The Most Likely Futures for US Refining Ed Arnold May, 2017 London Houston Singapore Moscow Dubai New York Portland Calgary Santiago Rio de Janeiro Beijing Shanghai Tokyo Sydney Astana Kiev Cape Town Riga San Francisco Washington Market Reporting Consulting Events
High level of uncertainty out 5-7 years Oil prices - Shale oil production trends - OPEC behavior - Asian and Latin American refined products demand MARPOL VI effects - Light-Heavy spread outlook US refined products demand - Domestic demand - Export demand -G/D demand ratio RFS and CAFE regulations Border taxes New pipelines Alberta bitumen
Oil prices: Long term oversupply is the issue 3 World Oil Demand, Supply and Cumulative Oversupply (Data Source: IEA, March, 2017 Update. Calculations by Argus.) Billion bbl/quarter 9.0 8.8 8.6 8.4 8.2 1,400 1,200 1,000 800 600 400 200 Million bbls 8.0 Q1-2014 Q2-2014 Q3-2014 Q4-2014 Q1-2015 Q2-2015 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 0 Global oil demand (left axis) Global oil supply (left axis) Cumulative oversupply since Q1, 2014 (right axis) Early indications are that oil was in oversupply in Q1, 2017.
4 Most likely scenario: Sticking in the shale band Light Crude OIL Price History ($2016 basis, monthy average prices, through March, 2017) $140 $120 $100 $80 $60 $40 $20 $0 $/bbl Shale Band: $35 - $65/bbl? Brent/North Sea Dated LLS Month 1 High probability that monthly average prices will remain volatile, and will stay within the shale band, until shale oil production can t keep up with demand growth, or until the long-term effects of lower E&P investment take hold.
5 MARPOL VI The 2020 global marine fuel sulphur cap is the latest of a series of regulations enforced by the IMO Most likely scenario: Impact on US refining will be significant.
Implementation in 2020 will bring changes World Bunker Fuel and Resid Demand 6 12 million bpd 10 8 6 4 2 0 Distillate Component of Bunker Fuel Resid Component of Bunker Fuel World Resid Demand (kbpd) Unless a ship-based option is widelyadapted, a significant portion of the ~3mn bpd of high sulphur resid used in bunker fuel will need to find a new home or be converted to low sulphur material Demand for low sulfur distillate will, most likely, increase significantly
MARPOL VI: Most likely scenario 7 Regional delays in implementation, temporary exemptions, uneven enforcement Plan for multi-year widening of light-heavy spreads High-sulphur distillate will be an undesirable product ULSD distillate demand will increase ULSD prices will rise No significant pre-emptive conversion or desulfurization investment Eventually, look for some additional resid conversion investment Slowly growing shift to marine LNG Wild cards: Longer term L-H spread differentials*, prolonged phase-in for the regulations, uneven enforcement * if this occurs, could incentivize major conversion investment
Light-heavy product differentials will widen 8 USGC ULSD - 3%HSFO Differential (fob, through March, 2017) $80 $/bbl $70 $60 $50 $40 $30 $20 $10 $0? Our current, most likely scenario Initial switch will disrupt normal price relationships. Creating a stronger incentive for investment in scrubbing. Longer term, prices should return to pre-2020 basis once more vessels are scrubber ready, and as alternative fuel use grows. No significant level of preemptive refinery investment, beyond the normal, but will see some additional desulfurization and conversion capacity. (If long term L-H spread diff, expect conversion investment.)
9 Light-heavy oil spread will widen, for a while Light-Heavy Crude Price Differential [Brent & North Sea Dated versus Maya (USGC). Yearly average prices, through 2016] $16 $14 $12 $10 $8 $6 $4 $2 $0? Brent & North Sea Dated - Maya (USGC) Differential But most likely not long enough to incentivize significant new US resid conversion investment Margins for refiners making HSFO will shrink
10 Marine demand to compete for low sulfur distillate Breakdown of Current US Low S Distillate Use Trucks, Buses & Automobiles 64.2% Military 0.2% Utilities 0.9% Oil Firms 1.9% Industrial Use 3.3% Off-Highway 3.3% Bunkers 4.0% Commercial Use 4.3% Farms 5.3% Railroads 6.0% Residential 6.5%
11 Ship-board scrubbers Different options available Total installed costs ( TIC ) probably more expensive than most current P50 estimates ($3m to $6m++ for new vessels, and $6m to $10m++ for retrofits) - High level of uncertainty with current TIC estimates. More likely on new ships versus retrofits Space requirement is significant, costing revenue Caustic storage (fresh and spent) and other waste will be a major technical issue. Caustic disposal may be the key implementation-cost issue Can t install fast enough to fit all large, viable ships If resid conversion or resid desulfurization investment is substantial, scrubber investors could be burned
US gasoline demand finally above 2007 levels 12 US -Yearly Domestic Gasoline Component Demand 10,000 9,500 9,000 8,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000 000 bpd 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Ethanol used in gasoline Gasoline and blendstock imports US-produced oil derived gasoline for domestic use -Data from EIA. Calculations by Argus. Petroleumderived gasoline demand not yet up to 2004 levels
US gasoline output continues to grow US-Yearly Refinery Gasoline Production 9,000 000 bpd 8,500 8,000 7,500 7,000 6,500 6,000 5,500 US gasoline & blendstock exports 13 US-produced oil derived gasoline for domestic use 5,000 -Data from EIA. Calculations by Argus. Gasoline export growth has been accelerating the last 4 years Most likely export demand scenario: Demand growth rate will gradually shrink Most likely US demand scenario: RFS continues as is. Only moderate changes to CAFE policy. ( 54.5 in 2025 ). Demand growth shrinks and eventually disappears.
14 US gasoline inventories at all time highs 2016 and 2017 US Gasoline Inventory Levels 260 250 240 230 220 210 200 190 180 170 160 Million bbls 2001-2015 inventory range 2016 inventory levels 2017 inventory levels 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 Week Number This places downward pressure on gasoline prices (and oil prices)
15 US distillate demand dropped in 2016 US-Yearly Domestic Distillate Demand 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 000 bpd 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Biodiesel Distillate imports US-produced distillate for domestic use -Data from EIA. Calculations by Argus.
US total distillate production dropped in 2016 US -Yearly Refinery Distillate Production 5,000 000 bpd 4,500 16 4,000 3,500 3,000 2,500 2,000 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Distillate exports US-produced distillate for domestic use -Data from EIA. Calculations by Argus. 2016 growth in distillate exports could compensate for loss in domestic demand. Most likely scenario: Flat to slowly declining demand, until MARPOL VI hits, then look for tight market to develop.
US distillate inventories near all time highs 17 2016 and 2017 US Distillate Inventory Levels 190 170 150 130 110 Million bbls 90 70 50 2001-2015 inventory range 2016 inventory levels 2017 inventory levels 1 3 5 7 9 111315171921232527293133353739414345474951 Week Number This places downward pressure on distillate prices (and oil prices)
18 G/D demand ratios have stopped dropping US -Yearly US G/D Demand Ratios 2.5 2.3 2.1 1.9 1.7 1.5 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 US G/D Domestic Demand Ratio US G/D Domestic + Exports Demand Ratio -Data from EIA. Calculations by Argus. Most likely scenario: This ratio will head back to lower levels once MARPOL VI takes effect
19 US refined products exports are still growing US - Major Refined Products Exports 3,500 3,000 2,500 2,000 1,500 000 bpd Unfinished Oils Jet fuel & other kero. Resid fuel oil Pet. coke Gasoline & Blendstocks Distillate 1,000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Most likely scenario: This will continue, but expect decelerating growth
Export product growth rates are variable 20 US-Export Growth Trends for Distillate and Gasoline are On Different Tracks (Rolling CAGRs ) 50% 40% 30% 20% 10% 0% -10% -20% Distillate NGLs & LRGs Gasoline & blendstocks 2012-2014 2013-2015 2014-2016 Pet. coke Resid fuel oil
21 RFS and CAFE, most likely scenarios RFS - RFS stays at current levels - RINS policy does not change CAFE Standards - No significant change - CARB has clout. - Car manufacturers do not want to build multiple vehicle types.
22 Border taxes Most likely scenario: Minor, measured changes Trump administration appears to be listening to US industry leaders Regardless, high level of uncertainty
23 New Crude Oil Pipelines Both Dakota Access and Enbridge s Keystone XL have new life Govt. of Canada has approved KM s Trans Mountain pipeline twinning Govt. of Canada has approved Enbridge s Line 3 replacement (enlargement) Probability of completion, for all 4 pipelines, within 2-4 years, higher than in 2016 But numerous lawsuits and hearings are obstacles on the paths to completion
24 Keystone XL, Enbridge Line 3 and Alberta bitumen Still face hurdles - Hearings at Nebraska Pubic Services Commission - Likely lawsuits: Sierra Club, NRDC and others Start of construction for KXL could be months or years off KXL less critical than when first envisioned - Other pipelines and rail transport have filled the gap Alberta Dilbit and Synbit will get to the USGC, regardless Supply of Alberta bitumen will continue to grow, slowly Most Alberta bitumen majors are in the business for long term - SAGD operations cannot easily be turned on and off - Despite the flight of foreign capital, ~$14billion in oil sands spending is forecast for 2017 - Recent permitting requests for multiple new SAGD projects
25 Alberta heavy oil import growth continues Canadian Oil Imports to US versus US Oil Production and Mexican and Venezuelan Imports 10,000 000 bpd 8,000 6,000 4,000 US Oil Production Canadian Crude Imports Mexican Oil Imports Venezuelan Oil Imports 2,000 0 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 Majority of Canadian import growth is Alberta bitumen Alberta bitumen import growth will compensate for the loss of Mexican and Venezuelan imports
Today, most Alberta bitumen heads to US PADD 2 Canadian heavy sour crude shipments into US 2,000 kbpd 1,500 1,000 500 293 289 1417 1436 PADD1 PADD5 PADD4 PADD3 PADD2 0 2009 2010 2011 2012 2013 2014 2015 2016 - Data from EIA. Calculations by Argus. Total US bitumen demand dropped in 2016. PADD 2 demand grew slightly. PADD 3 demand dropped.
PADD 3 Oil Import Quality Trend by Oil Type However, PADD 3 represents the largest opportunity 6,000 5,000 4,000 3,000 2,000 1,000 000b/d Note the relative stability of PADD 3 heavy sour import levels, since 2009 0 2009 2010 2011 2012 2013 2014 2015 2016 heavy sweet light sour light sweet medium sweet & sour heavy sour PADD 2 Oil Import Quality Trend by Oil Type PADD 2 demand growth is probably close to its peak demand level 6,000 5,000 4,000 3,000 2,000 1,000 0 000b/d 2009 2010 2011 2012 2013 2014 2015 2016 heavy sweet light sweet heavy sour light sour medium sweet & sour
There is room for additional Canadian bitumen in PADD 3 US PADD 3 Heavy Sour Crude Source Breakdown 100% 80% 60% 40% kbpd 10% 14% 27% Other Saudi Arabia Ecuador Brazil Colombia 20% 0% 32% 2009 2010 2011 2012 2013 2014 2015 2016 Canada Mexico Venezuela Much of the Venezuelan heavy sour crude is high TAN and is a obvious candidate for replacement.
29 US refinery crude API to slowly drift lower US Average Refinery Crude Oil Input Density and Sulfur Content API 32.5 32 31.5 31 30.5 30 wt% S 1.6 1.5 1.4 1.3 1.2 1.1 1 0.9 0.8 Average Crude Oil API (left axis) Average Crude Oil S level, wt% (right axis)... as US oil logistics systems become less constrained, and as US light oil finds it way to additional export markets.
Conclusions 30 Oil Prices: Most Likely in shale band for multiple years Expect volatility Wild cards: Supply disruption, demand surprises, or OPEC successfully managing long-term production cuts MARPOL VI: Plan for multi-year widening of light-heavy spreads High-sulphur distillate will be an undesirable product ULSD distillate demand will increase ULSD prices will rise No significant preemptive conversion of desulfurization investment Wild cards: Long term L-H spread differentials (if they materialize, could incentivize major conversion investment), prolonged phase in for the regulations
Conclusions, continued 31 US Gasoline Demand - Most likely that export demand growth rate will gradually shrink - Most likely that US domestic demand growth shrinks and eventually disappears - Wild cards: CAFE 54.5 disappears, RFS diminished, RFS increases US Distillate Demand - 2016 growth in distillate exports was not enough to compensate for the loss in domestic demand - Most likely scenario: Flat to slowly declining domestic + export demand, until MARPOL VI hits, then look for tight market to develop - Wild Cards: Marpol timing delays, major jump in GDP growth rates in developing or developed countries
Conclusions, continued 32 Pipelines & Alberta Bitumen - DAPL, KXL, Trans-Mount. twinning & Enbridge Line 3 all have new life - Most likely years of lawsuits and hearing for some of these - Additional Alberta bitumen will come into PADD 3 regardless (and a small additional amount into PADD 2) - Although the game has changed, Alberta majors are in the game for the long run - Wild cards: Successful law suits, major spills, technology breakthroughs
Conclusions, continued 33 RFS and CAFE Standards - Most likely, RFS stays at current levels - Most likely, RINS policy does not change - Most likely, CAFE policy sees no significant change - Wild cards: Near-term political-control shifts in DC, Trump administration policy shifts Border Taxes - Most likely scenario: Minor, measured changes - Trump administration appears to be listening to US industry - Regardless, high level of uncertainty
Argus Consulting Services Ed Arnold, Senior Consultant edward.arnold@argusmedia.com 6305446492 Houston www.argusmedia.com http://blog.argusmedia.com Stay Connected @ArgusMedia +Argusmediaplus Argus-media argusmediavideo Copyright notice All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus. Trademark notice ARGUS, the ARGUS logo, ARGUS MEDIA, ARGUS DIRECT, ARGUS OPEN MARKETS, AOM, FMB, DEWITT, JIM JORDAN & ASSOCIATES, JJ&A, FUNDALYTICS, METAL-PAGES, METALPRICES.COM, Argus publication titles and Argus index names are trademarks of Argus Media group. Disclaimer All data and other information presented (the Data ) are provided on an as is basis. Argus makes no warranties, express orimplied, as to the accuracy, adequacy, timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any party s reliance on the Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.