Investment Options for Crude & Condensate Stabilization and Splitting

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1 Investment Options for Crude & Condensate Stabilization and Splitting Ryan M. Couture Senior Consultant 2015 AFPM Annual Meeting March 23, 2015 San Antonio, TX

2 Presentation Outline U.S. Production and the Condensate Challenge Regulatory Environment Crude/Condensate Processing Options Factors Affecting Investment Decisions Slide 2

3 U.S. Production Growth Since 2008, U.S. crude production has grown by over 4 MMBPD Vast majority of this production growth has been from light tight oil development Natural gas production has also grown rapidly 9 This has resulted in 8 increasing amounts 7 6 of condensate and 5 NGL production Production (MMBPD) 4 Permian Niobrara Eagle Ford Bakken All Other Slide 3 Source: EIA

4 Crude Quality Mismatch API Gravity U.S. refining system 30.5 heavied-up crude slate, 30 Importing price-advantaged Domestic heavy crude production 29.5 has reversed this trend API Gravity Slide 4 Sulfur (wt%) Source: EIA Sulfur (wt %)

5 Presentation Outline U.S. Production and the Condensate Challenge Regulatory Environment Crude/Condensate Processing Options Factors Affecting Investment Decisions Slide 5

6 U.S. Crude Export Regulations Crude Oil Liquid hydrocarbons from underground reservoirs that have not been processed through a crude distillation tower Intermediates / Products Export License Required Outlined in 1975 Energy Policy and Conservation Act and 1979 Export Administration Act Export License Not Required Pre-Approved Case by Case 1. To Canada for local use 2. Alaska/U.S. flagged vessels for ANS 3. Crude Swaps 4. Heavy California crude/25 MBPD 5. Processed Condensate exports recent BIS clarification Presidential determination that it is consistent with national interest Slide 6

7 Condensate Classification Raw Natural Gas Natural Gas Processing Plant Natural Gas Wellhead Lease/Field Condensate Condensed Liquids Plant Condensates (NGL/Y Grade) Liquids Crude Oil Exportable Product Not Exportable Condensate Condensate Grade Crude Oil (API 45 +) (TM&C: 50 +) Slide 7

8 Crude Distillation Tower Law states crude must be processed through a crude distillation tower before it can be exported In June 2014, news came out that two companies were issued private BIS rulings, allowing for export of stabilized condensate BIS released FAQs in December 2014, laid out factors evaluated when determining minimum processing requirement: Material transformation using evaporation/condensation Change in API gravity Change in % hydrocarbon in product streams Whether product streams have alternate uses besides export (blendstock, petrochemical feedstock, etc.) Distillation process uses temperature gradients, significant internal structures (trays/packing) and has differentiated output streams Process goes beyond equipment required to separate vapors and liquids for transportation needs Slide 8

9 Presentation Outline U.S. Production and the Condensate Challenge Regulatory Environment Crude/Condensate Processing Options Factors Affecting Investment Decisions Slide 9

10 Overview of Options Several levels of processing Field level stabilizers Centralized stabilizers Crude/condensate fractionators (splitters) Refinery processing of LTOs Primary outlet for domestic production thus far Will shift some if exports increase or as projects come on-line Slide 10

11 Field Stabilizer Processing at or near wellhead Intended to strip light ends from wild crude/condensate for transport/storage Produces two streams, overhead mixed LPGs and stabilized bottoms stream Low complexity, skid mounted and package designed Field Stabilizer Slide 11

12 Centralized Stabilizer Located at/near transportation hubs (pipeline, rail, port) Larger than field stabilizers Towers are more complex, with packing or trays (simple crude distillation tower) May have one or more product side draws (naphtha, etc.) in addition to overhead LPGs and stabilized bottoms stream Centralized Stabilizer Slide 12

13 Crude/Condensate Fractionator Located at/near ports Intent to export some/all products Similar to conventional refinery crude distillation tower, requires substantial infrastructure Often run by midstream operators on take-or-pay agreements Produce LPGs, naphthas, distillate and VGO Crude/Condensate Fractionator (Splitter) Slide 13

14 Refinery Processing While dedicated condensate processing is growing, to date refiners have absorbed nearly all production growth The shift in crude qualities, including condensates, has prompted refiners to invest to maximize throughput Variety of upgrades to maintain/increase capacity Colleague Jim Jones presenting on Delek Refining expansion tomorrow morning (9:00 AM) Slide 14

15 Modifications For LTO Processing Required modifications are very refinery specific Pre-flash Tower Overhead Cooling and Light Ends Processing Upgrades Naphtha/ Distillate Treating Capacity Increases Distillation Tower Capacity Increase Slide 15

16 Presentation Outline U.S. Production and the Condensate Challenge Regulatory Environment Crude/Condensate Processing Options Factors Affecting Investment Decisions Slide 16

17 Supply & Demand Balance Global condensate production has doubled since 2007 Led by Middle East and U.S. growth Condensate demand growth greatest in Asia Korea, China and Singapore biggest consumers Majority of condensate imported from Middle East Over 1 MMBPD of condensate processing capacity built globally since 2006 Additional 400 MBPD anticipated through 2018 Middle East projects will reduce condensate exports Slide 17

18 2014 Global Condensate Trade Flows

19 The Drivers For Domestic Processing U.S. supply/demand mismatch U.S. refining significant conversion capacity Gasoline surplus lessens naphtha demand or the incentive to produce more gasoline Petrochemical U.S. demand primarily C1-C3, limited naphtha/condensate consumption vs. Europe/Asia U.S. crude export restriction Limited market for unprocessed condensate Refinery feedstock or for export to Canada as diluent Limited potential for crude swaps Slide 19

20 Economic Considerations Location Proximity to crude production, product markets and export facilities U.S. Gulf Coast has ideal infrastructure/market Also allows for easy segregation of processed condensates for export (for stabilizers) Feedstock quality Drives product yields 100% 80% 60% 36% Relative crude price 40% Product demand 20% 0% 8% Slide 20 6% 4% 3% 15% 9% 23% 19% 20% 27% Eagle Ford Condensate 32% 35% 29% 34% Eagle Ford Crude WTI Crude LPG LSR Naphtha Distillate Gasoil* *Gasoil cut quality varies, affects product value and market.

21 Economic Considerations (cont d) Historical look at fractionation profitability Looked at light sweet crude and condensate on USGC Fractionation was profitable on average over past several years Cracking refinery remained more profitable through same period Backcast is hypothetical Skewed, does not account for price relationships Both crude/condensate and product market impacts Assumptions on transportation and operating costs Slide 21

22 Conclusions U.S. production growth has prompted industry investment Refinery upgrades/expansions Dedicated stabilizer/fractionator projects Processing economics dependent on export policy Several key factors remain: Impact of low crude prices on global product demand Demand growth, primarily in Asia and Latin America Level of crude/condensate production Level of processing required for export Market impacts on stabilizer vs. fractionator economics Middle East export competition Domestic vs. international and crude vs. condensate discounts Slide 22

23 Presenter Ryan M. Couture Senior Consultant 2100 Ross Ave, Suite 2920 Dallas, TX turnermason.com Slide 23

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