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Baker & O’Brien, Inc. All rights reserved.
Argus Americas Crude Summit
January 28, 2015
Refining America’s Light Tight
Oil (LTO) Production
1
• The Growth of U.S. LTO Production
• The Industry’s Response to Date
• What Happens Next?
• Impact on Refined Products and Intermediates
• Other Considerations
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.
Overview
2
0 20 40 60 80 100 120
Robert W. Baird Morgan Stanley US Investment Goldman Sachs Credit Suisse Average
Update
Bakken
Eagle Ford
Permian – Delaware
Permian - Wolfcamp
Marcellus/Utica
Uinta
Niobrara
Texas Panhandle
Mississippi Lime
$/B
Major Shale Plays
WTI Price, January 15,
2015
Marginal Production Economics of Major U.S. Shale Plays
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.
3
US Crude Oil Production
Source: EIA and Baker & O’Brien Analysis
US Crude Oil Production MB/D
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Jan
-20
05
Jun
-20
05
No
v-2
00
5
Ap
r-2
00
6
Sep
-20
06
Feb
-20
07
Jul-
20
07
Dec
-20
07
May
-20
08
Oct
-20
08
Mar
-20
09
Au
g-2
00
9
Jan
-20
10
Jun
-20
10
No
v-2
010
Ap
r-2
01
1
Sep
-20
11
Feb
-20
12
Jul-
20
12
Dec
-20
12
May
-20
13
Oct
-20
13
Mar
-20
14
Au
g-2
01
4
Other PADD 5
Other PADD 3
Other PADD 2
PADD 1
CA
Alaska
CO/WY/UT
Louisiana
ND/SD/MT
TX/NM
GOM
4
The Industry’s Response
Displacement of Imports
Crude Oil Exports Begin Upward
Climb
Increased Crude Runs
Source: EIA
13,000
14,000
15,000
16,000
17,000
Jan 01, 2010 Jan 01, 2011 Jan 01, 2012 Jan 01, 2013 Jan 01, 2014
U.S
. C
rud
e R
un
s M
B/D
6,500
7,500
8,500
9,500
10,500
11,500
Jan 01, 2010 Jan 01, 2011 Jan 01, 2012 Jan 01, 2013 Jan 01, 2014
U.S
. C
rud
e Im
po
rts
MB
/D
0
100
200
300
400
500
Jan 01, 2010 Jan 01, 2011 Jan 01, 2012 Jan 01, 2013 Jan 01, 2014
U.S
. C
rud
e E
xpo
rts
MB
/D
5
The Industry’s Response (continued)
Expansions in Domestic
Refining Capacity
New Investments in Logistics
Infrastructure
Expansion of Product Exports
Source: EIA
0
500
1,000
1,500
2014 2015 2016 2017 2018
Cu
mu
lati
ve E
xpan
sio
ns,
M
B/D
Start-up Year
Firm Planned
Source: Baker & O’Brien Analysis
1,000
2,000
3,000
4,000
Jan 01, 2010 Jan 01, 2011 Jan 01, 2012 Jan 01, 2013 Jan 01, 2014
U.S
. P
rod
uct
Exp
ort
s M
B/D
6
How Much More LTO Was Expected?
Source: EIA. Incremental production is calculated using EIA‘s forecast for Lower 48 onshore crude oil production minus Q4 2013 actual production.
-
500
1,000
1,500
2,000
2,500
3,000
-
500
1,000
1,500
2,000
2,500
3,000
2014 2015 2016 2017 2018
MB
/D
U.S. LTO Production Increase Since Q4 2013
EIA Reference Case EIA Low Resource Case EIA High Resource Case
7
How Much More LTO Can We Now Expect?
Source: EIA. Incremental production is calculated using EIA‘s forecast for Lower 48 onshore crude oil production minus Q2 2014 actual production.
(500)
-
500
1,000
1,500
2,000
2,500
2015 2016 2017 2018 2019 2020
MB
/D
U.S. LTO Production Increase Since Q2 2014
AEO 2014 Reference Case AEO 2014 Low Case AEO 2014 High Case EIA STEO (Jan-15)
8
Displacement of U.S. Crude Oil Imports
Source: EIA
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
MB
/D
Lower 48 Waterborne Crude Oil Imports (January 2008 - September 2014)
Light Medium Heavy
>35 26-35 <26
9
Medium Crude Imports
Source: EIA
0
500
1,000
1,500
2,000
2,500
3,000
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
MB
/D
U.S. Waterborne Medium Crude Oil Imports - Top 5 Sources (January 2008 - September 2014)
KUWAIT
ANGOLA
NIGERIA
IRAQ
SAUDI ARABIA
10
• Expect some “capacity creep” in ability to run more LTO.
• Medium grades are likely to be backed out.
• West Coast LTO logistics bottlenecks are overcome.
• More stabilized condensates will be exported.
What Can the Industry do Next?
11
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.
7% 8% 10% 20%
33% 37% 42% 16%
23% 24%
27%
31% 35%
37%
34%
34% 34%
30%
22% 18%
19%
44% 36% 33%
23% 14% 10%
3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Eagle Ford Bakken WTI Avg. MediumImport
Avg. HeavyImport
Railbit Rawbit
Crude Oil Distillation Yields
<350 F
350-650 F
650-1000 F
1000 F+
Vo
lum
e %
12
Typical LTO Handling Constraints
STILL GAS TO SATURATED GAS PLANT
Crude vaporization capacity
Saturated gas plant capacity
Light product cooling and hydraulics
Crude column diameter
Overhead hydraulics and cooling
Naphtha treating and processing
Preheat train configuration
Source: Petroleum Fractionation Overview, University of Oklahoma and Baker & O’Brien.
• Physical constraints to processing LTO vary by refinery but are generally centered around crude oil distillation and light ends handling.
* Note: “PA” = pumparound circuit
13
• Direct substitution of medium crude with LTO:
– Refiners would generally need to sacrifice some throughput in order to substitute light for medium without some additional investment.
Options for Replacing Medium Crude Oil with LTO
• 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
14
Options for Replacing Medium Crude Oil with LTO
33%
8%
23% 20%
31%
22%
27% 27%
22%
34%
27% 30%
14%
36%
23% 23%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Avg HeavyImport
LTO 41% LTO, 59%Heavy
Avg MediumImport
Distillation Yields, vol %
<350 F
350-650 F
650-1000 F
1000 F+
Blend
15
• Case Study: A 100,000 Bbl/day 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
Case Study: Replacing Medium Crude with LTO/Heavy Blend
0
10
20
30
40
50
60
70
80
90
100
40% 50% 60% 70% 80% 90%
MB
/D
% LTO
Naphtha and Lighter
Distillates
VGO and Heavier
Constant Light Ends Constraint
Turndown Constraint
16
• Direct substitution of LTO for heavy crude imports obviously has turndown limitations. This turndown limit could be alleviated by blends of LTO and bitumen.
Alternative for Replacing Heavy Crude Oil with LTO
• Blends of LTO with Canadian “rawbit” or “railbit” (10-25% diluent) could substitute for some heavy crude imports:
– Advantages: Similar to that for displacement of medium grades
– Challenges:
Getting the right blend
Asphaltene precipitation
Crude blending facilities
Availability of rawbit and railbit
Possible high acid (TAN) constraints.
17
Alternative for Replacing Heavy Crude Oil with LTO
42%
8%
30% 33%
37%
21%
31% 31%
19%
34%
24% 22%
3%
36%
14% 14%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Rawbit LTO 34% LTO,66% Rawbit
Avg HeavyImport
Distillation Yields, vol %
<350 F
350-650 F
650-1000 F
1000 F+
Blend
18
• U.S. production of refined product and intermediates will be influenced by a number of factors:
– LTO production volume and timing
– U.S. refinery capacity additions and timing
– Crude oil and condensate export volumes
– Availability of heavy crude oil and bitumen and logistics for bringing it to market
– LTO absorption mechanisms chosen by individual refiners
• Given these uncertainties, three scenarios for processing LTO were modeled.
How Will Refined Products and Intermediates be Impacted?
SCENARIO 1 2 3
LTO Production EIA
Reference EIA High Resource
EIA High Resource
+ 20%
% LTO in Blended Medium Crudes Base (41%) Base (41%) High (70%)
19
• In all LTO absorption scenarios, LPG, naphtha, and distillate production increase.
• Surplus virgin naphtha may be exported (similar to processed condensate).
• Distillate exports will increase in all scenarios.
Implications for Refined Products
0
100
200
300
400
500
600
700
2014 2015 2016 2017 2018
MB
/D
Naphtha and Lighter Production versus 2013
Scenario 1 Scenario 2 Scenario 3
0
100
200
300
400
500
600
700
2014 2015 2016 2017 2018
MB
/D
Distillate Production versus 2013
Scenario 1 Scenario 2 Scenario 3
20
• VGO and Resid production would grow with moderate LTO growth
– There are almost 400 MB/day of VGO imports, and over 450 MB/day of heavy fuel imports that have the potential to be displaced
• In the short term, VGO and vacuum resid (VR) production may decline until condensate splitters and crude unit expansions come online
How LTO Affects the Bottom of the Barrel
(100)
(50)
0
50
100
150
200
250
300
2014 2015 2016 2017 2018
MB
/D
AGO/VGO Production versus 2013 Scenario 1 Scenario 2 Scenario 3
(100)
(50)
0
50
100
150
200
250
300
2014 2015 2016 2017 2018
MB
/D
Vac Resid Production versus 2013 Scenario 1 Scenario 2 Scenario 3
21
The Case for Investment – Other Factors
Source: Baker & O’Brien Analysis
-10
0
10
20
30
40
50
Re
al 2
01
4 G
ross
Mar
gin
($
/B)
USGC Historical Refining Gross Margins (LLS Cracking Gross Margin, Maya Coking Gross Margin)
Real LLS Cracking Margin 12-Month Moving Average (Cracking) Real Maya Coking Margin 12-Month Moving Average (Coking)
22
The Case for Investment – Other Factors
Source: PRISM
Q3 2014 Refining Cash Margins by PADD $/B
23
0 20 40 60 80 100 120
Robert W. Baird Morgan Stanley US Investment Goldman Sachs Credit Suisse Average
The Case for Investment – Other Factors
Bakken
Eagle Ford
Permian – Delaware
Permian - Wolfcamp
Marcellus/Utica
Uinta
Niobrara
Texas Panhandle
Mississippi Lime
$/B
Major Shale Plays
WTI Price, January 15,
2015
Marginal Production Economics of Major U.S. Shale Plays
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.
24
• Diesel:
– LDV diesel sales up ~40% from 2013
– Emissions match those of gasoline-powered vehicles
– Lags Europe – and likely to continue
• Diesel Uptake Lags Europe
– Availability
– Price
– Emissions Regulations
– Government Actions
The Case for Investment – Others Factors
25
The Case for Investment – Others Factors
-5
0
5
10
15
20
25
-2,500
0
2,500
5,000
7,500
10,000
12,500
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
$/B
MB
/D
US Gasoline and Distillate Consumption vs Differential
ULSD - RUL US Gasoline Consumption US Distillate Consumption
-2,500
0
2,500
5,000
7,500
10,000
12,500
AEO 2014 Projected US Consumption of Gasoline and Distillate
US Gasoline Consumption US Distillate Consumption
26
The Case for Investment – Others Factors
0%
10%
20%
30%
40%
50%
60%
70%
USGC Average NWE Average New Middle East Refinery
Per
cen
t o
f C
rud
e C
har
ge
Conversion/Upgrading Units - USGC vs. NW Europe and Middle East
FCC
Hydrocracking
Coking
27
• US crude oil production has increased significantly since 2010 and is expected to continue to rise.
• Continued investigation of displacement of crude imports.
• Opportunistic capital options for overcoming light ends limitations.
• Light virgin products will increase.
• The case for investment will continue to evolve.
Summary
28
Baker & O’Brien – Independent Energy Consultants
www.bakerobrien.com
Dallas Headquarters
12001 N. Central Expressway Suite 1200
Dallas, TX 75243 Phone: 1-214-368-7626
Fax: 1-214-368-0190
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1333 West Loop South Suite 1350
Houston, TX 77027 Phone: 1-832-358-1453
Fax: 1-832-358-1498
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London EC4A 2BU Phone: 44-20-7373-0925