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Energy and commodity price benchmarking and market insights
Crude Pricing and Indexation Denver, Colorado
Gus Vasquez 18 June 2012
• Report prices in all world markets for o Refined products o Crude o NGL & LPG o Coal and coke o Gas o Power o Fertilizers o Emissions
• Over 400 staff globally with numerous offices • Rapid growth in spot and term contract indexation,
swaps market indexation
Who is Argus?
• Argus is now a standard benchmark for trade in o US domestic and import crude oil o US gasoline, diesel, and jet fuel
• Argus reports the market the way that it trades and believes liquidity and transparency lead to accuracy
• Argus prices for US crude are volume-weighted averages of trades throughout the entire trading day
• Argus Sour Crude Index (ASCI) o Used to price both long-haul and short-haul foreign crudes
• Argus LLS o Used to price Bakken and Eagle Ford
Why Argus?
• Provide representative, verifiable, and consistent price discovery by monitoring arms-length market activity
• Consult with industry and wider stakeholders to ensure appropriateness of methodologies o Avoid a “one size fits all” approach o Where possible reflect existing market structures and
trading practices
• Argus believes liquidity and transparency lead to accuracy o Argus has a robust process for assessing market prices in the
absence of active trading
Argus approach to price discovery
• Daily volume weighted average of deals done o Example: US Gulf coast domestic crude pricing o Differentials to WTI are averaged with volume weighting o Differentials applied to Nymex settlement price
• Daily assessment of low/high range o Examples: Bakken Clearbrook, West African delivered USGC o Trade is too illiquid to use daily VWA o All VWAs default to a low/high range when liquidity is low
Basic methodologies
• Assessed bid/ask range at a moment in time o Forward curves
• Monthly weighted averages of deals done o Example: WCS Canada o Based on monthly average pricing common in the market
• Calculated indices
Basic methodologies
• Differential price is volume-weighted average of all deals over entire trading day o All qualifying deals are counted regardless of volume o Counterparties are validated and duplicates netted out o Aggregate volume minimum must be met, or price defaults
to mean of low and high
• Differential averages are applied to Nymex settlement price o During 3 days after expiry, applied to WTI Cushing price,
which is a volume-weighted average of “roll” trades, which are applied to the prompt month Nymex settlement price
Volume-weighted averages
Index pricing
• The spot market at the Gulf coast – when all deals are considered – is deep and broad
• A ready well of deals exists for price formation even if WTI-related transactions decline
• The use of LLS and Mars as secondary benchmarks is growing and offers several possibilities to the marketplace o Argus continues to monitor the Gulf coast market for signs of
foundational change
• Healthy indices lead to confidence in derivatives markets
The spot markets are healthy
Spot trade activity
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000Ju
n Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar Ap
rM
ay Jun Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar Ap
rM
ay Jun
2010 2011 2012
Tota
l b/d
per
mon
th
Eugene Island
Poseidon
Southern Green CanyonBonito
Thunder Horse
WTI P-Plus
HLS
WTS
WTI Midland
Mars
One popular way to get to a final price is:
CMA (Nymex settles during delivery month) +
Average diff to CMA based on settles during Nymex trade month (Argus diff to CMA monthly average)
+ Argus trade month average differential for crude grade
+/- Transportation and quality adjustments
Contract pricing formulas
Price can also be calculated in the following way:
Average Nymex Settles in Delivery Month +
Argus Trade Month Average differential
Or price could just equal: • The average of Argus Trade Month price (Argus outright prices)
• The average of Argus daily price during delivery month
Other pricing formulas in contracts
Another way to calculate price is:
Average Nymex Settles in Nymex prompt month +
Argus Trade Month Average differential
And finally:
Average daily WTI Posting during delivery month +
Argus P+ trade month average +
Argus Trade Month Average differential
Other pricing formulas in contracts
• Price = Average Nymex Settles in Delivery Month + Argus Trade Month Average differential + Quality differential - Transportation Costs
• Example: o Nymex settles at $100/bl + $12.50/bl for LLS + $2 for Eagle Ford o Eagle Ford price at a given location = $114.50/bl
• Netback will be:
o Eagle Ford at $114.50/bl - $10/bl for transportation to St James o Final Eagle Ford Price at the field = $104.50/bl
Calculating a netback value to the field
Value vs. price
Examples of refinery yields
Crudes by quality
WTS
WTI
LLS
HLS
Thunder HorseBonito
Eugene Island
Poseidon
Mars
SGC
Escravos
Nemba
KissanjeBasrah Light
Oriente
Maya
ASCI
20.00
25.00
30.00
35.00
40.00
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50
API G
ravi
ty
Sulfur
• The goal of refining is to turn crude oil into higher value products
• With necessary equipment, a complex refinery can buy low value crude and turn into high value product
• Crude price is a function of o Refinery demand (equipment in each refinery varies and
product slate changes seasonally) o Current value of products o Crude supply o Transportation constraints
What does this have to do with price?
• Refinery outages o Planned maintenance o Unplanned outage
• Seasonality o Summer is gasoline season o Winter is about heating oil
• Refinery margins o Margins determined by product and oil prices o Weak margins may force refiners to cut runs
• Product export opportunities
Demand side factors affecting price
4-Week Avg USGC utilization of operable capacity
80
85
90
95
Jun 1
0
Jul 1
0
Aug 1
0
Sep 1
0
Oct 1
0
Nov 1
0
Dec 1
0
Jan
11
Feb 1
1
Mar
11
Apr 1
1
May
11
Jun 1
1
Jul 1
1
Aug 1
1
Sep 1
1
Oct 1
1
Nov 1
1
Dec 1
1
Jan
12
Feb 1
2
Mar
12
Apr 1
2
May
12
% ag
e ut
ilizat
ion
• Field or platform maintenance • Transportation disruptions
o Pipeline issues o Bottlenecks or new infrastructure coming on line
• Regional oversupply o The Cushing disconnect
• Import fluctuations • Increase or decrease in production
o Natural field decline o New plays coming on
Supply side factors affecting price
Break in flow disrupts stream
Refiner pays more for
other optionsDecreased
SupplyIncreased
Supply
Pipeline Break
US domestic production forecasts
0
0.5
1
1.5
2
2.5
320
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
mill
ion
barr
els
per d
ay
Deepwater Gulf of Mexico US Shale Oil
Source: EIA
Waterborne sweet crude imports into USGC
Source: EIA
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
Jan-
10Fe
b-10
Mar
-10
Apr-
10M
ay-1
0Ju
n-10
Jul-1
0Au
g-10
Sep-
10O
ct-1
0No
v-10
Dec-
10Ja
n-11
Feb-
11M
ar-1
1Ap
r-11
May
-11
Jun-
11Ju
l-11
Aug-
11Se
p-11
Oct
-11
Nov-
11De
c-11
Jan-
12Fe
b-12
'000
bar
rels
Net Loss: 1.015mn b/d supply
665,450 b/d: Feb 2012
1,680,000 b/d: Sep 2010
• A bottleneck at Cushing pushed WTI to discounts against Brent beginning in 2007
• WTI has been unable to return to its historic premium over Brent
• Persistent crude over-supply in the Chicago area depressed WTI values as Cushing stocks rose o Canadian crude inflows exacerbated supply
The WTI/Brent inversion
• Once crude reached Cushing, it could previously only move north to the Midwest or go into storage
• Now, with the Seaway Pipeline reversal, crude can also move from Cushing to the USGC o Pipeline was reversed around mid-May o Initially moving 150,000 b/d
• US domestic differentials to WTI are constructed using: o The Brent/WTI spread o The value relative to other domestic grades o Increasingly, the value of grades versus LLS and the value of
LLS versus Brent
The WTI/Brent inversion
LLS relationship to Brent and WTI
75
85
95
105
115
125
135
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12
$/bl
Brent LLS WTI
• WTI’s dislocation from Gulf coast increased the basis risk embedded in Gulf coast differential
• Discouraged spot transactions versus WTI for Gulf coast grades
• Encouraged increased trade against non-WTI pricing references – especially at the Gulf coast o The Argus methodology is currently a volume weighted
average only of deals done at a differential to WTI o In illiquid markets, Argus will make an assessment based on
other information, such as conversion or box trades
• Encouraged growth in LLS swaps transactions
WTI inversion effect on spot market liquidity
Mars differential to WTI
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
$/bl
LLS differential to WTI
-5
0
5
10
15
20
25
30
35
$/bl
Ratio LLS-WTI:Brent-WTI, 1:30 CST
60%
70%
80%
90%
100%
110%
120%
130%
140%
Mar
-11
Apr-1
1
May
-11
May
-11
Jun -
11
Jul-1
1
Jul-1
1
Aug-1
1
Sep-
11
Sep-
11
Oct-1
1
Nov-1
1
Nov-1
1
Dec -1
1
Jan-1
2
Jan-1
2
Feb-
12
Mar
-12
Mar
-12
Apr-1
2
May
-12
May
-12
Ratio LLS-WTI:Brent-WTI, 1:30 CST
Secondary benchmarks
• Diverse participants • Active physical trade and transparency • Flexible infrastructure • Evergreen production lifespan • Reacts to local fundamentals • Reacts to global waterborne fundamentals • Provide a stable value that differentials can be
predictably set against • Supported by a strong financial market with a sound
regulatory structure
What makes a good benchmark?
• Light Louisiana Sweet is a blended stream • Capline defines LLS as any crude oil stream that has:
o Between 34-41°API o Sulfur content of no more than 0.40pc o Total Acid Number (TAN) of no higher than 0.70
• Increasingly the blending of west African crudes into LLS is being displaced by the blending of shale crude o Bakken (arrives by rail) and Eagle Ford (arrives by barge) o A strong supply profile going forward
• Because of its location and supply flexibility, LLS price is well correlated to Atlantic basin crude prices
What is LLS?
• LLS is already used as a benchmark with US domestic light grades being discussed on an LLS basis o Bakken o Eagle Ford o West Texas
• Foreign lights coming into US Gulf coast have been offered at an LLS-related price
• Valero, Marathon and others use LLS in financials to calculate product margins
• Swaps activity on LLS is rising sharply o Open interest is 50% higher than a year ago
The current role of LLS
• In general, any crude that arrives at St James can be blended to LLS specs. Economics determine the mix
• Domestic grades normally used: o Any grade from USGC production o Bakken (arrives by rail) and Eagle Ford (arrives by barge)
• Foreign grades commonly used: o Venezuelan (used as base and blended with condensate) o West African o Saharan Blend
• Because LLS is a blended grade, the forward supply profile is strong – unlike that for the North Sea
LLS Blending and Supply
LLS buyers and sellers
11.52%
11.48%
10.71%
9.43%
8.29%6.46%
6.08%
4.80%
4.56%
3.80%
3.42%
3.42%
3.42%
2.66%
2.28% 1.14% 1.14%
LLS Sellers
15.23%
15.21%
12.24%
9.03%8.78%
7.22%
5.70%
4.80%
4.11%
3.80%
2.66%2.28%
1.14% 1.14% 1.03%
LLS Buyers
• Gulf coast buyers of Latin American crude are using ASCI and/or Argus Mars as the basis for their purchases
• US domestic producers have signed deals on ASCI as a way of capturing generic Gulf coast sour values o Also internal pricing purposes
• ASCI can be used with an adjustment factor to price term crude on either an fob or cif basis
• As a combination of three medium sour streams, ASCI removes any concerns over hurricane disruption
• ASCI has a proven three-year record o Around 1.8mn b/d of imported crude price on ASCI
ASCI offers a robust alternative benchmark
ASCI buyers and sellers
16.35%
12.52%
11.70%
11.53%9.01%
8.24%
4.36%
4.28%
4.16%
3.95%
2.97%2.31%
2.31%
2.31% 1.32% 1.05%
ASCI Sellers
18.26%
17.01%
15.32%7.91%
5.93%
4.28%
3.95%
3.41%
3.29%
2.97%
2.31%
2.31%1.98%
1.65%1.65%1.32% 1.32% 1.32% 1.32%
ASCI Buyers
Infrastructure
• Production increases are currently outpacing the ability to move barrels to market
• Current planned projects would provide greater take-away capacity than total production o Not all proposed projects will come to fruition
• Railing, trucking and barging are providing short to medium term solutions
Overview of infrastructure issues
• Once pipeline projects are completed, crude valuations and market dynamics will change
• Challenges remain for producers as finding buyers becomes increasingly difficult
• Light sweet imports should continue to drop and eventually even disappear altogether
Overview of infrastructure issues
Pipeline Expansions, New Builds and Reversals
Storage Expansions
Projects Completion Schedule Cushing 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15Seaway Reversal (Enterprise/Enbridge)*Mississippian Lime (Plains)OK Pipeline (SemGroup, Gavilon, Chesapeake JV)Flanagan (Enbridge)Keystone XL (TransCanada)**
Bakken 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15Bakken North (Plains)Bakken Expansion (Enbridge)High Prairie (Saddle Butte Pipeline)Bakken Marketlink (TransCanada)
Eagle Ford 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15Harvest EFEnterprise EF Phase I*Trafigura/Energy Transfer PartnersNuStar/Valero EFKinderMorgan Crude & Condensate ProjectPlains Eagle FordNuStar/TexStar Eagle FordKoch Eagle FordEnterprise EF Phase II
West Texas 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15Bone Spring (Plains)Basin Expansion (Plains)Permian Basin Norht & South Spraberry (Plains)West Texas Gulf (Sunoco)Longhorn Revesal (Magellan)Ho-Ho Reversal (Shell)Westward Ho (Shell)
*Project has been completed **Pending regulatory approval
Capacity: 400,000 b/d Route: Cushing, Oklahoma to
Freeport, Texas Operational: June 2012 • Pipeline was reversed to take
crude to USGC • Currently shipping 150,000 b/d,
ramp up to 400,000 b/d by 1Q13 • Includes lateral pipes to ECHO
terminal and from ECHO to Beaumont/Port Arthur
• Twin line of 450,000 b/d by 2014
Enterprise / Enbridge Seaway pipeline
Source: Enterprise
LLS differential to WTI
-5
0
5
10
15
20
25
30
35
$/bl
Capacity: 830,000 b/d Route: Hardisty, Alberta to Port
Arthur, Texas Operational: early 2015 • Expected to ship 2/3 heavy
crude • A bill was approved by Energy
Committee in early February. Pipeline permission process will continue.
• Companies committed to 380,000 b/d through take-or-pay contracts from Canada to USGC
TransCanada Keystone XL Pipeline
Capacity: 585,000 b/d Route: Flanagan, Illinois to
Cushing, Oklahoma Operational: mid-2014
• Generally adjacent to Enbridge’s Spearhead pipeline
• Initial open season Oct 2011 • A second binding open season
ended in February • Capacity is fully contracted
except from mandatory 10pc required by federal regulators
Enbridge’s Flanagan South Pipeline Project
Source: Enbridge
Conclusions
• Crude value and price diverge depending on market fundamentals o And price also varies from one region to another
• The relationship between similar crudes, competing against each other for a limited amount of buyers in a given region, can determine price o Benchmarking
• Quality differences can determine a grade’s value relative to its competitors, all things being equal
Conclusions
• Transportation costs can make a crude uncompetitive in certain regions but more attractive in others
• Contract pricing takes into account index pricing, quality differences and transportation
• Quickly changing infrastructure and production levels are adding uncertainty to the future of prices, especially for lighter grades
Conclusions
Any questions?
