State of the Oil Markets?

State of the Oil Markets? U.S. and Global Refining Prospects John R. Auers, P.E. Executive Vice President Washington DC February 17, 2016

U.S. Refining is YUGE! 2

What Determines Refining Winners? Refined Product Supply/Demand Global/Regional Demand Growth Competitive Environment Investment to shape product slate/gain access to other markets $ Feedstock Supply Dynamics Regional crude supply balance/exit capacity Availability of other feedstocks/blendstocks Investment in processing capability/improved access Operating/Other Costs Natural gas price (for both energy and H2) Size/ Spreads fixed costs; both at refinery and corporate level Improved cost management Investment in energy/operating efficiencies Regulatory Environment Both regional and national regulations Can impact demand, supply and costs; affect investment options Ability to shape legislation/rulemaking Wise decision making in investment/compliance strategies 3

Demand Growth (Million BPD) 5 4 3 2 1 0 1 2 3 1.4 Demand Growth Concentrated in Emerging Markets 2005 to 2015 World Demand Growth 9.2 Million BPD 2.0 1.1 U.S. Europe Japan Latin America 1.5 1.4 4.4 2.2 India China Rest of Asia 4.1 Rest of the World Source: BP Statistical Review, EIA 4

Demand Growth (Million BPD) 0.4 0.3 0.2 0.1 0 0.1 0.2 Low Prices Have Temporarily Changed Demand Patterns - 2015 0.27 0.34 World Demand Growth 1.35 Million BPD 0.13 0.03 U.S. Europe Japan Latin America 0.19 0.33 0.22 India China Rest of Asia 0.16 Rest of the World Source: BP Statistical Review, EIA 5

Worldwide Refining Capacity Shifts World 11050 11% U.S. 930 5% Latin America 220 3% 2005-2015 Europe 1900 10% Africa 400 13% Middle East 2150 30% Russia 940 17% All Units in MBPD Additional ~2 Million BPD under threat Asia/Pacific 8750 37% Non OECD Asia 9400 60% OECD Asia 670 8% 6 Source: BP Statistical Review, EIA, Pemex

U.S. Regional Demand Growth (2005-2015) 200 0 0.1% 0.8% Product Demand Change (Thousand Barrels Per Day) 200 400 600 800 0.5% 0.9% 1000 1.6% 1200 PADD I PADD II PADD III PADD IV PADD V 7

140 120 U.S. Regional Demand Growth (2014-2015) 2.1% Product Demand Change (Thousand Barrels Per Day) 100 80 60 40 20 1.0% 0.6% 3.2% 0 20 0.9% PADD I PADD II PADD III PADD IV PADD V 8

Drivers of U.S. Competitiveness Advantaged Crude Costs Free Market Principles, Economically and Politically Stable U.S. Refining Competitiveness Most Advanced, Complex Refineries Low Energy Costs Low Capital Costs Highly Skilled, Flexible Workforce 9

Shale Gas Benefit to U.S. Refiners Natural Gas Cost ($/MMBTU) $18 $16 $14 $12 $10 $8 $6 $4 Refining Cost Per Barrel* 2013 2014 2015 U.S. Average $ 0.72 $ 0.83 $ 0.52 ARA Crack $ 2.69 $ 2.15 $ 1.65 Italy Crack $ 3.28 $ 2.55 $ 2.11 Singapore Crack $ 2.58 $ 2.15 $ 1.19 U.S. Advantage $1.86 2.56 $1.32 1.72 $0.67 1.59 *Using Estimated Regional Refinery Efficiency International Prices Rise U.S. Low Price Maintained Domestic/International Price Compression With Oil Price Decline $2 $0 55% Drop In U.S. Natural Gas Price 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD U.S. Henry Hub ARA Zeebrugge Italy PSV Hub Japan/Korea LNG 10 10

LLS Brent Discount ($/BBL) Domestic vs. International Crude Price $15 $10 $5 $0 2008 2009 2010 2011 2012 2013 2014 2015 2016 $5 Brent Priced at Transportation and Quality Adjusted Import Parity vs. LLS ($3 to $5 discount) Regional Crude Discounts Skyrocket due to Logistical Constraints Transition Brent equal to LLS Transitions back towards Import Parity as crude price/us production falls $10 $15 Domestic discount develops as LS crude imports at USGC are fully displaced 11

U.S. Net Product Exports: 4000 3000 2000 1000 2005 to Present Decline in domestic demand combined with favorable refining environment U.S. world s largest product exporter MBPD 1000 0 1985 1990 1995 2000 2005 2010 2015 2000 3000 4000 U.S. world s largest product importer 6 month Rolling Average 12 12

Regional Trends/Prospects PADD I Most Challenged Very competitive market ; USGC/Canada/Europe all fighting for share Disadvantaged crude supply environment; Export policy change/jones Act Lost 500 MBPD of capacity; access to LTO s/canadian has saved others PADD II Has Benefited From Crude Surplus Crude surplus/lack of exit capacity led to large crude discounts Significant investment to run advantaged heavy Canadian crude New pipelines/changing market have reduced discounts PADD III Significant Variability/Ability to Export Products is Key Refineries with advantaged access to Permian/Eagle Ford fared best Midstream build-out has spread advantage/refining investment also key Product exports have been big positive; helped by problems in Latin America 13 13

Regional Trends/Prospects PADD IV Both Supply and Demand Benefits Only region where domestic production exceeds crude runs Access to Canadian/Bakken crude adds to supply advantage Relatively strong and consistent demand growth Disadvantages: small/limited ability to access other markets/isolated PADD V Strong Potential; Stronger Threats Challenging Regulatory Environment Declining demand moving region from small shortage to small surplus Region about 1 refinery long; outages have caused short-term shortages Declining local supply/limited access to new LTO production 14 14

Refining Margin ($/BBL) $40 $35 $30 $25 $20 $15 $10 $5 $0 U.S. Refining Margins Golden Age of Refining Logistical Constraint Related Blowout 2015 Margins USAC: $5.99 USGC: $10.30 USMC: $14.07 PADD IV: $13.75 USWC: $16.65 Jan 2016 Margins USAC: $1.39 USGC: $6.67 USMC: $2.90 PADD IV: $1.39 USWC: $11.75 USAC USGC USMC PADD IV USWC 15 15

U.S. vs. Global Margins Refining Margin ($/BBL) $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 $2 2015 Margins U.S. Avg.: $11.80 ARA Crack: $6.06 Italy Crack: $3.99 Sing. Crack: $5.20 Jan 2016 Margins U.S. Avg.: $5.98 ARA Crack: $4.50 Italy Crack: $2.79 Sing. Crack: $6.79 U.S. Average ARA Cracking Italy Cracking Singapore Cracking 16 16

120% 100% 80% 60% 40% 20% A Rising Tide Lifts All Ships Equity Performance Late 2014, Crude Price Begins Sharp Decline Low Prices Spur Demand, Performance of Ind. Refiners; Recent Weakness due to Product Surplus Low Prices Hurts Majority of Industry, Midstream Lags 0% 20% 2013 2014 2015 2016 40% Ind. Refiners Int. Majors Ind. Producers Midstream 17

Independents vs. Integrated Majors Net Income, Billions of Dollars $14 $12 $10 $8 $6 $4 $2 $0 Independent Refiners Crude Price Decline Boosts Demand, Income for Refiners Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 60% 40% 20% 0% 20% 40% 60% 80% $140 $120 $100 $80 $60 $40 $20 $0 Integrated Majors For Integrated Majors, Price Decline Cuts Sharply into Income Q4 Q3 Q2 Q1 Q2 Q1 Q3 Q4 60% 40% 20% 0% 20% 40% 60% 80% Percentage Change vs. 2011, Earnings & Crude Price $2 2011 2012 2013 2014 2015 100% $20 2011 2012 2013 2014 2015 100% Q4 Q3 Q2 Q1 Annual Net Income % Avg. Crude Price % Ind. Ref: VLO, PSX, TSO, MPC, PBF, WNR, HFC Int. Majors: XOM, CVX, BP, RDS 18

Upstream Contribution Falling $120 $100 83% 83% Note : Upstream vs. Downstream Earnings, Excludes Writedowns/Special Items/Other Business Segments Billions of Dollars $80 $60 $40 84% Upstream Downstream $20 $0 17% 17% 16% 2007 2008 Average 2011 2014 Average 2015 Companies: XOM, CVX, RDS, BP 19

Final Thoughts on Key Issues Lower For Longer Crude Price Environment Impacts for refiners are more complex than for other market segments Positive: Stimulates demand, higher margins on certain products, lessens competition from alternatives Negative: Decreased crude and natural gas cost benefits, Regionally specific Crude producing regions negatively impacted Lifting of Crude Export Ban Short Term: No substantive impact due to current market environment Longer Term: Will keep large domestic discounts from developing, remove incentives for crude-to-product investments East Coast refiners are disadvantaged by Jones Act Other Regulations Impacting Refiners - Demand/Costs/Access Alternative fuels mandates/subsidies Carbon taxes or other petroleum focused taxes Permitting Issues For refinery and logistics investments More stringent environmental regulations (fuel specifications, CAFÉ, etc.) 20 20

Final Thoughts on Key Issues (cont.) Product Demand Will Be Key Continue to be driven by economic growth; tougher than ever to forecast Demographics population growth, economic maturation, lifestyle changes, Impacted by new technologies breakthroughs in alternatives and efficiencies, driverless vehicles, others U.S. Should Continue to Be World Leader in Refining Ability to maintain and grow product exports will be critical (esp. for USGC) Challenged by new refining capacity in both importing/exporting countries Important not be handicapped by excess regulation Benefits of domestic production growth are real; temporarily muted Can expect more rationalization of capacity in other Europe/OECD Asia 21 21

Presenter John R. Auers, P.E. Executive Vice President Univ. of Nebraska Chem. Engr. Univ. of Houston MBA Formerly with Exxon Industry studies/analysis, forecasting, modeling Leads Outlook team Contact Info jauers@turnermason.com Office 214-223-8887 22 22