Pre U.S. Crude Boom (~2007/2008)

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2 Pre U.S. Crude Boom (~2007/2008) Export regulations irrelevant. Refinery Utilization U.S. Production Canadian Imports Saudi Imports Other Light & Medium WB Imports Heavy Waterborne Imports Declining U.S. crude production made up for by increasing imports exceed 10 MM BPD Light & Medium waterborne imports make up almost 60% of total imports. U.S. refinery utilization holds in the mid 80% range. 2

3 Today U.S. production rises over 60% from Refinery Utilization U.S. Production Canadian Imports Saudi Imports Other Light & Medium WB Imports Heavy Waterborne Imports Canadian imports grow over 35% as oil sands production increases. Increasing production squeezes out waterborne light imports total light/medium waterborne imports down to 2.7 MM BPD U.S. refinery utilization rises to near 90%. 3

4 Day of Reckoning when North American production exceeds refining capacity. Max Sustainable Refinery Utilization ~92% Future U.S. production continues to grow Refinery Utilization Export restrictions incentivize increased refinery utilization U.S. Production Canadian Imports Saudi Imports Other Light & Medium WB Imports Heavy Waterborne Imports Canadian imports continue to grow but can t reach tidewater Waterborne imports decline to structural minimum levels (Latin heavy/saudi/other) U.S. refinery utilization maxes out; with exports restricted there is no where else for new production to go 4

5 Factors Influencing Day of Reckoning When Export Restrictions Strand Domestic Crude Actual Level of Production Growth Estimates vary widely from 2 MMBPD to 6 MMBPD over the next ten years Ability to Expand Exports to Canada 2013 Light/Medium Waterborne (non-u.s.) Imports into Canada > 500 MBPD 2013 Light/Medium Imports into U.S. from Canada = 1.0 MMBPD Dependent on build-out of Canadian pipelines to Tidewater Ability to Access West Coast Markets This would also influence economics for exporting ANS California Low Carbon Fuel Standard (LCFS) /other regulations will also impact access Ability of U.S. Refining System to Displace Lt. Sour/Medium Crudes Very dependent on Saudi willingness to decrease imports Level of U.S. Processing Additions TM&C estimate is currently at about 500 MBPD over next 3 years How Current Export Restrictions are Applied Day of Reckoning Could be as early as 2015/16 or after

6 Dispositions for Excess U.S. Production Mid-Range Scenario Most Saudi Imports Displaced Thousand BPD Foreign Lt/Med Imports to E. Canada Lt/Med Imports from Canada Foreign Med. Imports Foreign Lt. Imports Raymond James* EIA AEO 2014* *Incremental crude production in excess of refinery/splitter additions

7 Dispositions for Excess U.S. Production Saudi Lt. Sour/Medium Imports Remain at Current Levels Thousand BPD Foreign Lt/Med Imports to E. Canada Lt/Med Imports from Canada Foreign Med. Imports Foreign Lt. Imports Raymond James* EIA AEO 2014* *Incremental crude production in excess of refinery/splitter additions

8 Impacts of Export Restrictions Requires crude production growth to be processed domestically Makes the entire U.S. an effectively stranded location (similar to Cushing) and creates price discounts will impact production levels Spur increased refinery utilization and new investment Investment delayed due to regulatory uncertainty Increase refined product exports; where is the limit? Price discount trajectory/levels Discounts blow out when all nonstructural light/medium waterborne imports displaced key is Saudi reaction Ultimately discounts decline to levels based on marginal industry investment type 8

9 U.S. Gasoline Import/Export Balance 1,500 Canada Mexico Europe Latin America Asia / Other 1,000 28% % 37% MBPD 0 62% 75% 48% 35% Exports Imports , Crude 2022 Exports Crude 2022 Crude Allowed 2022 Crude Exports Exports Allowed Exports Restricted Restricted 9

10 LLS-WTI Experience $30 $25 $20 Sale of 30 MMBBL from U.S. SPR Seaway acquisition announced Inventories build in Cushing Stranded with booming production massive and volatile discount $25 $ Per Barrel $20 $15 $10 $15 Arab Spring sparks crude price rises, LLS outpaces WTI Seaway reversal, 150kbd Cushing to Houston $10 J-11 M-11 S-11 J-12 M-12 S-12 J-13 At parity through 2006 Seaway expansion, 150->400 MBPD Market recognizes disconnect 2007 to 2010 Investment results in quality and transportation adjusted parity $5 $ $5 10

11 Domestic-to-International Discount Brent (Dated) LLS (St James) Forecast Increasing volatility during transition LLS transitions to discount as light crude imports disappear Eventually discount declines to level based on investment economics 0 J-10 O-10 J-11 A-12 J-13 O-13 (5) 15 Large Cone of Uncertainty - substantial volatility $ Per Barrel At import parity through 2010? (5) (10) Actual Forecast - Exports Restricted? 11

12 Industry Responses Increase Refinery Utilization PADDs I, III, and V can absorb additional 400 MBPD of light crude Incentivized by large domestic to international crude discounts PADD V would need improved logistics to access tight oils Will delay/reduce required new processing investment Refinery Investment Two timeframes: Current to 2018 and 2018 and beyond Current to 2018 investment required regardless of export policy Both refiners and midstream players will participate Heavy-to-Light Refinery Conversions limited Will cause significant increases U.S. product exports 12

13 Industry Investments Current to 2018 Made to provide industry the ability to run very light crudes and condensates delays Day of Reckoning Most being done within refinery gates Focused on Eagle Ford; also some Utica Refinery specific Pre-flash towers, new atmospheric units; also condensate splitters and condensate hydroskimmers by midstream players Total level of required investments exceed $2 billion Does not include opportunistic investments to take advantage of regional proximity to advantaged crudes 13

14 Industry Investments Made to convert crude to exportable products Various types condensate splitters/expansions, diesel HDS additions, Eagle Ford and WTI hydroskimmers Midstream segment likely to sponsor many of the projects Economics highly sensitive to naphtha and atmospheric tower bottoms (ATB) prices/ability to find export homes USGC WTI Hydroskimmer will be price-setter 14

15 Final Thoughts U.S. Prod. Growth Will Surpass Domestic Refining Capacity Day of Reckoning influenced by a variety of factors could be anywhere from 2015/16 to Saudi strategy on exports to U.S. critical Continued Strict Export Restrictions will Lead to Stranded Crude Domestic prices discounted; situation similar to WTI/LLS experience Large Cone of Uncertainty - Duration and depth of discount hard to predict; very volatile Industry Responds with Investment in Crude-to-Product Facilities Investment delayed by policy uncertainty Ultimate discount reduced to level based on USGC diesel hydroskimmer economics ability to find homes for increased product exports key Gasoline Price Impacts With U.S. becoming large net exporter, domestic prices tied to world prices Short-term impacts hard to predict; influenced by logistics/other policies 15

16 Presenter John R. Auers, P.E. Executive Vice President Univ. of Nebraska Chem. Engr. Univ. of Houston MBA Formerly with Exxon Industry studies/analysis, forecasting, modeling Leads Outlook team Contact Info Office

17 Extra Slides

18 Foreign Producer U.S. Capacity Company Location Foreign Entity Capacity Percent CITGO Lemont, IL PDVSA CITGO Lake Charles, LA PDVSA CITGO Corpus Christi, TX PDVSA Motiva Port Arthur, TX Saudi Aramco Motiva Convent, LA Saudi Aramco Motiva Norco, LA Saudi Aramco Pasadena Ref. Pasadena, TX Petrobras Shell Deer Park Deer Park, TX PEMEX Chalmette Ref. Chalmette, LA PDVSA Total 2,436 1,660* *Foreign ownership weighted capacity 18

19 Refinery Expansions Required Crude Expansions Operator Location MBPD* Startup Flint Hills Corpus Christi, TX 30 Late 2014 Valero Houston, TX 90 2Q 2015 Valero Corpus Christi, TX 70 3Q 2015 Marathon Canton, OH Marathon Catlettsburg, KY Opportunistic Crude Expansions Operator Location MBPD Startup Dakota Prairie Refining/Calumet Dickinson, ND Valero McKee, TX HollyFrontier Woods Cross, UT Calumet Great Falls, MT Tesoro Salt Lake City, UT *Project will allow refinery to run higher volumes of very light crude and condensate from regional tight oil production. Estimated total expansion of crude capacity is not necessarily equal to capacity of new condensate splitter or preflash tower and is TM&C's estimate. 19

20 Condensate Splitters Under Construction Operator Location MBPD Startup Kinder Morgan, Phase Q 2014 Houston, TX Kinder Morgan, Phase Q 2015 Trafigura Corpus Christi, TX 50 4Q 2014 Proposed Operator Location MBPD Startup Magellan Midstream Corpus Christi, TX TBD TBD Martin Midstream Corpus Christi, TX Up to Q 2016 Targa Resources TBD TBD TBD Castleton Commodities Corpus Christi, TX TBD TBD 20