Where Should My Crude Go.Now? Argus North American Petroleum Transportation Summit June 1-3, 2015

Transcription

1 Where Should My Crude Go.Now? Argus North American Petroleum Transportation Summit June 1-3, 2015 Baker & O Brien, Inc. All rights reserved.

2 Presentation Overview Last year s presentation: Where Should My Crude Go? How refiners plan crude purchases The stepwise displacement of Light/Medium Crude Imports Limitations of refineries to run Light Tight Oil (LTO) Breakeven values of LTO in different refineries This year s presentation: Where Should My Crude Go Now? Industry reaction to production increases and price drop Refining industry adaptations Light Ends quality issues and opportunities Note: This presentation assumes that current restrictions on crude oil exports will continue for at least the next several years, and does not address the pros/cons or impacts of lifting or keeping those restrictions. 1

3 Jan-2005 Jun-2005 Nov-2005 Apr-2006 Sep-2006 Feb-2007 Jul-2007 Dec-2007 May-2008 Oct-2008 Mar-2009 Aug-2009 Jan-2010 Jun-2010 Nov-2010 Apr-2011 Sep-2011 Feb-2012 Jul-2012 Dec-2012 May-2013 Oct-2013 Mar-2014 Aug-2014 Jan-2015 MB/D Current Landscape U.S. Crude Oil Production at Highest Level in 30 Years 10,000 U.S. Crude Oil Production 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Other Onshore CA Alaska CO/WY/UT Louisiana ND/SD/MT TX/NM GOM Source: U.S. Energy Information Administration (EIA) and Baker & O Brien Analysis. 2

4 Current Landscape What Changes at Lower Crude Prices? Source: Platts. 3

5 Current Landscape Where Should My Crude Go Now? BALLPARK PRODUCTION BY AREA ILLUSTRATES RELATIVE TAKEAWAY VOLUMES 1 MM B/D 0.5 MM B/D 2 MM B/D 0.5 MM B/D 1.5 MM B/D 4

6 Current Landscape WTI Price Below Most Reported Shale Breakeven Points $/Bbl. Major Shale Plays Uinta Marginal Production Economics of Major U.S. Shale Plays, WTI Basis May 1, $59.10 Texas Panhandle Permian Delaware Bakken Mississippi Lime Eagle Ford Niobrara Permian Wolfcamp WTI Average Prices $ $ * - $50.12 Marcellus/Utica Robert W. Baird Morgan Stanley US Investment Goldman Sachs Credit Suisse Average Note: Some companies report estimates for subplays, such as Uinta-Green River, Uinta-Vertical, and Uinta-Horizontal. For this analysis, those estimates have been grouped together in the major play. *2015 January through May 1, Sources: Banking analyst reports and EIA. 5

7 Current Landscape Notional Shale Breakeven Points Comments from Industry: Jim Volker, CEO of Whiting Petroleum, said that Whiting would increase production around $70 per barrel (/Bbl.) 1 In a $50-$60 price environment, it will be flat, but at $70, it will continue to grow... 2 Scott Sheffeld, CEO of Pioneer Natural Resources $70 a barrel for U.S. oil turns it on for us Harold Hamm, CEO of Continental Resources, Inc. 3 (1) Wall Street Journal, Shale Oil Drillers Ready to Ramp Up, May 14, (2) Oil and Gas Investor, Permian Perseveres, May (3) Wall Street Journal, Shale Oil Drillers Ready to Ramp Up, May 14,

8 Dollars Per Barrel Current Landscape Which Price to Use for Production Breakeven? WTI Futures Prices February 4, 2015 April 4, 2015 May 15, Source: Barchart.com. 7

9 Current Landscape U.S. Crude Oil Production Expectations Source: EIA Annual Energy Outlook 2015 with Projections to 2040, April

10 Current Landscape U.S. Crude Oil Production Expectations Focus time frame Source: EIA Annual Energy Outlook 2015 with Projections to 2040, April

11 Current Landscape Crude Oil Production Expectations Source: EIA. Incremental production is calculated using EIA s forecast for lower 48 onshore crude oil production minus Q actual production. 10

12 Industry Reaction Displacement of U.S. Crude Oil Imports Canadian Pipeline Lower 48 Waterborne Source: EIA. 11

13 Industry Reaction Medium Crude Import Sources Note: Q contains only January and February data. Source: EIA and Baker & O Brien analysis. 12

14 U.S. Crude Exports MB/D U.S. Crude Imports MB/D U.S. Crude Runs MB/D Industry Reaction Industry Responses: Higher Runs, Displacement of Imports and Exports 17,000 Increased Crude Runs 16,000 15,000 14,000 13,000 1-Jan Jan Jan Jan Jan Jan-2015 Displacement of Imports 11,500 10,500 9,500 8,500 7,500 6,500 1-Jan Jan Jan Jan Jan Jan-2015 Crude Oil Exports Increased then Stalled Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: EIA. 13

15 U.S. Product Exports MB/D Industry Reaction Additional Effects Include Rail/Pipe Logistics, Product Exports, and Capacity Expansions New Investments in Logistics Infrastructure 5,000 Expansion of Product Exports 4,000 3,000 2,000 1,000 1-Jan Jan Jan Jan Jan Jan-2015 Source: EIA Expansions in Domestic Refining Capacity Source: EIA. Source: Baker & O Brien Analysis 14

16 Industry Reaction What is the Industry Doing? The refining industry is implementing measures to increase LTO absorption: 1. Higher unit utilizations 2. Direct substitution of LTO for existing feedstocks 3. Blending of LTO with imported medium and heavy grades 4. Investments in light ends overhead and downstream processing 5. Capacity growth: grassroots crude and condensate units Can U.S. refiners technically process all the available domestic crude oil through a combination of the above mechanisms? 15

17 Volume % Current Landscape The Key LTO Processing Constraint: Light Ends Handling Refineries designed to process medium and/or heavy crude oils often cannot handle the naphtha and lighter material (<350 F) contained in LTO. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 44% 34% 16% 36% 33% 34% 23% 34% 24% 7% 8% 10% 23% 30% 27% 20% Eagle Ford Bakken WTI Avg. Medium Import Source: PRISM TM Crude Oil Distillation Yields 16 14% 22% 31% 33% Avg. Heavy Import 10% 18% 35% 37% Railbit 3% 19% 37% 42% Rawbit <350 F F F 1000 F+

18 Current Landscape Typical Light Crude/Condensate Handling Constraints for Existing Refineries Physical constraints to processing LTO vary by refinery, but are generally centered around crude oil distillation and light ends handling. Light product cooling and hydraulics STILL GAS TO SATURATED GAS PLANT Saturated gas plant capacity Overhead hydraulics and cooling Naphtha treating and processing Crude column diameter *Note: PA = pumparound circuit Preheat train configuration Crude vaporization capacity Source: Petroleum Fractionation Overview, University of Oklahoma, and Baker & O Brien. 17

19 Analysis Methodology Options for Replacing Medium Crude Oil with LTO Direct substitution of medium crude with LTO: Refiners would generally need to sacrifice some throughput in order to substitute light for medium crude oil without some additional investment. LTO/heavy blends can substitute for some medium grade imports: Advantages: Enables refiners to maintain crude throughput and keep downstream units full. Challenges: Blending exact substitute for medium grades Asphaltene precipitation issues Crude oil blending facilities Availability of heavy crude oil Possible high acid (TAN) constraints 18

20 Analysis Methodology Options for Replacing Medium Crude Oil with LTO Distillation Yields, Vol.% 100% 90% 80% 70% 14% 22% 36% 23% 23% 60% 50% 40% 30% 31% 34% Blend 27% 30% 27% 27% <350 F F F 1000 F+ 20% 10% 0% 33% Avg Heavy Import 22% 8% LTO 41% LTO, 59% Heavy 23% 20% Avg Medium Import 19

21 MB/D Analysis Methodology Case Study: Replacing Medium Crude with LTO/Heavy Blend Case Study: A 100,000 B/D refiner of imported medium crude oil, constrained by the volume of naphtha and lighter material that can be processed As the proportion of LTO in a substitute LTO/Heavy blend increases above 40%, crude throughput declines and feedstock available for downstream conversion units declines Unit turndown constraints become a factor when downstream feedstock (VGO and heavier) falls to <70% of downstream capacity, suggesting 65% maximum LTO in the blend Conversion units might be partially filled with atmospheric tower bottoms available from new condensate splitters Constant Light Ends Constraint 40% 50% 60% 70% 80% 90% % LTO Turndown Constraint Naphtha and Lighter Distillates VGO and Heavier 20

22 Economics Required LTO Price Discounts To incentivize expansions, modest discounts of LTO vs. imported grades needed These discounts are on par with expected LLS-Brent differentials going forward LTO Crude Oil Discount Required for Various Project Types, $/Bbl yr. payback 5-yr. payback 1 0 Mega Project: Low Estimate 20% Expansion 10% Debottleneck Mega Project: High Estimate 10% Exp, incl naphtha HDS/Ref Notes: (1) Includes effect of lost profit during unit outages. (2) Top of bars represent a 33% investment recovery per year or about a three-year payback. (3) Bottom of bars represent a 20% investment recovery per year or five-year payback. 21

23 Quality Issues New Issues Increased production of LTO and Condensate Price discounts have motivated the U.S. refining industry to modify equipment, although significant investments and time are needed Increased exports of processed condensate that incur global freight costs Increasing sales and exports of light products Quality Arbitrage Shipped crude is being spiked with light ends or condensate on common carrier pipelines Meets pipeline specifications, but composition is different than typical WTI crudes If you have crude with light ends greater than average you are benefitting If you have vapor pressure giveaway, you may be subsidizing others 22

24 Quality Issues Impact of Increased LTO Production on Delivered WTI Quality Current NYMEX Contract Specifications Deliverable domestic crude streams include the following: WTI, Low Sweet Mix (Scurry Snider), New Mexican Sweet, North Texas Sweet, Oklahoma Sweet, and South Texas Sweet Blends of the above streams are deliverable, if they meet quality specifications Condensates are excluded from the contract definition of crude petroleum Light Sweet Crude Oil futures states specifications as: Sulfur: < 0.42% by weight Gravity: > 37 to < 42 degrees API Viscosity: 60 SUS Max BS&W: < 1% Pour Point: < 50 F RVP: < 9.5 psi Source: NYMEX Rulebook Chapter 200: Light Sweet Crude Oil Futures. 23

25 Quality Issues Impact of Increased LTO Production on Delivered WTI Quality Current NYMEX Contract Specifications Deliverable domestic crude streams include the following: WTI, Low Sweet Mix (Scurry Snider), New Mexican Sweet, North Texas Sweet, Oklahoma Sweet, and South Texas Sweet Blends of the above streams are deliverable, if they meet quality specifications Condensates are excluded from the contract definition of crude petroleum Light Sweet Crude Oil futures states specifications as: Sulfur: < 0.42% by weight Gravity: > 37 to < 42 degrees API Viscosity: 60 SUS Max BS&W: < 1% Pour Point: < 50 F RVP: < 9.5 psi Some shippers allow 11 psi TVP* Source: NYMEX Rulebook Chapter 200: Light Sweet Crude Oil Futures. Note: *True Vapor Pressure. 24

26 Quality Issues Impact of Increased LTO Production on Delivered WTI Quality The Crude Oil Quality Association (COQA) has recommended additional specifications to WTI: Micro Carbon Residue: 2.40 Wt.% or less Total Acid Number: 0.28 mg KOH/g or less Metals Nickel: 8 ppm or less Vanadium: 15 ppm or less High Temperature Simulated Distillation Light Ends (< 220 F): 19 Wt.% maximum 50% point: between 470 F and 570 F Vacuum Resid (>1,020 F): 16 Wt.% maximum Adoption is still pending Not a market-based solution Source: Crude Oil Quality Association What is the Quality of WTI/Domestic Sweet? 25

27 Quality Issues Impact of Increased LTO Production on Delivered WTI Quality Light Straight Run (LSR) and condensate can be blended with WTI and still meet the pipeline specifications However, the Resulting Composition can Differ Significantly from typical WTI The amount of Light Straight Run is substantially higher A Dumbbell Curve Source: PRISM, COQA, and Baker & O Brien Analysis. 26

28 Quality Issues The Opportunity of Light Ends Refiners are discounting LTO due to higher contents of Light Ends and LSR, which are composed of: 1. Propane (C3) Inventory levels are high, but can be exported or burned as fuel (low value) 2. Butane (C4) Butanes are blended in gasoline Butane can be converted to alkylate (limited demand) Excess summer butane is stored in caverns in Utah, Conway, and Mont Belvieu 3. Light Straight Run - (C5-C6) LSR is blended into gasoline LSR can be shipped to Canada for diluent blending purposes Highest value of LSR is usually olefins cracker feed although limited demand 27

29 Quality Issues The Opportunity of Light Ends Relative Economic Value of Condensate Splitter Intermediate Products (Jan Apr 2015 Average) Lower Relative Values SOURCE: Baker & O Brien Analysis and Platts. 28

30 Quality Issues The Opportunity of Light Ends SOURCE: Baker & O Brien Analysis and Platts. 29

31 Quality Issues The Opportunity of Light Ends SOURCE: Baker & O Brien Analysis and Platts. 30

32 Quality Issues Impact of Increased LTO Production on Delivered WTI Quality Source: PRISM, COQA, and Baker & O Brien Analysis. Both of these qualities meet pipeline specs 31

33 Quality Issues TAPS A Crude Oil Quality Bank Model Trans-Alaska Pipeline System (TAPS) carries blended crudes from the Alaska North Slope (ANS) to the Port of Valdez NGLs are also injected into TAPS at the North Slope Simple refineries process ANS crude from TAPS and return light and heavy fractions to the pipeline creating a Dumbbell Crude Alaska North Slope Valdez Port of Valdez 32

34 Quality Issues TAPS A Crude Oil Quality Bank Model TAPS Quality Bank is a zero sum game Total receipts are equal to total payments Shipper of Crude A receives ANS crude oil and $ in Valdez equal to the amount of Crude A it puts into TAPS: Receives from Quality Bank: $( )/Bbl. = $2.38/Bbl. Similar situation for producers of Crudes B, C, D, and E North Slope Pump Station 1 Crude A, $95/Bbl Crude B, $97/Bbl Crude C, $100/Bbl Crude D, $102/Bbl Crude E, $92/Bbl NGLS, $60/Bbl TAPS Alaskan Refinery Port of Valdez ANS Loaded in Ships for Various West Coast Markets $92.62/Bbl Light Products for Alaska 33

35 Quality Issues Mid-Continent Crudes Valuation Methodology Stream qualities (distillation yields) are measured periodically through sampling and testing, and are averaged over a month Measurement of volume and composition Transparent and logical valuation methodology Published spot market prices Gathering Point Destination Terminal Crude A, $95/Bbl Blended WTI $97.20/Bbl Crude B, $97/Bbl Crude C, $100/Bbl Pipeline to Gulf Refineries Crude D, $102/Bbl Crude E, $92/Bbl NGLS? 34

36 Summary At sub-$70/bbl. prices, U.S. crude oil production growth is stalling. Logistics infrastructure (pipelines/rail) will operate with spare capacity giving producers choices of where to send their crude. Refiners and others have been modifying equipment to handle increased volumes of shale crude given committed production with built-in price discounts or fees. Latecomers will be left as price-takers. Light ends content is constraining U.S. infrastructure. Quality arbitrage is profiting certain volume aggregators but few producers. Certain pipeline routes are candidates for quality bank pooling. This could create a market mechanism to dispose of light ends. 35

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