new crudes for new u.s. & export demand - stratas...
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UPSTREAM | MIDSTREAM | DOWNSTREAM | FUEL & TRANSPORT
New Crudes for New U.S. & Export Demand SPE-Gulf Coast Section General Meeting Study Group Luncheon - Houston Petroleum Club
Greg Haas, Director of Integrated Energy, Stratas Advisors
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© Stratas Advisors. All rights reserved. 2
Introduction – Stratas Advisors
Global strategic insights, energy research and advisory consulting from well to wheels
© Stratas Advisors. All rights reserved. 4
Who We Are
www.stratasadvisors.com
• Global consulting and advisory firm
• Coverage of the energy sector and related industries
• Focused on helping clients reach decisions and
achieve tangible results
• Clients include IOCs, NOCs, independents, energy
consumers, financial entities and policy-makers
• Research and consulting staff comprises professionals
located in key global energy centers including Houston,
Brussels, and Singapore
• Combined, our team brings 300 years of energy
industry expertise, including
– Petroleum Engineers,
– Geologists
– Process Engineers
– Financial Analysts
New Crudes for New Demand Markets
© Stratas Advisors. All rights reserved. 6
Overview
• Upstream Crude Oil Production Growth – Forecasts and Plays
• Price Dislocations on Quantity, Quality, and Location x 3
• Key Projects in the Midstream/Downstream Investment Treadmill
• Independence Now
© Stratas Advisors. All rights reserved. 7
The Mid-Continent Plays include the Barnett, Mississippi Lime, Panhandle, and Woodford plays
Activity: Mid-Continent has second most rigs as of 9/1/2017
Source: Stratas Advisors, Baker Hughes data
© Stratas Advisors. All rights reserved. 8
Mid-Continent Crude Oil Production Projected To Increase Due To
Woodward Shale Plays
Source: Stratas Advisors forecasts, EIA historical data
© Stratas Advisors. All rights reserved. 9
Strong Crack Spreads Incentivizing Refineries To Increase Their Runs
-10
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0
5
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2010 2011 2012 2013 2014 2015 2016 2017
Refinery Crack Margins @ USGC LLS versus WTI Cushing, $/bbl
WTI 321 @ GC LLS 321 @ GC
Source: Stratas Advisors with Bloomberg dataSource: Stratas Advisors North American Oil Service, Bloomberg data
13000
13500
14000
14500
15000
15500
16000
16500
17000
17500
18000
Refinery Crude Runs, Mbbl/d
5-Yr Range 5-Yr Ave 2017 2016
Source: Stratas Advisors with EIA data Source: Stratas Advisors North American Oil Service, EIA data
• Running WTI in Gulf Coast refineries rather than LLS more valuable for refinery margins
• As 2017 closes, refining margins have grown well above the mid-single digit breakeven levels
• Refiners have responded and have taken refinery crude runs higher vs. year ago and 5 year average
© Stratas Advisors. All rights reserved. 10
Domestic Crude Demand Strong, May Get Stronger with Expansions
75
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Refinery Utilization, %
5-Yr Range 5-Yr Ave 2017 2016
Source: Stratas Advisors with EIA dataSource: Stratas Advisors North American Oil Service, EIA data
Refinery Crude Run Expansions in the Presslog
Source: Stratas Advisors North American Oil Service
• Underpinned by strong exports and growing gasoline demand and the favorable economic
margins that result, U.S. refinery utilization is setting new highs or trending at the top end of the 5-
year range (outside of the extraordinary hurricane shutdown period)
• U.S. could potentially add a combined 271 Mbbl/d of processing capacity by 2020
© Stratas Advisors. All rights reserved. 11
U.S. Exporting 2 MMbbl/d Crude!
Sources: Stratas Advisors North American Oil Service, EIA data
0
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Crude Exports, Mbbl/d
Max-Min 5-Yr Ave 2017 2016Source: Stratas Advisors with EIA data
• Capacity to export should increase while costs decrease when Very Large Crude Carriers
(VLCC) begin loading North American crude for export
• We are watching the reconfiguration of the Louisiana Offshore Oil Port (LOOP) to enable export
shipments of crude
• We are also watching the innovations/improvements by Oxy at the Port of Corpus Christi and by
others elsewhere
2017 U.S. Crude Oil Export Destinations
© Stratas Advisors. All rights reserved. 12
0
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Total Commercial Crude Stocks, Mbbl(Down 81 MMbbl since May 2017 peak. SPR also down 25 MMbbls in 2017)
Max-Min 5-Yr Ave 2017 2016
Source: Stratas Advisors North American Oil Service, EIA data
The Great 2017 U.S. Crude Destocking
Underway is a Rapid & Substantial Crude Destocking
• Commercial crude stocks have declined in 7 months of 2017 so far
• After dropping 81 MMbbls since March 2017, U.S. now at 2015 commercial stock levels
• 25 MMbbls of SPR crude have also been sold off year to date with more coming in years ahead
But Why Now in 2017? Why Ramp Exports & Refining so much to destock the crude overhang?
© Stratas Advisors. All rights reserved. 13
WTI Discount to Brent Re-Emerging
Sources: Stratas Advisors North American Oil Service, Bloomberg data
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2010 2011 2012 2013 2014 2015 2016 2017
WTI Discount to Brent Re-Emerging, $/bbl(Cushing to Coast Pipelines the Problem today as in 2011-2014)
EUCRBRDT Index
USCRWTIC Index
Differential has widened to more than $6/bbl on a barrel of crude worth less than $60
© Stratas Advisors. All rights reserved. 14
Waterborne and Inland Crudes Linked, But Separately
• Low differentials between the prices of Brent and LLS waterborne crudes
• Low differentials between the prices of Midland and Cushing WTI inland crudes
• Either of the waterborne light crudes trades at a premium to either of the inland light crudes
• Adequate export logistics and infrastructure between hubs to aid the balance and reduce discounts
• Low Cushing to Gulf Coast tariffs help keep differentials low, but are likely heading higher per the open
season by TransCanada on Marketlink and comments by Enterprise Products on the Seaway pipeline
• The costs of export logistics at the Gulf Coast are likely to rise now too given the rocketing rate of
crude exports – 2 million barrels per day recently – which is up from nothing just a few years ago
0
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2010 2011 2012 2013 2014 2015 2016 2017
LLS Discount to Brent Still Narrow, $/bbl(U.S. Can Export Today -- 2MMbbl/d+ Currently)
EUCRBRDT Index
USCRLLSS Index
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20
40
60
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100
120
2010 2011 2012 2013 2014 2015 2016 2017
WTI Midland Discount to WTI Cushing Still Narrow, $/bbl(Pipelines from Midland to Cushing not the problem)
USCRWTIM Comdty
USCRWTIC Index
Sources: Stratas Advisors North American Oil Service, Bloomberg data
© Stratas Advisors. All rights reserved. 15
Cushing Stocks Not Moving Like Gulf Coast Stocks
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50,000
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Crude Stocks @ Cushing Hold While USGC PADD 3 Drops, Mbbls
Cushing PADD 3
Sources: Stratas Advisors North American Oil Service, EIA data
• USGC PADD 3 crude stocks are down 62 MMbbls from 1Q17 high, and now stand just 10% over 5YA
• Cushing crude stocks are over up 50% higher than 5YA and are setting new records for this time of year
• The Cushing inland hub has no tidewater or cross-border export opportunities
• Cushing-connected Midcon refineries have less capacity than the Gulf Coast regional refining network
• So if new Permian, Scoop/Stack, Uinta, Bakken & other crude flows pile into Cushing, there they will sit,
and potential rate increases at TransCanada’s Marketlink and Enterprise Seaway will widen differentials.
© Stratas Advisors. All rights reserved. 16
• YE 2017 outbound expansions of 315
Mbbl/d to be muted by inbound production
deliveries gains from Permian and
Scoop/Stack
• Cushing stocks may continue to grow up to
Mid-2018, when USGC-bound takeaway
from Permian will takeaway 730 Mbbl/d to
Corpus Christi, Houston, and Nederland
• In 2019-2020, a reversed Capline could flood
Gulf Coast with light crude from Canada,
Bakken, or Scoop/Stack and Rocky (and
conceivably Permian) supplies via Cushing
• In 2019-2020 timeframe, Permian takeaway
expansions will divert more crude to USGC
although some to Cushing as well
Better Balance via Cushing Region Long Haul Pipelines and Projects
© Stratas Advisors. All rights reserved. 17
Takeaways
Upstream Growth: Crude-directed drilling and completions will take field production to new highs and
push new light crudes into Cushing. We expect highest growth from Permian and Scoop/Stack.
Midstream Investment : Midstream takeaway projects will need to get back on pace and stay ahead of
production to efficiently move light crude to more U.S. refining and offshore markets.
Key Crude Projects: Refinery expansion less important than exports as crude gains swamp fuel
demand. Midstream projects to watch include the Capline Reversal, DAPL, Diamond, Ozark,
Midland-Sealy, Permian Express 2 and the LOOP reconfiguration.
Differentials Widen on Growth (Quantity): By location, Inland crudes will be at a discount to
waterborne grades when infrastructure to the Gulf Coast refiners and through the export terminals
there is insufficient or costly. Already, tariffs between Cushing and the Gulf Coast rise are showing
inflationary signs at the TransCanada Marketlink and Enterprise Products Seaway pipelines.
Terminal fees on the Gulf Coast may rise as well given strong utilization. Wide differentials are
foreseeable until pipeline takeaway out of Cushing improves around 1H18. If production stays high
and all else equal, differentials should tighten further when VLCCs lower international transit costs.
Differentials May Widen on Quality: By quality, U.S. light crudes (inland WTI and coastal LLS) will be
at a discount as a whole if crude quality continues to lighten and vary as U.S. shale plays age.
Independence Now: Already, U.S. net imports represent just 10%of petroleum demand. We expect the
U.S. to continue to achieve even greater levels of energy independence as the industry works under
favorable governance to advance toward full net-export status in petroleum.
© Stratas Advisors. All rights reserved.
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UPSTREAM | MIDSTREAM | DOWNSTREAM| FUEL & TRANSPORT
Strategic Insights Across The Energy Value Chain A Hart Energy Company
Thank you for your attention
Greg Haas, Director, Integrated Energy, [email protected] , 713-260-5201
Questions and Answers
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APPENDIX: U.S. Crude Distillation Expansions Anticipated by 2020
PADD 4 Crude Oil Refining Capacity Expansions (Mbbl/d)
Operator Location
Crude
Capacity at
Start of 2017
Expanded
Crude Distillation
Capacity
In-
Service
Year
HollyFrontier Corp. Woods Cross, UT 45 60 2018
CHS Inc. Laurel, MT 56 81 2020
Refinery Crude Distillation Capacity Totals Total 101 141
Additional PADD 4 Capacity 40
PADD 3 Crude Oil Refining Capacity Expansions (Mbbl/d)
Operator Location
Crude
Capacity at
Start of 2017
Expanded
Crude Distillation
Capacity
In-
Service
Year
ExxonMobil Beaumont, TX 345 405 2018
MMEX Resources Corp. Fort Stockton, TX 0 50 2019
Raven Petroleum Laredo,TX 0 50 2018
Refinery Crude Distillation Capacity Totals 345 505
Additional PADD 3 Capacity 160
PADD 2 Crude Oil Refining Capacity Expansions (Mbbl/d)
Operator Location
Crude
Capacity at
Start of 2017
Expanded
Crude Distillation
Capacity
In-
Service
Year
Meridian Energy Group - Phase I Belfield, ND 0 27.5 2018
Meridian Energy Group - Phase II Belfield, ND 0 27.5 2019
Western Refining St. Paul, MN 84.5 100 2020
Refinery Crude Distillation Capacity Totals 84.5 155
Additional PADD 2 Capacity 70.5
Sources: Stratas Advisors North American Oil Service, media reports, company disclosures