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Executives

Douglas Pike – Director, IR

James Gallogly – Chairman and CEO

Clifford Potter – Principal Finance Officer

Analysts

Don Carson – Susquehanna Financial

Hassan Ahmed – Alembic Global

Duffy Fischer – Barclays Capital

Bob Koort – Goldman Sachs

Laurence Alexander – Jefferies

Kevin McCarthy – Bank of America

Jeffrey Zekauskas – JP Morgan

PJ Juvekar – Citi

Bill Hoffman – RBC

Hamed Khorsand – BWS Financial

Frank Mitsch – Wells Fargo

Bill Young – ChemSpeak

Gregg Goodnight – UBS

LyondellBasell Industries NV (LYB) Q3 2011 Earnings Call October 28, 2011 11:00 AM ET

Operator

Hello, and welcome to the LyondellBasell teleconference. At the request of LyondellBasell, this conference is being recorded for instant replay purposes. (Operator Instructions) I’d now like to turn the conference over to Mr. Doug Pike, Vice President, Investor Relations. Sir, you may begin.

Douglas Pike

Thank you, Dorian. Hello and welcome to LyondellBasell’s Third Quarter 2011 Teleconference. And I’m joined today by Jim Gallogly, our CEO; Kent Potter, our Principal Financial Officer; Karyn Ovelmen, our new CFO; and Sergey Vasnetsov, our Senior Vice President of Strategic Planning & Transactions.

Before we begin the discussion I’d like to point out that a slide presentation accompanies today’s call and is available on our Web site at www.lyondellbasell.com. I’d also like for you to note that statements made in this call relating to matters that are not historical facts are forward-looking statements. And these forward-looking statements are based upon assumptions of management which are believed to be reasonable at the time made and are subject to significant risks and uncertainties. Actual results could differ materially from those forward-looking statements.

For more detailed information about the factors that could cause our actual results to differ materially, please refer to the cautionary statements in the presentation slides and our financial reports, which are available at www.lyondellbasell.com/investorrelations. And reconciliations of non-GAAP financial measures to GAAP financial measures, together with any other applicable disclosures including the earnings release, are currently available on the Web site, www.lyondellbasell.com.

Now finally I’d like to point out that a recording of this call will be available by telephone beginning at 1:00 p.m. Eastern Time today until 11:00 p.m. Eastern Time on November 28 by calling 800-789-9018 in the United States and 203-369-3337 outside of the United States. The passcode for both numbers is 6798.

During today’s call we’ll focus on third quarter 2011 performance, the current environment and the near-term outlook. That being said, I’d like to turn the call over to Jim.

James Gallogly

Well thank you for joining our earnings call. As Doug mentioned, a set of presentation slides accompany this call and are available on our Web site.

Before I discuss results I’d like to thank Kent for coming out of retirement to work with me again and help build the new LyondellBasell. Kent, we’re sorry to see you leave. We wish you the best in your second retirement.

We’re also excited to have Karyn join our team. Her skills and background will serve the company and our investors well. Karyn is already actively engaged in her new role.

Let’s take a look at Page 4 and review a few financial highlights of what has been our best quarter ever. Net income was $895 million and EBITDA exceeded $1.7 billion. This brings our year-to-date EBITDA to $4.7 billion and earnings per share to $4.12. During the quarter we had a few items that on a net basis negatively impacted EBITDA by $14 million and EPS by $0.02 per share.

All of our business segments continued to perform well during the quarter and our plants operated well. Perhaps the best example of this was the Houston refinery which operated at designed through-put, benefited from smart crude buying and generated record profits. During the quarter the only significant plant reliability impact on earnings was approximately $20 million from the residual impacts of the second quarter Morris plant power supply outage.

Reliable operations typically go hand-in-hand with excellent safety performance and strict cost control. The third quarter was no exception. You can see on Page 5 that our safety performance has surpassed prior year results and is near the top of our industry. As you know, we carefully track our fixed cost spending. Through three quarters, after adjusting for foreign exchange impacts, our costs continued to trend in-line with prior year spending at approximately $3.6 billion. Strict cost management remains an integral part of our strategy (audio gap) summary a quarter and year-to-date we’ve continued to (audio gap) financial and operating record. Help based and uncertainty in the global economy, I’m very confident that we have positioned ourselves to excel in any environment.

Let me now turn the call over to Kent to discuss our financial performance.

Clifford Potter

Thanks, Jim. And thank you all for joining us this morning. Before I discuss the quarter, I’d like to spend a few minutes on our recent financing announcement and my own retirement.

Regarding the financing, we reached a point when we felt that the timing was right to address the capital structure. You will note in the slide package, by the end of the third quarter our cash position had grown to almost $6 billion and we finished the quarter with no net debt. After deliberating for months, and consulting with many others, we arrived at a plan that I believe is quite balances and achieves our goals. Rather than reviewing all the details of the plan, I will refer you to the press release and the 8-K that we issued last week.

It simply stated, and assuming that we proceed with all aspects of the program, we will reduce our debt and associated interest costs, relieve many of the constraints created by the covenants in our existing bonds, will release the security on the bonds, will issue a new unsecured bond, increase our pension funding and return cash to our shareholders through an increased regular dividend and a special dividend.

This positions our capital structure very conservatively with attributes consistent with an investment-grade rating. This was one of my principal goals as the CFO of LyondellBasell, as I firmly believe that a solid balance sheet is a requirement for the company to become the top competitor in our industry.

At this time I’m not going to say any more about the financing, as legally we are limited in what we can say. For this reason, I would ask that you respect that we will not be able to take questions on this subject.

Now regarding my retirement. Many of you know I originally committed to a period of no more than two years, and I’ve actually overstayed that somewhat. But being part of the team that took this company out of bankruptcy has been, without a doubt, challenging but professionally very rewarding. I believe we have positioned LyondellBasell firmly on the road to being to being the best. We have some great people in this company and I have to add, especially in the finance department, who have accomplished some amazing things. Much remains to be done, but as I have gotten to know Karyn over the last couple of week, I am convinced that she is perfect for the job and will be a key and valued member of Jim’s leadership team.

Now, let’s go back to the quarter’s results. Please refer to Page 6. As Jim said, this was a record quarter, and it’s nice to see all aspects of the company performing so well. I just want to highlight a few key items that have driven our performance. First, within Olefins & Polyolefins Americas, we benefited during the quarter from strong margins from both ethane and naphtha feedstocks. Our Midwest crackers were particularly advantaged. In our Olefins & Polyolefins in Europe, Asia and International segment, our results benefited from the strength of our differential positions such as polypropylene compounding, Catalloy resins and the JVs that we discussed in some detail last quarter.

In Intermediates & Derivatives the continued strong and improving performance of our propylene oxide technology stands out to me. In the past four quarters this segment has generated over $1.1 billion of EBITDA. In Refining and Oxyfuels, the improvement in both the operating and commercial performance of the Houston refinery has been remarkable. In a world with generally poor refining results and numerous refineries that are either closing or for sale, this facility has fairly differentiated itself. Finally, I think that the overall reliability of our operations highlights just how far we’ve come as a company.

During the second quarter call I spent quite a bit of time discussing our joint ventures. I won’t repeat that, but will say that this quarter equity income was $52 million and dividends totaled $55 million.

Pages 7 and 8 summarize our cash flow, working capital and liquidity. During the quarter we generated nearly $1 billion of excess cash and built our cash balance at $5.9 billion, essentially equal to our debt. Total capital spending in the quarter was $279 million, and within this was approximately $75 million related to the pipeline acquisition we closed during the third quarter. You might recall that we acquired approximately 200 miles of pipelines from BP. These pipelines are dedicated to our Channelview Olefins business, and the acquisition reduces costs and ensures we have control of these critical pipelines. We will operate these along with approximately 2,000 miles of pipelines within our existing system.

In terms of total spending for the year I continue to anticipate 2011 capital spending will be approximately $1.1 billion. On the chart on the right side of Page 7 you can see our cash generation since the emergence in May 2010. Since then we have added $3.2 billion to our cash balance, reduced debt by $1.4 billion and paid $171 million of dividends. In total, approximately $4.8 billion has been generated over the span of the 17 months.

On Page 8 you can see our working capital has been relatively unchanged across this year. On the right hand side of the chart we have plotted our cash and liquidity over the past 12 months. On September 30 our cash balance was $5.9 billion, liquidity was $7.9 billion and we had no new debt. With that I’ll now return the call to Jim.

James Gallogly

Thanks, Kent. Let’s step through a summary of third quarter results for each of our businesses. Page 9 addresses the Q results for the Olefins & Polyolefins America segment. The third quarter continued a string of strong quarterly results. EBITDA was $673 million bringing year-to-date segment results to greater than $1.7 billion dollars. The third quarter improved by $95 million versus the second quarter. Within the segment Olefins provided the strength as EBITDA improved by approximately $155 million the key drivers of the improvement increase margins and strong operating reliability.

Additionally you might recall that the second quarter included the impact of our Channelview turn-around which we estimated to be approximately $75 million. Ethylene margins improved by approximately $0.04 a pound as our average sales price declined by $0.02 per pound. The cost of ethylene production metric declined by close to $0.06 per pound. Approximately 75% of our ethylene was produced from natural gas liquids. However, there were periods during the quarter when naphtha economics were favored and we incrementally shifted the feed slate in that direction.

Regarding reliability, our results were negatively impacted by the residual effects of the second quarter of cogeneration supply reps at our Morris site. This reduced the quarter’s results by an estimated $20 million dollars and was approximately equal to the second quarter impact. We have now completed all the repairs following this incident.

In Polyolefins our results declined as spreads contracted in both polyethylene and polypropylene. Our average polyethylene and polypropylene sales prices declined by approximately $0.05 per pound. This resulted in a moderate margin decline in both polymers. Sales volumes for both polymers were relatively unchanged.

During October sales volumes have not changed significantly from the third quarter sales pace and we continue to operate our ethylene plants at or near maximum rates. However, there has been significant cost and price volatility. Co-product prices have been the most volatile. And the cost of ethylene from naphtha has increased towards global naphtha economics. This is similar to the situation that we experienced early in the year.

We have also experienced ethane cost increases. We believe that this volatility is contributed to a combination of pipeline disruptions and producers’ efforts to optimize the economics of their natural gas liquids pipeline systems. The capacity of this infrastructure is being pressured by the growth in supply from shale development. Having said that, our approximately two billion pounds of Midwest ethylene capacity has been significantly advantaged versus Gulf Coast due to lower regional ethane costs.

Let’s move to Page 10 and turn our attention to Olefins & Polyolefins Europe, Asia and International. This segment also had a good quarter with EBITDA of $261 million. This was $14 million less than the second quarter EBITDA which was negatively impacted by $61 million of accruals. Olefins continued to be the primary contributor to EBITDA, although this business saw results decline by approximately $55 million. The decline was primarily attributed to a $0.07 per pound reduction in ethylene margin.

Polyolefins profitability declined by approximately $80 million primarily due to lower margins. Our margin declines were generally consistent with industry data. The impact of the margin decline was partially offset by a 3% increase in polyolefin sales volumes.

Partially offsetting the declines in the base commodity products were increases in Polypropylene compounding and joint venture dividends. Polypropylene compound results improved by approximately $15 million. Equity income for joint ventures reported in this segment was $37 million and we received $45 million in dividends. Our HMC joint venture in Thailand paid $35 million and one of the Saudi Polypropylene joint ventures distributed $10 million.

Looking to the fourth quarter, the October ethylene price was unchanged from September while the propylene price declined slightly, €10 per ton. Butadiene price remains elevated but there was decline was record third quarter levels. Naphtha costs have been relatively steady since the end of September. We anticipated the decline in Polyolefin volumes consistent with year-end seasonal trends and European economic uncertainties.

Please turn to Page 11 for a discussion of the Intermediates & Derivatives segment. Third quarter EBITDA was $297 million, $17 million less than the second quarter, which benefited from a $41 million gain from the sale of silver and spent catalyst. Results in the propylene oxide and derivatives improved by approximately $70 million. The improvement primarily reflects higher margins. Solvents and butanediol were particularly strong.

In other products lines we experienced slight declines in acetyls, styrene and TBA Intermediates. However, for perspective, I should mention that the third quarter was still outstanding. In fact, during the past three years, third quarter Intermediates & Derivative results were only exceeded during the second quarter of this year.

Fourth quarter results are expected to be somewhat below the third quarter as they will be impacted by, first, turnaround activity in acetyls at one of our gas sites which includes a PO plant and butanediol plant; second, typical seasonal impacts.

Moving forward to Page 12, I’d like to discuss the Refining & Oxyfuel segment. Third quarter EBITDA was $519 million, a $166 million increase versus the second quarter. The Houston Refinery result represented approximately 80% of the EBITDA. The Houston Refinery had an outstanding quarter as EBITDA increased by approximately $135 million over already strong second quarter results.

Crude throughput slightly exceeded nameplate capacity, averaging 269,000 barrels a day. The Maya 211 benchmark spread declined by approximately $2 per barrel. However, our spread improved versus the second quarter. This improvement was achieved primarily through the optimization of the crude slate and the acquisition of crude oil at discounted prices.

Last year I promised we would improve the Houston Refinery’s performance. Our people are delivering on this promise. The Berre refinery continued to post losses during the quarter. We continue to limit crude runs due to economic conditions. The labor strike at the end of the quarter had a minimal impact on results. Oxyfuel results improved by approximately $20 million versus the second quarter, largely due to improved margins.

In general, the fourth quarter has started with industry margins following typical seasonal trends. As you can see on the bottom right corner of the page, the Maya 211 spread has declined by approximately $5 per barrel. Thus far, the reported industry MTBE spread has remained nearly unchanged due to warmer than normal weather in Europe at the beginning of the quarter. However, we expect a spread to follow typical seasonal patterns and decline as the quarter progresses.

Operationally the Houston Refinery has continued to perform well. And the Berre Refinery has been restarted following the labor strike. The Berre Refinery will continue to operate while local management conducts consultations with the Works Counsels product to cease production and mothball the facility at the end of the year.

Let’s move to Page 13 and the Technology segment. This segment posted third quarter EBITDA of $45 million. Catalysts remained strong during the quarter.

If you now turn to Page 14, I’d like to step back from the details and summarize the environment. First, I should emphasize the third quarter results were the best that we have ever achieved. The strength of the quarter contributed to year-to-date EBITDA of approximately $4.7 billion and sufficient cash to move forward with our refinancing plans. Our back-to-basics strategy and intense focus are bearing fruit. All aspects of the company have performed well. Reliability has been strong, our capital programs and growth plans have advanced and cost management remains a priority. Our results continue to outperform our peers and I hope that the strength and quality of the new LyondellBasell is apparent.

With respect to the fourth quarter, there are economic uncertainties but despite all the headlines and negative sentiment, the economy has shown some resilience of late. Though we don’t know how the global situation will play out, I’m very comfortable with our position. They have emphasized the basics and this approach works in any economic environment. Our success has been quite obvious and our strong assets, operations and balance sheet will ensure competitiveness independent of the economic environment. Additionally, the fundamentals that have supported our business remain intact. Low natural gas costs relative to crude oil create a global advantage for our U.S. operations. Despite recent volatility in ethane prices, this trend is expected to continue for a number of years.

While the European business climate has weakened, our efforts to significantly improve our cost position there and to differentiate our products will allow reasonable returns. Our Intermediates & Derivatives segment has demonstrated specialty-like returns which we expect to continue. The Houston refinery is highly competitive and is clearly demonstrating its earning power.

We’re addressing the Berre refinery losses. I’m not going to speak about our expansion and growth plans today, as I would prefer to preserve that discussion for our investor day when we have a better opportunity to discuss details. We have a number of significant growth projects with excellent returns and we look forward to telling you more about them.

In summary, the quality of our results speak for themselves. We recognize that there will always be uncertainties and volatility in the economy. Our strategy coupled with the flexibility and quality of our assets, ensure success regardless of the economic environment. Thank you for your past and future support. Dorian, we’re now ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from David Begleiter with Deutsche Bank. We’ll go on to the next question, Don Carson with Susquehanna Financial, your line is open.

Don Carson – Susquehanna Financial

Thank you. Just a question on your outlook for feedstock costs and ethane specifically. I know earlier you’d been somewhat more constructive on the outlook for ethane supply starting to exceed demand. I’m just wondering if you can talk about your near-term outlook for ethane. And when you would expect either additional supply or addition compression capacity to lead to a looser ethane balance?

James Gallogly

Sure. Don, at present ethane prices have spiked. They’re over $0.90 a gallon. You’ve seen those prices move around a lot, sometimes moving $0.05 or $0.10 in a very short period of time. We think there’ll be continued volatility. Some of that is due to logistics constraints. Some of it’s due to the need for prompt barrels for instance at the end of the month people have been cracking much lighter, because that’s where the margin is right now. That’s put some additional pressure on things. We expect a lot of those logistical issues to be cured, some next year. We’re putting in some additional pipes ourselves as a company to source feedstock from Belvieu into some of our Houston crackers to increase throughput.

We also see some seasonal issues. Some people are shipping propane and butane on the same lines where ethane moves. Some of that is very seasonal. We expect that volatility to continue for a period of time, but as you know there’s additional fractionation coming online. We think this is more short term rather than long term. We remain extremely bullish on the opportunity to see this ethane advantage continue for multiple years.

Don Carson – Susquehanna Financial

And you’ve got a nice Midwest advantage. Do you think that’s sustainable? Or do you think that’s temporary as well? And if it is sustainable, any plans to debottleneck further in Morris or in your other Midwest plants?

James Gallogly

Yeah. Our Clinton and Morris facilities have both been very advantaged of late, sometimes in excess of $0.50. That’s typically closer to $0.20 on a normalized basis. I don’t expect it to continue at that extremely elevated level for a long period of time, but it certainly is nice while it’s there. One of the things that hopefully you’ve seen is that our rates have come up in Morris and in Clinton. We’ve operated at record levels during multiple months. We’re working on some very modest debottlenecks downstream to take full advantage of a slightly increased capacity in the crackers, but we’re really not looking at any significant debottleneck there. Just slight pushes here and there in volume, but longer-term we’re hopeful that that $0.20 average will continue.

Don Carson – Susquehanna Financial

Thank you.

Operator

Our next question comes from Hassan Ahmed with Alembic Global.

Hassan Ahmed – Alembic Global

Good morning, Jim. I two-part question if I could One on product prices and one again digging a bit deeper into the butane side of things. This is a Midwest advantage flourished through the course of Q3, as one thinks about the next year and the like, do you see a move towards the historic trend levels?

James Gallogly

In our Midwest crackers?

Hassan Ahmed – Alembic Global

Yes. I mean historically if I look at trend levels, the delta between call it Conway and Mont Belvieu ethane pricing was call it close to $0.20 a gallon. Do you see that transpiring or that sort of spread being hit through the course of 2012?

James Gallogly

We obviously have a much better spread than that today, but over time it should average back out in that direction. The reason that it’s that way right now because there’s very significant excess production, but there’s also, I’ll remind you a pipeline planned in 2013 that should reduce some of that extreme price advantage that we have.

Hassan Ahmed – Alembic Global

Fantastic. Now on the product pricing side of things, assuming let’s say that crude oil and natural gas prices remain where they are today, there’s a lot of chatter about Asian crackers really sort of making breakeven to negative profitability. So if energy prices remain where they are today, do you see over the next couple of months a positive inflection call it in spot pricing on the olefin side of things?

James Gallogly

No. It’s always about the economy.

Hassan Ahmed – Alembic Global

Sure.

James Gallogly

If the economy improves, Hassan, you’ll see those prices move up, but right now those Asian crackers, especially the smaller ones, are the marginal cracker and they are closer to breakeven. The good news is we don’t have any of those.

Hassan Ahmed – Alembic Global

Okay. And the final, final one – would you be able to quantify on the O&P America side of things, how much of a sequential EBIDTA boost you got from the Midwest advantage through the Midwest ethane advantage for the Q3.

Clifford Potter

Well, it’s about 20% of our capacity, a couple billion pounds. So you can put that in perspective. The price did run up of late and that has been a help but we kind of expect that to continue for a while. So...

James Gallogly

Yeah. Let me try to help you a little bit with some of the numbers. And if you think about it, Midwest EP mix has stayed in the $0.38 to $0.40 range. Meanwhile, Gulf Coast ethane has moved from being in the 70s up to the low 90s. So when you’ve got a $.20 move on the Gulf Coast and no move in the Midwest, $.20 a gallon would translate upwards to $.10 a pound in ethylene. That’s sort of your – your recent sort of shift that you’ve seen.

Hassan Ahmed – Alembic Global

Very helpful. Thank you so much, guys.

Operator

Our next question comes from Duffy Fischer with Barclays Capital.

Duffy Fischer – Barclays Capital

Yes. Good morning. I want to talk just – the propylene molecule versus the ethylene molecule. Obviously the propylene molecule and its derivatives have fallen off faster, harder than people would have thought over the last month or so. How do you see the structural balance in the demand for the propylene molecule – both North America where we’ve gone away from some of the cracking lighter and globally versus where the supply sits today? And how long do you think it’ll be before that starts to tighten back up?

James Gallogly

Duffy, a lot of this happens very much real time. Obviously everybody is cracking lighter today, us included. That makes that propylene molecule pretty valuable. We have the flex unit which helps us in our profitability because if you turn ethylene into propylene – but I would expect that to normalize again. About the time everybody’s cracking really, really light it brings co-prices back up and things normalize, so you kind of have to watch it quarter by quarter. But a lot of stuff that would – has – that could move out of propylene – polypropylene into polyethylene – a lot of that’s happened in the substitution.

Duffy Fischer – Barclays Capital

Okay. And then I just wanted – you had mentioned that you had put some of your own pipes into bring a little more capacity to your own plants. Roughly how big or how meaningful would those be?

Clifford Potter

Yeah, what we’re looking at doing is de-bottlenecking some of our furnaces. We’re running them lighter and we were in certain instances ethane constrained, so we’re doing a little line looping and a few things like that to be able to run our furnaces at maximum. And so that’s about all I’d like to comment on at this point in time.

Duffy Fischer – Barclays Capital

Okay. Good enough. Thank you, fellas.

James Gallogly

Thank you.

Operator

Our next question comes from Bob Koort with Goldman Sachs.

Bob Koort – Goldman Sachs

Thank you. Good morning. Jim, can you talk a little bit about in Refining there’s been a lot of variation in your purchasing price or costs relative to when the Peta Base the contract was there? Is it a function of your premium disappeared? Or you’re buying it at a bigger discount to the market now? What has sort of driven your cost position there?

James Gallogly

Bob, there’s several things that are going on. One, we’re simply buying more distressed cargos than we used to. We’ve been in the market, taking advantage of the flexibility that our outstanding refinery gives us. So distressed cargos, we have varied the types of crudes that we’ve brought in. We’re running far more efficiently. There are just a number of things that have caused us to improve the profitability.

Bob Koort – Goldman Sachs

So these should be sustainable, Jim?

James Gallogly

There’s been a very nice Maya 211 spread, and when you have that you can take advantage of it. The spreads come down some, but I’d like to say that our team is far more alert than it used to be historically about these kinds of things, and you should expect this to continue to do well.

Bob Koort – Goldman Sachs

And if I could follow up on ethane, I’m sure you’ll get a few more even, but there seems to be a variance between some of the expectations of the ethylene producers and maybe some of the consultants about when ethane prices might finally crack. I’m wondering if you could maybe give us some more granular view from your standpoint. And then as an oil and gas guy, is there any risk that there’s not enough gas demand to merit pulling all that shale out of the ground? So maybe we don’t actually get all those liquids out? Or is that de minimis risk?

James Gallogly

First in terms of when the ethane price might moderate, it went up pretty quickly. It hasn’t been at those elevated levels for a long time. Your guess is as good as mine when it comes back down. As I mentioned, there were some issues with certain of our competitors needing prop barrels, some other things going on that created extra noise. When the price moves multiple cents in a day, you know there’s some unusual market conditions going on. That has been occurring. I would expect that to moderate some, and again as propylene prices and all that come up, and as co-products become more valuable, there’ll be some basic moderations.

Now, in terms of the gas price and the impact on ethane, and whether the low gas price ultimately affects things, a few comments. First, I haven’t drilled in the gas wells for at least 2.5 years now. It wasn’t that long ago when I had quite a lot of insight about the economics in those wells. Depending upon the play we start getting $3.50 to $4.00 net gas price and a lot of that stuff looks really good. Nice returns, you see a lot of people spending billions upon billions of dollars drilling those wells. A couple things that most people don’t realize, and one is that people according to their leases need to drill to earn the acreage. Otherwise takes significant write-downs in their lease acquisition costs. So I think that drilling is going to continue at a pretty elevated pace despite where the gas prices are as we enter into November. People, the producers, typically look longer than a quarter when they start drilling those wells.

The second, is I think one of the trends you’ll see is people start to do infill drilling in their spacing units. That typically happens, these are tight sands, and big spacing units, and typically what happens is, as you don’t drain the whole unit – I know I’m talking a lot of E&P talk to chemical guys, but what happens is you start to infill drill within a 640 to a 320 to 160, that kind of thing and keeps the trends going. And once you’ve got the gathering lines and the fractionation in place, the economics get even better for the subsequent wells. So I think this trend keeps going. I’m very excited about it. That’s one of the reasons I came to a chemical company. I could see the long-term advantage in what’s going on here in the United States and the shale plate.

Bob Koort – Goldman Sachs

Thanks. That’s very helpful.

Operator

Our next question comes from Laurence Alexander with Jefferies.

Laurence Alexander – Jefferies

Good morning.

James Gallogly

Good morning, Laurence.

Laurence Alexander – Jefferies

Two quick questions. First on productivity, can you give an update on your thinking about productivity run rates and how you be to flex your cost structure if the margins come under pressure for a more sustained period?

Clifford Potter

Yes. I have to take that a bit geography by geography. I assume we’re talking Olefins & Polyolefins and maybe Refining because R&D business is pretty stable and has nice earnings profile and kind of stays there quarter to quarter. But if you look at, let’s start with O&P Americas. Our volumes are staying up but we can literally change our rates almost on a dime. We buy a fair amount of comp barrels and so we can change rapidly if we wanted to reduce rates. But I’ll tell you at this moment in time we’re running our crackers full out. And our polymer volumes are holding up at this point in time. We mentioned there’d be some seasonality but we can move very rapidly on that.

In Europe we’ve already, as you can see from the numbers, we’ve already reduced our rates. And that’s been a trend that we’ve had for several months. Europe is definitely weaker. We’ve been controlling inventory and even there remember we’re net short and so we can flex up or down pretty rapidly. On the refining side I’m happy to report we’re running very hard at the refinery and It’s very easy there to delay cargos, this or that, if we need to if we wanted to reduce run rates. But the cracks are still pretty decent. We see no reason to do that and we got our foot on the floor.

Laurence Alexander – Jefferies

And then if we could flesh out a little bit more detail of the strong results in the Houston refinery. How much of the performance this quarter was driven by the sourcing as opposed to just higher crack spread capture? And has there been a structural improvement in the crack spread capture rate since, over the last couple years? Or how do you expect that to go going forward?

James Gallogly

Yeah. I’ll make a comment then I’ll let Doug add a few additional comments. First, I personally think we have made a structural change. We typically under-perform the Maya 211. There were ways that we were running that refinery that in my view were not appropriate. We have taken our life cycle oil, for instance and moved it to a third party hydrocracker. We have been running hydrotreaters at appropriate levels without the high severity. That’s allowed us, as you can see, bump up the crude rates we’re running to the point where we had a quarter in excess in nameplate. That’s pretty strong.

We also repaired our cap cracker at the beginning of the year. You remember we had a major turn around there. And even at these rates we have a second stage compressor that isn’t running on the cap that we have a little bit more juice yet that we can add when we repair that. So we’re running a lot better we’re buying a lot smarter. We have made some structural changes in the way we run the unit. And so I feel, I feel pretty good about that asset. Doug did you want to add some comments.

Douglas Pike

Yeah. Well, I just want to say that as Jim said we’ve been making those improvements and they’ve been going forward and there’s more coming. So some of it is in the yield, the good bit of it though is in the buying and of course, that’s going to be a little bit lumpy as we go forward and we’ve talked about each of the last several quarters Kevin and his team have really beaten the benchmark and have been able to buy distressed crude. Because we’ve got a facility that gives us that flexibility and we also have an operating model that gives us that flexibility.

And I think that’s something, we can’t tell you it will continue at the rate that you saw this quarter, which was higher than we’ve achieved in the past. But I think we feel very comfortable that the assets and the people we have now are going to continue to achieve the ability to pull in some cargos and best utilize the assets. I think that’s one of the key differences that we’re seeing now versus say a year or so ago.

Laurence Alexander – Jefferies

Thank you.

Operator

Our next question comes from Kevin McCarthy with Bank of America.

Kevin McCarthy – Bank of America

Good morning. Jim, Lyondell shares have been trading at relatively low multiples of EBITDA and net earnings compared to pure companies in the chemical industry. In that context, would you comment on the decision to return cash to shareholders in the form of a special dividend as opposed to share repurchases or other applications?

James Gallogly

Yes. First, Kevin, I was going to ask you why the shares trade like that. We’ve had back-to-back record quarters, and I think we’re performing pretty well. I’d sure like to see our share price respond. But part of the reason that we’re doing a special dividend versus share repurchases is frankly two things. One, there are some unique tax implications to bind back our shares, being a Dutch company. At this moment in time, given our emergence from Chapter 11 a little over a year and a half ago, there are some unique issues there. And secondarily we just pay a lot of attention to shareholder concentration. So at this moment in time we thought special dividend was the right thing to do. Obviously we have our growth plans in place, paying down debt, a variety of other things. So it was simply put we’ve generated so much cash, that it seemed the appropriate thing to do now. We’ll look at share repurchases at a later date.

Kevin McCarthy – Bank of America

As a follow-up, Jim, you’ve been following these actions. Your balance sheet looks like it will carry modest financial leverage relative to EBITDA generation for example. If we take a longer term view, let’s say the next three to five years, my understanding is that the Netherlands related tax angles could change over time, and in that context should we think about special dividends as modus operandi so to speak? For lined all over that period? Or is it likely that you could shift tactics and favor repurchases as the tax angles change?

James Gallogly

A couple of things there. First, the tax angles will change as time goes forward. We know that. We’ll have to watch the shareholding and see if that changes, if our attitude changes. Generally I would say longer term we prefer shorter repurchases versus special dividends, but we’ll just see how things set themselves up as time goes on. We really don’t want to comment on that too specifically other than to say that Kent and I, when we started this company and the new LyondellBasell, have consistently said we’d like to move toward an investment grade. We don’t think the #1 performing petrochemical company in the business can be that without an investment grade credit. So we’re pushing really, really hard on that. I know Karyn will have that same view. We’re focused on growing free cash flow and we’re going to find economically attractive ways to return value to shareholders. I’ll just simply say that.

Kevin McCarthy – Bank of America

All right. Fair enough. Thank you.

Operator

Our next question comes from Jeff Zekauskas with JP Morgan.

Jeffrey Zekauskas – JP Morgan

Hi. Good morning. In the coming 12 months, do you see any industry Olefins capacity reductions going on in Europe?

Clifford Potter

Jeff, that’s a bit difficult to say. I know that a number of people have predicted it. There are some stresses and strains on the smaller units. Profitability hasn’t been that good for multiple months. Europe is generally a high-cost platform. And so there could be some of that. In terms of us as a company, as I mentioned, we’re net propylene short. A little reasonably balanced on the ethylene side. We run our crackers hard. We’ve got nice competitive positions. And remember that during Chapter 11 we shut down our high-cost assets. So we’ve done a lot of structural changing as a company, so you shouldn’t look for us to do much of that. We think we’re pretty well positioned and what we remain focused on in Europe is reducing our backroom costs. We’ve been in discussions with our works council now for months and are moving forward on a significant cost reduction program. More to come on that as the discussions progress with the works councils.

Jeffrey Zekauskas – JP Morgan

Secondly, how does the downward volatility in propylene prices affect the I&D operation?

Clifford Potter

Well, in general I&D uses are fair amount of propylene and propylene oxide. Some of the other products – one of the things that people don’t always realize is low natural gas prices here in the United States, really a nice benefit to our I&D business, we call it getting a couple bites at the apple, not only in the Olefins chain but also in I&D. And propylene prices coming down can help us structurally across the globe. And propylene oxide is a global business, but I’ll say a fair number of that are just nicely structured markets with sometimes formula-based pricing, and you’ve seen us have nice consistent specialty-like returns in that business. So our second and third quarters were our two best quarters in history in that business.

Jeffrey Zekauskas – JP Morgan

So if it’s formula-based pricing, is there a benefit that you’ll get in fourth quarter before the formulas adjust?

Clifford Potter

Well, not really. I don’t think it’s fair to say that. There is an element that relates to the propylene price. It doesn’t really work like that. It’s just basically nice stable returns.

James Gallogly

We look at that business obviously monthly. We might pick up some in those changes, but in general, Jeff, if you think about it, it’s got a high propylene component. The other 20% of propylene oxide is there. So it’s been a good steady product. When you go downstream into the derivatives, one of the derivatives, butanediol, we’re the only people that source from propylene. So there’s a place where the others are sourcing primarily from C4s and we source from C3s, so that ratio will improve as you see propylene move.

Jeffrey Zekauskas – JP Morgan

Okay. Thank you very much.

Operator

Our next question comes from PJ Juvekar with Citi. Your line is open.

PJ Juvekar – Citi

Hi, Jim.

James Gallogly

Hello.

PJ Juvekar – Citi

As your ethane prices went double in the Gulf Coast, how did you change your feedstocks late in the third quarter? And I think you mentioned increased naphtha tracking, I would imagine that with propylene going down that may not be as profitable. So what happened to your feedstock slate in 3Q? And where do you think it goes in 4Q?

James Gallogly

First, one of the things that people didn’t realize is in the third quarter there were moments in time where naphtha cracking was favored, and we swung right around with some of our very, very flexible crackers at Channelview and took advantage of that almost immediately. So we’ll watch the crack and pay attention to that. Poor crack is pretty light to begin with. Channelview has got a lot of flexibility. We’re cracking a lot of ethane, NGLs at this point in time, both those facilities, and of course the Clinton and Morris, it’s extremely light and we have a very significant advantage right now.

One of the things that people are missing from time to time as Corpus has really moved up in terms of advantage because of the Eagle Ford play. We’re taking a lot of inexpensively priced condensate, local product that people are bringing to there. So we’re cracking some methane. More has been available down there. We’ve lightened up the furnaces. But we’ve also had some I’ll call lit distressed feedstocks that have really been advantageous to us because of the new production down there in the Eagle Ford. Sometimes it’s trucked in. We’re putting in a little bit of pipeline connection in from a few of the producers, but some of that just cross the truck rack at very distressed prices and really helped us.

PJ Juvekar – Citi

That’s very helpful. And secondly can you tell us what’s happening to the U.S. polyethylene export – with rising fleet stocks and you got the economy doing whatever it is doing. And then secondly do you see some destocking in the channel as polyethylene prices decline?

James Gallogly

Yeah. First on polyethylene exports. I think we’ve made the comment that as a domestic producer of polyethylene we have significantly reduced our exports. We’ve found ways to sell a lot of our product – about an extra 10% to 15% depending upon the moment – of our total U.S. capacity domestically instead of exporting it, particularly to Asia. We just basically shut off that channel because we had higher net backs at home. Now we still moved some product into South America into Mexico and typically these are some premium products with nice margins. We’ll take advantage of that when we can. But so our exports are generally down.

So the fact that Asia is soft, that would have hurt us a lot a couple of years ago. We’ve moved out of that market simply because as I said in the early days it’s not only the cost position but it’s also the revenue and we like to sell up. And I think you can see some of that in our results. In terms of destocking, a lot of the downstream folks look at oil prices and ethylene prices, and ethylene prices are going – and of course then polypropylene – look where propylene prices are. And they try to buy opportunistically. There’s always a slight seasonal decline around the end of the year but I think it really, a lot of that near term movement depends on what’s happening day to day, month to month really on ethylene and propylene prices.

PJ Juvekar – Citi

Thank you.

Operator

Our next question comes from Bill Hoffman with RBC. Your line is open.

Bill Hoffman – RBC

Thanks and good morning. Just to follow on the prior question, as we look at sort of the year end here – with prices starting to come down do feel like it’s going to exacerbate sort of a year-end effect as well as curious on what you’re hearing from your customers with regards to their desires to go through year end with much lower than normal inventories.

Clifford Potter

Yeah, Bill. They always – typically people try to carry less inventory but they’re going to watch and see which direction prices are headed as to what their actual behavior is. And I think I made the comment before and I’ll repeat it – a lot depends on the economy. If we start to get a little economic improvement you’ll see people start to behave differently than at a point in time when they’re worried about the economy. So there’s always some seasonality but we have to remember that inventories really weren’t high this year. And we start talking about restocking inventories that should be fairly minor. Europe’s a little bit different than the U.S. on that but in the U.S. I don’t think anybody spilled a lot of inventory.

Bill Hoffman – RBC

And what are you seeing right now in Europe?

Clifford Potter

Well, we were reducing our inventories over the last 45 days or so. And I think we’re in reasonably good shape and I expect some of the other producers did that. August is a pretty heavy holiday period over there. And people waiting to see in September which way the markets were going. They were a little softer than people expected and so people like us started destocking at the producer level. And of course our customers are doing the same thing. So again Europe has some destocking or some slow down at the end of year as well. So – but it was already fairly weak. So it’s weak going into weak.

Bill Hoffman – RBC

Thanks. That’s helpful. And then just as we look in the fourth quarter as well any sense on this year the deicer demand season? And how things are looking there? Is that going to be something that’s going to provide you a pretty decent offset?

Douglas Pike

Well, I don’t think we’re going to be able to predict the weather here.

Bill Hoffman – RBC

I got you there.

Clifford Potter

But it did, it already in snowed in the Rockies.

Bill Hoffman – RBC

Yeah.

Clifford Potter

Saw it on the news. Big snow.

Bill Hoffman – RBC

Okay.

Clifford Potter

Last year was a good year in deicers and it’s not a huge contributor to our business. But it’s a plus. And so we’ll watch and see what the weather is.

Bill Hoffman – RBC

Thanks. And then finally just as you look into 2012 can you give us some thoughts on your capital spend next year and projects you got – some big projects you got on target?

James Gallogly

Yeah. We’re going to save some of that discussion for investor day because I’d like to talk about our growth projects at that point in time. But I’ll say we have consistently said to everyone that we would spend about a billion dollars a year plus or minus on safety and base spending with a bit of higher return profit generating. We’re going to add to that with some of our growth projects. But the nice thing is that the returns have been better then we predicted a year-and-a-half ago. We mentioned some of these drill projects, lots of port expansion and a few other things that again without going into all the details. And that’ll take some capital investment. But at investor day we’ll go in more detail about that and I think you’ll be very excited about the projects and the returns that we’ll see.

Bill Hoffman – RBC

Great. Thank you.

Operator

Our next question comes from Hamed Khorsand with BWS Financial.

Hamed Khorsand – BWS Financial

Hey. Good morning. Just two questions here. How much of the Q4 decline that you’re expecting do you think is related to seasonality compared to the price volatility and margin compression you’ve been talking about?

Douglas Pike

So, Hamed, this is Doug. Let me take a first shot at that. I think when we speak to seasonality it’s in a few different areas, typically. Refining area, you typically see some seasonality in spreads around gasoline. And what we’ve seen is, spreads, the Maya 211 spread was about $24 in the third quarter. It’s around $18 or $19 now. Our Oxyfuels business is a business that’s been in a very good position because the raw materials are gas based, the product is gasoline based. But as a result, the profitability, because of the butane as a raw material, is primarily second and third quarters. So I would expect to see normal seasonality there and you’ve kind of seen it in our history; you can see that very clearly.

The other piece of seasonality that we look at is principally polymers and where a converter’s going to go on Christmas, how much of a down time. Typically, they will take a week or sometimes more down time on their production side at Christmas, and that varies, but we’ll see that as sort of a week, week and a half, maybe even up to two in December, on the polymer side. So those are the pieces of seasonality that are biggest. And although I was kidding Bill about we’re not going to predict weather, we are hoping for snow because we’d like to sell more deicer in December.

Hamed Khorsand – BWS Financial

Okay. And then, how much of an impact do you think there is on the margins in the fourth quarter coming from competitors starting up production again?

Douglas Pike

No, I don’t think – are you saying from turnarounds and coming through?

Hamed Khorsand – BWS Financial

Yeah.

Douglas Pike

I don’t think that’s what we’re seeing. People work pretty hard to balance themselves through a pretty – a turnaround period, so I don’t think we’re seeing much of that.

James Gallogly

There’s a bit of new production coming up in the Middle East that everybody’s aware of. And there’s been a decent turnaround schedule over the last few weeks, and I know the first quarter of next year will have a pretty heavy turnaround schedule, including us taking OP 1 down. Then for a short period of time, OP 2 at the same time.

Douglas Pike

Dorian, in the interest of time, we’re only going to be able to take a couple more questions. So we’ll try to move forward quickly. And if I could ask everyone to try to limit them to just one question, please.

Operator

Thank you. Our next question comes from Maggie Cheung with Wells Fargo.

Frank Mitsch – Wells Fargo

Hi. Yes, actually, this is Frank Mitsch sitting in for Maggie. Hey, Kent, just wanted to wish you best wishes in your coming retirement.

Clifford Potter

Thanks, Frank.

Frank Mitsch – Wells Fargo

And if I could come back to the Refining & Oxyfuels, the sequential increase was $150 million. As I’m listening to this call, I’m getting the sense that the vast majority of that was actions taken by Lyondell rather than the industry as a whole. Am I reading that correctly? How would you apportion the sequential improvement in profitability there to things that were unique to Lyondell as opposed to the industry as a whole?

James Gallogly

Let me take a shot at that. As you know I ran a very large refining system for another company in years past. I made the comment when I came here that the biggest surprise that I saw was how poorly we ran our refinery, I’ll just put it that bluntly. We in 2008 left 100s of millions of dollars of EBITDA on the table compared to a couple of look-alike refineries that I previously ran. I said that we would fix that, that we had some structural issues with our cab cracker, where we were reducing rates. We were not following what I would call refining 101 principles in the way that we operated the asset, and frankly we brought in some refiners. We did some work on some of the hardware. We’ve done a lot of commercial work, and we’re very competitive again.

This is a very, very nice refinery that’s capable of performing with the best in the industry, and we’re now acting like that, and we’re showing results like that. So it’s both the hardware. And I’ll tell you, our people are performing very well. I’m extremely proud of the reliability and the safety record of that asset. There’s been a significant turnaround in our individual performance on many fronts. So expect us to act like a top-quality refiner in the future, and put up some good numbers.

Frank Mitsch – Wells Fargo

That’s terrific. Just curious, in terms of operating rates in O&P America as in O&P Europe. Could you give an average operating rate for the third quarter? And where do you stand right now here in October?

Douglas Pike

You can actually kind of look right there in the earnings release what the ethylene production data, but we’ve continued to run the U.S. side pretty full, and then we trimmed back a little bit, 5% or so probably in Europe during the third quarter. Remember our balances. That’s a key thing to remember. We’ve made adjustments to the system with the idea that we want to run our Olefins plants in Europe at pretty much at full rates, and we’ve got other places where we can take the swing. Then of course in Saudi, I didn’t mention Saudi, we want to run that full with our joint venture partners.

Frank Mitsch – Wells Fargo

Great. Thank you.

Operator

Our next question comes from Bill Young with ChemSpeak. Your line is open.

Bill Young – ChemSpeak

Thank you. I’ve got a quick question on the ethane situation, a follow up here. I believe enterprise is reversing one of their pipelines in the Midwest and putting in some new connections from maybe West Virginia to shift ethane down to the Gulf Coast. Do you expect more of this going forward? And how do you see the balance given the expansion that have been announced by Dow and Westlake and some of the others for their Gulf Coast olefins operations?

James Gallogly

Well, Bill, first remember we’re also going to expand. I don’t want to be left out of that.

Bill Young – ChemSpeak

Well, we don’t hear too many details. I’m looking forward to Investor Day.

James Gallogly

We’re going to explain that in more detail, but yes, we are also a growing company on that front, and I think we’re demonstrating we know how to run those kind of assets and make money with them. But there are going to be some Marcellus-type pipelines bringing product down, but having said that, there’s still a fair amount of production in that region. We think there’ll be a continuing Midwest advantage, although it won’t be as robust longer term as it is today. We mention that there is another pipeline in ‘13 that will bring some products out. That’s good for our other 80% of our U.S track. So either way we feel pretty good about it, extra ethane capacity.

Bill Young – ChemSpeak

Okay. Great. And last what are the main points in your view to explain the significant drop in margins in polyethylene in the third quarter?

James Gallogly

Well, there has been some drop in the pricing. Some of that is simply squeeze from the olefin side. That price has been very high.

Clifford Potter

Bill, we’ve had a price increase on the table and the market just hasn’t been strong enough to put it through, and so we saw some late quarter decline in pricing. I think we’re seeing, Jim talked quite a bit about economic uncertainties and volatility and that has to affect a guy on the purchasing side, too, as he’s looking forward. He’s going to be a little bit cautious and a little bit conservative, and so things are going to work through as we go through a bump. And we’re also seeing some pretty good economic data, much better than I think people anticipated in GDP and such. So the key for us is Jim’s got a path, a strict, tight cost control, we’re taking care of the balance sheet and operating reliability has been for us. So maybe a little bit, a bump through a little bit of this price volatility, but we don’t see anything really has gone through, any major, major shift down. There’s a little bit on the edges everywhere.

James Gallogly

We’re still running pretty hard in polymers in the U.S. So we’re moving the volumes and the pricing will come. Again, it’s about the economy. I’ve said that a couple times already. Let’s do this.

Bill Young – ChemSpeak

Okay. Great. Thank you. Thank you very much.

Douglas Pike

We’ll take one last question I think if we can. I apologize for anybody else in the queue that we can’t get to.

Operator

Thank you. Our final question comes from Gregg Goodnight with UBS.

Gregg Goodnight – UBS

Good morning, gentlemen. Great quarter. Actually I have several questions. Doug, I’ll be happy to take them offline in the interest of time.

Douglas Pike

Yeah, in the interest of time if we can kind of try to hold it to your key question. Okay?

Gregg Goodnight – UBS

Okay. Well my key question was in the – you mentioned the purchase-distressed crudes in optimization of your mix to the Houston refinery. My main question was were there some one-off purchases that are likely not to be repeated going further out? Was this quite an unusual quarter or do you think your purchasing strategy now will be able to repeat this sort of a quarter in the future?

James Gallogly

Well, Gregg, it depends a bit on what margin you have to take advantage of and what crudes are available. I won’t say that it’s not a cargo or two. This is – we’ve had a nice continuing pattern. Let me give you an example. The front end of our refinery allows us to take some high TAN crudes, for instance. You know we’ve got really good metal up on the front end and so we can take cargoes that other people simply can’t take and when somebody turns back at cargo or there’s some extra cargo or production from the particular geographic location, we’re able to take it when many others can’t. Sometimes we need to blend it down, other times we can run it straight but because of the flexibility we have, it gives us an opportunity to take cargoes that very few other buyers can utilize.

And I think our people are paying a great deal of attention and I think we’re going to have some continuing performance. Will it be the same? No. The Maya 211 is down some but we’re going to stay very alert to market trends.

Gregg Goodnight – UBS

Outstanding. Doug, can you remind us when the investor day is please?

Douglas Pike

Yeah, we’re going to put that on in early December.

Gregg Goodnight – UBS

Thank you.

Douglas Pike

I think Jim’s going to make a few comments and we’ll close for today.

James Gallogly

Yes, let me make a couple quick comments. First, I’d like to again thank Kent for his dedicated service. I can tell you that no one has worked harder to help turn our company around so thank you, Kent, for your dedicated service to us. Also, I really look forward to working with Karyn. She’s a great addition to our staff and I think you all will realize that within the coming quarters.

We’ve had back-to-back record quarters, outstanding results. We’re very proud of that. The market has been good but I think you’ve seen that we can operate these assets well and we will take advantage of whatever market opportunities come our way. You’ve seen that we’re proceeding with our capital restructuring plans, I think that’s a significant event. It seems like the right time to do that. We’ve generated a significant amount of cash and we are investor friendly and we’ll return excess cash to our shareholders in a prudent fashion. We’ve outperformed industry benchmarks. I’ve said that we intend to be the top petro-chemical company in the world. And to do that, we have to continually outperform our peers and I think you’re seeing that we’re starting to do that on a fairly regular basis. Our strategy, a back-to-basics is working well, our asset flexibility allows us to take advantage of naphtha when that’s favored or ethane when that’s favored.

The final thing I want to say is that the industry is on a positive path. There aren’t a lot of new assets being built. The economy does have some volatility at this point in time but we think we’re extremely well positioned for the future. We’re very, very excited about that despite these short-term macroeconomic uncertainties. I’d like to thank you for your continued support. We’ll keep trying to do a good job for you.

Operator

Thank you, for joining today’s conference. That does conclude the call at this time. All participants may disconnect.

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