The effects of increasing access to the U.S. Gulf Coast on global and North American price spreads Presented by: John Homan Marketing and Logistics Representative, Laricina Energy Ltd. Crude Oil Markets, Rail & Pipeline Takeaway Summit: Western Canada 2012
Outline 2 Index versus posted pricing WTI-Brent price disparity New pipeline capacity to the USGC Seaway, Keystone XL Southern leg North American light sweet spreads Light/Heavy differentials Pricing forecasts
Postings vs. Index pricing 3 Prior to public trading platforms and broker indexes, postings were the main source of price discovery Online brokerage and trading platforms now allow for daily and monthly index price discovery Postings are being phased out Index pricing is readily available Index reflects actual trading in a visible and liquid market $US/bbl $US/bbl $120 $100 $80 $60 $40 $20 $0 $100 $90 $80 $70 $60 $50 $40 Index Sweet @ EDMT Suncor Sweet @ EDMT Imperial Sweet @ EDMT Shell Sweet @ EDMT January February March April May June July August September Index WCS @ Hardisty Suncor WCS @ Hardisty Cenovus WCS @ Hardisty For less liquid grades, postings remain relevant for price discovery but are still based off of index pricing of the liquid grades $30 $20 $10 $0 January February March April May June July August September Source: Suncor, Imperial, Shell, Cenovus Crude oil postings Net Energy, Shorcan monthly index pricing
Global and North American price spreads 4 West Texas intermediate (WTI) / Brent North American light oil spreads WTI / Louisiana Light Sweet (LLS) WTI / Mixed Sweet (MSW) LLS/MSW Light/Heavy spreads Maya/Brent Western Canadian select (WCS) / WTI
WTI/Brent Historical Pricing 5 10 Efficient market Inefficient market 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 $U S /b b l -10 Pipeline constraints -20-30 Pricing data sourced from the EIA, www.eia.gov
Cushing flows Growing production along with deepening market contango directed more flow to Cushing ExxonMobil Pegasus 6 Prior to the Seaway reversal Exxon s Pegasus pipeline was the only route to clear the Midwest WTI/LLS spread began to support increased barge flow (Midwest to USGC) Source: wwww.exxonmobilepipeline.com Seaway reversal start-up May-2012 (150k bpd) Meanwhile falling North Sea production and geopolitical tension is supporting Brent
Cushing flows Accessing the USGC 7 (000's bpd) Flows in to Cushing assume KS @ <80k bpd 1,073 Plus: area production 230 1,303 Less: area refining 450 Flows out of Cushing 713 Potential Cushing supply overhang 140 Post 2013 Cushing relief Seaway Reversal - 400 Net Cushing flows Balanced/Drawing TransCananda GC - 550 Net Cushing flows Drawing Source: CAPP, www.capp.ca
Transportation differential pricing parity 8 MSW @ EDMT T-port implied spreads ($/bbl) ~$6/bbl ~$4.75/bbl Brent MSW/WTI -$6.00 WTI/LLS -$4.00 LLS/Brent $3.00 WTI @ Cushing ~$4/bbl LLS @ St. James Wood-Pat ~$3/bbl Average spreads Prior to pipeline constraints (Jan 2007 - Jan 2011) MSW/WTI -$2.50 WTI/LLS -$3.00 LLS/Brent $3.00
USGC light oil: from a demand to a supply driven market 9 Implied spreads ($/bbl) Supply Driven MSW @ EDMT MSW/WTI -$6.00 WTI/LLS -$4.00 Brent LLS/Brent -$3.00 WTI/Brent -$7.00 WTI @ Cushing LLS @ St. James *Medium sour grades are backed out as refiners need heavier crude to balance their crude slate
10 Futures curve supports the WTI/Brent spread topping out at -$6 to -$7/bbl 120 WTI/Brent FWD Curves 0 115 WTI Brent WTI/Brent (rt axis) 110-5 -7 $US/bbl 105 100 95-10 -15 $/bbl spread 90 85-20 80-25 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Pricing: CME Group www.cmegroup.com October 12, 2012
11 Light/Heavy spreads
Street consensus L/H differential forecasts 12 Source: BMO Industry Perspectives on Heavy Oil Differentials, October 2012
Local supply/demand balances - Canada Heavy pricing impact - minor 13 CAPP 2012 - Total Cdn refining capacities (pipeline accessible) CDN HVY production is 1.5 MMbpd while Canadian refiners can process 250 300 Mbpd The planned reversal of Enbridge s line 9 along with rail deliveries to the East coast could increase CDN HVY processing a further 100 Mbpd Thousands bpd 1,000 900 800 700 600 500 400 300 200 100 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Heavy Conventional Medium Sour Light Synthetic Conventional Light Sw eet Majority of extra capacity will go to light and medium sour crudes Line 9 reversal Rail Source: CAPP, www.capp.ca
Local supply/demand balances - USA Heavy pricing impact positive but diminishing 14 In the short term PADD II in the US Midwest will remain the dominant consumer of CDN HVY 2011 PADD II: Foreign Sourced Supply by Type and Domestic Crude Oil Domestic crude, 1,851 Heavy, 1,013 Light/Medium Sour, 195 PADD II heavy demand is increasing by ~470 Mbpd to ~1.5 MMbpd as refinery conversion projects come online over 2012-2013 7,000 6,000 5,000 *Includes small volumes of Medium Sw eet Source: EIA Light Sweet*, 313 CAPP 2012 - Crude Oil Supply Forecast CDN HVY production is forecast to increase to 2 MMbpd by 2015 Thousands of bpd 4,000 3,000 2,000 1,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 WESTERN CANADA OIL SUPPLY Total Heavy Supply Oil Sands Heavy
Local supply/demand balances - USA 15 PADD IV (Montana, Wyoming, Colorado, Utah) currently imports ~170 Mbpd of CDN HVY Total refining capacity = 630 600 500 400 PADD IV thousand barrels per day 300 Including 2012-2013 refinery conversion projects CDN HVY refining capacity within easy reach of supply amounts to 2 MMbpd 200 100 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Light Sweet* Light/M edium Sour Heavy Source: 2012 CAPP Refinery Survey This is enough capacity within easy reach of supply to absorb CDN HVY bbls into 2015 PADD III (USGC) is the first of the less accessible markets to receive significant volumes of CDN HVY Heavy pricing impact significant and positive Source: Purvin and Gertz Crude Oil and Oil Sands Market Outlook 2010
16 USGC Heavy pricing benchmark (WCS vs. Maya) Prior to Jan 2011, WCS was pricing close to the Maya price after adjusting for transport Pre-constraints Post-constraints Total Since Jan 2011, WCS has traded at a large discount MAYA-WCS Jan-08 - Dec-10 Jan-11 - May-12 Jan-08 - Jun-12 spread US$/bbl Mean 4.99 24.26 11.36 Pipeline constraints need to be resolved to move WCS back on par with Maya on a transport adjusted basis Pre-constraints Post-constraints Total Historically Maya has priced at a ~$10.50 - $12.50/bbl discount to light sweet crude in the USGC WCS being similar quality should realize the same value to light oil MAYA-Brent Jan-08 - Dec-10 Jan-11 - May-12 Jan-08 - Jun-12 spread US$/bbl Mean -10.15-10.83-10.37 Pre-constraints Post-constraints Total MAYA-LLS spread Jan-08 - Dec-10 Jan-11 - May-12 Jan-08 - May-12 US$/bbl Mean -13.01-11.99-12.68 Pricing data sourced from Bloomberg
Fundamental implied heavy to light spread Maya has been pricing at ~88% of light sweet (Brent) WCS has been pricing at ~79% of light sweet (WTI) WCS should reach towards an equivalent value of ~88% vs. light sweet 95% 17 90% 85% 80% 75% 70% 65% Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Maya as a % of Brent (12 month moving average) Maya as a % of Brent (5 yr average) Pricing data sourced from Bloomberg WCS as a % of WTI (12 month moving average) WCS as a % of WTI ( 5 yr average) Heavy pricing impact long term positive
Refinery configurations and crude diets Heavy pricing impact long term positive 18 USGC crude imports have trended towards heavier oil The volume of heavy crude imports as a percentage of total USGC imports has increased from 44 percent in 2010 to 47 percent in 2012
Refinery configurations and crude diets Heavy pricing impact short to medium term positive 19 PADD II Coking Projects An increase to a heavier crude slate in the US Midwest to process ~470 Mbpd more heavy oil will provide further support to heavy oil narrowing the L/H spread As USGC refiners gain access to more discounted Canadian crude they could also increase refinery utilization rates PADD II refinery utilization 2012 YTD 93% PADD III refinery utilization 2012 YTD 86% Refining charts source: Goldman Sachs Americas: Energy: Oil Refining August 13 th, 2012
Refinery configurations and crude diets Heavy pricing impact downside risk in the short term 20 The WTI/Brent spread is currently paying for the movement of excess resid from the Midwest to the USGC The removal of 1 barrel of resid allows for 3 barrels of heavy runs 2012/2013 Midwest heavy conversion projects should be able to handle the excess resid barrels as the WTI/Brent spread narrows 35 Residual Fuel Oil movements (Midwest to USGC) 30 Thousands of bpd 25 20 15 10 5 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: EIA
International heavy oil supply/demand balances Heavy pricing impact long term positive 21 Mexico and Venezuela heavy oil imports continue to decline Source: EIA
International heavy oil supply/demand balances 22 Global ideal demand for heavy oil is expected to surpass supply even after considering the expected heavy supply growth from the Middle-East Heavy Crude Oil Supply Change vs. Heavy Crude Oil Ideal Demand Change Source: Wood Mackenzie A Netback Impact Analysis of West Coast Export Capacity, December 2011
23 The cause of the recent strength has centered around field maintenance at a few heavy production facilities combined with increased rail takeaway capacities This move provides some insight into the upside potential of heavy differentials Net Energy foward price curve - October 2nd, 2012-10 -10% $/bbl -12-14 -16-18 -20 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14-12% -14% -16% -18% -20% -22% Discount to WTI fwd curve -22-24% WCS differential WCS % discount to WTI Pricing data: Net Energy, www.ne2.ca
Rail/Barge accessing new clearing markets 24 Rapidly growing rail/barge loading and unloading facilities Rail will open up new markets in PADD s I and V Incremental rail transport costs can be fully offset with access to higher priced markets with net gains having exceeded $20/bbl in 2012 Source: CAPP 2012: Crude Oil Forecast, Pipelines and Markets
Rail/Barge accessing new clearing markets 25 Flows from US Midwest to US Gulf Coast vs. spread $/bbl (left axis); thousand b/d (right axis, inverted) Pricing impact increased volatility
Crude quality & stream segregation 26 The current explosion of light oil production will likely put a floor on the L/H spread Refiners have the ability to under run their heavy upgrading to optimize crude inputs Refiners will force heavy and light oils to compete for capacity *Refiners have said that this optimization implies a L/H spread no lower then a $5 - $9/bbl range $US/bbl 30 25 20 15 10 Historical Canadian light/heavy spread CDN MSW/WCS Average spread since 2010 Still significantly better then historical Canadian L/H spreads 5 0 1-Feb-10 1-Apr-10 1-Jun-10 1-Aug-10 1-Oct-10 1-Dec-10 1-Feb-11 1-Apr-11 1-Jun-11 1-Aug-11 1-Oct-11 1-Dec-11 1-Feb-12 1-Apr-12 1-Jun-12 1-Aug-12 *Source: CIBC August 15, 2012 Too Much Of A Good Thing Pricing source: CME group, Net Energy, Shorcan
Pipeline take-away capacities Pricing impact significant in the short to medium term Insufficient pipeline capacity cushions will keep a ceiling on CDN differentials in the short term 27 The biggest risk is the potential of further delays in Keystone XL Pipelines export capacity is increasingly under pressure based on production forecasts Longer term pipeline capacity will continue to be a problem if production levels increase at rates beyond CAPP s forecast Flanagan South and Seaway pipeline projects that combined with the Alberta Clipper pipeline could move 400+ Mbpd of trapped oil out of Canada / US Midwest to the USGC by mid-2014 Low risk of not being approved
Short term: Pipeline capacity issues will maintain high downside price volatility Heavy conversion projects in PADD II lay the foundation for stronger heavy differentials Medium term: Increased production from tight oil plays put downward pressure on light sweet oil Pipeline access to the USGC narrows the light/heavy spread towards $5 - $15/bbl Longer term: USGC becomes the new bottleneck for light oil leading to light exports and a supply driven market USGC heavy demand relies more on imports from Canada The wild cards are: x Pricing Outlook Better support to differentials sooner then expected from rail/barge take-away capacity Altered refinery slates to take advantage of exploding light sweet production intensifying competition for refinery space while increasing pipeline strains 28 2012 2013 2014 2015 2016 2017+ Brent - Forecast $112.50 $105 - $115 $95 - $105 $95 - $105 $95 - $105 $95 - $105 WTI/Brent Spread - Forecast -$17.00 -$12.00 -$7.00 -$7.00 -$7.00 -$7.00 WTI - Forecast $95.00 $98.00 $93.00 $93.00 $93.00 $93.00 L/H Differential Forecast 20% 20% 18% 18% 18% 15%
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