U.S. Crude Oil: The Upside & The Other Side

U.S. Crude Oil: The Upside & The Other Side Greg Haas ghaas@hartenergy.com Director of Research, Integrated Oil & Gas Houston, Texas March 13, 2014

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Agenda U.S. Crude Oil The Upside: Upstream, Midstream, Downstream U.S. Crude Oil The Other Side: Crude Competition, Flaring, Rail Safety Initiatives, Fuel Demand Declines U.S. Crude Oil The Integrated Effects Questions and Answers 2014 Hart Energy. All rights reserved. 3

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2006 2007 2008 2009 2010 2011 2012 2013F 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E Mb/d U.S. Crude The Upstream Upside One year later, what we are saying/seeing: Our peak crude oil production forecast is higher and earlier Our 2015 production forecast is up 170 Mb/d Our playwide peak production forecast of 1,285 Mb/d arrives in 2022 vs. 1,145 Mb/d in 2025 Cumulative estimated recovery by 2030 is up 1 billion barrels, from 7.2 Bbbls to 8.2 Bbbls 1,400 1,200 1,000 800 600 400 200 0 NASQ Bakken/Three Forks Crude Oil Forecasts 4Q12 4Q13 Source: Hart Energy Research & Consulting - North American Shale Quarterly Service (NASQ) 2014 Hart Energy. All rights reserved. 10

U.S. Crude The Upstream Upside Expanding Resources USGS doubled its Bakken/Three Forks estimate of undiscovered technically recoverable reserves to 7.4 Bbbls ND s most recent total OOIP resource estimate is 300 Bbbls with 7 Bbbls to 15 Bbbls recoverable - Lynn Helms, ND State Dept. of Mineral Resources to Congress, 7/14/12 Hart Energy Research & Consulting s 4Q13 NASQ estimated Bakken recovery through 2030 is 8.5 Bbbls, up from an estimated 7.5 Bbbls in 4Q12 Source: USGS 2014 Hart Energy. All rights reserved. 11

U.S. Crude The Upstream Upside Still running room to back out offshore imports 9,000 8,000 (thousand b/d) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2012 2013F 2014E 2015E 2016E 2017E Source: Hart Energy Research & Consulting - North American Unconventional Oil (NAUO 2014) Based on our estimates of future crude oil production, midstream deliverability and refinery utilization, we expect imported crude oil volumes to decline significantly Canada can access U.S. discounted crude as well to back out costlier offshore imports of light, sweet crude oil Logistics must be available to clear any overhang and to distribute crude across the continent so that U.S. benchmark WTI & LLS prices avoid significant decline 2014 Hart Energy. All rights reserved. 12

U.S. Crude - The Midstream Upside: Crude By Rail Announced investments in loading/unloading facilities, unrisked 5-Year Forward NAUO 2014 Forecast (thousand b/d) Rail loading U.S. 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 We expect crude by rail (CBR) to remain a dynamic midstream contributor to the N. American logistics portfolio We see more developers building interconnected multi-modal terminals to transload pipelined barrels onto railcar for delivery to end-use refiners We expect CBR operators to realize operating-cost efficiencies to offset the increased costs of new safety standards (or else we expect lower rail shipments and higher pipeline use) Source: Hart Energy Research & Consulting - North American Unconventional Oil (NAUO 2014) 2014 Hart Energy. All rights reserved. 13

U.S. Crude The Midstream Upside Bakken reaching all refining markets -50 Bakken to East Coast Discounts vs. Estimated Rail Fees ($/bbl) Bakken to Brent Rail Cost High Rail Cost Low -40-30 -20-10 0 10 Source: Hart Energy Research & Consulting - North American Unconventional Oil (NAUO 2014) Rail is taking Bakken crude to all major refining markets Movements to East Coast markets are ideally geared for light Bakken crudes Refiners accessing Bakken via CBR are likely to continue backing out higher-cost foreign imports in both the U.S. and Canada 2014 Hart Energy. All rights reserved. 14

U.S. Crude The Downstream Upside Incremental refining expansion - especially light oil capacity Announced Refining Capacity Expansion in North Dakota, Unrisked Facility Location Capacity at Start of 2013, thousand b/d Capacity at 2017 Year-end, thousand b/d est. Dakota Oil Processing Trenton, ND 0 20 in 2015 Thunder Butte Petroleum Services Makoti, ND 0 20 in 2014 Dakota Prairie Refining Dickinson, ND 0 20 in 2014 Bison Oil / American Energy Source: Hart Energy Research Devils & Consulting Lake, - North ND Holdings LLC American Unconventional 0 Oil (NAUO 202014) in 2016 North Dakota state refining capacity could at least double Additional micro-refinery developers could add small incremental local crude demand (~10 Mb/d to 15 Mb/d each) Other U.S. developers announced projects to take on 470 Mb/d of light crude in new distillation capacity and 780 Mb/d of condensate at new splitter capacity The continental downstream industry offers upside to the Bakken crude oil industry thanks to the competitive advantages that refiners realize by accessing and running discounted Bakken feedstock in plants fueled by discounted shale gas 2014 Hart Energy. All rights reserved. 15

U.S. Crude The Downstream Upside U.S. refinery advantage drives fuel exports around Atlantic/Caribbean Change in Net Exports (thousand b/d) 700 600 500 400 300 200 100 0-100 -200 Diesel Gasoline Source: Hart Energy Research & Consulting - North American Unconventional Oil (NAUO 2014) We see fuel exports from U.S. refiners as competitively advantaged due to discounted domestic crude oil feedstock and low-cost natural gas fuels European gasoline demand and refining margins are likely to decline while surplus output grows. Dumping excess gasoline into the U.S. could pressure U.S. East Coast refiners. European distillate demand ramp-up should offer some opportunity for increased exports from PADD 3 but must compete against new Middle Eastern refinery output Latin American fuel demand growth (up 840 Mb/d by 2017) will offer incremental export potential, but the U.S. must compete against pending new Brazilian refinery output 2014 Hart Energy. All rights reserved. 16

(thousand b/d) (thousand b/d) U.S. Crude The Upstream s Other Side Crude producers selling into an increasingly flush market 14,000 United States Crude Oil NGL Condensate Total 2017 liquids production is projected at more than 12 MMb/d in the U.S. and 5 MMb/d in Canada 12,000 10,000 8,000 6,000 Light crude oil production is likely to exceed 9.8 MMb/d We estimate NGLs will likely exceed 3.9 MMb/d while lease condensate will likely exceed 1.1 MMb/d 4,000 2,000 0 6,000 5,000 2012 2013 2014 2015 2016 2017 Canada Crude oil Condensate NGL Heavy oil to market is likely to exceed 3 MMb/d, mostly Canadian 4,000 3,000 2,000 1,000 0 2012 2013 2014 2015 2016 2017 Source for above images: Hart Energy Research & Consulting - North American Unconventional Oil (NAUO 2014) 2014 Hart Energy. All rights reserved. 18

Mb/d U.S. Crude The Upstream s Other Side Canadian crude surplus aiming at U.S. 4,500 Western Canada Oil Production PADD 2 & 4 Canadian Oil Imports 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2012 2013F 2014E 2015E 2016E 2017E Source: Hart Energy Research & Consulting - North American Unconventional Oil (NAUO 2014) The traditional home for crude oil from Western Canada has been PADD 2 and PADD 4 We forecast Western Canadian production gains are double the PADD 2+4 demand gain (1.0 MMb/d supply gain vs. a demand gain under 500 Mb/d) 2014 Hart Energy. All rights reserved. 19

2006 2007 2008 2009 2010 2011 2012 2013F 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E MMscf/d U.S. Crude The Midstream s Other Side Associated natural gas flaring must be addressed 900 NASQ Bakken/Three Forks Gas Forecasts 4Q12 4Q13 800 700 600 500 400 300 200 100 0 Source: Hart Energy Research & Consulting - North American Shale Quarterly Service (NASQ) More oil drilling/production means more associated gas production, and that could mean more gas flaring (29% of gas production today) Flaring Task Force and North Dakota move to require drillers to submit a Gas Capture Plan when they apply for a drilling permit Now capturing 71%, but Task Force set a goal of capturing 85% by 2016, then 90% by 2020, toward an ultimate goal of 95% Gas production forecasts continue to rise. Our peak forecast has almost doubled. 2014 Hart Energy. All rights reserved. 20

U.S. Crude The Midstream s Other Side Reducing flaring means investing in midstream infrastructure New Infrastructure Since 2006 Wet gas gathering pipelines @ 9,555 mi. Gas processing fleet @ 1.259 Bcf/d Dry gas takeaway @ 2.0+ Bcf/d NGL takeaway @ ~150 Mb/d $1.7B announced for 2014-2015 + 1,000 mi. wet gas gathering pipe + 400 MMcf/d gas processing + 75 Mb/d NGL takeaway + 400 MMcf/d gas export + 775 mi. dry gas inter/intrastate p/l Source: North Dakota Flaring Task Force, 2014 This upstream challenge is an opportunity for the midstream New investment in gathering, processing capacity and takeaway pipeline opportunities Likely local end-use markets for incremental natural gas will be 1) Oilfield equipment repowered for natural gas and/or 2) Gas-fired electric generation facilities to meet local electricity demand growth 2014 Hart Energy. All rights reserved. 21

Pipeline Capacity (thousand b/d) Rail Takeaway Share U.S. Crude The Midstream s Other Side Heightened Bakken crude oil takeaway competition The Bakken Logistics Portfolio: CBR Skyrockets as Pipeline Takeaway Doubles 700 70% 600 500 400 300 200 100 0 % CBR Takeaway Share Bakken Pipeline Takeaway Capacity YE08 YE09 YE10 YE11 YE12 YE13E Source: Hart Energy Research & Consulting - North American Unconventional Oil (NAUO 2014) 60% 50% 40% 30% 20% 10% 0% Utilization of existing pipelines? Viability of new pipeline projects? Utilization of manifest loading facilities? Utilization of unit train loading facilities, new and pending? Impact of new safety rules and costs? 2014 Hart Energy. All rights reserved. 22

U.S. Crude The Other Side: Crude Competition Macro-level factors will drive regional crude preferences and distribution Tranche 1 Tranche 2 Regional/local crudes Interregional crudes PADD 1 PADD 2 PADD 3 PADD 4 PADD 5 Very limited Bakken by rail Bakken Declining: WTI, LLS Growing: Eagle Ford Declining: WTI, LLS Growing: Bakken Niobrara n/a Totally consumed includes ANS, California local Bakken Tranche 3 Canadian light and heavy Limited volume WCS Growing: WCS Growing: WCS Limited volume WCS Limited light and heavy Tranche 4 Other imported crudes Declining balance Declining as Canadian and Bakken increase Declining as Western Canadian Select and Eagle Ford increase n/a Balance with PG, Asia, LA, Russian Source: Hart Energy Research & Consulting - North American Unconventional Oil (NAUO 2014) Ramping volumes peg Bakken and W. Canadian Select as key marginal crudes for the continent while Eagle Ford is becoming the key marginal crude in PADD 3 2014 Hart Energy. All rights reserved. 23

U.S. Crude The Downstream s Other Side U.S. fuels demand will stagnate and then decline 20,000 (thousand b/d) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 Total LPG/Gas Gasoline Jet Fuel Distillate Residual Fuel Other 4,000 2,000 0 2012 2013 2014 2015 2016 2017 Source: Hart Energy Research & Consulting - 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 2014 Hart Energy. All rights reserved. 24

The Impact of U.S. Crude Oil Across the value chain Upstream U.S. unconventional crude production has rocketed from essentially zero in 2005 to more than 3 MMb/d a decade later. Bakken/Three Forks alone now outputs more barrels than the four North Sea streams that go into the global benchmark blended Brent crude oil. The development of unconventional liquids has reversed the U.S. production decline that started in the 1980s. Multi-decade supply records are falling. 2014 Hart Energy. All rights reserved. 27

The Impact of U.S. Crude Oil Across the value chain Midstream Ramping production and wide differentials are altering crude oil flow dynamics. Potentially wider U.S. crude exports (including potentially from SPR) may upend world oil market structures. Investments in logistical assets are required to align with the new flow dynamics and to alleviate bottlenecks. New pipelines, unit train facilities and marine multimodal logistics are underwritten by wide differentials. A unit train crude terminal investment wave is now underway after earlier manifest facilities proved the concept. For rail, 2013 was The Year of the Terminal. 2014 is The Year of the Tanker. 2014 Hart Energy. All rights reserved. 28

The Impact of U.S. Crude Oil Across the value chain Refining Ramping unconventional production and new logistics are altering the supply landscape for feed & fuel while upping refinery competitive advantage. In five years, the U.S. has rotated from the world s largest fuel importer to the largest fuel exporter. U.S. advantaged unconventional oil/gas is driving future refining investments and altering global refining markets (Atlantic and Caribbean first). 2014 Hart Energy. All rights reserved. 29

Greg Haas ghaas@hartenergy.com 713-260-5201 Strategic Insights Across the Energy Value Chain UPSTREAM MIDSTREAM PROCESSING FUEL & TRANSPORT 1616 S. Voss Road Suite 675 Houston, TX +1.713.260.6400 Bogotá Brussels Denver Houston London Melbourne Mexico City New Delhi New York San Diego São Paulo Singapore Washington, D.C. 2014 Hart Energy. All rights reserved. 31