U S Oil & NGL Fundamentals U.S. -- Shale Liquids Moving From Excess to Exports -USAEE - Houston Chapter, Thursday, October 16, 2014 Greg Haas, Director of Research, Stratas Advisors Stratas Advisors. All rights reserved.
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Agenda - U.S. Oil & NGL Fundamentals U.S. Liquids Undergoing a Shale Supply Shift New Infrastructure Lowers Regional Differentials But a Bottlenecked Border Drives U.S. Downstream Advantages Product Exports Monetize Excess U.S. Retools to Import Low, Export High Questions and Answers Stratas Advisors. All rights reserved.
U.S. Liquids id Shale Supply Shift Stratas Advisors. All rights reserved. 4
Shale liquids moving from excess to exports U.S. Crude Oil Supply Shift - An unprecedented hockey stick pattern since 2010 The NGL Supply Shift - Lags crude due to processing plant construction timelines 10,000 Mb/d 9,000 Mb/d 8,000 Mb/d 7,000 Mb/d 6,000 Mb/d 5,000 Mb/d 4,000 Mb/d 3,000 Mb/d 2,000 Mb/d 1,000 Mb/d 0 Mb/d 1981 1982 1983 1985 1986 1987 1989 1990 1991 1993 1994 1995 1997 1998 1999 2001 2002 2003 2005 2006 2007 2009 2010 2011 2013 2014 U.S. Field Production of Crude Oil U.S. NGL Production (Gas Plant & Refinery) Source: Stratas Advisors analysis, EIA data Stratas Advisors. All rights reserved. 5
U.S. liquids supply growth expectations Supply gains continue as producers selling into an increasingly flush market 14,000 Crude Oil NGL Condensate 12,000 10,000 (thousand b/d) 8,000 6,000 4,000 2,000 0 2012 2013 2014 2015 2016 2017 Source: Stratas Advisors, North American Unconventional Oil (NAUO 2014) We expect total 2017 liquids production to exceed 12 MMb/d in the U.S Light crude oil production is likely to exceed 9.8 MMb/d NGLs should average 3.9 MMb/d while lease condensate will likely exceed 1.1 MMb/d Stratas Advisors. All rights reserved.
Lower Differentials via New Infrastructure t Stratas Advisors. All rights reserved. 7
Crude differentials narrowed Double digit it differentials eradicated d as new infrastructure t comes into service SYN 80.16$/b ANS 81.25$/b W.CAN 68.51$/b BAKKEN 75.81$/b WTIc 81.31$/b BRENT 83.59$/b SAUDI 82.69$/b KUW L 81.30$/b DUBAI 83.42$/b WTSm 75.56$/b SGC 80.11$/b HLS 83.06$/b LLS 84.51$/b MAYA 74.36$/b Source: Stratas Advisors, Hart Energy Rextag, Bloomberg, 10/14/14 Stratas Advisors. All rights reserved.
Rapid U.S. crude infrastructure expansion Crude by Rail matches quick ramp timelines of new shale plays 5-Year Forward NAUO 2014 Forecast (thousand b/d) Rail loading US U.S. 4695 4,695 Rail loading W. Canada, unrisked 1,102 Rail loading U.S. Bakken, unrisked 1,623 Rail loading Niobrara, unrisked 1,159 Rail loading Utica, unrisked 228 Rail loading Permian/Panhandle, unrisked 937 Rail loading Eagle Ford, unrisked 380 Rail loading Cushing Area, unrisked 141 Rail loading Woodford, unrisked 226 Rail offloading PADD U.S. 6,657 Rail offloading E. Canada 290 Rail offloading PADD 1 1,494 Rail offloading PADD 2 846 Rail offloading PADD 3 2,589 Rail offloading PADD 4 35 Rail offloading PADD 5 1,693 Source: Stratas Advisors - North American Unconventional Oil (NAUO 2014) We expect crude by rail (CBR) to remain a dynamic midstream contributor to the N. American logistics portfolio, although at higher costs due to new tanker specifications and rules related to testing/categorization/staffing We see more developers building interconnected multi-modal terminals to transload pipelined barrels onto railcar for delivery to end-use refiners We expect maturation of shale plays will lead to greater pipeline investment including integration with CBR operations. Price differentials will fall to transport tariffs at more perfect equilibrium Stratas Advisors. All rights reserved.
Our NGL service models impacts of 600+ projects & plants New NGL infrastructure remaking this market as has already happened for crude oil Incremental C2 & C5+ Export Pipelines 800 * 600 400 Utopia/Cochin East 50 Mb/d (75 Mb/d potential) Mariner West 50 Mb/d (80 Mb/d potential) Mariner East 1 70 Mb/d 200 0 2013 2018E *Incremental capacity if expanded to full potential Mt. Belvieu NGL Hub Source: Stratas Advisors, 2014 U.S. NGL Service, Company Information Stratas Advisors. All rights reserved. 10
Bottlenecked Border Drives Downstream Activity it Stratas Advisors. All rights reserved. 11
U.S. expanding crude refineries & condensate splitters Crude & condensate processing expansions can convert U.S. excess to exports 888,000 b/d of potential light processing capacity expansion concentrated in PADDS 2, 3 & 4 PADD 4 - Crude, 53,000 PADD 3 - Condensate, b/d, 6% 240,000 b/d, 27% PADD 3 - Crude, 300,000 b/d, 34% Condensate Splitters, 400,000 b/d, 46% PADD 2 - Crude, 135,000 b/d, 15% PADD 2 - Condensate, 160,000 b/d, 18% Source: Stratas Advisors, EIA, Company Information, Media Reports Stratas Advisors. All rights reserved. 12
Ownership of U.S. refineries to change North American refineries changing hands amid changing North American crude supply regime. 8 4 2 5 1 3 7 6 Refinery Old Owner New Owner Ownership changes should be anticipated for several key U.S. & Canadian refineries that represent a combined 1.7 million barrels per day of crude distillation capacity. This presents a material opportunity for the North American domestic oil production industry to capture market share from importers. Changes in light crude refinery ownership will likely trigger changes in light crude supply relationships. Crude supply changes will likely be seen at the Come-by-Chance & Citgo Lemont refineries if sale transactions close. As new rail, pipeline & marine logistics relieve regional bottlenecks & as supply ramps inland & offshore, we expect crude-on-crude competition between U.S. & Canadian grades. Crude slate changes will likely be most notable at light oil refineries that gain access to crude options from multiple light tight oil plays or upgraders. If & when new owners take over PdVSA s shares in the 4 heavy high-acid crude refineries listed below, they could seek new flexibility & access to run a higher slate of discounted Canadian heavy crude oil. In 2013, these 4 refineries imported 366 Mb/d of Venezuelan heavy crude oil, which was 52% of U.S. heavy Venezuelan imports. Crude Displacement Crude Distillation Opportunity Design Capacity, Mb/d Status 1 Come by Chance Refinery Harvest Operations Corp. SilverRange Financial Offshore light. 115 Operational 2 Lemont Refinery CITGO Petroleum (PdVSA) To be determined Canadian light crude oil 167 Operational 3 Corpus Christi Refinery CITGO Petroleum (PdVSA) To be determined Venezuelan crude 165 Operational 4 Sweeny Refinery JV of Phillips 66 / PdVSA To be determined Venezuelan crude 168 Operational 5 Lake Charles Refinery CITGO Petroleum (PdVSA) To be determined Venezuelan crude 425 Operational 6 Chalmette Refinery JV of Exxon Mobil / PdVSA To be determined Venezuelan crude 192 Operational 7 HOVENSA St. Croix, U.S. Virgin Island JV of Hess Oil Corp., PdVSA Identified, Undisclosed. HOVENSA once refined 650 Mb/d of light crude before 2012 idling 495 Idled. Authorities expect buyer to restart refinery. 8 Torrance Refinery ExxonMobil Corp. To be determined Diverse domestic slate. 150 Operational Stratas Advisors. All rights reserved.
U.S. petchem industry expands on advantaged liquids Cost-advantaged d US U.S. shale gas & NGL = low cost fuel & feed for chemical makers Source: Stratas Advisors 2014 U.S. NGL Service Stratas Advisors. All rights reserved. 14
And now, lease condensate export infrastructure too What are the requirements & potentials for field condensate exports? Schematic of a Condensate Stabilizer - Three marketable streams from one hard to handle field stream - Marketable rich sales gas is compressed & Marketable Y-Grade Marketable Stabilized Condensates or C5+. injected into high pressure gas pipeline. NGL mix to pipeline. Outlet volume is approximately 70% of Predominantly C1, but also contains small Contains C2 to C4. inlet volumes. Can be moved by liquid fractions of C2 to C4. pipeline, rail tanker car or tanker trucks. High pressure bullet tanks for raw field condensate Atmospheric storage tanks for stabilized condensate Gas-fired hot oil heater provides heat for condensate distillation. Gas is purchased. Reboilers transfer heat without fluid inter-mixing. ii Stripper Column Stabilizer Column Source: Stratas Advisors - 2014 U.S. NGL Service, Company Information Electric drive pumps keep fluids in motion. Plant can be powered dby distributed ib dgeneration or by purchased electricity. i Stratas Advisors. All rights reserved. 15
US U.S. Product te Exports Monetize Excess Stratas Advisors. All rights reserved. 16
U.S. demand swamped by shale supply shift Cascade of light crude to U.S. refineries meets stagnant fuel demand (thousa and b/d) 20,000 18,000 Total 16,000 LPG/Gas 14,000 Gasoline 12,000 Jet Fuel 10,000 Distillate 8,000 Residual Fuel Other 6,000 4,000 2,000 0 2012 2013 2014 2015 2016 2017 Source: Stratas t Advisors - North American Unconventional Oil (NAUO 2014) Gasoline demand drops 100 Mb/d lower by 2017 when accelerated declines begin Demand for middle distillates (including jet fuel) to increase slightly We expect combined total U.S. fuel demand to begin structurally declining post-2015 Stratas Advisors. All rights reserved.
U.S. refiners rely on imported heavy crude supplies U.S. 2013 heavy crude imports (3,758 Mbbl/d total) nearly flat with 2012 PADD 4, 190 Mbbl/d, 5% PADD 1, 105 Mbbl/d, 3% Demand for heavy crude is nearly light-crude inelastic. The U.S. imported essentially the same volume of heavy crude oil in 2013 as compared to 2012 (3,758 MMbbl/d versus 3,763 MMbbl/d, respectively). PADD 5, 330 Mbbl/d, 9% A review of the regional data shows little surprise. PADD 2, Easy access & refinery coker project completions & 1,109 operations drove PADD 2 imports upward at a 16% Mbbl/d, 29% growth rate. Despite the rush of light crude to the U.S. Gulf Coast refining region, the demand for heavy crude oil by the region s refineries held above 2 million barrels in 2013 (2.025 Mb/d of heavy PADD 3, crude imports in 2013 versus 2.146 Mb/d in 2012). 2,025 Mbbl/d, 54% Heavy crude oil imports into PADD 5, however, showed a small & temporary increase in 2013 over 2012 rates. On the West Coast, the 2013 heavy import rate of 324 Mbbl/d beat the 2012 rates by 3%. PADD 5 refiners gave back that gain & more this year in 2014 to date. The available data through May data shows PADD 5 heavy crude imports sank 18% to 266 MMbb/d in a period when imports as a whole of heavy crude into the U.S. as a whole sank 4.5% below the 2013 full year numbers. Source: Stratas Advisors, EIA Stratas Advisors. All rights reserved. 18
U.S. shale can still displace light & intermediate supply We see running room to back out overall U.S. supplies of offshore imports 7,636 U.S. Imports of Crude Oil (thousand b/d) 6,921 6,273 6,130 5,659 5,369 2012 2013F 2014E 2015E 2016E 2017E Source: Stratas Advisors- North American Unconventional Oil (NAUO 2014) Based on our models for future crude oil production, midstream deliverability and refinery utilization, we expect U.S. imported crude oil volumes to decline Logistics must be available to clear any overhang and to distribute crude across the continent so that U.S. crude prices avoid significant decline U.S. producers can also expect Eastern Canadian refineries to seek more U.S. discounted crude to back out costlier offshore imports of light oil Stratas Advisors. All rights reserved.
How low can U.S. intermediate crude imports go? U.S. 2013 intermediate t crude imports (2,935 Mbbl/d total) t PADD 5 572 Mbbl/d, 20% PADD 1 377 Mbbl/d, 13% Better availability of U.S. light crudes can be blended with Canadian heavy crudes to form blended intermediates. Imports of intermediate crudes into U.S. refineries took a sizable hit in 2013, declining 10% to 2.935 Mb/d from 3.243 Mb/d in 2012. PADD 4 45 Mbbl/d, 2% PADD 3 1,458 Mbbl/d, 50% PADD 2 484 Mbbl/d, 16% Over 2013, the largest drop of intermediate crude oil imports was seen in PADD 3 (-231 Mb/d) followed by declines in PADD 1 (-58 Mb/d) 2013 imports of intermediate crude into the remaining three regions held relatively firm, with combined 2013 imports dropping just 18 Mb/d from the combined 2012 levels. We anticipate further declines in offshore intermediate imports as more U.S. light production comes to market & as multimodal logistics improve from Canada (via new pipeline, rail & marine tankers options). Source: Stratas Advisors, EIA Stratas Advisors. All rights reserved. 20
U.S. US Retools to Import tl Low, Export thi High Stratas Advisors. All rights reserved. 21
U.S. now a net exporter of refined products Since 2010, shale supply gains have established U.S. as fuel export superpower 4,000 Mb/d 3,000 Mb/d 2,000 Mb/d 1,000 Mb/d 0 Mb/d -1,000 Mb/d -2,000 Mb/d -3,000 Mb/d -4,000 Mb/d Product Exports Product Imports Net Product Exports Source: Stratas Advisors, EIA Stratas Advisors. All rights reserved. 22
NGL export infrastructure getting put to work We expect cost-advantaged U.S. NGL to supply global markets Of the 600+ infrastructure projects we have included in our models, we see all purity product exports occurring via pipeline, rail and marine terminals now operating or under construction. Feeding those export facilities are pipelines, storage facilities, tank farms, ship builders, tanker car makers, fractionation plant operators, de-ethanizer developers, and more. Source: Stratas Advisors - 2014 U.S. NGL Service, Company Information Stratas Advisors. All rights reserved. 23
U.S. now a net exporter of purity NGLs Since 2010, shale supply gains have established U.S. as NGL export superpower 1,400 Mb/d 1,200 Mb/d 1,000 Mb/d 800 Mb/d 600 Mb/d 400 Mb/d 200 Mb/d 0 Mb/d -200 Mb/d -400 Mb/d -600 Mb/d Purity Product Imports - US, Mb/d Purity Product Net Exports - US, Mb/d Purity Product Exports - US, Mb/d Source: Stratas Advisors, EIA Stratas Advisors. All rights reserved. 24
U.S. still a deep net importer of crude oil But crude supply shift has enabled lower import reliance and higher h product exports 200 Mb/d -1,800 Mb/d -3,800 Mb/d -5,800 Mb/d -7,800 Mb/d -9,800 Mb/d -11,800 Mb/d Crude Exports Crude Imports Net Crude Imports Source: Stratas Advisors, EIA Stratas Advisors. All rights reserved. 25
Combined net liquids imports versus demand Meeting U.S. liquids id demand d requires less and less net imports 6,000 Mb/d 4,000 Mb/d 2,000 Mb/d 0 Mb/d -2,000 Mb/d -4,000 Mb/d -6,000 Mb/d -8,000 Mb/d -10,000 Mb/d -12,000 Mb/d -14,000 Mb/d -16,000 Mb/d Source: Stratas Advisors, EIA Crude & Product Exports Crude & Product Imports Net Crude & Product Exports Stratas Advisors. All rights reserved. 26
U.S. not energy independent but more energy secure The 20% threshold h in view 80.0% Net Imports as % of Net Demand 70.0% 60.0% 50.0% 40.0% 30.0% 0% 20.0% 10.0% The Deutch Mark John Deutch s 20% import target as an acceptable goal for U.S. energy security EIA s Oct 7 2014 STEO shows 19.4% in Dec. 14 and 15.1% in Dec. 15. * * 0.0% Source: Stratas Advisors, EIA Stratas Advisors. All rights reserved. 27
Petroleum import cost forecast this decade cut over $1.3 trillion The future ain t what it used to be. - Yogi Berra 600 Net Crude Oil & Petroleum Products Import Expenditures now seen $1.3 trillion lower in 2014 vs. 2009 Annual Energy Outlook lars Billion ns, 2012 Doll 500 400 300 200 In 2009 AEO, 10 year sum was seen at $3.83 trillion. AEO 2014 now sees as $2.46 trillion. 100 0 Source: Stratas Advisors, EIA 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2009 ER AEO Net Expenditures (2007 converted to 2012 dollars) 2014 AEO Net Expenditures (2012 dollars) Stratas Advisors. All rights reserved. 28
Questions &A Answers Greg Haas ghaas@stratasadvisors.com 713-260-5201 Stratas Advisors. All rights reserved. 29
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