Baker & O’Brien, Inc. All rights reserved.
OPPORTUNITY CRUDES CONFERENCE
OCTOBER 22, 2018
Growing U.S. Light Crude
Exports and IMO 2020 Driven
Discounts: Who Benefits?
1
Legal Notice
Baker & O’Brien, Inc. (Baker & O’Brien) prepared this report for the 2018 Opportunity Crudes Conference. The opinions and findings in this report are based upon Baker & O’Brien’s experience, expertise, skill, research, analysis, and related work to date. This report relies upon public and proprietary data available to Baker & O’Brien at the time this report was prepared. All forecasts and projections contained in this presentation represent Baker & O’Brien’s best judgment, utilizing its skill, and expertise. However, such forecasts and projections are inherently uncertain due to the potential impact of factors or future events that are unforeseeable at this time or beyond Baker & O’Brien’s control. Baker & O’Brien expressly disclaims all liability for the use, disclosure, reproduction, or distribution of this information by or to any third party. PRISM™ is Baker & O’Brien’s refinery modeling and database system that includes operational and economic performance details for refineries in the U.S., Canada, Europe, and Asia. PRISM is a trademark of Baker & O'Brien, Inc. All rights reserved.
2
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Introduction
3
IMO 2020 Summary
Marine Bunker Fuel Pollution Regulation– MARPOL International Maritime Organization – “IMO 2020”
Key Questions Can refineries make 0.5% sulphur fuel oil?
What will happen to 3.5% sulphur fuel oil (HSFO)? How will commodity prices respond?
4
U.S. Crude Supply Trends and Outlook
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, August 2018
5
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Jan
-07
Jun
-07
No
v-0
7
Ap
r-0
8
Sep
-08
Feb
-09
Jul-
09
Dec
-09
May
-10
Oct
-10
Mar
-11
Au
g-1
1
Jan
-12
Jun
-12
No
v-1
2
Ap
r-1
3
Sep
-13
Feb
-14
Jul-
14
Dec
-14
May
-15
Oct
-15
Mar
-16
Au
g-1
6
Jan
-17
Jun
-17
No
v-1
7
Ap
r-1
8
Sep
-18
MB
/D
Permian
Eagle Ford
Permian and Eagle Ford Crude Oil Production
Permian and Eagle Ford Crude Oil Production
Current Permian Pipeline Takeaway Capacity
Current Eagle Ford Pipeline Takeaway Capacity
Source: EIA
6
Existing USGC Onshore Pipeline Infrastructure
Cushing
Denver
St. Louis
El Paso
Corpus Christi
Hou/TX City/Freeport
Bmt/Pt A.
St. James
Refinery/Refining Center
Key City/Town
WTG, 340
Wink
McCamey
Midland
Co. City
Wortham
Crane
Wichita Falls
Shale Play
Gardendale
Source: Baker & O’Brien
7
Planned USGC Onshore Pipeline Infrastructure
Cushing
Denver
St. Louis
El Paso
Corpus Christi
Hou/TX City/Freeport
Bmt/Pt A.
St. James
Refinery/Refining Center
Key City/Town
WTG, 340
Wink
McCamey
Midland
Co. City
Wortham
Crane
Wichita Falls
Shale Play
Gardendale
ETP/Magellan/Delek, 600 (2020)
BridgeTex Expansion, 40 (Q1-19)
XOM/PAA, 1,000 (Est. Q4-2020)
Gray Oak, 700 (Q4-19) EPIC, 440-675 (Q3-2019)
Cactus 2, 585-670 (Q4-19) Cactus 3, 200-400 (Est. Q4-20)
Jupiter, 500 (Est Q4-2020)
ETP NGL Conversion, 200 (Q2-20)
Sunrise – Upper, 500 (2020+) Sunrise - Lower, 500 (Q2-19)
8
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
MB
/D
Permian Production Forecasts versus Takeaway Capacity
Jupiter
Cactus III
XOM/PAA
Seminole NGL Conv
ETP-Permian
Gray Oak
EPIC
Cactus II
Sunrise
BridgeTex Exp
Existing @ 90%
PAA (6/18)
Jeffries-Base Case (4/18)
EIA AEO 2018 (1/18)
By 2020, Permian Pipeline Bottlenecks are Removed
Existing Pipelines and Local Refineries*
Source: Baker & O’Brien Analysis, PAA Note: Existing pipelines and local refineries shown at 90% due to constraints
To Brownsville
To Houston/Nederland
To Corpus Christi
To Cushing
9
• Shale crude oil production from the Permian Basin and Eagle Ford shale plays has grown substantially since 2010
• Crude oil pipeline infrastructure was rapidly expanded to accommodate new production but has not kept pace in the Permian Basin
• USGC refineries are limited on additional light crude processing capability without substantial discounts in pricing or additional refinery capital investments, leaving incremental production for exports
Permian and Eagle Ford Production and Pipelines Summary
10
Pipelines from the Permian and Eagle Ford are Currently Directed to the USGC, Providing Access to Refineries and Waterborne Export Markets
Sources: Capacity data is from Baker & O’Brien PRISM. Inset refinery map is sourced from the EIA.
• USGC is home to 8.4 MMB/D of refinery capacity with significant deep conversion and sulfur removal capabilities
• Strategic market location with access to water for imports/exports, regional trade through large interstate pipelines supplying the East Coast and Central U.S., integrated petrochemical facilities, and business friendly environment
11
Hypothetical Two-Train Complex Refinery
Hydrogen
Atm Crude Unit
Naphtha HDS
Reformer
HDS 1
VGO Hydrotreater
FCC
Alkylation
Cat Poly
H2 SMR Plant
Hydrocracker
Coker
Atm Crude Unit
Vac Crude Unit
HDS 2
Train 1 Low-Sulfur Crude Oil
Nat Gas Hydrogen for Hydrocracker, HDS units
LCO to HDS2 or Hydrocracker
C5+ Naphtha Coker Naphtha
SR Naphtha
SR Distillate
LVGO
HVGO
Vac Resid
SR Naphtha
LVGO
HVGO
SR Distillate
Coker Hvy Gasoil
Naphtha
Vac Crude Unit
Vac Resid
Coker Gasoil
LCO from FCC
Petcoke
Distillate Blending
Gasoline Blending
C4=, IC4
C3=
Hydrocracker Diesel
Reformate
Asphalt
Isomerization LSR Naphtha Isomerate
Butane
Train 2 High-Sulfur Crude Oil
Hydrogen
Hydrogen
Hydrogen
Blending
ETBE
Atm Resid
To FCC
Heavy Fuel Oil (HFO) Blending
12
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018(YTDJuly)
MB
/D Light Swt
Light Sr
Medium Swt
Medium Sr
Heavy Swt
Heavy Sr
• Quality of crude oil produced in the Eagle Ford and Permian Basin is typically light (40+ API) and sweet (<0.5%S)
• USGC refineries are limited on additional light crude processing capability without substantial discounts in pricing or additional refinery capital investments
– Only major Gulf Coast project announced is the expansion of ExxonMobil’s Beaumont refinery by 350 MB/D
Additional Light Crude Processing is Constrained at Gulf Coast Refineries
Light Sweet crude oil imports backed out of USGC by 2013
Light Sour and Medium Sweet crude oil imports declined by 250 and 150
MB/D respectively vs 2008
Texas Gulf Coast Imports of Foreign Crude Oil by Quality*
*For Corpus Christi, Beaumont/Port Arthur, and Houston Source: EIA Company Level Imports, Baker & O’Brien Analysis
13
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
MB
/D
U.S. Gulf Coast Crude Exports by Port
LOUISIANA
BEAUMONT
HOUSTON AREA
CORPUS CHRISTI
BROWNSVILLE
• USGC refineries are not configured to process 100% light crude oil
• Congress lifted the long-standing crude oil export ban in December 2015 and since then exports have increased rapidly
• The Houston Area (Houston, Texas City, Freeport) surpassed Corpus Christi exports
U.S. Gulf Coast Crude Oil Exports Have Increased Rapidly
Hurricane Harvey
Source: ClipperData, Baker & O’Brien Analysis
14
U.S. Gulf Coast Crude Oil Exports to Europe and Far East
Freight (1H 2018) $13.79/tonne – 80 dwt $8.25/tonne – 135 dwt
Freight (1H 2018) $17.90/tonne – 130 dwt $15.52/tonne – 150 dwt
The delivered value of U.S. Light Tight Oil has absorbed freight costs to become the incremental crude in global markets
~$1 – 1.80/B
~$2 – 2.40/B
15
• The next two slides will tell us:
– The distillation process that creates heavy fuel oil
– Yields of distillate, gas oils, and resid for three commodity crudes
– The typical sulfur in:
Whole crude
Resid
Distillate plus Resid
• …and answer these questions:
– Does a representative heavy fuel oil blend from light sweet crude meet 0.5% sulfur?
– Can a European refinery simply drop virgin distillate into Heavy Fuel Oil (HFO) to meet the 0.5% bunker fuel specification?
Heavy Fuel Oil From Commodity Crudes
16
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Brent37.5 API0.40 % S
Fu
el O
il S
ulf
ur
(wt.
%)
Yie
ld (
vo
l.%
)
Fuel Oil Yield and Quality*
VR MCB LCO FO Sulfur (RHS→)
Basic FCC Cracking Refinery – Simplified Model BASE CASE - BRENT CRUDE
Crude
Sulfur
Fuel Gas
LPG
Gasoline
Jet/Kero
Diesel/AGO
Atm
os
ph
eri
c T
ow
er
H2
HDT
H2S
H2
H2S
FCC
LVGO
Light Ends Naphtha
Vacuum Resid
1
1
450°F
650°F
Va
cu
um
To
wer
Gas Plant -Treating Sulfur Recovery
Reforming Alkylation and Isomerization
Naphtha Hydrotreating
1
HVGO
1050°F+
1050°F
950°F
LCO
MCB/Slurry
Source: PRISMTM
650°F+
0.00
0.50
1.00
1.50
2.00
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Brent37.5 API0.40 % S
Die
se
l S
ulf
ur
(wt.
%)
BE
FO
RE
HD
T
Yie
ld (
vo
l.%
)
Middle Distillates Yield and Quality
Diesel/AGO Jet/Kero Diesel Sulfur (RHS→)
*These blends are representative of many possible combinations
17
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Bonny Light35.1 API0.15 % S
Brent37.5 API0.40 % S
Arab Light32.5 API1.93 % S F
ue
l O
il S
ulf
ur
(wt.
%)
Yie
ld (
vo
l.%
)
Fuel Oil Yield and Quality*
VR MCB LCO FO Sulfur (RHS→)
Basic FCC Cracking Refinery – Simplified Model COMPARE CRUDES
Crude
Sulfur
Fuel Gas
LPG
Gasoline
Jet/Kero
Diesel/AGO
Atm
os
ph
eri
c T
ow
er
H2
HDT
H2S
H2
H2S
FCC
LVGO
Light Ends Naphtha
Vacuum Resid
1
1
450°F
650°F
Va
cu
um
To
wer
Gas Plant -Treating Sulfur Recovery
Reforming Alkylation and Isomerization
Naphtha Hydrotreating
1
HVGO
1050°F+
1050°F
950°F
LCO
MCB/Slurry
Source: PRISMTM
650°F+
0.00
0.50
1.00
1.50
2.00
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Bonny Light35.1 API0.15 % S
Brent37.5 API0.40 % S
Arab Light32.5 API1.93 % S
Die
se
l S
ulf
ur
(wt.
%)
BE
FO
RE
HD
T
Yie
ld (
vo
l.%
)
Middle Distillates Yield and Quality
Diesel/AGO Jet/Kero Diesel Sulfur (RHS→)
*These blends are representative of many possible combinations
18
• Roughly, how much Brent-blend based middle distillate do we need to blend into heavy fuel oil to meet 0.5% sulfur?
– From previous slide
Brent-blend based fuel oil is about 1.0% sulfur
Brent middle distillates are about 0.25% sulfur
At a 66% blend ratio, heavy fuel oil blending will consume all of the virgin middle distillates
If ULSD is used (~0% sulfur), then the ratio is 50%
Conclusion: Using middle distillates to dilute sulfur in fuel oil will be costly, especially if ULSD supply decreases
• Can a European refinery blend crudes to meet the 0.5% bunker fuel specification?
– See next slide
Heavy Fuel Oil From Commodity Crudes
19
Basic FCC Cracking Refinery – Simplified Model CRUDE BLEND WITH VGO DOWNGRADE
Crude
Sulfur
Fuel Gas
LPG
Gasoline
Jet/Kero
Diesel/AGO
Atm
os
ph
eri
c T
ow
er
H2
HDT
H2S
H2
H2S
FCC
LVGO
Light Ends Naphtha
Vacuum Resid
1
1
450°F
650°F
Va
cu
um
To
wer
Gas Plant -Treating Sulfur Recovery
Reforming Alkylation and Isomerization
Naphtha Hydrotreating
1
HVGO
1050°F+
1050°F
950°F
LCO
MCB/Slurry
Source: PRISMTM
650°F+
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
BL : Brent50 : 50
BL : Brent75 : 25
BL : Brent75 : 25
FCC BYPASS
Fu
el O
il S
ulf
ur
(wt.
%)
Yie
ld (
vo
l.%
)
Fuel Oil Yield and Quality*
VR MCB LCO LVGO FO Sulfur (RHS→)
LVGO (0.3%) S
*These blends are representative of many possible combinations
20
• Brent Crude is the Atlantic Basin benchmark crude
– Brent and WTI prices are commonly compared
• Many European refineries run North Sea/African crudes similar to Brent (sweet) and Urals (sour)
– European refineries compete with U.S. refineries’ product exports
• European refineries are now running WTI and Eagle Ford
– WTI and Eagle Ford compete with Brent
– Breakeven values versus Brent set the refining value
– Breakeven value in Europe minus freight may influence the USGC value
Refining Value of Light Sweet Crude Exports
21
European Refineries
Source: Google Maps, PRISM
Coking Refineries
Non-Coking Refineries Sweden Norway
Finland
22
Northwest Europe Representative Refinery
Hydrogen
Atm Crude Unit
Naphtha HDS
Reformer
HDS 1
VGO Hydrotreater
FCC
Alkylation
Cat Poly
H2 SMR Plant
Hydrocracker
Coker
Atm Crude Unit
Vac Crude Unit
HDS 2
Train 1 Low-Sulfur Crude Oil
Nat Gas Hydrogen for Hydrocracker, HDS units
LCO to HDS2 or Hydrocracker
C5+ Naphtha Coker Naphtha
SR Naphtha
SR Distillate
LVGO
HVGO
Vac Resid
SR Naphtha
LVGO
HVGO
SR Distillate
Coker Hvy Gasoil
Naphtha
Vac Crude Unit
Vac Resid
Coker Gasoil
LCO from FCC
Petcoke
Distillate Blending
Gasoline Blending
C4=, IC4
C3=
Hydrocracker Diesel
Reformate
Asphalt
Isomerization LSR Naphtha Isomerate
Butane
Train 2 High-Sulfur Crude Oil
Hydrogen
Hydrogen
Hydrogen
Blending
Visbreaker
ETBE
Heavy Fuel Oil (HFO) Blending
Atm Resid
To FCC
23
• What is the refining value of WTI and Eagle Ford versus Brent in Northwest Europe?
– Using 2017 prices (“Current” relationships)
– Using discounted HFO prices ($15 is similar to 2020 futures)
– And using increased ULSD prices ($4 is similar to 2020 futures)
European Crude Oil Price Analysis
Source: Baker & O’Brien analysis and PRISMTM , Freight is assumed constant, WTI at 42 API, Eagle Ford at 47 API
24
• What is the refining value of WTI and Eagle Ford versus Urals in Northwest Europe?
– Using 2017 prices (“Current” relationships)
– Using discounted HFO prices ($15 is similar to 2020 futures)
– And using increased ULSD prices ($4 is similar to 2020 futures)
European Crude Oil Price Analysis
Source: Baker & O’Brien analysis and PRISM, Freight is assumed constant; Urals at 32 API
25
• Using current price relationships, WTI has about $1/B more value than Brent and about $2/B more value than Urals
– Likewise Eagle Ford has $1.70/B and $2/B more value than Brent and Urals respectively
• Using discounted HFO prices and increased ULSD prices:
– Versus Brent: WTI stays flat and Eagle Ford increases slightly
– Versus Urals: WTI and Eagle Ford values increase dramatically
Summary of European Crude Oil Price Analysis
Source: Baker & O’Brien analysis and PRISM , Freight is assumed constant
26
• Post 2020: Distillate and crude sulfur value scales will be steep
– 3.5% Fuel Oil price will be heavily discounted
• Complex refineries with residual fuel upgrading (coking) will benefit from high sulfur crude discounts
• Many European refineries do not have the hardware to upgrade high sulfur residual fuel oil
– Project schedules to meet 2020 timelines are past
• U.S. Light Tight Oil will be valued highly in non-complex European refineries to lower volume and sulfur content of residual fuel
• Assuming unconstrained export logistics by 2020, wellhead prices of U.S. Light Tight Oil will likely be influenced by demand at foreign refineries
Conclusions
27
Possible Europe and U.S. Refineries Sulfur Optimization
IMO 2020 DRIVING FORCES
• 0.5% fuel oil production will be challenging for low complexity refineries in Europe
• Sweet crude will likely displace sour crude in lower complexity refineries in Europe
• Backhaul freight will lower cost for sour crude and resid to complex refineries in the U.S.
28
• Why haven’t more coker projects been announced?
• How much sour crude can U.S. refiners absorb?
– Reversal of today’s challenge: absorbing light, sweet crude
• Can U.S. crude oil export infrastructure support 2020+ volumes?
• How much HSFO can be consumed globally for power generation?
• Will refinery runs increase to meet displaced HSFO?
Key Questions and Studies-in-Progress
29
For a similar analysis of IMO 2020 impacts
on heavy Canadian crude,
see Baker & O’Brien’s presentation at the
Crude Oil Quality Association Conference “Looming IMO 2020 and Resulting Impact on Crude”
October 25, 2018
Curtis Ruder
Canadian Crude Oil Price Analysis
30
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