Perspectives on US Energy Outlook, Cocktail Party Issues and Impacts on E&C Players October 4, 211
1 World Oil Outlook 2 US Refining and Gasoline Outlook 3 US Natural Gas Outlook 4 US NGL Outlook Wood Mackenzie 2
Oil supply, outside OPEC increases markedly North Sea Russia Canada Kazakhstan US China Egypt Mexico Oman Total Non-OPEC Supply * 21: 5.48 m b/d 22: 56.6 m b/d +5.58 m b/d *including unconventionals Yemen Thailand Indonesia Ghana Brazil Argentina Australia and Indonesia Unconventionals Source: Wood Mackenzie.1<.25.25<.5 m b/d m b/d.5< m b/d Note: Countries included where change is greater than 1, b/d Wood Mackenzie 3
Million b/d OPEC spare crude oil capacity ensures demand can be met 7 7.5% 7.% Forecast of OPEC Crude oil Capacity Minus Call on OPEC Crude oil 6 % of global oil demand 5 4.7% 4 3 4.2% 3.9% 3.6% 3.5% 3.6% 3.2% 3.2% 3.2% 3.% 3.3% 3.4% 2.9% 2.5% 2 1 Source: Wood Mackenzie 25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 22 *Call on OPEC crude oil is world oil demand forecast compared with our forecasts for non-opec production, OPEC and non-opec natural gas liquids, world refining processing gains, and our definition of unconventionals (consisting of biofuels, CTL,GTL, and shale oil). Source: Wood Mackenzie Wood Mackenzie 4
Million b/d million b/d World oil demand forecast shows strong growth Demand by Region Demand by Major Sectors 15 1 FSU 6 95 Africa 9 85 Latin America 5 8 Middle East 75 7 65 Other Asia India 4 6 55 China 3 5 45 4 Advanced Asia 2 35 3 25 Europe 1 2 15 1 North America - 5 198 1985 199 1995 2 25 21 215 22 198 199 2 21 22 Transport Petrochemical Feedstock Source: History-IEA, EIA; Forecast-Wood Mackenzie Industry & Pow er Generation Residential/Commercial Wood Mackenzie 5
US$/bbl Brent price forecast to 22 shows increase from about $1 14 12 1 Price volatility risk Financial investors shifting stance Inflation and weak US dollar hedges Upward price risk Political turmoil in key producing nations Attack on Iran nuclear facilities Inadequate upstream investment 8 6 4 Downward price risk Recovery from financial crisis lags expectations Slower than expected GDP growth Iraq supply wildcard 2 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 22 Source: History - Thomson Datastream, Forecast - Wood Mackenzie Brent Real Brent Nominal Wood Mackenzie 6
Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 COCKTAIL PARTY ISSUE #1: What s up with WTI? Cushing constraints dislocate WTI from global oil markets Brent WTI spread has multiple drivers Rising North America light crude production (WTI ) US refineries re-positioning (WTI ) Strong Asian oil demand growth (Brent ) Libya production off-line (Brent ) $/bbl 25 2 15 1 Brent WTI Price Spread Widening spread helps inland refiners Buy crude on a WTI basis Product import competition (from USGC) indexed off Brent 5-5 Source: Platts, Wood Mackenzie Wood Mackenzie 7
MILLENIUM KOCH USGC connectivity is primarily inbound to Cushing impacting the WTI - Brent differential Nanticoke Guernsey Cheyenne KEYSTONE Lockport Chicago Detroit Platteville Flanagan Wood River Patoka Robinson El Dorado Coffeyville Ponca City Cushing McKee Borger Memphis El Paso Slaughter Co. City Wichita Falls El Dorado Longview Midland Eagle Ford Corsicana St. Charles Legend: Inbound Outbound Outbound planned Corpus Christi` Houston Port Arthur/ Beaumont Free port New Orleans St James Source: Wood Mackenzie April 211 Wood Mackenzie 8
Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Cushing storage utilizations influence the price dynamics of Brent WTI differentials Cushing Stock & Shell Capacity (24-21) Brent WTI diff vs. Storage utilization (24-21) 1' bbls 7, 6, 5, 4, (Utiliz. %) 1% 8% 6% WTI $/bbl 5 4 3 2 1 Recent differentials suggest other factors are governing the dynamics of WTI (Utiliz. %) 1% 8% 6% 3, 4% -1-2 4% 2, -3 2% 1, 2% -4-5 % % Capacity Stock Utilization Brent-WTI Utilization Wood Mackenzie 9
1 World Oil Outlook 2 US Refining and Gasoline Outlook 3 US Natural Gas Outlook 4 US NGL Outlook Wood Mackenzie 1
Additional CDU Capacity, kbd. Global capacity additions are concentrated in emerging Asia and the Middle East, with closures in the developed world 6, 5, 4, 3, Refinery Capacity Additions kb/d -5 Refinery Closures and Capacity Reductions 29 21 211 212 213 214 215 2, -1 1, -15-2 -1, Asia Pacific Middle East North America Latin America by end 21 211-17 Greater Europe FSU Sub- Saharan Africa -25-3 -35-4 Greater Europe N. America Asia Pacific Source: Wood Mackenzie Product Markets Service Wood Mackenzie 11
Cumulative change, Mbd On a cumulative basis demand just outpaces capacity growth 12 Global Demand and Capacity to Supply 1 8 6 4 Non-refinery supply Refinery expansions New refineries Demand 2 211 212 213 214 215 216 217 Excludes capacity creep and utilisation rate changes Source: Wood Mackenzie Product Markets Service Wood Mackenzie 12
North American Oil Product Demand shows decreased Gasoline and Naphtha Demand Million barrels per day 25 21 211 215 22 225 23 United States LPG (excl C2) 1.37 1.26 1.25 1.21 1.16 1.16 1.15 Naphtha.4.27.26.22.19.19.18 Gasoline 9.16 9.3 9.3 9.11 8.79 8.27 7.75 Jet/Other Kero 1.75 1.44 1.44 1.5 1.56 1.6 1.63 Gas/Diesel Oil 4.12 3.79 3.9 4.16 4.2 4.23 4.22 Fuel Oil.92.55.53.39.37.35.33 Other 3.9 2.8 2.92 3.14 3.23 3.23 3.2 US-5 Total 2.8 19.15 19.32 19.73 19.51 19.3 18.46 Sources: EIA & IEA (history), WM (forecast) Wood Mackenzie 13
2 25 21 215 22 225 Global capacity utilization equalizes, but margins improve in Asia, where oil demand is growing $/bbl 1 9 8 7 6 5 4 3 2 1 Percent 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Northwest Europe ($/bbl) Mediterranean ($/bbl) USGC LLS Cracking, $/bbl Singapore Dubai ($/bbl) Northwest Europe Mediterranean USGC Singapore Wood Mackenzie 14
CP ISSUE #2: What is happening on USEC refining? USEC continues to suffer from global competition Gasoline Trade 15 1 5-5 -1-15 Gasoline flows from Europe to North America are forecast to continue North America 15 1 5 Latin America 15 1 5-5 -1-15 Europe continues to export to Africa and the Middle East 15 1 5 Europe Africa 15 1 5-5 -1-15 Middle East 15 1 5-5 -1-15 FSU 15 1 5-5 -1-15 Asia Growing surplus of gasoline in FSU as refiners invest in improving octane levels Asian exports to the Middle East decline Current key trade (kbd) New net trade 215 (kbd) -5-1 -15-5 -1-15 2 25 29 215 22 Source: Wood Mackenzie Analysis Wood Mackenzie 15
Opportunity may be for USEC players to play a larger role in supplying diesel/gasoil to Europe Diesel/Gasoil Trade 12 8 4 North America US exports of diesel to Europe should increase 12 8 4-4 European imports Europe from Middle East should increase 12 8 4-4 -8 FSU Russia continues to export diesel/gasoil to Europe -8-12 -4-8 -12 US exports of diesel to Latin America should decline Current key trade (kbd) 12 8 4-4 -8-12 Latin America -12 12 8 4-4 -8-12 Africa 12 8 4-4 -8-12 Middle East 12 8 4-4 -8-12 Asia Middle East diesel/gasoil exports to Asia fall later in the forecast period New net trade 215 (kbd) 2 25 29 215 22 Source: Wood Mackenzie Analysis Wood Mackenzie 16
Run cut losers are in the Atlantic Basin USGC utilisations manage to stay fairly constant % 9 % 9 85 8 75 7 85 8 75 7 USGC Utilisation 65 26 21 27 215 28 65 26 21 27 215 28 US East Coast Utilisation % 9 85 8 75 7 Europe Utilisation 65 26 21 27 215 28 Source: Wood Mackenzie Product Markets Service Wood Mackenzie 17
2 25 21 215 22 miles per gallon CP ISSUE #3: Why are these utilizations so low? Improved vehicle efficiency is a restraint on gasoline demand 4 Average light vehicle efficiency is below CAFÉ standards which measure vehicles in optimum driving conditions not typical driving conditions By 225 CAFÉ standards are proposed to move towards 54 mpg 3 2 1 Existing vehicle stock means the average fleet efficiency takes longer to improve Average Fleet Average Light Vehicles Revised Cafe Standard Wood Mackenzie 18
211 212 213 214 215 216 217 218 219 22 26 27 28 29 21 211 212 213 214 215 216 217 218 219 22 221 222 kb/d Carbon intensity, gco2e/mj Compliance with RFS and LCFS regulation substitutes with Ethanol Forecast Compliance With the US RFS The Californian LCFS Carbon Intensity Requirements vs Two Gasoline Ethanol Blends 2,5 98 96 CARBOB + 1% Brazilian Ethanol CARBOB + 2% Brazilian Ethanol 2, 94 1,5 92 9 1, 5 88 86 84 82 8 Ethanol Biodiesel Renewable Fuel Standard CARBOB - California Reformulated Gasoline Blendstock for Oxygenate Blending Wood Mackenzie 19
1 World Oil Outlook 2 US Refining and Gasoline Outlook 3 US Natural Gas Outlook 4 US NGL Outlook Wood Mackenzie 2
bcfd Natural gas supply anticipated to grow (Bcfd, dry) 12 1 Supply overall increases by 27 Bcfd in the US 21-23. The largest increases are in the Gulf Coast and the Northeast. 8 6 4 2 2 22 24 26 28 21 212 214 216 218 22 222 224 226 228 23 Rockies San Juan Gulf Coast Gulf of Mexico MidContinent Permian Fort Worth Northeast West Coast Alaska WCSB East Coast Arctic Wood Mackenzie 21
Shale gas reserves are key to growth Horn River Shale Horn River Montney TGS Monteney Columbia TGS Mannville CBM Horseshoe Canyon CBM WCSB CANADA UNITED STATES OF AMERICA Utica Shale Pacific Ocean Woodford Barnett km 2 4 8 West Coast Lance Pinedale TGS Almond TGS Baxter Shale Wasatch TGS Mancos TGS Honaker Trail TGS Gothic Shale Hovensweep Big George CBM Fruitland CBM Wyodak CBM Mesaverde CBM Mesaverde Piceance TGS Mesaverde- San Juan Rockies Pierre Shale Vermejo CBM Niobrara TGS Anadarko Woodford Shale Northeast Cherokee CBM Fayetteville Shale Pennsylvanian CBM Granite Wash TGS Caney Shale Palo Duro Shale Arkoma Woodford Barnett Travis Peak TGS Floyd Shale Permian Shale Haynesville Shale Gulf Coast Barnett-Woodford Deep Haley Shale TGS Selma Chalk Cotton Valley Deep Bossier Shale TGS Austin Chalk TGS Wilcox TGS MEXICO Eagle Ford Shale Lobo Wilcox TGS Mid-Continent Lower Vicksburg Shale New Albany Shale Gulf of Mexico Antrim Shale Berea Oriskany Huron Shale Chatanooga Shale Eagle Ford Marcellus Shale Atlantic Ocean Fayetteville Haynesville Marcellus Source: Wood Mackenzie Wood Mackenzie 22
bcfd CP ISSUE #4: Will we be allowed to get to it? The supply mix depends on shales, and hydraulic fracturing 45 Close to 5% of supply longer term will be affected by regulations on hydraulic fracturing. Still, strong growth potential - 28.5 Bcfd in the known shale plays by 225! 4 35 3 25 2 15 1 5 2 23 26 29 212 215 218 221 224 227 23 Barnett Fayetteville Woodford Haynesville Marcellus Eagle Ford Horn River Montney & Duverney Wood Mackenzie 23
TWh bcfd Power is still the largest and a growing use of natural gas in the US Initially, rapid growth, but a longer term slowing US Power Demand for Gas Coal retirements, a resumption of economic growth drive 1.5 Bcfd growth annually through 22 6, 5, 4, 4 35 3 25 Post 22, efficiencies and renewables reduce growth to < 1 Bcfd yearly. 3, 2, 1, 2 15 1 5 2 22 24 26 28 21 212 214 216 218 22 222 224 226 228 23 Nuclear Hydro Coal Gas Renew ables Other Gas demand Wood Mackenzie 24
21 $/mmbtu New-drill cost curves indicate higher long-term Henry Hub price requirement, but well below recent years US new drill gas supply stack* 8 7 6 5 Marcellus Pinedale tight gas Barnett Pinedale tight gas Barnett Haynesville Haynesville Lower Bossier tight gas 4 3 2 Eagle Ford Fayetteville Fayetteville Lower Bossier tight gas Cotton Valley tight gas Cotton Valley tight gas 1 Eagle Ford Marcellus 1 2 3 4 5 6 7 8 9 1 11 bcfd *Assumes development breakeven economics (not including land lease costs) at a 1% real IRR adjusted to a Henry Hub- equivalent price 211 22 Source: Wood Mackenzie (North America Gas Service) Wood Mackenzie 25
1 World Oil Outlook 2 US Refining and Gasoline Outlook 3 US Natural Gas Outlook 4 US NGL Outlook Wood Mackenzie 26
(Thousand bbl/d) Middle East continues to dominate the LPG production while the US supply remains steady 4 Regional NGL Production 2-22 35 3 25 2 15 1 5 2 25 21 215 22 US FSU Europe Asia Africa Latin America Middle East Wood Mackenzie 27
Given the infrastructure of regional demand, the USGC is the hub for Propane and Butane for Chemical use US North West Europe Middle East Asia Ethane Propane Butane Naphtha Gasoil Other Wood Mackenzie 28
LPG petchem demand expected to increase in the Middle East while other regions demand profile remains nearly unchanged US Europe Middle East Asia 1% 1% 1% 1% 9% 9% 9% 9% 8% 8% 8% 8% 7% 7% 7% 7% 6% 6% 6% 6% 5% 5% 5% 5% 4% 4% 4% 4% 3% 3% 3% 3% 2% 2% 2% 2% 1% 1% 1% 1% % 21 22 % 21 22 % 21 22 % 21 22 Industry Petchem Feedstock Residential Commercial Agriculture Road Other Wood Mackenzie 29
bcfd CP ISSUE #5: Why is everybody s talking about Ethane? With all these shales NGL content ( richness ) is a key driver 35 US Shale Gas Production by Play High oil-gas price differential has increased the attractiveness of liquids-rich shale gas plays Increased focus on wetter shale plays in 21/11 3 25 2 15 Lean Shifting upstream strategies and capital allocation across independents 1 5 Wet 2 23 26 29 212 215 218 221 224 227 23 Barnett Eagle Ford Montney Marcellus Fayetteville Woodford Haynesville Horn River Source: Wood Mackenzie Unconventional Gas Service Wood Mackenzie 3
27 21 215 22 Thousand Bbl/day North America s Liquids Fairway unveils an ethane supply story US NGL Production (27-22) 2, 1,8 1,6 1,4 1,2 Aux Sable Sarnia 1, 8 6 4 2 Conway Liquids Fairway Mont Belvieu Ethane Propane Butane Source: Wood Mackenzie 31
21 215 22 Feedstocks $/MMBtu USGC petchems may focus on maximizing Ethane feedstock Feedstock demand to produce 1 ton of Ethylene 18 Ethane Price Projection ($/MMBtu) 21-225 16 Naphtha Butane 14 12 1 Propane 8 Ethane 6 4 2..5 1. 1.5 2. 2.5 3. 3.5 4. ton Naphtha Ethane Natural Gas Wood Mackenzie 32
In summary, how do the broader trends in the energy industry impact the E&C business? Macro-Fundamentals E&C Impact Oil supply is stable and more from non-opec sources Gasoline demand declining Overall demand CAFÉ RFS/LCFS Natural gas volumes increased with (wet) shale plays NGL supply stable, but ethane will grow significantly Mega projects in the upstream remain in the mix (Brazil deepwater and Canada) Infrastructure plays become the more important in future Refining projects to be smaller more geared to regulatory compliance vs. profitability Gas fired power plants win the day Ethylene units may already have too many announced Wood Mackenzie 33
THANKS Any Questions? Wood Mackenzie 34
Wood Mackenzie Kintore House 74-77 Queen Street Edinburgh EH2 4NS Global Offices Global Contact Details Europe +44 ()131 243 44 Americas +1 713 47 16 Asia Pacific +65 6518 8 Email energy@woodmac.com Australia - Canada - China - Japan - Malaysia - Russia - Singapore - South Africa - United Arab Emirates - United Kingdom - United States Wood Mackenzie has been providing its unique range of research products and consulting services to the Energy industry for over 3 years. Wood Mackenzie provides forward-looking commercial insight that enables clients to make better business decisions. For more information visit: Wood Mackenzie 35