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Outlook for FCCs
Issues and opportunities in Europe, Middle East and AfricaMiddle East and Africa
April 2015Barcelona
Trusted commercial intelligencewww.woodmac.com
Agenda
1. Market Overview
2. Outlook for gasoline and propylene
3. FCCs - Issues and Opportunities
Trusted commercial intelligencewww.woodmac.com
2
4. Key risks and uncertainties
Review of 2014 - Oil demand growth weakness and Saud i behaviour have been the key changes
� Year-on-year growth in oil demand for 2014 was less than what we forecast in September 2013.
� This was due to milder than normal winter weather earlier this year in Europe and a downward shift in China’s diesel demand.
� The initial plunge in oil prices was mostly due to rising concerns about economic
Change in oil supply/demand forecast for 2014
Unconventionals
Non-OPEC
Global demand
Sep 2013 fcst Sep 2014 fcst Dec 2014 fcst
Trusted commercial intelligencewww.woodmac.com
3
due to rising concerns about economic weakness
� US tight oil production growth during 2014 was strong, as expected, with a modest upside adjustment
� Saudi has not cut production to support prices.
� The change in OPEC behaviour has been critical to the pricing collapse
Source: Wood Mackenzie
-0.5 0.0 0.5 1.0 1.5 2.0
Total supply
OPEC NGLs
OPEC crude
Proc Gains
Unconventionals
Million Barrels Per Day
Global demand growth of ~800 kbd projected for 2015 and 2016: Steady growth in China, large swings in US
% growth in Chinese and US oil demand Volume growth in Chinese and US oil demand
2%
3%
4%
5% China US
400
600
800
1,000 China US
Trusted commercial intelligencewww.woodmac.com
4
-3%
-2%
-1%
0%
1%
2011 2012 2013 2014 2015(600)
(400)
(200)
-
200
2011 2012 2013 2014 2015
Source: Wood Mackenzie
US tight oil production growth remains strong throu gh H1 2015, but significant volumes eroded thereafter
Monthly US tight oil production forecast
Tight oil production flexes earliest, levelling off in late 2015 and then recovering during 2016
US tight oil outlook (Autumn 2014)
4,000
5,000
6,000
7,000
'000
b/d
Other tight oil
Utica
Bone Spring/Wolfcamp
Niobrara
Eagle Ford
Bakken/Three Forks4,000
5,000
6,000
oil p
rodu
ctio
n ('0
00 b
/d)
Tight oil early-Feb 2015Pre-oil price fall outlookTight oil mid-Dec 2014
Trusted commercial intelligencewww.woodmac.com
5
0
1,000
2,000
3,000
4,000
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
'000
b/d
0
1,000
2,000
3,000
Jan-
14M
ar-1
4M
ay-1
4Ju
l-14
Sep
-14
Nov
-14
Jan-
15M
ar-1
5M
ay-1
5Ju
l-15
Sep
-15
Nov
-15
Jan-
16M
ar-1
6M
ay-1
6Ju
l-16
Sep
-16
Nov
-16
oil p
rodu
ctio
n ('0
00 b
/d)
Source: Wood Mackenzie
80
100
120
140
US
$/bb
lPrice forecast through 2016: moderate price recover y in second half of 2015 and 2016
Brent and WTI price history and forecast to 2016
Weaker than expected global economic growthLower than expected oil price floor for US tight oilSupply outages ease
Forecast
Trusted commercial intelligencewww.woodmac.com
6
0
20
40
60
Jan
-12
Apr
-12
Jul-
12
Oct
-12
Jan
-13
Apr
-13
Jul-
13
Oct
-13
Jan
-14
Apr
-14
Jul-
14
Oct
-14
Jan
-15
Apr
-15
Jul-
15
Oct
-15
Jan
-16
Apr
-16
Jul-
16
Oct
-16
US
$/bb
l
Brent WTI
OPEC policy – decision to cutOil market anticipates supply responseStronger oil demand recovery
Source: History - Argus; Forecast - Wood Mackenzie
60
80
100
120
140
Pric
e re
qui
red
in
201
5 to
mai
ntai
n cu
rren
t ne
t d
ebt l
evel
s (U
S$/
bb
l Bre
nt)
Buy-backs
Dividends
Exploration
Development and financing
At US$50/bbl no IOC is free cash flow positive (fro m Upstream)This has a major impact on the budgets/plans of oil majors
Brent price required to maintain current net debt l evels in 2015
Trusted commercial intelligencewww.woodmac.com
7
0
20
40
60
Inp
ex C
orpo
ratio
n
Tu
llow
Oil
Nob
le E
ner
gy
To
tal
New
field
San
tos
Kos
mos
Con
tinen
tal
Che
sape
ake
Rep
sol
CN
RL
BG
OM
V
Lund
in
Che
vron
Ta
lism
an
Ana
dark
o
Enc
ana
Con
oco
Phi
llip
s
Sta
toil
Ma
rath
on
Pio
nee
r
Pet
robr
as
Apa
che
Occ
iden
tal
Eni
Sun
cor
Ene
rgy
Can
adi
an
Oil
San
ds
Hes
s
Dev
on
Pac
ific
Rub
iale
s
Cen
ovu
s
BP
Hus
ky
Mu
rph
y O
il
LUK
OIL
Exx
onM
obi
l
She
ll
EO
G
Pre
mie
r
Oil
Sea
rch
Den
bur
y
Pric
e re
qui
red
in
201
5 to
mai
ntai
n cu
rren
t ne
t d
ebt l
evel
s (U
S$/
bb
l Bre
nt)
Adjusted for announced cost cuts
Upstream only, including buybacks, dividends, exploration, development and financing costs. Dividend and buy-back estimates allocated in proportion between business segments. Assumes equity financing for all projects. Calculated using previous Wood Mackenzie estimates, except for those which have announced updated 2015 guidance as of December 2014 (Apache / COS / Cenovus / ConocoPhillips / Denbury / LUKOIL / Pacific Rubiales, Premier, Santos and Tullow).
Source: Wood Mackenzie
-5
0
5
10
15
20$/bbl
In 2013, Russian refiners dominated the first quart ile, but overall financial performance was poor.....European net cash margins were lower during 2013 than 2012
Weighted Average NCM : $1.76/bbl
Trusted commercial intelligence© Wood Mackenzie
8
-25
-20
-15
-10
-5
Africa Europe FSU 2012 NCM
Source: Wood Mackenzie
� Weighted Average Net Cash Margin for the region was $1.76/bbl for 2013 versus $3.28/bbl for 2012
� An near perfect 50/50% split exists between positive and negative margins
� Russian refiners primarily sit in the first quartile thanks to the local export taxation system
� African refiners are spread evenly across the curve. Some reach the first quartile thanks to configuration or cost of crude acquisition advantages.
The majority of Middle East refineries evaluated in 2013 were cash negative. The new regional projects are expected t o be first quartile
Refinery Net Cash Margins, ($/bbl)
0
5
10
15
$/bbl
1st
Quartile 2nd
Quartile 3rd
Quartile 4th
Quartile
Trusted commercial intelligence© Wood Mackenzie
9
� Average NCM of Asian refineries in 2013 was $1.6/bbl, an annual decline of nearly 50%, in line with weaker fundamentals in 2013 primarily driven by a slow down in China.
� Middle East refiners mostly secured third or fourth quartile ranking apart from 4 refineries which were spread out in the top two quartiles. Average NCM of Middle East refineries in 2013 was negative $2.80/bbl.
� Chinese and Indian refineries dominated the cash positive refineries, while cash negative refineries were mostly in the Middle East and Japan.
� Of the 66 Chinese refineries assessed in 2013, 35 refineries were in the top quartile, but only 5 Indian refineries could garner a top-quartile ranking.
-15
-10
-5
2013 Asia Pacific 2013 Middle East 2012
However, H2 2014, European refining margins were st rong, as product prices lagged crude, so supporting corporat e earnings
China 7.3%
European FCC gross refining margins
4
6
8
10
12
14
($/b
bl)
Trusted commercial intelligencewww.woodmac.com
10
Source: Wood Mackenzie
-4
-2
0
2
4
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
Jan-
14
Jan-
15
($/b
bl)
NWE Brent FCC Med Urals FCC
So what about 2015… ECA’s in Europe and US to shift demand from fuel oil to diesel/gasoil, but on the assumption of ‘full compliance’
2015 Emission control areas regulation
Demand shift from fuel oil to diesel is 215 kb/d
NWE
Trusted commercial intelligencewww.woodmac.com
11
Emission Control Area
Source: Wood Mackenzie
oil to diesel is 215 kb/d
0
100
200
300
400
500
600
2014 2015
NWE
Fuel Oil Distillate
…..which is difficult to spot from the gas oil crack spread. Gasoline cracks have also started 2015 at low levels
NWE Gasoline Crack Spreads versus Brent NWE Gas oil (0.1%S) Crack Spread versus Brent
10
15
20
25
$/bb
l
15
20
25
$/bb
l
Trusted commercial intelligencewww.woodmac.com
12
Source: Wood Mackenzie
-5
0
5
Jan
Feb
Mar
Apr
May Jun
Jul
Aug
Sep Oct
Nov
Dec
$/bb
l
5-yr range Series1 2014 2015 2016 5-yr avg
Source: History Argus, Forecast Wood Mackenzie
0
5
10
Jan
Feb
Mar
Apr
May Jun
Jul
Aug
Sep Oct
Nov
Dec
$/bb
l
5-yr range Series1 2014 2015 2016 5-yr avg
Source: History Argus, Forecast Wood Mackenzie
Agenda
1. Market Overview
2. Outlook for gasoline and propylene
3. FCCs - Issues and Opportunities
Trusted commercial intelligencewww.woodmac.com
13
4. Key risks and uncertainties
Future gasoline demand driven by growth in Asian ca r ownership versus efficiency gains in developed markets
Gasoline Demand Change, 2013-2020
1.0
1.5
2.0
Dem
and
Cha
nge,
mill
ion
b/d
Trusted commercial intelligencewww.woodmac.com
14
China
-0.5
0.0
0.5
1.0
Asia Pacific Russia &Caspian
Greater Europe Latin America Middle East North America Sub-SaharanAfrica
Dem
and
Cha
nge,
mill
ion
b/d
Source: Wood Mackenzie
Upgrades and changes to crude slate raise average g asoline yields in most regions
Change in Gasoline Supply, 2013-2020
4.0%
6.0%
8.0%
400
600
800
1,000
Ave
rage
ref
iner
y yi
eld
chan
ge
Sup
ply
Cha
nge,
kb/
d
Refinery Supply Non-Refinery Supply Yield Change
Trusted commercial intelligencewww.woodmac.com
15
-6.0%
-4.0%
-2.0%
0.0%
2.0%
-600
-400
-200
0
200
400
Asia Pacific Russia &Caspian
Greater Europe Latin America Middle East North America Sub-SaharanAfrica
Ave
rage
ref
iner
y yi
eld
chan
ge
Sup
ply
Cha
nge,
kb/
d
Source: Wood Mackenzie
Gasoline trade volumes fall, as the North American and Middle East deficits reduce challenging European refinery utili sation
203040
-50-40-30-20-10
010203040
-50-40-30-20-10
010203040
-50-40-30-20-10
010203040Europe
Russia & Caspian
Middle East
North America
The Middle East deficit falls, thereby prompting lower imports from Europe and higher exports to Africa and Asia
North American imports from Europe fall
Gasoline Trade Forecast
Trusted commercial intelligencewww.woodmac.com
16
-50-40-30-20-10
01020
-50-40-30-20-10
010203040
-50-40-30-20-10
010203040
-50-40-30-20-10
010203040
Key net trade 2013 (mtpa)
Key net trade 2020 (mtpa)
Gasoline flows to the ME from Asia reverse as new refining capacity in the ME meets with strong gasoline demand in Asia
Latin America
East
Asia
Africa
Asia North American exports to Latin America, Asia and Africa rise
To N. America2013 balance
2020 balance
Arrow width proportional to trade volume
Balances do not total zero – please see Balancing the World Methodology
Source: IEA, GTIS, Wood Mackenzie
In Europe, steam cracker feedstock switching in pro pylene supply declining…
Europe Propylene Production by Technology
10.0
12.0
14.0
16.0
Million Tons
Trusted commercial intelligencewww.woodmac.com
17
0.0
2.0
4.0
6.0
8.0
2005 2010 2015 2020
Steam Cracking Refinery Propane Dehydrogenation Metathesis
Olefins Interconversion Methanol-to-Olefins OthersSource: Wood Mackenzie
Globally, on-purpose supply will be needed to match demand growth, though there is a risk of over-investment in Asia a nd North America
World Propylene Supply by Technology
20%
25%
30%
80
100
120
140
Million Tons Propylene % On-Purpose
Trusted commercial intelligencewww.woodmac.com
18
0%
5%
10%
15%
0
20
40
60
80
2005 2010 2015 2020
Others MTO/P PDH Refinery Purification Steam Cracker % On-Purpose
Source: Wood Mackenzie
Agenda
1. Market Overview
2. Outlook for gasoline and propylene
3. FCCs - Issues and Opportunities
Trusted commercial intelligencewww.woodmac.com
19
4. Key risks and uncertainties
Issue: A global surplus of light products develops, so challenging gasoline crack spreads
Change in Product Balances Before Yield Shift, 2014 -2020Change in Product Balances Before Yield Shift, 2014 -2020
5
10
15
MtSurplus
Trusted commercial intelligencewww.woodmac.com
20
Source: Wood Mackenzie
(20)
(15)
(10)
(5)
-
5
LPG Naphtha Gasoline Jet/Other Kerosene Diesel/Gasoil Fuel Oil
Deficit
Issue: Many FCC refiners are part of sites that are competitively weak, so threatened by closure
European/Africa NCM 2013 curve highlighting FCC ref inersEuropean/Africa NCM 2013 curve highlighting FCC ref iners
0
5
10
Trusted commercial intelligencewww.woodmac.com
21
Source: Wood Mackenzie
-15
-10
-5
0
FCC/RCC refiners Others
Opportunity: Propylene’s relative pricing strength to gasoline is to moderate after peaking this year
Seasonality further complicates this outlook
Annual Pricing relationships (weight basis)
1.5
2.0
2.5
Trusted commercial intelligencewww.woodmac.com
22
0.0
0.5
1.0
1.5
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Gasoline to Brent Propane to Brent Propylene to Brent
The opportunities and challenges for FCC refineries vary by region
� Europe» On a global basis, the region with the most challenging market environment (weak
demand, strong competitive threat from other regions and significant over-capacity)» As a minimum, at least 4 – 6 refineries need to close to provide a sustainable platform
for European refinery utilisation. Improvement in reducing cost and carbon emissions essential
� Middle East
Site specific factors further complicate the regional dynamics
Trusted commercial intelligencewww.woodmac.com
23
� Middle East» Current high FCC utilisations supported by regional deficit position. Region moves to a
gasoline surplus so impacting utilisation and blending, competing into East Africa » Fuel specifications tightening
� CIS - Refinery operations strongly influenced by the country balances and export tax regime. High FCC run rates challenged by growing surplus that needs to be exported, along with Sulphur product quality specifications in Russia being tightened.
� Africa - Region is structurally deficit refined products, particularly gasoline in West Africa. High utilisation anticipated, along with maximising gasoline yield whilst processing deep into vacuum residue fraction (to maximise feedstock)
Agenda
1. Market Overview
2. Outlook for gasoline and propylene
3. FCCs - Issues and Opportunities
Trusted commercial intelligencewww.woodmac.com
24
4. Key risks and uncertainties
The oil market and refining sector are exposed to a multitude of competing forces
Key risks are price – in both absolute and differential terms
Uncertainty Risks
� Strength of oil demand growth
� Global economic growth
� Reaction of tight oil to low oil price –uncharted territory
� Low absolute price
Trusted commercial intelligencewww.woodmac.com
25
� Lifting US export ban
� US refining investments (light oil processing)
� Stranded US refining assets, but higher oil supply
� Differentials narrow, supporting oil supply
� Oil supply/demand balance
» Iranian sanctions
» Middle East stability
» Venezuelan fuel supply
� OPEC response
� Absolute price
� Light/heavy differentials
� Refining margin upside
Disclaimer
� This presentation has been prepared for WR Grace’s 15th FCC Technology Conference in Barcelona during April 2015 by Wood Mackenzie Limited. The presentation is intended solely for the benefit of attendees and its contents and conclusions are confidential and may not be disclosed to any other persons or companies without Wood Mackenzie’s prior written permission.
� The information upon which this presentation comes from our own experience,
Strictly Private & Confidential
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26
� The information upon which this presentation comes from our own experience, knowledge and databases. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them.
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27
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Email [email protected] www.woodmac.com
Wood Mackenzie* is a global leader in commercial intelligence for the energy, metals and mining industries. We provide objective analysis and advice on assets, companies and markets, giving clients the insight theyneed to make better strategic decisions. For more information visit: www.woodmac.com
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