Strategic Factors Impacting The California Crude Oil Market. About Purvin & Gertz, Inc. California Independent Petroleum Association

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1 Strategic Factors Impacting The California Crude Oil Market Hyatt Regency Huntington Beach Mike Sarna Eric Wei Long Beach Office 1 About Purvin & Gertz, Inc. Privately-Owned, Independent International Energy Consulting Firm Founded in 1947 Over 1 staff members worldwide All consultants have chemical engineering degrees Representative offices in Houston, Texas (Headquarters) Long Beach, California (Since 1982) Calgary, Canada Singapore London, England Moscow, Russia Buenos Aires, Argentina Website at Main Services: Crude oil and natural gas market analysis Refinery analysis (technical & economic) Refined product market analysis Terminal/Pipeline infrastructure analysis Due diligence/ Independent engineer Strategic planning/ M&A assistance Asset valuation Litigation support Training & Seminars Studies are conducted on single or multi-client basis Routine Publications Petroleum & natural gas price forecast Global supply/demand projections 2 1

2 Presentation Overview California Crude Oil Market California Refinery Demand ANS Supplies California Supplies Foreign Supplies Factors Impacting California Crude Oil Price California Benchmark Crude Oil Price Import Costs Global Supply-Demand Balance International Crude Price California Crude Oil Quality Differentials Closing Remarks 3 California Crude Oil Marketing Regions Refineries in San Francisco and Los Angeles are dependent on ANS and imported crude oil deliveries by tanker. San San Francisco Francisco Refining Capacity Refining Capacity 62 MBPD 62 MBPD CALIFORNIA NEVADA Refineries in Central California process SJV and OCS crude. Closure of Shell Bakersfield refinery pending. Central Central Area Area Refining Capacity Refining Capacity 185 MBPD 185 MBPD Gaviota Ventura Los Los Angeles Angeles Refining Capacity Refining Capacity 97 MBPD 97 MBPD ARIZONA 4 2

3 California Crude Oil Supply Shift Decline in ANS supplies has led to increased dependence on foreign crude oils. Refiners must create strategies for foreign crude oil supplies. Growing role of imported crudes creates basis for projecting the value of California crudes CRUDE OIL DEMAND 1,617 Thousand Barrels Per Day 23 CRUDE OIL DEMAND 1,791 Thousand Barrels Per Day ANS 37% Foreign 11% CA 52% Foreign 34% ANS 23% CA 43% Source: EIA, CEC, Purvin & Gertz Analysis 5 California Fuel Consumption Growth FUEL CONSUMPTION -MBPD Source: CalTrans TOTAL VEHICLE FUEL CONSUMPTION (MBPD) VEHICLE CONSUMPTION Annual Growth % % 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% ANNUAL GROWTH -% 1.%.5%.% California population growth will continue to drive demand growth for gasoline, jet and diesel fuels. California refinery crude runs are likely to creep further, but more refined product imports are also expected. California refiners will import more crude oil to meet growing demand. 6 3

4 Historical West Coast Refinery Crude Runs Crude runs increased 4% in 23: MTBE Phase-out Economic recovery Washington refineries account for roughly 23% (~54 MBPD) of crude demand. Thousands Of Barrels Per Day 25 2 CA WA Source: EIA, CEC 7 Historical California Crude Runs By Source Thousands of Barrels Per Day CA Crude ANS Crude Imported Crude Source: CA DOGGR, CEC, EIA, Purvin & Gertz Analysis 8 4

5 ANS Disposition ANS deliveries have favored Washington over California Lower transportation costs Better utilization of Jones Act tankers Limited infrastructure for larger foreign crude tankers Some west coast refiners control a significant share of ANS marketing ConocoPhillips ExxonMobil BP 9 Historical ANS Production (Thousand Barrels per Day) 2, 1,5 Total Cook Inlet Production Alaskan North Slope WA Refinery Crude Demand ANS declines have slowed due to recent recovery enhancements & development of new fields. 1, Washington Refinery Crude Demand Source: EIA, AK Dept. Of Oil & Gas ANS deliveries to California have declined. Washington refineries have continued to rely on ANS. 1 5

6 California Oil Production Declines Total California production declined at an annual rate of 1.9%. LA Basin crudes declined at a faster 4% annually. Thousands Of Barrels Per Day Foreign Crude Sources FROM ARAB GULF ARGENTINA & AUSTRAILIA FROM EUROPE, AFRICA & ARAB GULF Foreign supplies Arab Gulf S. America Mexico Canada Asia International crude oil price linkages Mexico S. America Arab Gulf 12 6

7 23 California Foreign Crude Oil Imports The Arab Gulf crudes make up 58% of foreign imports, while Latin American crudes accounted for 31%. Thousands Of Barrels Per Day SAUDI ARABIA ECUADOR IRAQ MEXICO ANGOLA ARGENTINA AUSTRALIA CANADA UNITED ARAB EMIRATES INDONESIA OMAN PERU KUWAIT YEMEN COLOMBIA BRUNEI VENEZUELA NIGERIA BRAZIL EQUATORIAL GUINEA VIETNAM 13 Benchmark Crude Pricing Basis: Import Parity ANS Middle East Import Parity Differential, $/BBL.4.2 Est. Middle East Import Cost (VLCC w/ Lightering) - (.2) ANS can be used as a benchmark crude for evaluating U.S. West Coast crude oil prices. (.4) (.6) (.8) (1.) (1.2) (1.4) ANS prices have gradually risen to levels consistent with delivered imports from Middle East (Western Hemisphere Import Parity Pricing). Source: Platts, Purvin & Gertz Analysis 14 7

8 Delivered Costs For Foreign Crudes Port and terminal infrastructure improvements may eventually reduce delivery costs. ILLUSTRATIVE EXAMPLE 35 Dollars Per Barrel Foreign Market FOB Price VLCC/LR-2 Tanker Losses & Insurance Lightering Duty/Fees Historical Arab Gulf Tanker Costs VLCC Cost Dollars Per Barrel Jan-1 Mar-1 May-1 VLCC: Arab Gulf To USWC VLCC: Arab Gulf To USGC Jul-1 Sep-1 Nov-1 Jan-2 Mar-2 May-2 Jul-2 Sep-2 Nov-2 Jan-3 Mar-3 May-3 Jul-3 Sep-3 OPEC Crude Thousand Barrels Per Day OPEC Crude Production Nov-3 Jan-4 Mar Foreign flagged crude oil tanker fleet is operating near full capacity. As OPEC production and exports increase, tanker costs are likely to increase. 16 8

9 Crude Price And OPEC Spare Capacity Thousands Of Barrels Per Day 12 1 OPEC CUTS- LOW UTILIZATION 24 $/BBL Strong demand growth led by Asia and U.S. economic recovery has cut spare OPEC crude oil production capacity. 8 6 HIGH OPEC UTILIZATION Despite production increases by OPEC and Former Soviet Union, crude oil inventories remain tight Source: IEA, Platts Price OPEC SPARE CAPACITY Iraq War Unlike previous oil shocks, the current price environment is accompanied by high OPEC and non- OPEC utilization. 17 World Crude Oil Demand Growth Oil Demand Growth From 1Q 21 (Millions Of Barrels Per Day) Q 21 Source: IEA 2Q 21 3Q 21 4Q 21 1Q 22 2Q 22 3Q 22 4Q 22 1Q 23 2Q 23 3Q 23 4Q 23 World China Other Asia (Excl. Japan) 1Q 24 Seasonal global petroleum demand usually peaks in winter months. Growth in worldwide demand over 2 nd Half of 23 was roughly 4.5 million barrels per day. Over the last 3 years, roughly 65% of worldwide demand growth was driven by Asian countries. 18 9

10 Crude Oil Valuation Overview Regional Benchmark Crude Pricing International Import Parity International Export Parity Marginal Production Costs CRUDE OIL VALUATION Value Adjustments For Crude Quality Refinery economic indifference 19 Estimating The Crude Oil Quality Differential ILLUSTRATIVE EXAMPLE Market Clearing Price (US$/ Barrel) CLASSIC SUPPLY-DEMAND FRAMEWORK Crude Oil Demand Curve (Refinery Breakeven) Refiner s Margin (US$/ BBL) Supplier s Surplus (US$/ BBL) Marginal Refinery Operation Determines Market Value Market Crude Oil Demand (Barrels Per Day) Crude Oil Supply Curve (Supplier Indifference) Key Assumptions Refineries will expand crude oil consumption until favorable economics disappear (marginal refinery mode). Crude oil supply costs based on market alternatives or marginal production costs. 2 1

11 Determining Crude Oil Quality Differentials ILLUSTRATIVE EXAMPLE Crude Oil Price (US$/BBL) Relative Market Clearing Price REFINERY OPERATING MODE ECONOMICS Coking Mode Mode Variable Realization FCC FCC Cracking Mode Mode Variable Realization Total Crude Oil Demand (Barrels Per Day) Hydroskimming Mode Mode Variable Realization Topping Mode Mode Variable Realization Crude oil quality differentials are based on the crude oil s relative value in the marginal refinery mode. The marginal refinery mode in the West Coast is usually FCC Cracking, which produces residual fuel oil. 21 Main Factors Impacting Crude Quality Differentials Refinery cracking yields Fuel oil yield Vacuum residue Viscosity blending properties Gasoline yield Gasoline, Jet & Diesel Refinery processing cost Sulfur Nitrogen/ Metals Gas oil volume Crude Oil Refinery Cracking Mode Refined product prices Light product fuel oil differential Marginal product disposition Export parity Import parity Refinery Fuel Oil 22 11

12 Recap California refineries are expected to expand as California product demand grows. Foreign crude imports will continue to increase as ANS and California supplies decline. Light sour crude oil from the Arab Gulf and Latin America will be the main source of foreign crude. Quality differentials for crude oils are usually dependent on the economics of the marginal refinery mode. Crude oil supplies in California are expected to follow import parity. Worldwide petroleum demand growth, particularly in Asia, has created a tight market for crude oil and tanker services. VLCC tanker costs from the Arab Gulf to the U.S. can have a significant impact California crude oil prices. 23 Outlook And Comments Although significant risk exists, strong Asian demand growth is likely to continue requiring increases in worldwide production. Supply concerns related to Middle East tensions have recently moved crude oil prices beyond industry fundamentals. Iraq and Former Soviet Union are seen as the main wildcards for increased crude supplies. Near-term crude oil prices should ease as non-opec production increases in 24 and 25. Long-run crude oil prices should more closely follow reserve development costs. Some California refiners may elect to import product rather than increase crude run due to high cost of expansion and difficulty with latest CARB specifications

13 About This Presentation This presentation has been prepared for the (Client). It provides an overview of the factors expected to influence the market for crude oil in the California region. Neither the presentation nor any part of the presentation shall be provided to third parties without the written consent of Purvin & Gertz. Any third party in possession of the presentation may not rely upon its conclusions without the written consent of Purvin & Gertz. Possession of the presentation does not carry with it the right of publication. Some of the information on which this report is based has been provided by others including the Client. Purvin & Gertz has utilized such information without verification unless specifically noted otherwise. Purvin & Gertz accepts no liability for errors or inaccuracies in information provided by others. Purvin & Gertz conducted this analysis and prepared this report utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of the events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY