27 April 2016 Crude Export and the New Dynamics Mel Larson, Principal Consultant SUPERIOR RESULTS. SUSTAINED.
Topics of Interest Crude Export Impact The Great Divide Export to everywhere The US Advantage 27 April 2016 2
Impact of Lower Crude Pricing The Great Divide 27 April 2016 3
Global Market History The Perfect Storm Saudi Arabia no cut in November of 2014 Reality since Iran sanctions in mid 80s, Saudi had risen to power. Without the sanctions Iran takes market from Saudis. The explosion of LTO incentivized refiners to process LTO Push out like-for-like crude most notably West African crude. West African crudes need a new home Asia becomes new home to sell crude, West African crude. This is more about market share than price of crude In December 2015 as part of the Congressional budget deal, the 40 year crude export ban is lifted. 27 April 2016 4
Canada Crude Southward Ho West and East pipeline projects are in jeopardy Environmental challenges abound in each direction East flows are coming through US via Line 9 Reversal through Chicago Lifting of export ban introduces more choices for crude selection based on economics Canadian Economics challenged Taxation, abandoned well closures (over 700) and low oil pricing present a challenge to sustain production Canadian crude becoming more stranded Only outlet is through the US via Cushing Priced against Maya at a discount Less Diluent, thus less of an outlet of LTO light and natural gasoline 27 April 2016 5
Canadian / US Major Crude Pipelines Enbridge Gateway is delayed for years Eastern line to Saint John extreme environmental hurdles Access to Eastern Canadian Refineries via US Cushing to US GC line in place and being used 27 April 2016 6
USA Oil Flow Expanding the Options Storage capacity increasing Houston and St. James capacity increasing USA pipeline construction continues Cushing to Memphis West Texas to Houston Reversed Zedyco to St. James LTO from West Texas now via pipeline to Louisiana New line Connecting Shell Convent / Norco (and others) Line 9 from Chicago to Quebec Potential isolation of crude processing in some regions Capline from Gulf to Patoka maybe be reversed to supply Canadian and midcontinent crude to Gulf Coast into Louisiana refineries 27 April 2016 7
US Crude Shifts PADD Differences Impediments Continue Crude exports open market however Jones Act continues to inhibit economic access to crude to PADD I and V. Crude from USGC to East Coast must be delivered in Jones Act Vessel. PADD Differences PADD I Competitive to foreign refiners Import of crude and product from Canada, EU and ME PADD II & IV Domestic and Canadian Crude mostly, meeting domestic demand PADD III & V Blend of Domestic / Foreign PADD III Exporting Products Gasoline / Diesel / Jet / Diluent PADD V Importing crude and product on the margin 27 April 2016 8
USA Pipelines 27 April 2016 9
Margin and Demand Driven 27 April 2016 10
Global Boundaries Regulatory Changes Impact Refining China US / EU HS Fuel Oil Declining to Elimination Emissions regulations and drive for lower fossil fuel Changes in Coke Sulfur imports Lower Coal use / Reduce Emission Lower Ozone / RVP / NOx / Particulate / Sulfur MARPOL 0.5 wt% Sulfur fuel Power Plants shifting to Nat Gas 27 April 2016 11
Markets and Demand It s Margin Export ban lifting opens up each PADD to margin pressures that are different Margin Domestic cracked spreads solid to strong (PADD II / IV) Incremental value in crude processing and exporting product (PADD III) - PADD I Most constrained margin» The advantage of stranded LTO is gone. Foreign crude competitive thus shrinking margin against foreign supplies at NY Harbor.» No meaningful export of production from East Coast 27 April 2016 12
What Happened to Diesel? Cheap crude changed the dynamics of fuel Gasoline demand enjoys growth in EU Thanks to VW and diesel emissions scandal there is continued political drive to cut pollution in London and Paris (political centers) banning diesel vehicles Gasoline demand in US continues to increase Asian demand of gasoline rising (India and China) Market glut in diesel Diesel demand down (lower US E&P) New refineries focused on diesel vs. balance production China Teapots switched from fuel oil to crude processing increasing glut 27 April 2016 13
US Export Diesel / Gasoline 40000 35000 30000 25000 20000 15000 10000 5000 0 27 April 2016 14 Jan-2009 Apr-2009 Jul-2009 Oct-2009 Jan-2010 Apr-2010 Jul-2010 Oct-2010 Jan-2011 Apr-2011 Jul-2011 Oct-2011 Jan-2012 Apr-2012 Jul-2012 Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013 Jan-2014 Apr-2014 Jul-2014 Oct-2014 Jan-2015 Apr-2015 Jul-2015 Oct-2015 Jan-2016 Diesel K bbls/month Gasoline K bbls/month Source: U.S. Energy Information Administration
Production Demand Looking Forward EU refineries continue to be challenged with lower margin operations Middle East and Asian growth to supply EU and Asian demand ME investment in refinery projects in Asia to source crude Latin American demand will continue to grow without refinery expansions Home for US produced gasoline and diesel 27 April 2016 15
The US Advantage Everyone is a Merchant Refiner 27 April 2016 16
The US Wins U.S. Refining Competitiveness Factors Advantaged Crude Costs Free Market Principles, Economically and Politically Stable Most Advanced, Complex Refineries Low Energy Costs U.S. Refining Competitiveness Low Capital Costs Highly Skilled, Flexible Workforce Better in the USA Domestic Project Cost and Execution Benefits Turner Mason 27 April 2016 17
US Product Demand Gasoline demand may increase somewhat, however Diesel demand will be steady Advent and improvements in hybrid vehicles will dampen growth Use of Compressed Natural Gas (CNG) in dual fuel fleets more prevalent Potential to grow with resurgence of LTO US refiner utilization to remain >88% Export market demand will drive USGC refiners with domestic needs supplied by Mid-Continent facilities 27 April 2016 18
Coker / FCC / Sulfur Coker Operations Incentivize Crude Options Coke is < 5% of refinery profit therefore value is in discounted crude Petcoke disposal will be the challenge in next 10 yrs Sulfur function of crude feed and will export to LATAM markets FCC Revitalized Gasoline demand domestically and LATAM 27 April 2016 19
The Next Three Years Crude Oil Price Will Increase After the glut is gone Lack of exploration and recovered reserves will incentivize LTO recovery US / Canadian infrastructure investment now in place to take greater advantage of LTO Challenges in Excess C4 / C5 Management Expect 1 psi RVP waiver to disappear 27 April 2016 20
Questions? Thank you. 27 April 2016 21