The Game Shifts: The North American Crude Boom and Its

Impacts Downstream

John R. Auers

Turner, Mason & Company

Dallas AIChE

October Section Meeting

October 23, 2012

Presented by

International consulting practice since 1971

Downstream focus; refinery/chemical engineers

Industry and financial clients

Publish various outlook and forecast productsCrude and Refined Products OutlookRefinery Construction OutlookWorld Crude Oil OutlookThe Great NGL Surge! (with BENTEK Energy)Special Studies

2

Turner, Mason & Company

Detailed regional production forecasts

Updates of refinery demand by facility/region

Analysis of required logistics

Evaluate challenges and opportunities for producers and refiners and midstream operators

Initial publication – June 2012

Update issued in October 2012

3

2012 North American Crude Study

US Refining Industry Largely Balanced Until 1970 Run domestic crude to supply domestic demand

Limited imports of either crude or products

Growing Dependence on Imports after 1970 Falling production/growing demand led to rapidly growing crude

imports

ANS discovery/recession temporarily reversed trend in early 80’s

Low prices accelerated trend after 1985; Imports more than tripled to over 10 million BPD by 2005

Somewhat similar story on product imports – gasoline imports grew from just over 300 MBPD in 1995 to almost 1.2 million BPD by 2007. 4

Historical Perspective

US Production Makes a U-Turn Towards Strong Growth

Canadian Production Growth Accelerating

New Crude Production Is Causing Regional Imbalances

Crude Quality is Different from Previous Forecasts

Net Effects: Pricing Dislocations Incentives for Finding Midstream Options US Appetite for Imports Receding Regulatory Implications Yield/Processing/Operating/Investment Issues at Refineries Lower supply costs/contribute to US ability to become major product

exporter5

What’s Happening Now?

Today’s Presentation

Crude Production

Changes in Crude Quality

Crude Supply Balance

Impacts on Refiners

6

History of NA Crude Production

U.S. production up by over 1.5 MMBPD since 2008• Reverses 20+ year trend of declines• Comes despite slowdown in Gulf after Macondo

Canadian crude on upward trend for 3 decades• Up by almost 1 million MBPD in the last decade• Largest reserve base in the world/unconventional resources • Almost all reserves located in Western Canada

Driven by high prices and technology advances

7

Production Forecasts

US forecasts differ widely• Official EIA LT forecast for 2020 = 6.7 MMBPD• IEA and OPEC forecast higher levels• Some analysts have production over 10 MMBPD• All credible forecasts shows continued growth

Canadian production forecasts less variable• Resource base is better understood• Dependent on price/ability to remove logistical limits

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TM&C Forecasts

Total US/Canada increase of 4.6 MMBPD by 2020 (from 2011 levels)• U.S. growth of 3.1 MMBPD (to 8.8 MMBPD)• Canadian growth of 1.5 MMBPD (to 4.5 MMBPD)• U.S. growth mostly in PADDs 2 and 3• Declines in Alaska/California to continue• Canadian growth primarily in the West• Revision in upward direction is more likely

Forecast assumptions• Crude prices (LLS/Brent) remain in $90 to $120 range• Assumes some limitations (manpower, materials, regulatory, etc.)• Limited production from some high potential prospects• Logistical assets are built to move crude to markets in a timely fashion

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2000

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lion B

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U.S. Crude Production Forecast

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PADD I PADD II PADD III PADD IV PADD V-500

0

500

1,000

1,500

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U.S. Crude Production Change by PADD2011 to 2020

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U.S. Crude Production Change by Area2011 to 2020

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2011 2012 2013 2014 2015 2016 2017 2018 2019 20200

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Canadian Crude Production Forecast

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Presentation Agenda

Crude Production Forecast

Changes in Crude Quality

Crude Supply Balance

Impacts on Refiners

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Gravity°API

SulfurWt.%

Super Light ≥ 40.0 All

Light Sweet 31.0 – 39.9 ≤ 0.99

Light Sour 31.0 – 39.9 ≥1.00

Medium Sweet 24.1 – 30.9 ≤ 0.99

Medium Sour 24.1 – 30.9 ≥1.00

Heavy ≤ 24.0 All

TM&C Crude Quality Categories

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Super Light

Light Sweet

Light Sour

Med. Sweet

Med. Sour

Heavy-200

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800

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1,400

1,600

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U.S. Change in Crude Production by Grade2011 to 2020

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Shale Crude vs Displaced Light Imports Key Qualities

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Property Bakken Eagle Ford

SoyoBonny Light

API Gravity 41 45 39 34

Sulfur, wt% 0.20 0.60 0.14 0.24

Distillation Yield, volume %

Lt. Ends, C1-C4 3.5 3.8 2.1 1.3

Naphtha 35.7 40.1 23.5 20.3

Middle Distillates 30.9 29.7 34.5 45.5

Gas Oil 24.8 21.2 31.1 27.4

Vacuum Residue 5.2 5.2 8.7 5.4

Heavy Canadian Crude Quality Shift

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Property Current 2020

Change

API Gravity 20.3 20.3 - -

Sulfur, wt% 3.4 3.4 - -

TAN, mg KOH/gm 1.15 1.50 0.35

Distillation Yield, volume %

Lt. Ends, C1-C4 2.7 6.0 3.3

Naphtha 14.0 13.1 -0.9

Middle Distillates 21.7 18.6 -3.1

Gas Oil 33.8 32.1 -1.7

Vacuum Residue 27.8 30.2 2.4

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0.2

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API Gravity

AP

I G

ravit

y

Su

lfu

r, w

t. %

Future Quality of U.S. Crude Oil Production

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2011 2012 2013 2014 2015 2016 2017 2018 2019 202028.5

29.0

29.5

30.0

30.5

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31.5

32.0

0.0

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Actual Planned

Ab

solu

te G

ravi

ties,

°A

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ere

nce,

°AP

I

Crude Run Gravity Change for U.S. Refineries

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Crude Production Forecast

Changes in Crude Quality

Crude Supply Balance

Impacts on Refiners

Presentation Agenda

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PADD I/East Coast 2011 crude runs at 1.1 MMBPD (down from 1.6 in 2005) 98% imported; 20% from Canada/Most of rest from Africa 80% light or super light Very limited pipeline access

PADD II/Mid-Continent 2011 crude runs at 3.2 MMBPD (very steady year to year) Canadian imports 45%; In-PADD production and movements

from PADD III about equal at 25% Non-Canadian imports at 150 MBPD (down from 700 MBPD in

1999 and over 1 MMBPD in early 90’s. 66% light/27% heavy/7% medium

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US Regional Crude Slates

PADD III/Gulf Coast 2011 crude runs at 7.4 MMBPD (very steady year to year) 65% imported; 35% produced in PADD 44% light/24% medium/32% heavy Total light and medium imports at 2.6 MMBPD; down by 900

MBPD in last four years

PADD IV/Rocky Mountains 2011 crude runs at 532 MBPD (very steady year to year) Canadian imports 44%; In-PADD production 56%; no non-

Canadian imports 47% light/13% medium/40% heavy

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US Regional Crude Slates (cont.)

PADD V/West Coast 2011 crude runs at 2.3 MMBPD (down by 300 MBPD since 2005) 8% Canadian; 50% other foreign; 42% produced in PADD 54% light/13% medium/33% heavy Crude imports constant at 1.1-1.2 MMBPD for last six years Limited pipeline access from Canada/none from rest of US

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US Regional Crude Slates (cont.)

Crude Flow TimelineCrude Oil Milestones Midstream Devopments

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12 Lt/Med foreign imports to PADD II

endSeaway Expansion to 400 MBPD

Keystone Cushing to USGC Startup

Longhorn Pipeline Startup

Lt Swt foreign imports to PADD III end

Reversal of Enbridge Line 9

Seaway Expansion to 850 MBPD

ONEOK Bakken Crude Express Startup

Keystone XL Startup

Lt Sour foreign imports to PADD III end

Med Swt foreign imports to PADD III end

Lt Swt movements to PADD I increase

Med Sour foreign imports to PADD III end

Lt/Med Sour imports to PADD I end

Canadian crude to PADD V increases

KM Trans Mountain Expansion to 750 MBPD

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2011 20200%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Production Canada Imports

U.S. Crude Balance

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Non-Canadian Imports

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32%

15%

53%

20116675 MBPD

PADD III Heavy

PADD V

Other

58%31

%

11%

20203056 MBPD

PADD I Bakken replaces over 80% of non-Canadian imports Canadian imports relatively steady/move to heavier grades Crude slate significantly lighter (1.6 API gravity)

PADD II No non-Canadian imports Canadian non-heavy imports replaced by in-PADD production PADD III crude replaced by in-PADD production Crude slate lighter by about 0.5 API gravity/much lighter than capability

PADD III Almost all but heavy imports replaced by domestic crude Canadian dilbits replace significant volume of Latin heavies Overall crude slate lighter by almost 1.0 API gravity

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Changes in Regional Crude Slates

PADD IV Canadian non-heavy production replaced by in-PADD crude Only region with production greater than demand Significant export of crude to other PADDs Crude run quality relatively constant

PADD V Canadian imports increase to over 20% PADD IV, PADD II and possibly PADD III crude reaches refineries

These make up for production decreases and start to displace

waterborne imports Crude run quality relatively constant 29

Changes in Regional Crude Slates(cont.)

Limited Remaining US Destinations PADD I Non-Canadian imports less than 150 MBPD PADD III heavy imports displacement slows as most remaining Latin imports

are contractually/economically “locked-in” PADD V still importing almost 1 million BPD

PADD V Challenges LCFS could limit/prevent heavy Canadian imports Limited logical mid-stream options from Continental US Return of in-PADD crude production growth possible

Exports Not forbidden/requires export license in most cases Politically controversial Potential destinations – Asia/Europe

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What Happens After 2020?

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U.S. Crude Oil Exports1990 to 2011

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Crude Oil Exports

Liquid hydrocarbons from underground reservoirs thathave not been processed through a crude distillation unit

Pre Approved

ExportLicense

Required

Crude Oil

1. Alaska Cook Inlet2. To Canada for consumption

there3. Heavy California crude up to 25

MBPD

Case by CasePresidential determination that it is consistent with national interest

1979 Congressional Act, expired in 1994 but extended each year by Presidential Notice

ExportLicense

Not Required

Intermediates/Products

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Crude Production Forecast

Changes in Crude Quality

Crude Supply Balance

Impacts on Refiners

Presentation Agenda

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US refiners will enjoy crude cost advantage As light imports disappear, LLS flips to permanent discount vs. Brent Domestic light crudes priced to incentivize USGC refiners to replace

imported medium crude barrels

Regional differentials Inland refiners continue to be most advantaged Pipeline access to USGC will decease WTI/LLS spread St. James becomes price setting location Economics for EC and WC refiners improve as they gain access

Heavy crude discount increases when Canadian crude arrives on USGC

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Price Impacts

Influx of light/super light crude could reduce capacity Loss could be 10%+ at refineries designed for heavier crudes Units impacted include crude and vacuum units, gas plants, and debutanizers Displacement of higher sulfur crude will impact sulfur units US refining system could lose the equivalent of 2 or 3 average refineries if capital

investment is not made

Other concerns Higher TAN from Canadian dilbits will require capital/treating costs Potential compatibility issues Loss of access to imports will decrease crude slate flexibility

Benefits Lower resid yield/metals content of shale oil will facilitate resid cracking Sulfur plant limited refineries will benefit from sweeter crudes

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Operating Impacts

Yield Concerns “Dumbbelling” of Crude Slate

Higher NGL and naphtha Lower middle distillate Resid yield yields up in Canadian heavy crudes

Implications Higher NGL yield adds to surplus from field production Higher naphtha runs counter to declining domestic gasoline

demand/potential lower aromatics limits Distillate demand growing faster than gasoline

Remedies Construction of hydrocracking units – very capital intensive Development of NGL and gasoline export markets

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2011 2012 2013 2014 2015 2016 2017 2018 2019 2020-100

-50

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Gasoline Distillate

MB

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Change in U.S. Product Yields2011 to 2020

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U.S. Net Product Export Forecast

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Concluding Thoughts

US refiners will see a major shift in their crude slates over the next 10 years

Almost all non-Canadian and non-heavy crude imports will be be displaced except in PADD V

Ability to move new crudes into PADD I, PADD V and ultimately offshore will be important

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Concluding Thoughts (cont.)

Domestic surplus will lead to crude cost advantages for all US refiners

“Dumbbelling” of crude slate will provide numerous yield and processing challengesWill have to spend significant capital to maintain

capacityAbility to maintain distillate production will require

hydrocrackersDevelopment of gasoline export markets will be

important 40

John R. Auers – Senior Vice President

Turner Mason & Company

Email: jauers@turnermason.com Telephone: 214-754-0898

Presenter

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