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Stillwater Associates LLC

Steel Tank Conference Presentation ™

Steel Tank Conference Presentation

Prepared for STI/SPFA Fall ConferenceSeptember 27, 2017




1. Stillwater Associates is a transportation energy consulting company specializing in downstream markets

2. We work at the intersection of operations and logistics, markets and regulations

3. Our associates leverage decades of experience at major oil companies to help clients navigate challenges with the highest level of industry knowledge, market analysis, policy insight, and emerging technology strategies

4. Clients include government agencies, trade associations, oil companies, technology developers, private equity firms, and law firms



Today’s Agenda

1. The transportation fuels supply chaina. Storage is integral to the transportation fuels supply chainb. U.S. Crude Oil Productionc. Refiningd. Terminalse. Retail

2. Impact of the U.S. shale boom on supply and demand3. Changing regulatory landscape4. Conclusion



The transportation fuels supply chain is complicated

Crude Oil Production Transportation Refining Transportation Terminalling Transportation Consumer

Storage is an integral part of the supply chain

4



Tight oil extraction technology created the U.S. crude oil boom

5

2016 Top 5 Crude Oil Producing RegionsState Thousand

Barrels per Day (kbd)

Texas 3,213

Federal Offshore(Gulf of Mexico)

1,598

North Dakota 1,033

California 508

Alaska 490

Most growth in U.S. crude oil production is expected to come from tight formations within the Texas Permian region and from the Gulf of Mexico

The tight oil boom has changed transportation fuels logistics

Crude oil production can be far away from refining centers. Infrastructure is needed for storage and transport.



The bulk of U.S. refinery capacity is located on the Coasts

7Crude oil is moved from production areas to refineries via pipeline, rail, tanker, and truck



Refineries produce gasoline, diesel, and jet fuel from crude oil

8

The refining process distills crude oil into more useful products by altering the chemical structure of hydrocarbon molecules, changing the size of molecules and removing impurities like sulfur and nitrogen



Refineries must have storage to function

1. Crude oil and finished products are stored at the refinery “tank farm”

2. Crude oil is fed from the tanks to the refining processes

9Inventory in the tanks must be enough to insure no interruption in refinery operations



Finished products are moved to bulk storage and blending terminals

10

1. Finished petroleum products are moved from the refinery to the bulk storage and blending terminals

2. They are blended with additives and/or renewable fuels before being taken to consumers

3. Typical features of include:• Storage tanks Pipelines• Marine receipt facilities• Rail receipt facilities• Truck loading racks



Ethanol and biodiesel are also stored at terminals

11

1. At the terminal, ethanol and biodiesel are stored in dedicated tanks because they requires special handling and testing

2. Water management is critical in the storage and blending of ethanol because it will stratify when mixed

3. Ethanol is blended with BOB at the terminal to create E10 and E85

4. Biodiesel tanks may need to be heated in the winter to avoid gelling in the winter

5. Depending on the region, biodiesel is blended at the terminal with ULSD to create B5



Retail Stations are the last link in the distribution system

12

1. Tank trucks deliver finished products from the terminal to the retail station2. Most stations have at least two underground storage tanks (USTs) for

gasoline3. Diesel is stored separately in a third UST



Today’s Agenda

1. The transportation fuels supply chain2. Impact of the U.S. shale boom on supply and demand

a. Demandb. U.S. crude exportsc. U.S. product exportsd. Exports to Mexico

3. Changing regulatory landscape4. Conclusion



Domestic crude oil supply continues to increase

U.S. Crude Oil Production and Refined Product Supply(2013-2018 projected)

Crude Oil Production: Total U.S. Motor Gasoline Product Supplied

Jet Fuel Product Supplied Distillate Fuel Oil Product Supplied



The demand for octane is likely to increase

1. As the autos move towards high compression engines, octane demand will go up

2. The autos are interested in even higher octane fuels3. Higher level ethanol blends are being tested 4. Refining industry may want a piece of that higher octane

requirement5. Supply chain issues will have to be worked out

15



The U.S. exports 9 times more petroleum products than crude oil

U.S. Petroleum Products and Crude Oil Exports

Most gasoline and diesel exports go to Mexico and South America



U.S. crude exports have grown exponentially since 2014

Monthly U.S. Crude Oil Exports

Thou

sand

bar

rels

per

day

1. Most U.S. crude oil exports go to Canada

2. However, since the crude oil export ban was lifted in 2015, the number of countries importing U.S. crude has risen

Source: EIA Petroleum Supply Monthly



U.S. gasoline exports have a substantial share of total Mexican gasoline sales

Source: EIA Petroleum Supply Monthly, PEMEX

Mexican liberalization should drive infrastructure spending 18



Product flows between Mexico and the U.S.

1. Gulf Coast Tankers

2. Cross Border Pipeline

3. West Coast Tankers

West Coast

19



Today’s Agenda

1. The transportation fuels supply chain2. Impact of the U.S. shale boom on supply and demand3. Changing regulatory landscape

a. The Renewable Fuel Standard (RFS)b. California’s Low Carbon Fuel Standard (LCFS)c. International Maritime Organization Marine Sulfur Rule

(IMO2020)4. Conclusion



What is the Renewable Fuel Standard (RFS)?

1. EPA regulation issued in compliance with Congress’ Energy Independence and Security Act of 2007 (EISA) legislation

2. RFS Obligated Parties (OPs) are refiners and importers of gasoline and diesel3. 4 obligation categories - Advanced Cellulosic Biofuel, Non-Cellulosic Advanced,

Biomass Based Diesel, and Conventional Renewable Fuel4. OPs demonstrate annual compliance by obtaining and retiring Renewable

Identification Numbers (RINs) associated with renewable fuels5. OPs calculate their Renewable Volume Obligation (RVO) by multiplying the

percentage of gasoline and diesel production with annual percentage standards set by EPA



What is California’s Low Carbon Fuel Standard?

1. Part of a group of programs designed to reduce greenhouse gas (GHG) emissions enacted through AB 32, the 2006 Global Warming Solutions Act

2. Applies to transportation fuels, including gasoline, diesel and their alternatives consumed in California

3. Goal is to reduce the carbon intensity (CI) of the transportation fuel pool by 10% by 2020

4. Petroleum importers, refiners, and wholesalers are Regulated Parties (RPs) under the LCFS

5. Fuels with a CI lower than the target established by the California Air Resources Board (CARB) generate LCFS credits. Fuels with CIs higher than the target generate deficits. Fuel producers with deficits must have enough credits through generation and acquisition to be in annual compliance with the standard.

6. According to CARB, low carbon fuel use in California is increasing. That means renewable and alternative fuels are making inroads into displacing gasoline and diesel.



LCFS Performance

1. For 2017, LCFS credits are trading at an average of $84/MT

2. 1Q2017 LCFS deficits exceeded credits for the first time

3. Credit prices will increase into 2020 unless more credits can be generated



What is the IMO’s Marine Sulfur Rule (IMO 2020)?

1. The International Maritime Organization (IMO) has implemented a global sulfur cap for marine fuel (aka bunker fuel oil) for 1/1/2020

2. Ship owners have four options for dealing with the regulationa. Reduce sulfur emissions by installing scrubbers on their smoke

stacks. Ships with scrubbers can burn high sulfur bunker fuel and the technology can extract the sulfur from the ship’s engine exhaust. Scrubbers cost $5-10 million per installation.

b. Ships can be built or converted to burn liquefied natural gas (LNG). There is almost no sulfur in LNG.

c. Ships that do not scrub stack gas will need to burn low sulfur fuel, with sulfur less than 0.5%.

d. Choose to not comply with the regulation. Enforcement will be the responsibility of the ship’s administration, i.e. the Flag State.



IMO 2020 Reduction Schedule

Stillwater expects that it will take until around 2025 before enough engineering changes are made to get sulfur emissions to the level the regulators are targeting



Conclusion

1. Demand infrastructure to support growing and changing petroleum requirements is expected to continue to grow

2. The segment expected to grow the most will be exports of both crude oil and finished petroleum products

3. New and expanded pipelines and increases in storage capacity will drive growth



Questions?



Stillwater Associates LLC… experience runs deep

Presenter:Barry Schaps

www.stillwaterassociates.com

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