Can the U.S. Refining Industry Absorb All the Domestic Light Tight Oil (LTO) Production? Shell Producer Conference Lake Charles, LA May 21, 2015 Baker & O Brien, Inc. All rights reserved.
Today s Road Map Crude Oil/Refining Overview Key LTO Study Assumptions LTO Absorption Mechanisms Full Refinery Capacity Utilization Refinery Capacity Expansions Displacement of Imports Conclusions Note: The study assumed that crude oil export restrictions will continue for the foreseeable future, and did not address the pros or cons of lifting those restrictions. 1
Thousands of Barrels Per Day Overview U.S. Refined Product Balance 2010 vs. Present 20,000 15,000 1,910 2,500 890 1,000 1,430 1,900 Net NGLs Ethanol/Biofuels 10,000 14,870 13,920 Product Imports 5,000 Refinery Supply for Domestic Use 0 (2,030) (3,800) Product Exports (5,000) 2010 Apr-15 Source: EIA and Baker & O Brien Analysis 2
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 Overview Domestic Crude Oil/NGL Production Rising MB/D 14,000 U.S. Crude Oil, Condensate and NGL Production 12,000 10,000 8,000 6,000 4,000 2,000 0 NGLs Other PADD 5 Other PADD 3 Other PADD 2 PADD 1 CA Alaska CO/WY/UT Louisiana ND/SD/MT TX/NM GOM Source: EIA and Baker & O Brien Analysis 3
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 MB/D Overview Crude Oil Imports Are in Steady Decline 12,000 U.S. Crude Oil Imports Waterborne and Non-Waterborne (2008 Feb 2015) 10,000 8,000 6,000 Non-Waterborne Imports Total Imports API 4,000 2,000 Light >35 Medium 26-35 Heavy <26 0 Source: EIA 4
Percent of Total Supply Overview North America Approaching Self-Sufficiency 100% 90% 10% U.S. Crude Oil Supply Sources 1% 15% 80% 70% 31% 26% 60% Other Non-Opec 50% 40% 30% 21% 58% OPEC Canada & Mexico U.S. Crude 20% 37% 10% 0% 2010 Apr-15 SOURCE: EIA 5
Overview WTI Price Still Below Most Shale Breakeven Levels Major Shale Plays $/B Uinta Marginal Production Economics of Major U.S. Shale Plays, WTI Basis 0 20 40 60 80 100 120 May 18, 2015 - $59.73 Texas Panhandle Permian Delaware Bakken Mississippi Lime Eagle Ford Niobrara Permian Wolfcamp Marcellus/Utica WTI Average Prices 2014 - $93.20 2013 - $97.90 2015* - $50.86 Robert Analyst W. #1 Baird Morgan Analyst Stanley #2 US Analyst Investment #3 Goldman Analyst #4 Sachs Credit Analyst Suisse #5 Average Note: Some companies report estimates for sub-plays 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 18 th, 2015 6
Million Barrels per Day Overview Imports Are Still Significant During 2014, imports comprised 45% of crude runs. LTO that can displace imports depends on the composition of the LTO relative to imports, especially the naphtha & lighter content. 18 16 2014 U.S. Crude Runs = 16.1 MMB/D 0.7 Light Naphtha and Lighter, Volume % 31.8 % 14 12 10 7.3 Imported Crude 2.7 3.9 Medium Heavy 23.3 % 14.2 % 8 6 LTO = 36.5 % 4 8.7 Domestic Crude 2 0 7
Key LTO Study Assumptions The key LTO processing constraint is handling naphtha and lighter hydrocarbons (boiling below 350 F). Displacement of imports with new LTO production will not be limited by political or strategic factors. LTO transportation to U.S. refineries will not be overly constrained. Study focus on technical feasibility. Economic feasibility is unique to each refinery, and dependent on many factors not part of our LTO study. Crude oil classification: Classification API Gravity Light >35 Medium 26 35 Heavy <26 8
Volume % Assumptions The Key LTO Processing Constraint Light Ends Refineries designed to process medium and/or heavy crude oils often cannot handle the naphtha and lighter material (<350 F) in LTO. 100% 90% 80% 70% 44% Crude Oil Distillation Yields 36% 33% 23% 14% 22% 10% 18% 3% 19% 60% 50% 40% 30% 34% 34% 34% 30% 27% 31% 35% 37% <350 F 350-650 F 650-1000 F 1000 F+ 20% 10% 0% 16% 23% 24% 7% 8% 10% 20% Eagle Ford Bakken WTI Avg. Medium Import 33% Avg. Heavy Import 37% Railbit 42% Rawbit 9
Assumptions Handling Naphtha and Lighter is the Key Constraint LTO processing limitations centered around crude 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. 10
LTO Absorption Mechanisms Using actual refinery crude runs and imports, a baseline was established for the end of 2013. From this baseline, estimates of LTO absorption capacity were made based on three mechanisms: 1) Full utilization of existing refinery capacity 2) Capacity expansion to process more LTO 3) Displacement of imports Used Baker & O Brien s proprietary PRISM TM model to estimate process limitations of specific refineries. TM PRISM is a registered trademark of Baker & O Brien, Inc. All rights reserved. 11
Capacity to Absorb Additional LTO, 2020, MB/D Summary Of Results - 2020 LTO Absorption Capacity By 2020, domestic refineries should be able to absorb an extra 3.7 million barrels/day (MMB/D) of LTO (± 0.6 MMB/D) compared to the 4 th quarter 2013 baseline. 4,000 3,500 320 Absorption Mechanism Full utilization of existing refinery capacity 3,000 2,500 2,000 1,500 1,000 500 0 1,292 2,052 Mid-Point of Estimates Capacity expansion (1.1 MMB/D already announced) Displacement of imports (primarily light/medium grades: <30% of current imports of ~ 7.5 MMB/D) 0 12
LTO Absorption Mechanisms Full Utilization of Existing Capacity Compared to the baseline, we estimate that refineries can process an additional 320,000 B/D of LTO simply by fully utilizing their existing capacity On average, refiners naphtha and lighter processing capacity was underutilized during the baseline period because: Crude Runs Were Below Full Capacity: Due to maintenance activity, poor economics, and other factors. When crude runs are below capacity, naphtha and lighter processing capacity is also underutilized, and more LTO can be processed. Runs Were Oriented to Medium or Heavy Crudes: Due to contractual obligations, availability, pricing, and other factors. Processing medium/heavy crudes frees up some naphtha and lighter capacity and potentially allows more LTO to be processed. 13
LTO Absorption Mechanisms Capacity Expansions - Announced Announced capacity expansion projects alone should absorb at least 1.0 MMB/D (± 0.14 MMB/D) of new LTO by 2020 High estimate assumes all announced projects are completed. Low estimate assumes all firm projects completed; 50% of others. 14
LTO Absorption Mechanisms Capacity Expansions Other In addition to announced projects, we estimate refiners are likely to install new capacity to absorb at least an additional 300,000 B/D (± 200,000 B/D) of LTO by 2020 Many companies are currently assessing future LTO production growth and their processing options. Many refiners could debottleneck their facilities to process 10% to 20% more naphtha and lighter material for relatively small investments. When small investments are involved, companies often do not formally announce their intentions to increase new processing capacity. 15
Conclusions Import Displacement Light Crude Summary We estimate that all of the 760,000 B/D of light crude imports could theoretically be displaced by 660,000 B/D of LTO Physically, such displacement is relatively easy since LTO has similar composition and quality compared to the light imports However, given the assumption that naphtha and lighter handling capacity is the limiting factor, on average only 0.87 barrels of LTO can be processed in lieu of an imported light barrel (31.8% / 36.5% = 0.87). Thus, a modest reduction in total refinery crude runs would result from full displacement of light crude imports 16
LTO Absorption Mechanisms Replacing Medium Crude Oil with LTO Direct substitution of medium crude with LTO: Refiners would need to sacrifice some runs to substitute light for medium absent 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 17
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 MB/D LTO Absorption Mechanisms Medium Crude Oil Imports in Decline 5,000 U.S. Medium Crude Oil Imports (2008 Feb 2015) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 KUWAIT ANGOLA NIGERIA IRAQ SAUDI ARABIA Total Medium Imports 500 0 SOURCE: EIA and Baker & O Brien analysis 18
LTO Absorption Mechanisms Import Displacement Medium Crude Medium crude displacement is more challenging because LTO contains almost 60% more naphtha and lighter material (36.5% vs. 23.3%) than does the average imported medium crude. However, some quantities of LTO can displace imported medium crude oil on a barrel-for-barrel basis because: Some refiners of medium crude have excess naphtha and lighter capacity available we estimate about 112,000 B/D could be displaced this way; A few refiners are investing to process LTO in lieu of medium crude oil we estimate 43,000 B/D could be displaced. Also, more importantly, refiners can make a blend of LTO/heavy crude oil to produce a look-alike material with composition similar to imported medium crude oil. Source: Baker & O Brien Estimates, Company Reports. 19
LTO Absorption Mechanisms Import Displacement Medium Crude A blend ratio of about 2:3 of LTO/imported heavy crude provides about the same naphtha & lighter material as the average imported medium crude oil. Higher LTO blends could also be prepared, but crude runs would be reduced. Other considerations for individual refineries would include: Asphaltene precipitation Crude oil blending facilities Heavy crude oil availability 100% 90% 80% 70% 60% 50% 40% 30% Distillation Yields, volume % 14% 23% 23% 36% 22% 27% 30% 31% 34% Blend 27% 27% <350 F 350-650 F 650-1000 F 1000 F+ Product quality (high TAN?) 20% 33% 10% 0% Avg Heavy Import 21% 8% 23% LTO 41% 40% LTO, LTO, 59% 60% Heavy Heavy 20% Avg Medium Import 20
Conclusions Import Displacement Medium Crude Summary We estimate that a total of 1.2 MMB/D (±200,000 B/D) of LTO can be absorbed by displacing medium crude oil imports by 2020. Medium crude imports displaced would total about 2.2 MMB/D. We developed both low and high LTO absorption cases: Low Case: ~ 40%/60% LTO/heavy crude blends, constant crude runs High Case: ~ 70%/30% LTO/heavy crude blends, crude runs 22% lower Import Displacement Mechanism Imports Displaced MB/D LTO Absorbed, MB/D Low Case Mid-Point High Case Employ excess naphtha & lighter handling capacity Investments underway to replace medium crude with LTO Substitute LTO/heavy blends for medium crude 112 112 112 112 43 43 43 43 2,006 822 1,025 1,227 Total Year 2020 (rounded) 2,200 1,000 1,200 1,400 21
LTO Absorption Mechanisms Import Displacement Heavy Crude As with medium crude oil, refiners will sacrifice crude runs through direct substitution of LTO for imported heavy crude oil. However, a few refiners are investing to enable substitution of LTO for heavy on a barrel-for-barrel basis. LTO blends with Canadian rawbit (e.g., ratio of about 1:2 LTO/rawbit ) or railbit could produce look-alike substitutes for some imported heavy crudes. However, other factors and limitations at individual refineries although more pronounced would be the same as outlined for displacement of medium crudes. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Distillation Yields, volume % 3% 19% 37% 42% 36% 34% 21% 8% Blend 14% 14% 24% 22% 31% Rawbit LTO 34% LTO, 66% Rawbit 31% 30% 33% Avg Heavy Import <350 F 350-650 F 650-1000 F 1000 F+ 22
Conclusions Import Displacement - Heavy Crude Summary We estimate that a total of about 215,000 B/D (±65,000) of LTO can be absorbed by displacing heavy crude oil imports by 2020. Heavy crude imports displaced would be between 430-880 MB/D. We developed low and high LTO absorption cases: Low Case: 200 MB/D of additional railbit for blending High Case: 400 MB/D of extra railbit and 100 MB/D of rawbit Import Displacement Mechanism Low Case, MB/D High Case, MB/D Imports Displaced LTO Absorbed Imports Displaced LTO Absorbed Investments to underway to replace heavy with LTO 43 43 43 43 Use a 33%/67% LTO/rawbit blend 0 0 100 33 Use a 17%/83% LTO/railbit blend 200 34 400 68 Replace 5% (low case) to 10% (high case) of remaining heavy crude oil imports with LTO, sacrificing crude runs 183 71 337 132 Total Year 2020 (rounded) 430 150 880 280 23
Conclusions Total LTO Absorption Capacity Estimate Compared to the baseline, by 2020, the U.S. should be able to absorb an extra 3.7 MMB/D (±0.6 MMB/D) of LTO production Absorption Mechanism U.S. Capacity to Absorb Incremental LTO, MB/D (2020 vs. Q4 2013) Low Mid Point High Full utilization of existing capacity 320 320 320 Announced capacity expansions 844 986 1,129 Future (unannounced) expansions 108 306 503 Displacement of light crude imports 661 661 661 Displacement of medium crude imports 977 1,180 1,382 Displacement of heavy crude imports 148 212 276 Total Year 2020 (rounded) 3,100 3,700 4,300 24
Conclusions LTO Absorption Capacity (AEO 2014) Based on EIA s 2014 LTO production forecast, refineries should be able to process all the new LTO available through this decade. Source: EIA and Baker & O Brien Analysis 25
Conclusions LTO Absorption Capacity (AEO 2015) Even based on EIA s new (and higher) 2015 LTO production forecast, there should be ample capacity to process all the LTO available. Source: EIA and Baker & O Brien Analysis 26
Conclusions LTO Absorption Impact on Refined Products Balance In all scenarios, production of light products LPG, naphthas, and distillates increase. Surplus naphtha can be exported similar to some lightly processed condensates today. Distillate exports increase in all scenarios. Vacuum gas oil (VGO) and vac resid (VR) production may decline in the short term but new condensate splitter bottoms will re-balance and gradually increase VGO/VR availability. There are about 400,000 B/D of VGO imports, and over 450,000 B/D of heavy fuel imports that might be subject to partial displacement. 27
Legal Notice The opinions and findings expressed herein are based on Baker & O Brien s experience, expertise, skill, research, and analyses subject to the stated assumptions. We utilized public information as well as in-house data bases available to us at the time of preparation. New information that may become available, and/or changes in market conditions subsequent to the date of the study could materially alter our conclusions. Any forecasts or projections provided herein are inherently uncertain due to many changing factors and future events that cannot be predicted with accuracy. Therefore, Baker & O Brien expressly disclaims any and all liability for the use, disclosure, reproduction, or distribution of this information by or to any party. Copyrighted 2015 by Baker & O Brien, Inc. 28
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LTO Absorption Mechanisms Capacity Expansions - Announced Owner Location Estimated Capacity, B/CD Estimated Start-Up Firm Delek El Dorado, AR 10,000 2014 Y Alon Big Spring, TX 3,000 2014 Y Calumet San Antonio, TX 3,000 2015 Y Delek Tyler, TX 15,000 2015 Y Kinder Morgan Galena Park, TX 50,000 2015 Y Marathon Catlettsburg, KY 35,000 2015 Y Tesoro Salt Lake City, UT 4,000 2015 Y Valero McKee, TX 25,000 2015 Y HollyFrontier Phase 1 Salt Lake City, UT 14,000 2015 Y Marathon Canton, OH 15,000 2015 Y Flint Hills Resources Corpus Christi, TX 10,000 2016 Y Magellan Corpus Christi, TX 50,000 2016 Y Valero Houston, TX 90,000 2016 Y Valero Corpus Christi, TX 70,000 2016 Y Buckeye Corpus Christi, TX 50,000 2016 Y Dakota Prairie Refining Dickinson, ND 20,000 2016 Y CHS McPherson, KS 15,000 2016 Y Ergon Newell, WV 5,000 2016 Y Dakota Oil Processing Trenton, ND 20,000 2016 Y Phillips 66 Santa Maria, CA 4,500 2016 Y Alon HollyFrontier Phase 2 Bakersfield, CA Salt Lake City, UT 60,000 15,000 2017 2017 Kinder Morgan Galena Park, TX 50,000 2017 Y Martin Midstream Corpus Christi, TX 50,000 2017 Targa Channelview, TX 35,000 2017 Phillips 66 Sweeny, TX 70,000 2017 Three Tribes Makoti, ND 20,000 2017 Western Refining El Paso, TX 25,000 2018 Castleton Corpus Christi, TX 100,000 2018 Magellan Corpus Christi, TX 50,000 2018 Quantum Energy Various 80,000 2018 American Energy Holdings Devils Lake, ND 20,000 2018 Quantum energy East Fairview, ND 20,000 2018 Rock River Resources Green River, UT 10,000 2018 WEC Gardendale, TX 10,000 2018 CHS Laurel, MT 5,000 2019 Total 1,128,500 30