,572 million, or 71%, compared to revenues in the first six months of 2009. The increases in the second quarter and first six months of 2010 compared to the same periods in 2009 were primarily due to the effect of significantly higher average sales prices for most products and for the first six months of 2010, higher sales volumes for ethylene and polypropylene. In the second quarter 2010, higher ethylene sales volumes were substantially offset by a 3% decrease in polyolefins sales volumes due to a scheduled maintenance turnaround at our Morris, Illinois polyolefin plant. The increases in average sales prices and ethylene sales volumes in the 2010 periods were driven by increased demand due to general economic recovery and a decrease in supply resulting from operating issues at competitor plants.

Operating Income (Loss)—Operating income in the second quarter 2010 increased by $255 million compared to the second quarter 2009 and increased by $501 million in the first six months of 2010 compared to the first six months of 2009. Operating results for the Successor period were negatively impacted by a $171 million non-cash charge to adjust inventory at June 30, 2010 to market value, which was lower than the April 30, 2010 value applied during fresh-start accounting. The application of fresh-start accounting also resulted in lower depreciation and amortization expense of $30 million in the Successor period.

The remaining increases in the second quarter and first six months of 2010 were primarily due to higher product margins, particularly for ethylene. Ethylene margins in the 2010 periods improved significantly compared to 2009 as higher average sales prices more than offset higher raw material costs. The higher results for ethylene in the first six months of 2010 were minimally offset by lower polyolefin results as higher ethylene prices during the first six months of 2010, negatively impacted polyethylene margins compared to the same period in 2009. Results for polypropylene, including Catalloy, also improved in the second quarter 2010 and first six months of 2010 compared to the same periods in 2009 primarily due to lower utility costs.

 

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Second Quarter 2010 versus First Quarter 2010

Operating income of $324 million in the second quarter 2010 compared to operating income of $145 million in the first quarter 2010. Operating results for the Successor period included the $171 million non-cash charge to adjust inventory that had declined in value after the emergence date and a benefit from lower depreciation and amortization expense of $30 million. The adjustment to inventory and change in depreciation and amortization expense are both a result of fresh-start accounting adjustments made to the inventory and fixed asset balances, respectively, of the O&P-Americas segment. The increase in the results of the segment’s underlying operations is primarily due to higher product margins, particularly polyethylene and ethylene. The higher product margins reflected higher average sales prices coupled with lower raw material costs. Polyethylene sales volumes were lower in the second quarter 2010 due in part to a scheduled maintenance turnaround at our Morris, Illinois facility.

Year Ended December 31, 2009 versus Year Ended December 31, 2008

While improving during the course of 2009 after a collapse of the market in the second half of 2008, ethylene market demand in the U.S. remained weak, resulting in lower industry operating rates in 2009 compared to rates in the 90% to 95% range during 2008. Ethylene margins contracted as benchmark sales prices decreased more than the benchmark weighted average cost of ethylene production. Polyolefins markets were weaker in 2009 compared to 2008 with the notable exception of U.S. PE markets, which benefited from strong export demand during 2009.

The O&P—Americas segment operating results for 2009 primarily reflect the strong PE export markets in 2009, lower olefins product margins and lower fixed costs. As a result of weak ethylene demand during late 2008 and the first half of 2009, LyondellBasell AF idled and subsequently shut down the Chocolate Bayou olefins plant, near Alvin, Texas. LyondellBasell AF also idled and subsequently restarted the La Porte, Texas olefins plant in January 2009. Polyolefins product results for 2009 reflected strong PE export markets in 2009, which benefited PE product margins and sales volumes. However, other polyolefins product markets were weaker and resulted in net lower sales volumes compared to 2008. As a result of LyondellBasell AF’s cost reduction program, fixed costs were significantly lower in 2009 compared to 2008.

In the third quarter 2008, operating results were negatively impacted by lost production at certain U.S. Gulf Coast plants due to the effects of a hurricane.

Year Ended December 31, 2008 versus Year Ended December 31, 2007

In 2008, the O&P—Americas segment included the olefins and polyolefins businesses of Lyondell Chemical, which were acquired on December 20, 2007.

During 2008, U.S. ethylene producers using crude oil-based raw materials experienced pressure on product margins as increases in average benchmark ethylene and co-product sales prices failed to keep pace with increases in average raw material costs. Benchmark prices of crude oil-based liquid raw materials averaged higher in 2008, despite the significant decline in crude oil prices in the latter part of 2008 from the record levels reached in mid-2008. Polyolefins markets experienced weakened demand during 2008 compared to 2007. The slowdown of the global economy, the crises in financial markets and the third quarter 2008 U.S. Gulf Coast hurricanes had the most significant negative effects on demand.

The O&P—Americas segment’s underlying operating results declined in 2008 compared to 2007, despite the acquisition of the Lyondell Chemical business, due to the significant volatility in raw material costs. Higher raw material costs and declines in polyolefin sales prices during 2008 compared to 2007 put pressure on polyolefin product margins. Furthermore, the rapid decline in crude oil prices, particularly in the fourth quarter 2008, resulted in adjustments of the inventory values to reflect their lower market value. Operating results were also negatively affected by Hurricane Ike, which resulted in lost production and additional costs in 2008.

 

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Ethylene Raw Materials

During 2009, production economics favored NGLs. As a result, LyondellBasell AF increased its use of NGLs and minimized liquids consumption at its U.S. plants. This included the above-noted permanent shutdown of LyondellBasell AF’s liquids-based Chocolate Bayou facility. During 2009, approximately 70% of LyondellBasell AF’s U.S. ethylene production was produced from NGLs.

The following table shows the average U.S. benchmark prices for crude oil and natural gas for the applicable periods, as well as benchmark U.S. sales prices for ethylene and propylene, and certain PE and polypropylene products. The benchmark weighted average cost of ethylene production, which is reduced by co-product revenues, is based on CMAI’s estimated ratio of heavy liquid raw materials and NGLs used in U.S. ethylene production and is subject to revision.

 

     Average Benchmark Price and Percent Change Versus Prior Year Period Average  
     For the twelve months  ended
December 31,
         For the twelve months  ended
December 31,
      
     2009    2008    Change     2008    2007    Change  

Crude oil—dollars per barrel

   61.58    99.51    (38.1 )%    99.51    72.23    37.8

Natural gas—dollars per million BTUs

   3.78    8.86    (57.3 )%    8.86    6.81    30.1

Weighted average cost of ethylene production—cents per pound

   26.21    45.39    (42.0 )%    45.39    37.93    19.0

United States—cents per pound

                

Polyethylene—(high density)

   66.50    86.42    (23.1 )%    86.42    73.25    18.0

Ethylene

   33.94    58.50    (42.0 )%    58.50    48.75    20.0

Polypropylene

   64.42    87.63    (26.5 )%    87.63    77.08    13.7

Propylene—polymer grade

   37.92    59.96    (36.8 )%    59.96    50.41    18.9

As indicated in the table above, 2009 average natural gas and crude oil prices decreased significantly compared to 2008. NGLs have been the favored raw material in ethylene production in the U.S. during much of 2009 as NGL prices have been lower relative to crude oil, and prices for heavy liquid ethylene co-products such as propylene have generally not been high enough to economically justify heavy liquid cracking.

The following table sets forth the O&P—Americas segment’s sales and other operating revenues, operating income, income from equity investments and selected product sales volumes. The 2007 period includes the acquired Lyondell Chemical olefins and polyolefins business from December 21, 2007.

 

     For the twelve months ended
December 31,

Millions of dollars

   2009    2008     2007

Sales and other operating revenues

   $ 8,614    $ 16,412      $ 2,817

Operating income (loss)

     169      (1,355     61

Income from equity investments

     7      6        12

Production volumes, in millions of pounds

       

Ethylene

     8,129      7,990        9,012

Propylene

     2,913      3,975        5,049

Sales volumes, in millions of pounds

       

Polypropylene

     2,509      2,928        3,300

Polyethylene

     5,593      5,256        377

 

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Revenues—Revenues were $8,614 million in 2009 compared to $16,412 million in 2008 and $2,817 million in 2007. The decrease in 2009 revenues reflects the effect of lower product sales prices and net lower sale volumes. The net lower sales volumes in 2009 were a result of lower sales volumes for polypropylene and ethylene and co-products, partly offset by higher sales volumes for PE, which benefited from the strong U.S. export markets. The 2007 period includes the revenues of the acquired Lyondell Chemical olefins and polyolefins business from December 21, 2007.

Operating Income—The O&P—Americas segment had operating income of $169 million in 2009 compared to an operating loss of $1,355 million in 2008 and operating income of $61 million in 2007. The underlying operations of the O&P—Americas segment in 2009 reflected the benefit of lower fixed costs, resulting from LyondellBasell AF’s cost reduction program, partially offset by net lower product margins and the effect of net lower sales volumes. Operating results for 2008 were negatively affected by the estimated $120 million impact of lost production due to Hurricane Ike, and related costs of $39 million, including a $7 million pretax charge for impairment of the carrying value of assets; inventory valuation adjustments of $619 million; and goodwill impairment charges of $624 million.

The 2007 period includes the operating results for the acquired Lyondell Chemical olefins and polyolefins business from December 21, 2007.

Olefins and Polyolefins—Europe, Asia, International Segment

Overview—The O&P—EAI segment manufactures and markets olefins, including ethylene and propylene, primarily for its internal consumption and butadiene; and polyolefins, which include PE, comprising HDPE and LDPE and polypropylene, as well as PP compounds, Catalloy process resins and PB-1 polymers. The manufacturing and marketing is generally in Europe, Asia and other regions outside of the Americas with the exception of PP compounds and PB-1, which are manufactured and marketed globally by the O&P—EAI segment.

Three and Six Months Ended June 30, 2010 versus Three and Six Months Ended June 30, 2009

Ethylene market demand in Europe wa