U.S. Dis(llates: A tale of economic resurgence and failed policy

Transcription

1 U.S. Dis(llates: A tale of economic resurgence and failed policy Ben Montalbano Director, Research and Opera7ons Energy Policy Research Founda7on, Inc. (EPRINC) PlaDs 2 nd Annual North American Refined Products Conference Houston, TX May 21,

2 Outline Refining Outlook: The good (economic advantages) The bad (policy) The U.S. dis7llate surplus Export markets Conclusion 2

3 In Favor of U.S. Refining: Feedstocks, Exports Based on economics alone, the U.S. refining industry is flourishing and poised to expand its role as an exporter. This despite the ongoing decline of U.S. refined product consump7on Follows a period of needed capacity ra7onaliza7on, mostly in PADD 1 Growing exports Net gasoline exports Net dis7llate exports Shale gas and oil Cheap shale gas provides significant opera7ng costs savings Refiners taking advantage of WTI- Brent spread; discounted light- sweet crudes moving from mid- con7nent to coasts Stable Canadian bitumen produc7on growth benefits coking refineries (More on this in a minute) 3

4 Crude Throughput and Capacity U(liza(on Utilization benefiting from throughput growth and capacity rationalization. Weekly U.S. Refiner Net Input of Crude Oil (Thousand Barrels per Day) Weekly U.S. Percent Utilization of Refinery Operable Capacity (Percent) Source: EIA Data 4

5 Shale Gas Reducing OPEX 5

6 Shale Oil Lowering Feedstock Costs U.S. Crude Oil Composite Acquisition Cost by Refiners (Dollars per Barrel) Cushing, OK WTI Spot Price FOB (Dollars per Barrel) Europe Brent Spot Price FOB (Dollars per Barrel) 20 0 Jan-2005 May-2005 Sep-2005 Jan-2006 May-2006 Sep-2006 Jan-2007 May-2007 Sep-2007 Jan-2008 May-2008 Sep-2008 Jan-2009 May-2009 Sep-2009 Jan-2010 May-2010 Sep-2010 Jan-2011 May-2011 Sep-2011 Jan-2012 May-2012 Sep-2012 Jan-2013 Source: EIA Data, EPRINC Calculations 6

7 These developments are reflected in crack spreads Gulf ULSD Spot - RAC Crack Spread Gulf ULSD Spot - Brent Crack Spread 5 0 Jun-2006 Oct-2006 Feb-2007 Jun-2007 Oct-2007 Feb-2008 Jun-2008 Oct-2008 Feb-2009 Jun-2009 Oct-2009 Feb-2010 Jun-2010 Oct-2010 Feb-2011 Jun-2011 Oct-2011 Feb-2012 Jun-2012 Oct-2012 Feb-2013 Source: EIA Data 7

8 and Equity Prices: DJIA (blue area) vs 4 publicly traded independent refiners Source: Yahoo Finance 8

9 U.S. Dis(llate Consump(on U.S. Product Supplied of Kerosene- Type Jet Fuel (Thousand Barrels per Day) U.S. Product Supplied of Distillate Fuel Oil (Thousand Barrels per Day) Jan-2000 Aug-2000 Mar-2001 Oct-2001 May-2002 Dec-2002 Jul-2003 Feb-2004 Sep-2004 Apr-2005 Nov-2005 Jun-2006 Jan-2007 Aug-2007 Mar-2008 Oct-2008 May-2009 Dec-2009 Jul-2010 Feb-2011 Sep-2011 Apr-2012 Nov-2012 Source: EIA Data 9

10 Net Imports (Exports) thousand barrels per day Increased throughput, great margins and shrinking demand driving exports. U.S. Net Imports of Total Petroleum Products (Thousand Barrels per Day) U.S. Net Imports of Finished Motor Gasoline (Thousand Barrels per Day) U.S. Net Imports of Gasoline Blending Components (Thousand Barrels per Day) U.S. Net Imports of Distillate Fuel Oil (Thousand Barrels per Day) U.S. Net Imports of Kerosene-Type Jet Fuel (Thousand Barrels per Day) Jan-2005 May-2005 Sep-2005 Jan-2006 May-2006 Sep-2006 Jan-2007 May-2007 Sep-2007 Jan-2008 May-2008 Sep-2008 Jan-2009 May-2009 Sep-2009 Jan-2010 May-2010 Sep-2010 Jan-2011 May-2011 Sep-2011 Jan-2012 May-2012 Sep-2012 Jan-2013 Source: EIA Data 10

11 Against U.S. Refining: Policy, Policy U.S. industry faces a slew of policy constraints which could undermine the recent resurgence CAFE Already in the books; can t really fight the idea, but maybe some modifica7ons down the road Tier III Should not have a meaningful impact on dis7llates, aside from it poten7ally pudng some less efficient refineries out of business. If anything, incen7vizes greater produc7on of diesel rela7ve to gasoline The Pending (?) Approval of Keystone XL RFS and the ethanol/gasoline blendwall A bigger impact on dis7llates than one might expect 11

12 PADD III Canadian Imports: Swiped by PADD II Venezuelan imports in steady decline since 2005 Source: EIA Data 12

13 PADD II Imports: Canadian Source: EIA Data 13

14 Average Weekly U.S. Rail Carloads Of Oil and Products 14

15 Keystone XL A big deal, but maybe ways around it the rail trend spreads to Canada 15

16 The RFS: Dragging Dis(llates into the Fire 1 EPA sets the % standard for the year primarily based on the volumetric mandates laid out in the RFS2 legisla7on and EIA s fuel demand forecast. (And cellulosic availability, etc.) 2 EPA then uses the final % figure to give obligated par7es an RVO (renewable volumetric obliga7on) 16

17 The Mechanics of the RVO The RFS discourages the sale not only of gasoline, but also diesel, into the U.S. market If you supply a gallon of ULSD domes7cally, it increases your RVO Simplis7c example: 1 gallon of ULSD supplied takes on a RVO of about ~0.10 RINs. Blending B5 (well above biodiesel mandate of 1.12%) gains RINs. Must go to the RIN market and purchase either biodiesel or ethanol RINs to complete compliance. When ethanol RINs are expensive and diminishing in availability, as they are now, supplying ULSD becomes costly 17

18 Compliance Op(ons Going Forward What to do when supplying ULSD exacerbates blendwall issues? Reduce crude runs Bad for business Shir diesel produc7on to hea7ng oil and kerosene jet fuel (do not incur RVO) If one can and only un7l the market collapses Blend more biodiesel, Brazilian swap Biodiesel uneconomic, in limited supply Buy RINs (ethanol or biodiesel) They are already gedng costly Export un7l there is nowhere else to send it Sell E85 at a loss (needs to be discounted to compete with gasoline) Pray for an increase in U.S. gasoline demand or incredibly low corn prices Pay fines for non- compliance 18

19 The RFS basic message to obligated par(es: Don t sell transporta7on fuels in the U.S. It is becoming increasingly expensive to sell diesel and gasoline in the U.S. Obligated par7es will look to sell abroad in order to reduce their RVO Not a solu7on, but buys 7me Over the next 1 to 2 years: expect more vola7lity, leading to higher prices 19

20 The future for U.S. dis(llates Assuming we all survive the RFS 20

21 U.S. Yields Swing Towards Dis(llate kbd demand destruction + 5% yield shift created 1.25 mm b/d new distillate availability Jan-2000 Aug-2000 Mar-2001 Oct-2001 May-2002 Dec-2002 Jul-2003 Feb-2004 Sep-2004 Apr-2005 Nov-2005 Jun-2006 Jan-2007 Aug-2007 Mar-2008 Oct-2008 May-2009 Dec-2009 Jul-2010 Feb-2011 Sep-2011 Apr-2012 Nov-2012 U.S. Refinery Yield of Finished Motor Gasoline (Percent) U.S. Refinery Yield of Kerosene-Type Jet Fuel (Percent) U.S. Refinery Yield of Distillate Fuel Oil (Percent) Light-sweet crudes will reduce maximum distillate potential Source: EIA Data 21

22 EIA Dis(llate and Jet Fuel Consump(on Forecast This would reduce surplus by ~500 kbd, or 50%, based on current production Jet Fuel Distillate Fuel Oil Source: EIA 2013 AEO 22

23 Where are exports going? 1200 Panama 1000 Netherlands 800 Mexico Gibraltar 600 France 400 Ecuador Columbia 200 Chile 0 Jan-2005 May-2005 Sep-2005 Jan-2006 May-2006 Sep-2006 Jan-2007 May-2007 Sep-2007 Jan-2008 May-2008 Sep-2008 Jan-2009 May-2009 Sep-2009 Jan-2010 May-2010 Sep-2010 Jan-2011 May-2011 Sep-2011 Jan-2012 May-2012 Sep-2012 Jan-2013 Brazil U.S. Exports of Distillate Fuel Oil (Thousand Barrels per Day) Source: EIA Data 23

24 US Jet Fuel and Distillate Exports: Nautical Miles from Houston Thousands of bpd 1,200 1, > 10,000 9,000-10,000 7,000-8,000 6,000-7,000 5,000-6,000 4,000-5,000 2,000-3,000 1,000-2,000 < 1,000 Houston to: Philaelphia: 2,127 New York: 2,029 Boston: 2, Source: Kevin Lindemer, for EPRINC 24

25 Future Markets for U.S. Dis(llate Surplus Steady demand growth predicted for U.S. but surplus will remain Asia is currently a net exporter of dis7llates Chinese refinery construc7on plans outpace projected demand growth IEA: up to 2.9 mm b/d of new capacity India has several large projects underway too This leaves Europe market there depends on economic growth In the badle Atlan7c Basin refiners, U.S. has and will beat out Europe in the long run U.S. economics superior and La7n America projects underway, but will be short dis7llates for several years 25

26 Major SA/CA Refining Projects Under Construc-on Brazil: 230kbd in 2014 Mexico: 150kbd Nicaragua: 150kbd Venezuela: 100kbd in 2014 Total: 630kbd (~125kbd of dis(llate) Closures of Hovensa, Aruba represent 585kbd Several addi+onal large projects in planning/engineering phase in various countries, but the region will remain a net importer for the +me being. The region currently takes in ~ 1 mm b/d of dis+llates and growing. 26

27 Dis(lla(on Capacity Requirements > 2016 Source: OPEC 2012 Oil Outlook 27

28 Conclusions U.S. has room to increase crude throughput, dis7llate produc7on as long as economic advantages remain and they should Dis7llate surplus will remain, despite U.S. demand growth forecast Export market is likely limited to Western Hemisphere Asia, ME may eventually compete But the U.S. has the economic advantage, proximity Policy could dictate the next several years, however. GTL? LNG? Bunker fuel 28