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Baker & O’Brien, Inc. All rights reserved. CONFIDENTIAL
Winner and Losers in the
Dynamic Downstream Sector
Onshore Energy Conference
01 November 2017
2 CONFIDENTIAL
Legal Notice
Baker & O’Brien, Inc., (Baker & O’Brien) prepared this presentation for the Aegis Onshore Energy Conference. The opinions and findings herein are based upon Baker & O’Brien’s experience, expertise, skill, research and analysis, and rely upon public and proprietary data available to Baker & O’Brien at the time this presentation was prepared. All forecasts and projections contained in this presentation represent Baker & O’Brien’s best judgment. However, such forecasts and projections are inherently uncertain due to the potential impact of factors or future events that are unforeseeable at this time or beyond Baker & O’Brien’s control. Any reproduction, distribution, or disclosure of this information is strictly prohibited without Baker & O’Brien’s prior written authorization. Baker & O’Brien expressly disclaims all liability for the use, disclosure, reproduction, or distribution of this information by or to any third party.
3 CONFIDENTIAL
• What defines “competitive”?
• Asset and Location Factors
• Competitive Landscape
• Possible Winners and Losers
• Hurricane Harvey
Agenda
4 CONFIDENTIAL
Refining and Petrochemical Value Chain: Overview
5 CONFIDENTIAL
• Refining
– Crude oil transport fuels
– Boiling ranges of molecules
– Key word - “Margin”
• Petrochemical
– Convert refinery gases, naphtha and NG to chemicals
– Chemical species
– Ethylene/propylene expensive to ship; plastics integration at site
– Key word – “Cost of production”
• Common Themes
– Capital intensive; scale and high utilization are key
– Feedstock costs comprise 80%+ of cash cost structure
– Globally competitive industries
Refining and Petrochemicals Characteristics
6 CONFIDENTIAL
• What defines “competitive”?
Agenda
7 CONFIDENTIAL
• Return on Investment?
• Gross Margin
– Supply versus Demand – Price Structure (“Cracks”)
– Conversion capability (“Complexity”)
• Cash Operating Cost (OPEX)
– Economy of Scale
– Efficiencies
– Regulations
• Net Margin (NM)
– The results
The Metrics
Location
8 CONFIDENTIAL
20
40
60
80
100
120
140
Do
llars
Pe
r B
arre
l
Brent
WTI
Maya
Yields and Prices of Crude Oils
0
20
40
60
80
100
Brent WTI Maya
Yie
ld P
erc
en
tage
Naphtha andLighter
Kerosene
AtmosphericGas Oil
AtmosphericResidue
Source: PRISM™ Source: Platts and Baker & O’Brien analysis.
9 CONFIDENTIAL
• Is oil refining profitability determined by the price of oil?
Wisdom of Crowds – Question #1
A
B
C
Yes
No
Sometimes
10 CONFIDENTIAL
Crack Spreads: A Proxy for Refining Gross Margin
Pri
ce ($
/Bb
l.)
Products Crude Oil
Crack
11 CONFIDENTIAL
Crack Spreads
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00Ja
n-0
7
Jun
-07
No
v-0
7
Ap
r-0
8
Sep
-08
Feb
-09
Jul-
09
Dec
-09
May
-10
Oct
-10
Mar
-11
Au
g-1
1
Jan
-12
Jun
-12
No
v-1
2
Ap
r-1
3
Sep
-13
Feb
-14
Jul-
14
Dec
-14
May
-15
Oct
-15
Mar
-16
Au
g-1
6
Jan
-17
Jun
-17
Do
llars
Pe
r B
arre
l
USGC Maya Coking U.S. East Coast W. Africa Resid Crack NWE Brent VBR-FCC
Source: Platts and Baker & O’Brien analysis.
12 CONFIDENTIAL
• What defines “competitive”?
• Asset and Location Factors
Agenda
13 CONFIDENTIAL
Asset Factor – Representative Oil Refining Economies of Scale
1.5
2.0
2.5
3.0
3.5
100 125 150 175 200 225 250 275 300 325 350 375 400
No
n-V
olu
me
Co
sts,
Do
llars
Pe
r B
arre
l
Capacity, Thousands of Barrels Per Day
14 CONFIDENTIAL
Asset Factor - Heavy Oil Upgrading Capability
0%
10%
20%
30%
40%
50%
60%
70%
New Middle East Refinery USGC Average USEC Average NWE Average
Pe
rce
nta
ge o
f C
rud
e C
har
ge
FCC
Hydrocracking
Coking
15 CONFIDENTIAL
Location Factor - Natural Gas Costs 2016
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
NWE USGC Middle East
Nat
ura
l Gas
Co
st, $
/MM
Btu
Source: World Bank and Baker & O’Brien analysis.
16 CONFIDENTIAL
US West Coast US East Coast NWE Middle East
Local Crude
Growing Market
Isolated Market
Complex Refineries
Low Regulatory Burden
Low Operating Expenses
Large Margins
Location Factors
17 CONFIDENTIAL
• What defines “competitive”?
• Asset and Location Factors
• Competitive Landscape
Agenda
18 CONFIDENTIAL
Refining and Petrochemical Growth Rates
Oil Refining, Oil Consumption
Petrochemicals, Ethylene
Source: BP Statistics and Baker & O’Brien Analysis.
OECD Non-OECD
Gasoline/jet/diesel Residue
OECD Non-OECD
19 CONFIDENTIAL
• Refining Capacity Additions
• Regulations
• Other Headwinds
Topics
20 CONFIDENTIAL
Will Competition Increase?
0
500
1,000
1,500
2,000
2,500
3,000
0
500
1,000
1,500
2,000
2,500
3,000
2017 2018 2019 2020 2021 2022
Tho
usa
nd
Bar
rels
per
Day
(M
B/D
)
Estimated Refinery Crude Capacity Additions through 2022 Africa
South and Central America
North America
Europe and Eurasia
Middle East
Asia Pacific
All Announced Projects
Up to 8 MMB/D
Note: Projects have been handicapped. All potential projects shown with dashed outline
21 CONFIDENTIAL
76.0%
78.0%
80.0%
82.0%
84.0%
86.0%
-3,500
-1,500
500
2,500
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Uti
lizat
ion
, %
MB
/D
Capacity Additions Relative to Consumption and Utilization
Consumption Change - Capacity Change Utilization Utilization w/o Closures
Competitive Landscape - Refinery Capacity Additions/Shutdowns
Demand declined or capacity additions were greater than demand change
Forecast =>
Utilization drops triggering shutdowns (1.00)
(0.50)
0.00
0.50
1.00
1.50
2.00
2017 2018 2019 2020 2021 2022
MB
/D
Estimated Net Capacity Additions
B&O'B Estimated Additions Speculative Additions/Shut Downs Net Additions
Long Term Average
Timing of these additions could shift
22 CONFIDENTIAL
• Clean Air
– Cleaner Transport Fuels
• Climate Change / Energy Security
– Carbon Dioxide emissions
– Bio-diesel / ethanol mandates
– Efficiency
• Process Safety
Regulations
23 CONFIDENTIAL
Regulations – Diesel Fuel Sulphur Levels
Source: United Nations Environment Programme.
24 CONFIDENTIAL
Regulations Clean Fuels - Marine Bunker Fuels - MARPOL
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
2005 2010 2015 2020 2025
% S
ulp
hu
r C
on
ten
t In
Mari
ne F
uel
Open Oceans(Global)
Coastal Seas(SECAs)
25 CONFIDENTIAL
Refinery & Petrochemical Headwinds
• Global Headwinds
– Anaemic oil demand growth (~1% per year)
– Expansions lead to over-capacity
– Environmental
Cleaner air (2020 MARPOL, engine type regulations)
Reduced carbon emissions
Transport: Shift to low emission vehicles
Industrial: Energy efficiency and decarbonization plans
Waste disposal - Focus on plastic recycling, alternatives to plastics
• Atlantic Basin Demand Headwinds
– Population growth and demographics
– Attitudes towards vehicle ownership
26 CONFIDENTIAL
• What defines “competitive”?
• Asset and Location Factors
• Competitive Landscape
• Possible Winners and Losers
Agenda
27 CONFIDENTIAL
• Competitive Landscape
– Refining
– Petrochemicals
• Winning Characteristics
Topics
28 CONFIDENTIAL
Indicative Atlantic Basin Cash Margin Estimates
Source: Baker & O’Brien PRISM™
29 CONFIDENTIAL
Marginal Refinery Market
30 CONFIDENTIAL
Estimated Regional Cost of Production for Ethylene
300
350
400
450
500
550
600
650
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120
Co
st o
f P
rod
uct
ion
, Do
llars
Pe
r To
nn
e
Cumulative Production, Millions of Tonnes Per Year
North America Ethane Plant
Middle East Ethane Plant
Middle East LPG Plant
NWE LPG Plant
NWE Naphtha Plant
31 CONFIDENTIAL
Petrochemical Capital Investment Growth
2013 2017 • 100 Capital Projects • Over $70 billion in Capital Investment
• Over 300 Capital Projects • Over $175 billion in Capital Investment
32 CONFIDENTIAL
• Location – Access to advantaged feedstock
e.g., US, Canada, Russia & Middle East
– Strategic access to a growing market e.g., Asia
• Assets – Value-Adding
Refineries - High percentage of upgrading capacity e.g. Inland Europe, USGC refineries.
Petrochemicals - Derivative integration - speciality chemicals, polymers
– Economies of scale – Synergy exploitation
Refinery-petrochemical integration (e.g., Korea, NWE, USGC)
Winning Characteristics
33 CONFIDENTIAL
2010 2011 2012 2013 2014 2015 2016
North America 275,000 325,000 675,000 88,000 140,000
Europe 447,000 96,000 717,000 272,000 379,000
Asia 140,000 265,000 140,000 777,000 302,000
Total Shutdown Capacity
862,000 686,000 1,392,000 500,000 1,296,000 302,000
Refinery Shutdowns
Refinery Crude Distillation Capacity (Barrels Per Day)
34 CONFIDENTIAL
• If you were to invest, say, $500 million, in the refining and/or petrochemical industry, which would you prefer?
Wisdom of Crowds – Question #2
A
B
C
D
E
NWE Refining
ME Refining
ME Petrochemical
USWC Refining
Asia Petrochemical
35 CONFIDENTIAL
• What defines “competitive”?
• Asset and Location Factors
• Competitive Landscape
• Possible Winners and Losers
• Hurricane Harvey
Agenda
36 CONFIDENTIAL
The Path: Harvey Took a Tour of U.S. Refineries and Petrochemical Facilities
Source: Petroleum Economist
37 CONFIDENTIAL
Impact on Eastern US
Source: EIA
No refineries – relies heavily on pipeline/barge movements from
USGC
38 CONFIDENTIAL
Impact of Hurricanes on U.S. Gulf Coast Refineries
0
1
2
3
4
5
6
7
8
9
10
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
Gro
ss In
pu
ts t
o U
.S. G
ulf
Co
ast
Ref
ine
rie
s (M
illio
ns
of
Bar
rels
Pe
r D
ay)
Weeks Before / After Storm Landfall
Hurricane Harvey
Hurricane Katrina
Hurricanes Gustav & Ike
Source: EIA
39 CONFIDENTIAL
Refining & Petchem Impacts
1.50
1.60
1.70
1.80
1.90
2.00
2.10
2.20
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Wee
kly
Ave
rage
Reg
ula
r U
nle
aded
Gas
olin
e P
rice
, D
olla
rs P
er G
allo
n
Shu
tdo
wn
Ref
iner
y C
apac
ity
(MB
/D)
USGC
New York Harbor
Lost Refining Capacity
40 CONFIDENTIAL
Baker & O’Brien, Inc.
Project Development
Engineering and Construction
Transportation and Storage
Refining
Product
Offsites
Marketing
Distribution
Petrochemicals
Product
• Litigation and Arbitration Support Expert Services – Engineering, Procurement, and Construction
(EPC)
– Property Damage and Business Interruption Insurance Claims
– Asset Valuations
– Accident/Incident Investigation
– Commercial Contracts
– Standard of Care
• Strategic Consulting and Industry Advisory Services
– Markets and Strategy
– Due Diligence and Advisor to Lenders and Investors
– Merger and Acquisition Support
– Competitive Position Analysis
– Supply Logistics
– Market Value Assessments
– Project Monitoring
– Economic Modeling
– Work Out Assistance
– Market Studies
– Offtake Logistics
– Feasibility Studies
– Independent Engineering
– Witness Performance Testing
– Due Diligence
– Optimization Studies
• PRISMTM Industry Modeling and Database
41 CONFIDENTIAL
Contact Information
London Office
146 Fleet Street, Suite 2
London EC4A 2BU Phone: 44-20-7373-0925
Houston Office
1333 West Loop South Suite 1350
Houston, TX 77027 Phone: 1-832-358-1453
Fax: 1-832-358-1498
Dallas Headquarters
12001 N. Central Expressway Suite 1200
Dallas, TX 75243 Phone: 1-214-368-7626
Fax: 1-214-368-0190
www.bakerobrien.com