Crude Export and the New Dynamics - Refining …refiningcommunity.com/.../05/Crude-Export-and-the-New-Dynamic-Lason...Crude Export and the New Dynamics Mel Larson, Principal Consultant

27 April 2016

KBC ADVANCED TECHNOLOGIES

Proprietary Information

SUPERIOR RESULTS. SUSTAINED.

Crude Export and the New Dynamics

Mel Larson, Principal Consultant

27 April 2016 2



Topics of Interest

• Crude Export Impact – “The Great Divide”

• Export to everywhere

• The US Advantage


Proprietary Information 327 April 2016

Impact of Lower Crude Pricing

“The Great Divide”

27 April 2016 4



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 5



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 6



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 7



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 mid-continent crude to Gulf Coast into Louisiana refineries

27 April 2016 8



US Crude Shifts – PADD Differences

• 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.

Impediments Continue

• 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

PADD Differences

27 April 2016 9



USA – Pipelines



Margin and Demand Driven

27 April 2016 11



Global Boundaries

• Emissions regulations and drive for lower fossil fuel

Regulatory Changes Impact Refining

• Changes in Coke Sulfur imports

• Lower Coal use / Reduce Emission China

• Lower Ozone / RVP / NOx / Particulate / Sulfur

US / EU

• MARPOL – 0.5 wt% Sulfur fuel

• Power Plants shifting to Nat Gas HS Fuel Oil Declining

to Elimination

27 April 2016 12



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 13



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 14



US Export – Diesel / Gasoline

0

5000

10000

15000

20000

25000

30000

35000

40000

Jan-2

009

Apr-

2009

Jul-2009

Oct-

2009

Jan-2

010

Apr-

2010

Jul-2010

Oct-

2010

Jan-2

011

Apr-

2011

Jul-2011

Oct-

2011

Jan-2

012

Apr-

2012

Jul-2012

Oct-

2012

Jan-2

013

Apr-

2013

Jul-2013

Oct-

2013

Jan-2

014

Apr-

2014

Jul-2014

Oct-

2014

Jan-2

015

Apr-

2015

Jul-2015

Oct-

2015

Jan-2

016

Diesel K bbls/month Gasoline K bbls/month

Source: U.S. Energy Information Administration

27 April 2016 15



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



The US Advantage

Everyone is a Merchant Refiner

27 April 2016 17



The US Wins

Free Market Principles,

Economically andPolitically Stable

Most Advanced,Complex

Refineries

Highly Skilled, Flexible

Workforce

U.S. RefiningCompetitiveness

AdvantagedCrude Costs

Low Energy Costs

Low Capital Costs

U.S. Refining Competitiveness Factors

“Better in the USA” ‒ Domestic Project Cost and Execution Benefits – Turner Mason

27 April 2016 18



US Product Demand

Gasoline demand may increase somewhat,

however…

Diesel demand will be steady

US refiner utilization to remain >88%

• 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

• Export market demand will drive USGC refiners with domestic needs supplied by Mid-Continent facilities

27 April 2016 19



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 20



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



Thank you.

Questions?

Documents

Crude Export and the New Dynamics - Refining …refiningcommunity.com/.../05/Crude-Export-and-the-New-Dynamic-Lason...Crude Export and the New Dynamics Mel Larson, Principal Consultant