The Rapidly Changing NA Crude Market Key Issues/Focus on the Downstream

Transcription

1 The Rapidly Changing NA Crude Market Key Issues/Focus on the Downstream Presented at 2015 Peters & Co. Energy Conference Lake Louise, Alberta January 21-23, 2015 John R. Auers Turner, Mason & Company

2 TM&C Overview International consulting practice since 1971 Downstream focus; refinery/chemical engineers Industry and financial clients Strategic Studies FMV Assessments & Venture Analyses National Policy Studies Publish various outlook and multi-client subscription reports Crude and Refined Products Outlook Refinery Construction Outlook World Crude Outlook North American Crude and Condensate Outlook 2014 Edition issued in October 2

3 Key Points Production Boom is a Generational Event for NA Oil Industry Provides opportunities and challenges for all industry segments in both countries U.S. moving from energy importer to exporter Even as U.S. backs out exports, Canadian imports continue to grow Significant implications economy-wide and internationally Regulatory Environment Will Play a Key Role U.S. crude export policy more likely to evolve than change wholesale Approval of routes to market faces challenges in both the U.S. and Canada Other policies increasing costs, suppressing demand, limiting access are important Canada Plays a Major Role in U.S. Supply Balance Largest market for Canada; most important source of imported barrels for U.S. Has rapidly become major (only) crude export destination for U.S. crude Eastern Canadian refineries will remain major product supplier to US East Coast 3

4 Key Points (Cont.) U.S. Refining Sector is a Key Part of the Equation/Potential Bottleneck Lower crude and natural gas costs add to existing advantages Regions with best access to growing crude will be most advantaged Investment needed to handle quality changes/in response to export ban Finding homes for growing levels of product exports will be a key challenge How Does New Low Crude Price Environment Change the Picture? Extended low prices will decrease production growth/how much? Will push Day of Reckoning related to crude export ban further in the future Projects could be delayed in all segments of the industry Key question will positive demand response be enough to stem the tide or will low prices damage industry for a long time like in the 1980 s/90 s 4

5 Presentation Outline The Recent Price Collapse Demand to the Rescue? LTO Revolution/Canadian Impacts Future Refining Limits and Reactions 5

6 Brent ($/Bbl) Balanced Tug of War Since 2011 Bulls International Unease Supply Concerns Rebounding Economic Growth Bears U.S. and Canadian Production Growth Continued European Weakness $130 $120 $110 $100 $90 $80 $

7 Growth (MBPD) Trouble Was Brewing (TM&C Crude Supply/Demand Forecast - October 2014) 8,000 7,000 6,000 5,000 4,000 3,000 U.S. + Canada account for over 70% of total demand growth NGL/Alt. Fuels/Other Non-OPEC + Iraq 2,000 1,000 Canada U.S. 0-1,000-2,000-3,000 World Demand Production OPEC Production* *Excludes Iraq 7

8 Brent Price ($/BBL) Dramatic Capitulation by Bulls Crude prices down by over 50% since July Bulk of decline in the last three months Due to both supply and demand factors U.S. LTO growth and potential return of lost supply from Iran, Iraq, Libya, other locations OPEC decision to play chicken with U.S. producers Worries about economic growth throughout the world $130 $120 $110 $100 $90 $80 $70 $60 $

9 Implications of Lower Prices Upstream industry feeling greatest pain Equity values down drastically; especially for LTO producers Capital budgets being slashed significantly in both the U.S. and Canada Production will be impacted; how much? Dependent on length/breadth of decline Short term (1H of 2015) NA production will see minimal impact Effects to become more evident in 2 nd Half of 2015 and more so in 2016 TM&C still evaluating longer term view; Global economic growth will be key Impacts on refiners are more complex Positives: Better margins on some products, increased demand Negatives: Decreased domestic discount, compressed crude differentials, lower relative natural gas cost advantage Midstream prospects also uncertain Lower domestic production will decrease need for some projects Permitting continues to be a challenge; Republican Congress helpful at the Federal level 9

10 Presentation Outline The Recent Price Collapse Demand to the Rescue? LTO Revolution/Canadian Impacts Future Refining Limits and Reactions 10

11 Gasoline Price ($/Gal) Gasoline Demand (MBPD) U.S. Demand is Price Elastic $4.50 $ $ $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 Rising prices drives down demand $ Price: 3 Month Rolling Average Demand: 12 Month Rolling Average Extended period of low prices causes rebound in demand Gasoline ($/Gal) 11 Sharp spike in prices before recession led to demand decline. Post recession price spike in 2010 causes additional drop in demand Demand (MBPD) Prices: EIA Retail Gasoline Price, Monthly Energy Review

12 U.S. Canada Chile Poland Spain Italy France Greece Norway UK Germany Israel Turkey New Zlnd. Japan Korea Fuel Taxes, $ per gallon Elasticity Impacted by Tax Structure $6 $5 $4 $3 U.S. Gasoline 80-90% Canada Gasoline 50-65% France Gasoline 30-40% Diesel 35-50% Japan Gasoline 45-60% Diesel 50-65% $2 $1 Gasoline Diesel $0 NA SA Europe Asia Pacific Crude/Processing as % of Total Cost, Remainder Tax 12 OECD/EEA Fuel Taxes, as of Jan 2010

13 Percent Subsidy, of Full Cost of Supply Some Countries Subsidize Fuel Prices 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 13 IEA % Subsidy for 2013, Selected Countries

14 Percent Subsidy, of Full Cost of Supply Some Countries Subsidize Fuel Prices 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Several Asian countries are moving to reduce or eliminate subsidies in wake of falling fuel prices. 14 IEA % Subsidy for 2013, Selected Countries

15 USA Canada Chile Argentina Venezuela Norway UK Greece Sweden France Spain Romania Poland Russia Israel South Africa Nigeria Egypt Kuwait Saudi Arabia Turkey Hong Kong New Zealand South Korea China India Indonesia Malaysia Gasoline Price Per Gallon Tax/Subsidy Impact on Pump Price $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 NA SA Europe Africa Asia Pacific 15 Bloomberg: Gasoline Prices by Country, Q4 2014

16 Percent Price Decrease June 30-Dec 30 Oil Price Impacts on Gasoline 60% 50% 50% 40% 37% 30% 20% 30% 27% 22% 18% 16% 10% 0% Brent U.S. Canada France UK Japan India Crude Gasoline 16

17 Presentation Outline The Recent Price Collapse Demand to the Rescue? LTO Revolution/Canadian Impacts Future Refining Limits and Reactions 17

18 Crude Oil Volume (MMBBL/D) Pre-Crude Boom: Growing Dependence on Imports as U.S. Production Declines U.S. Production peaks in Alaska North Slope begins production. Alaska North Slope peaks in 1988, begins to decline. Demand peaks around 2005, falls in due to recession. 8 6 U.S. oil consumption begins to fall. 4 In coming decades, U.S. oil production continues to fall, while demand increases. Imports grow. 2 Decline in production, Saudis flood market with coupled with increasing inexpensive oil beginning in U.S. Crude Oil Production demand is made up Oil prices fall over 50% in U.S. Crude Oil Imports with imports

19 Crude Oil Imports (MMBBL/D) Refinery Utilization (%) Shale Crude Boom Changed the Picture Total Imports down by 2.5MMBPD in the last 4 yrs Refinery utilization has risen as crude costs have declined U.S. production reverses course; increases by over 70% since 2008 Canadian production grows strongly, imports increase Waterborne (non-canadian) imports drop off over 3 MMBPD U.S. Crude Oil Production U.S. Total Crude Oil Imports U.S. Canadian Imports U.S. Waterborne Imports U.S. Refinery Utilization 70 19

20 Waterborne Imports, MMBBL/D Light/Medium Waterborne Imports 2007 October Displaced Crude MMBBL/D PADD 3 Light Sweet 1.3 PADD 1 Light Sweet 0.6 PADD 2 Total 0.3 Total Light Sour 0.7 Total Medium 0.7 Total Displacement Oct Oct Oct Oct Oct-14 Total U.S. PADD 3 PADD 1 PADD 5 PADD 2 Light Sweet Light Sour Medium 20

21 Canadian Developments are Important Canadian production also growing rapidly Primarily heavy production from Western oil sands Increasing access to tidewater is key XL stalled mid-term results reviving prospects Other P/L s being developed; some going forward others facing significant opposition Rail proceeding; will exceed 700 MBPD Canada important in U.S. export debate Eastern refineries important sink for U.S. light crude P/L s allow export outside N/A; decrease light/medium imports into U.S. 21

22 Canadian Imports (MMBPD) Canadian Crude Exports to U.S October Heavy (<24 API) Lt + Med Month Rolling Average 22

23 Crude Oil Exports (MBPD) U.S. Crude Exports to Canada 2007 November

24 Imports (MBPD) Eastern Canadian Imports (Quebec/Ontario/Atlantic) Three-month Rolling Average Heavy Light (Non U.S.) Light (U.S.)

25 Presentation Outline The Recent Price Collapse Profile of the U.S. Refining Industry LTO Revolution/Canadian Impacts Future Refining Limits and Reactions 25

26 Total Production MMBPD Production Increase MMBPD U.S. Growth to Continue How Much? Preliminary Oil Glut Forecast - Not To Scale Day of Reckoning Range TM&C 2014, Pre Price Collapse TM&C Low Crude Price 26

27 Total Production MMBPD Production Increase MMBPD Canadian Growth In New Environment TM&C 2014, Pre Price Collapse Preliminary Oil Glut Forecast - Not To Scale TM&C Low Crude Price

28 Price Per Barrel Price Implications $110 $100 $90 $80 $70 $60 $50 $40 $ Brent (Dated), Old Forecast Brent (Dated), Revised Forecast Bank of America Morgan Stanley WCS (Hardisty), Old Forecast WCS (Hardisty), Revised Forecast Citi 28

29 MBPD Change in Crude Production by Grade Vast majority of U.S. production growth is 38 API or greater Light (>31 API) Medium (24-31 API) Heavy (<24 API) Canada U.S. TM&C NACCO

30 Factors Influencing Day of Reckoning When Production Exceeds Domestic Capacity Actual Level of Production Growth Ability to Expand Exports/Back out Imports to/from Canada Access West Coast Markets Ability of U.S. Refining System to Displace Lt. Sour/Medium Crudes Level of U.S. Processing Additions How Current Export Regulations are Applied Day of Reckoning Likely Significantly Pushed Back by Price Drop 30

31 Industry Already Making Investments 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/new atmospheric units, pre-flash towers, etc. Upstream and midstream also making processing investments Field condensate stabilizers to facilitate safe storage and transportation EF Condensate splitters located on the coast (Corpus Christi and Houston) Additional opportunistic investments to take advantage of regional proximity to advantaged crudes PADD IV/North Dakota/Permian Size limited by regional demand 31

32 Percent Naphtha and Lighter in Crude LTO s Have More Light Components 100% 80% Light Tight Oils 60-80%+ 60% 40% 20% Heavy Crude 16% Medium Crude 23% 24% Conventional Light Crude 28% 32% 38% 39% 44% 0% Assumed Naphtha Cut Point is 350 F 32

33 Multiple Constraints Likely Required modifications very refinery specific Pre-flash Tower Overhead Cooling and Light Ends Processing Upgrades Naphtha Treating Capacity Increases Distillation Tower Capacity Increase 33

34 Costs Much Lower Than For Heavy Crude Modifications to Existing Refineries Operator Location Cost $MM Capacity (MBPD) Startup Flint Hills Corpus Christi, TX 250 * Late 2014 Marathon Canton, OH 100 * Late 2014 Marathon Catlettsburg, KY 150 * 2015 Delek Tyler, TX Q 2015 Valero McKee, TX Q 2015 Valero Houston, TX 290 * 3Q 2015 Valero Corpus Christi, TX 240 * 3Q 2015 HollyFrontier Salt Lake City, UT Condensate Splitters Operator Location Cost $MM Capacity (MBPD) Startup Kinder Morgan, Phase Q 2014 Houston, TX Kinder Morgan, Phase Q 2015 Trafigura/Buckeye Corpus Christi, TX Q 2015 *Project primarily to allow processing of extra light crude/condensate 34

35 Investments in Reaction to Saturation Made to convert crude to exportable products Market/regulatory uncertainty will incentivize low cost/complexity projects Similar to forces driving crude-by-rail vs. pipeline No incentive to add to global gasoline surplus Various types will depend on BIS guidelines Current rulings allow simple condensate stabilization; could apply to crude as well Large USGC located facilities to process growing WTI crude would meet current criteria Other facilities would also be built/wti diesel hydroskimmers could become price-setter if BIS imposes minimum criteria on definition of distillation Midstream segment likely to sponsor many of the projects Conversion of existing heavy crude refineries to light crude is least attractive option 35

36 Processing Options Distillation Field Condensate Stabilizer USGC Crude Stabilizer Condensate Splitter Increasing Level of Separation and Complexity 36

37 Processing Options Refining Distillate Hydroskimmer Light Crude Refinery Heavy Crude Refinery A A V V Increasing Level of Separation and Complexity 37

38 Economic Ranking of Processing Options Based on Capital and Operating Costs and TM&C Product Price Forecast Increasing Level of Required Discount Heavy Crude Refinery Revamp USGC Refinery "Add- On" Hydroskimmer (Export product $) USGC Greenfield WTI Hydroskimmer (Export product $) Increased USGC Utilization USGC Refinery "Add-On" Hydroskimmer (USGC product $) USGC Greenfield WTI Simple Stabilizer 38

39 Significant Heavy-to-Light Conversions Unlikely Western Hemisphere not short of heavy crude Production will continue to grow/dependent on price environment Limited heavy crude capacity in the rest of the world Producers will price crude to keep heavy oil refineries full Proactive to lock in refining capacity via JV s and LT contracts Heavy-to-light conversion investment not competitive with other alternatives (also dependent on price environment) Extensive modification require very high capital investment Heavy crude refiners will invest for optionality Run light crude opportunistically 39

40 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