Implications of the North American Oil Renaissance on U.S. Refiners

Transcription

1 Implications of the North American Oil Renaissance on U.S. Refiners Presented by: M U S E S T A N C I L Tod D. McGreevy Vice - President September 17-18, 213

2 MUSE, STANCIL & CO. Economic and technical expertise combined with an in-depth understanding of the commercial aspects of the global downstream energy industry Without exception, our work effort is customized to address each client s specific issues Independent energy consulting firm founded in 1984: Offices in Dallas, Houston, and London Business Strategy E&P Refining Midstream Biofuels Market Analysis Crude Oil Natural Gas NGLs Biofuels Asset Valuation and Performance Optimization Refining Midstream Biofuels PIMS Licensee since 1986 Project Development Refining Midstream Biofuels Transaction Due Diligence Refining Midstream Biofuels Expert Services International Arbitration Commercial Litigation Royalty and Contract Auditing Property Loss and Business Interruption Insurance Muse also owns 5 percent of OSIA, which develops and licenses software that interfaces with linear programming (LP) models and other refining and petrochemical planning tools -2-

3 OVERVIEW NORTH AMERICAN CRUDE OIL SUPPLY OUTLOOK CURRENT AND FUTURE NORTH AMERICAN CRUDE OIL MARKET FORECAST Disposition of North American Crude Oil Supply Projected Crude Oil Prices NORTH AMERICAN REFINING OUTLOOK Prices Margins Yield Effects Light Product Supply -3-

4 NORTH AMERICAN TOTAL CRUDE OIL SUPPLY Total North American crude oil supply is projected to grow by ~4, by 22 At a high level, the international border can be ignored and total crude oil supply can be partitioned into two key supply regions Southern Supply Region: West Texas; Eagle Ford; Gulf of Mexico offshore, plus onshore Gulf Coast Northern Supply Region: Western Canada; Bakken; and, Rockies The U.S. crude oil supply outlook has been generated via a joint effort by Muse Stancil and Crane Energy LLC, a Texas based reservoir engineering firm 14, 12, 1, 8, 6, North American Total Crude Oil Supply The Canadian crude oil outlook is the very recent CAPP 213 forecast 4, 2, Southern Northern Central East/West Coast, Crane Energy, CAPP -4-

5 NORTH AMERICAN LIGHT CRUDE OIL SUPPLY Of the ~2,3 of incremental light crude oil supply, essentially all of it is in the U.S. The Bakken (+~6 ), Eagle Ford (+~6 ), and the Permian Basin (+~3 ) are the key North American supply regions for light crude oil The new CAPP 213 forecast has light synthetic supply (not production) falling over time, although conventional light is now growing by ~1 to 22 With additional contributions from the Gulf Coast onshore and offshore, Midcontinent, and the Rockies About 6 percent of the light crude supply growth is in the Southern Supply Region The Gulf of Mexico offshore will also add a significant contribution to medium sour crude oil supply The situation for the heavy crude oil supply is quite different Little of the incremental North American supply outside of Western Canada is heavy North American Light and Medium Crude Oil Supply 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, Southern Northern Central East/West Coast, Crane Energy, CAPP -5-

6 FORECASTING THE FUTURE MUSE APPROACH Muse uses a highly detailed, LP-based distribution model of the North American crude oil markets to assess the implications of various forward scenarios The Muse Crude Market Optimization Model can be used to quantify the impact of differing supply volumes, new pipeline and rail routes, and changing refinery capacities and capabilities over time The optimization model is seeking to maximize the aggregate netback for all Western Canadian crudes (conventional, synthetic, and heavy) and U.S. crudes Refining values are generated outside the optimization model for various grades of Canadian synthetic and heavy sour crudes for the individual demand nodes Muse uses the PIMS LP modeling system to develop the refining values for the various refineries accessible from Western Canada PIMS is the LP modeling system used by most North American refiners The market scenario presented herein is regarded as a reasonable Base Case But there are many forward possibilities -6-

7 CANADIAN HEAVY CRUDE DISPOSITION The U.S. Gulf Coast and Northeast Asia will join the Midwest to become key outlets for Canadian heavy crude Absent Northern Gateway and the Trans Mountain expansion, most of the Asia-bound volumes would be redirected to the U.S. Gulf Coast If the west-bound pipelines are not built, the required heavy crude market share on the Gulf Coast will reach very high levels by the middle of the next decade Raising substantive issues of a competitive response by the existing heavy crude suppliers 4, Canadian Heavy Crude Oil Disposition 3,5 3, 2,5 2, 1,5 1, Western Canada Eastern Canada/U.S. Rockies Upper Midwest Lower Midwest Mid-Continent U.S. West Coast U.S. Gulf Coast Asia -7-

8 DISPOSITION OF NORTHERN LIGHT CRUDE OIL SUPPLY The incremental markets for light crude oil producers in the Northern Supply Region are on the East and West Coast of North America Shipments to the large Gulf Coast market are projected to be fairly static The Line 9B re-reversal and rail are the key transportation modes for accessing the eastern markets And possibly the TransCanada project 1,4 1,2 1, Northern Light Crude to Southern Markets U.S. Gulf Coast Northern Light Crude to Inland Markets 2, 1,8 1,6 1,4 1,2 1, Rockies Upper Midwest Lower Midwest Mid-Continent -8-

9 DISPOSITION OF NORTHERN LIGHT CRUDE OIL SUPPLY However, Northern light crude producers will encounter competition from Eagle Ford crude in Atlantic Canada and the U.S. East Coast Northern Light Crude to Western Markets 1, Puget Sound California Northern Light Crude to Eastern Markets 1,4 1,2 1, Ontario/Quebec Atlantic Canada U.S. East Coast -9-

10 TENSION IN THE MIDWEST As we ve seen, total light crude oil supply from the Northern Supply Region to the inland markets is forecast to remain comparatively constant And the Midwest is the largest component of the inland market demand segment However, this masks a significant shift in the precise source of supply to the inland market Canadian Light/Medium to Inland 1, Rockies Upper Midwest Lower Midwest Mid-Continent Bakken to Inland Markets 1, Rockies Upper Midwest Lower Midwest Mid-Continent -1-

11 TENSION IN THE MIDWEST The Canadian crude oil producers are projected to lose market share to the inland U.S. producers Creating a need to access other markets to the east and west Rockies Light to Inland Markets 1, Rockies Lower Midwest Mid-Continent -11-

12 NON-TRADITIONAL TRANSPORTATION MODES Rail will remain an important transportation mode for the Williston Basin Rail shipments of Bakken crude are projected for the entire forecast period If the major outbound pipeline projects are further delayed, Canadian rail shipments will continue A very recent development is the waterborne shipment of Eagle Ford crude to the U.S. East Coast and Atlantic Canada Much of the Eagle Ford production is pipelined into Corpus Christi, Texas, from which it must be further transshipped by barge or tanker to other markets Eagle Ford shipments to Atlantic Canada can be made on a lower cost, foreign-flagged tanker Rail Shipments Waterborne Eagle Ford Disposition Bakken Canadian Light Canadian Heavy U.S. East Coast Atlantic Canada -12-

13 NORTH AMERICAN CRUDE PRICE FORECAST -13-

14 CONVENTIONAL CRUDE PRICE FORECAST LLS AND WTI As southbound pipeline capacity is added, WTI is expected to stabilize at about $7./barrel under LLS This is a combination of about a $4.5/barrel Cushing-Gulf Coast pipeline tariff and a $2.5/barrel refining quality differential between LLS and WTI The 213 WTI price is overstated due to the use of annual average capacity for new pipelines The 212 values are a backcast using the model $/bbl Key U.S. Benchmarks LLS (versus Import Parity) WTI (Midland) -14-

15 NORTH AMERICAN CRUDE OIL MARKET IMPLICATIONS The North American crude oil markets will remain in flux, particularly for the light crude oil segment, as the rapidly evolving supply picture promises to continue to reshape the crude oil distribution patterns within North America For the Canadian light oil producer, high capacity access to the eastern and western markets is important Rail will continue to play a vital role in transporting crude oil within North America, particularly from the Williston Basin Light crude on the Gulf Coast is expected to price under import parity for some time to come The refiner response is something of a wild card for the light crude oil market North American refiners will continue to re-configure their refineries to respond to changes in crude supply patterns Gulf Coast refiners have already announced plans to expand their Eagle Ford processing capacity A more difficult forecasting challenge is assessing the market response of the existing heavy crude oil suppliers to the U.S. Gulf Coast A resurgence of Venezuelan and Mexican heavy crude oil supply would be interesting -15-

16 NORTH AMERICAN REFINING OUTLOOK -16-

17 MARGIN DRIVERS: CRACK The crack which tracks a weighted spread between gasoline/diesel and crude oil is not expected to exhibit much growth in real terms over the rest of the decade Crack vs. LLS $ Per Barrel Nominal Real

18 MARGIN DRIVERS: DISTILLATE TO GASOLINE SPREAD The distillate to gasoline spread which went positive for the first time only in 27 is expected to remain above 2 cpg 45. ULSD - CBOB Regular Nominal Real 3. /Gallon

19 REFINERY CONFIGURATION INFLUENCE ON MARGIN The chart at the lower right tracks average U.S. Gulf Coast margins for three primary refinery configurations found in the U.S. Distillation: Simplest operation that features little downstream conversion/upgrading Cracking: Mostly finished products but little or no residual oil destruction Coking: Highest complexity/significant residual oil destruction Coking historically generates the highest margin as the refiners exposure to the heavily discounted fuel oil market is mostly eliminated $/Bbl Distillation Cracking Coking Configuration Margins Distillation is a narrow margin operation dependent on niche markets and advantaged crude oil supply

20 CRUDE QUALITY VS. REFINED PRODUCT YIELD Comparing crude oil yields under different processing configurations helps explain the margin differentials on the previous slide Light Louisiana Sweet (LLS) in a cracking configuration yields a large percentage of gasoline and diesel with a relatively small residual oil cut This yield pattern boosts the value of the crude oil versus heavier crudes Coking LLS however doesn t provide much incremental value as there is little residual oil in need of upgrading Maya, a heavy crude from Mexico, has a very large residual oil cut that discount its value relative to LLS Coking Maya however, changes the refinery s yield to nearly match that of LLS in a cracking refinery The loss of saleable liquid product is typically offset by the market discount Percent Yield on Crude Heavy Oil Distillate Gasoline LPG LLS (Cracking) LLS (Coking) Maya (Cracking) Maya (Coking) -2-

21 HEAVY OIL UPGRADING YIELD COMPARISON Cracking and coking configurations require processing to upgrade large volumes of heavy gas oils with FCC the most commonly utilized process in the U.S. Hydrocracking, however, maximizes the yield of highest valued products (Jet + diesel) vs. FCC upgrading which favors gasoline and olefins production 12% Yield Comparison: FCC vs Hydrocracking Volume Percent Yield on Feed 1% 8% 6% 4% 2% % FCCU Hydrocracking LPG 23% 6% Gasoline 58% 37% Distillate Heavy Oil 2% 71% Heavy Oil 8% 4% -21-

22 OUTLOOK FOR HEAVY OIL UPGRADING The advantage for hydrocracking gas oil will generally range between $6-$8/bbl with some downward pressure as natural gas prices (which drive feedstock hydrogen costs) expected to slowly increase over the period 16. Gas Oil Conversion Margins $/bbl FCCU Hydrocracking Hydrocracking Advantage -22-

23 OUTLOOK FOR U.S. LIGHT PRODUCT YIELD BY REGION PADD 3 will continue to provide most of the light product (Gasoline + Distillate supply growth in the U.S., with a smaller increment available from PADD 2 8, Refinery Production of Light Product 7, 6, 5, 4, 3, 2, 1, PADD I PADD II PADD III PADD IV PADD V

24 U.S GASOLINE OUTLOOK Gasoline demand destruction will continue apace as driving habits change and CAFE standards increase Renewable fuel growth (mostly ethanol) will slow and fall well below the mandated volume later this decade Tier 3 gasoline regulations lowering sulfur to 15 ppm won t be implemented before 217 1, U.S. Gasoline/E85 Supply/Demand 9, 8, 7, 6, 5, 4, 3, 2, 1, Refinery Production Ethanol Imports Exports Demand Demand E

25 U.S. DIESEL OUTLOOK Diesel is the growth story for U.S. refiners for the foreseeable future Export growth could likely tail off as the U.S. economy picks up steam, encouraging more demand growth at home 6, U.S. Diesel Supply/Demand Balance 5, 4, 3, 2, 1, Production Imports Exports Demand

26 U.S. LIGHT PRODUCT BALANCE OUTLOOK Diesel demand growth and exports are the story for refiners in an otherwise flat products market 16, Light Product Supply/Demand Balance 14, 12, 1, 8, 6, 4, 2, Production Imports Exports Demand

27 MUSE CRANE STUDY Evolving Light Liquids Markets The Impact of Shale and Tight Sands Productivity on U.S. Midstream and Downstream Segments and Beyond How Bakken, Eagle Ford, and other light liquid supplies are impacting midstream and downstream markets; key areas of focus include: Reservoir quality and productivity impacts on future light liquid supplies Forecasting the Eagle Ford, Bakken, and other light liquids from evolving North America plays Crude quality mix Changing supply patterns impact disposition Refining Petrochemicals Product exports -27-