Patrick Long and Steve Roberts May 2014

Overview of Midstream and Downstream: Highlighting Current Events and Their Impact on the Back Office

Did You Know…

…the 42 gallon barrel originated with John D. Rockefeller?

Some oil was spilled during one of his early shipments. The result was 50 gallons a barrel now being 42…

Agenda

Introduction to Opportune Process & Technology Downstream Overview Crude Origin Logistics Refining Final Thoughts

Introduction to Opportune

Opportune at a glance

Opportune is a leading energy consulting firm, serving clients throughout North America and Europe from offices in Houston, Denver, and London.

We are unique in that we have the deep energy expertise of a large firm, but the nimbleness of a smaller firm.

We bring heavily experienced teams to deliver value to our clients in addressing complex strategic, transaction, process and technology issues.

Practice Areas• Process and Technology• Corporate finance• Complex financial reporting• Strategy and organization• Restructuring & Bankruptcy• Strategic Tax

Energy Segments• Energy trading and risk management• Upstream oil & gas• Refining & marketing• Power generation• Transport/distribution and storage

How Downstream Fits Into Oil Production

UPSTREAM

MIDSTREAM

DOWNSTREAM

Downstream’s Role Within the Industry

MidstreamMidstream DownstreamDownstreamUpstreamUpstream

Integrated Oils

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Energy is in the News

7

Senate Asks EIA to Study Crude Oil Export

Crude by Rail Costs Rival PipelineAdministration Delays

Keystone XL Decision

Environmental Groups Want Extensive Oil Review

North American Unconventional Basins

Crude Origin

Crude at the Wellhead Almost no value without the ability to get it to market First Purchaser usually makes initial logistical move towards liquid market Small pipeline gathering system or limited well-site storage and truck

transport to pipeline or storage

Complexities Geographically dispersed supply Divisions of interest Economics of transportation Leased Crude

Crude Origin

The increase in drilling technology has outpaced the industry’s ability to absorb the change efficiently.

Complexities / Challenges

• Leased Crude• Limited infrastructure to support boom• Health and safety uncertainty around

methods of drilling (e.g., fracking debate)

• Inventory tracking and reconciliation• New Suppliers with Limited Credit History• New Logistical Processes (Transloading)• New crude types

Current Events

• Shale boom has generated production in new regions• Fracking technologies have generated increased production in existing regions

Crude Origin – Accounting Impacts

New crude sources have created opportunities for many new companies to emerge almost overnight in this space.

Accounting Impacts

• Boom has created new companies to support the value chain, many of which are focused on operations and have limited accounting capabilities

• Secondary costs are often “invisible” to commercial deal teams, and only reveal themselves during actual transactional flow

• Significant transactional volume for royalty, tax, and other associated payments• Increased regulatory reporting requirements (permitting, first purchaser reports)

Crude Logistics

Two primary modes of logistics from initial gathering to market:Bulk Non-Bulk

Complexities / Challenges

• Pipelines have limited and fixed operating locations and throughput

• Vessels / barges are limited by access

• Trucks have flexible operating locations, but high costs and limited per truck volume

• Rail has wide operating range, similar capacity to barge

Current Events

• New oil production onshore has outpaced the available pipeline capacity in the region

• Cyclical swings in marine utilization has current costs very high

• Wellhead gathering demand has driven up truck costs

• High profile rail incidents have increased scrutiny on operations

Crude Logistics – Accounting Impacts

Two primary modes of logistics from initial gathering to market:

Bulk Non-Bulk

Accounting Impacts

• Most pipelines very automated and provide volumetric and invoice integration, but work on a monthly cycle

• Marine movements have numerous line item costs, events to manage, and mode of transport is highly paper based

• Limited tank car capacity leads to high number of transactions for equivalent volume of crude (vs bulk)

• Crude by rail is relatively new in industry, and organizations are slow to evolve processes to support the transactions

Rail is in the News

14

Oregon oil train shipments increased 250% in 2013

Railroad Fills Void as Oil Pipelines Fall Short

Rail Delivery System Under

Lots of Pressure

Railway Car

Manufacturers

Won’t Talk Safety

Despite Concerns

Rail Specific Complexities…in Accounting

• Hydrocarbon Pricing, Costs, Commercial Terms

• Transloading Costs• Inspections• Railcar Leases and Riders • Car Location Messages (CLM):

Locations, Sight Codes, Dates / Times, Destinations, Railroads, ETA’s

• Freight Costs• Fuel Surcharge• Customs Charges• Equipment Surcharge

• Destination Offloading Costs

• Cleaning• Track Repair• Yard Fees

Crude rail creates many complexities not typically seen with other modes of bulk transportation…they all have accounting implications!

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0 0.5 1 1.5 2 2.5 3 3.5

HighHigh

LowLow

HighHigh

Light

Heavy

APIGravity(API)

Sweet SourSulfur (%)

Libyan

USA WTI

North Sea Brent

Nigerian Forecados

Indonesian Duri

Arab Light

DubaiArab Medium

Arab Heavy

Alaskan North Slope

Venezuelan BCF-17

Mexican Maya Venezuelan Pilon

Ural

Crude Types Around the World

Different regions of the world have different crude types...

Bakken

Crude Properties

Light or heavy designation depends on the average molecular weight of the crude oil. Heavy oils are high in either tar (asphaltic) compounds,

polyaromatics, or both. Light oils are high in low molecular weight compounds, like

small alkanes. Light crude is easier to process which brings a higher price.

Sweet or sour depends on the sulfur content. Sweet crudes have a low sulfur content. Sour crudes have a high sulfur content. Sweet crude is easier to process which brings a higher price.

Converting Crude to Refined Product

Refineries convert crude oil into finished (refined) products

Processes• Separation• Conversion• Blending• Treatment

With Assistance of• Heat• Pressure• Catalysts• Additives

Oil Refinery

What Goes Into the Cost of Gasoline?

Refinery Types and Crude Optionality

Every refinery is different in terms of what units it has and how big each unit is.

Major groups: margin vs investment Topping plant Cracking plants Coking plants

Determined by crudes to be run and products to be produced Far East: run light crude to produce

distillates West Coast: run heavy crude to make

gasoline Rocky Mountain: limited crude access East Coast: must produce home heating oil

Crude Conversion Happens in Different Ways

Hydrocraking Breaks up the next heavies components

using hydrogen / catalysts

Fluidized Catalytic Cracking (FCC) Breaks up diesel quality components using

catalysts

Alkylation Combines light ends from crude tower with

by products from FCC

Refining Current Events

North American domestic oil production has increased, adding to the crude optionality for refineries

In US, Jones Act restricts export of domestically produced crude Anything that is processed can be exported, leading to new

construction of splitters that run crude through a single process then export the refined products

Global political instability has a constant impact on crude and refined product markets

Accounting Impacts

Numerous sources of crude coming into refinery must be tracked and measured

Changing economic landscape is bringing new counterparties with which to transact

Inventory Reconciliation

Yield Accounting

Production or increased supply from new areas brings new locations Master Reference Data impact

Potential new tax implications

New points at which to hold inventory

Final Thoughts

Transaction Processing and Scaling Organization and Processes to Support

Focus on larger trends and analysis

Health Checks to catch issues early

(Over) Communicate with the Business

Appendix

PADD: Petroleum Administration for Defense Districts

Source: eia.gov

Key Numbers and Stats to Remember

Gallons of Oil per Barrel 42

Barrels of Oil per Metric Ton (U.S.) 7.33

U.S. Petroleum Consumption 18.5 million barrels/day

Dependence on Net Petroleum Imports 45.6%

Motor Gasoline Retail Prices U.S. City Average $3.41/gallon

Regular Grade Motor Gasoline Retail Prices U.S. City Average (2011) $3.32/gallon

Premium Motor Gasoline Retail Prices U.S. City Average $3.68/gallon

Federal Motor Gasoline Tax 18.3 cents/gallon

U.S. Motor Gasoline Consumption 9,120,000 barrels/day (383 million gallons/day)

Share of US Oil Consumption for Transportation 69%

U.S. Average Home Heating Oil Price $4.23/gallon (excluding taxes)

Number of U.S. Operable Petroleum Refineries 148

Largest U.S. Refinery by Capacity – Port Arthur, TX (Motiva) 600,000 barrels/day

Top U.S. Petroleum Refining States - Texas 4,717,199 barrels/day

Did You Know…

…U.S. oil demand in 2013 was 18.5 million barrels per day?

…every day the US consumes enough oil to cover a football field with a column of oil 2500 feet tall? That's 121 million cubic feet.

… the current U.S. refining capacity is 16.1 Million BPD

What to Know About Gas Prices

As this year’s driving season begins, gas prices this week reached a nationwide average of $3.17 per gallon, four cents per gallon higher than the previous record set last year.

The media stories are increasing, and as friends and family start to ask about gas prices, it’s important to understand the facts about what goes into the price at the pump:

Crude price drives the price of gasoline

Gasoline is a global product

Taxes take a toll

Consumers are in control

What Are the Most Common Refined Products?

Refined Product Application Specifications

Gasoline Transportation Octane, Vapor Pressure, Oxygen & Sulfur

Jet Fuel Power Generation & Transportation Freeze, Flash & Smoke Points

Diesel Fuel Power Generation & Transportation

Sulfur, Cetane Index, Viscosity & Pour Point

Home Heating Oil Heating Sulfur, Viscosity & Pour Point

Residual Fuel Oil Industrial Uses, Power Generation & Transportation Sulfur, Viscosity & Pour Point

Others – LPG, Lubricants, Naphtahs, Greases, Asphalt, Coke & Waxes

Heating, Industrial Uses, Transportation & Petrochemicals

Measuring Crude Oil Using Density and Gravity

The lighter the crude, the more desirable the components it naturally contains are. Measured in degrees API Light crude > 30 API / Heavy crude < 30 API EX: Roofing Tar = 8 API; Motor Oil = 40 API

Quality and Price of Various Marker Crudes

Gravity Sulfur Price

WTI 39.6 0.24% $100.32

Brent 38.3 0.37% $111.30

ANS 30.0 1.09% $110.46

Maya 21.8 3.33% $107.05

Classifying Refineries by Major Processes

When looking at an oil refinery from a technical perspective items are the most relevant.

Complexity - an oil refinery’s ability to process feedstocks, such as heavier and higher sulfur content crude oils, into value-added products. Generally, the higher the complexity and more flexible the feedstock slate, the better positioned the refinery is to take advantage of the more cost effective crude oils. The result is incremental gross margin opportunities for the refinery.

Capacity – is a measurement of how much crude oil can be processed on a daily basis. The measurement is determined based on the standard crude slate that is run through the refinery. By adjusting the crude slates, there is the ability to slightly adjust the maximum amount that a refinery can run on a daily basis.

Each type of crude has a unique distillation curve that characterizes the kinds of chemical compounds in that crude

Each type of crude has a unique distillation curve that characterizes the kinds of chemical compounds in that crude

Petroleum Refining: Leffler

Crude oil boils at

150o… 450o… 750o… 900o...

150 450 750 900

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100

200

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400

500

600

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10 20 30 40 50 60 70 80 90 100

LIGHT NAPHTHA

BUTANES & LIGHTER

HEAVY NAPHTHA

GAS-OILCAT PLANT FEED

RESIDUE

CUMULATIVE PERCENT VOLUME

Crude Oil Distillation Curve and Its Fractions

KEROSENE

Distillation: A Boiling Process

Crude oil boils at a number of temperatures…

Major Components of Distillation: Crude Tower

Vaporizes crude oil Separates components Sends lighter gas to top Settles heavier liquid to bottom Directs components to other

processes Keeps chemical nature the same

Major Components of Distillation: Vacuum Tower

Receives heavier crude from the crude tower

Heats crude again Distills under a vacuum to prevent

decomposition Distills lighter vapor into gas oil Sends heavier crude to coker unit Produces Fuel Oil

Major Components of Distillation: Summary

The outputs of these two units are sent throughout the refinery, either as finished products or components that need more refining

Going from lightest to heaviest distilled component, natural gas (or methane) comes first

Methane is used as fuel in the refinery

Major Components of Conversion: Delayed Coker

Receives heavy crude from the vacuum tower

Breaks up the heaviest components with high temperature and pressure

Makes heavy components lighter Sends some components for

further processing Produces solid industrial fuel called

coke

Improving Octane Through Conversion

Low Octane – Molecules in straight line

Higher Octane – Molecules in shape or branch

Two processes for reshaping moleculesReforming

Forms a ring of molecules

Isomerization

Rearranges molecules geometrically

De-sulfurization: Getting It Out

Removes sulfur using catalysts and pressurized hydrogen

Low pressure – 600 to 800 psi (reduces sulfur to 500 ppm)

Medium pressure – 800 to 1,200 psi (reduces sulfur to 50 ppm)

High pressure – 1,200 to 1,800 psi (reduces sulfur to 5 ppm)

Gasoline Blending: Getting the Right Mix

Mixes components from: Crude / vacuum tower Hydrocracker FCC Alkylation

And creates products with specifics, desired characteristics Regular Premium Aviation gasoline

Top 10 List: Largest Global Refineries

Rank Company Location Crude Capacity (b/cd)

1Paraguana Refining Center

Cardon/Judibana, Falcon, Venezuela

940,000

2 SK Corp. Ulsan, South Korea 817,000

3 GS Caltex Corp. Yeosu, South Korea 750,000

4 Reliance Petroleum Ltd. Jamnagar, India 660,000

5ExxonMobil Refining & Supply Co.

Jurong/Pulau Ayer Chawan, Singapore

605,000

6 Reliance Industries Ltd. Jamnagar, India 580,000

7 S-Oil Corp. Onsan, South Korea 565,000

8ExxonMobil Refining & Supply Co.

Baytown, Texas, USA 560,500

9Saudi Arabian Oil Co. (Saudi Aramco)

Ras Tanura, Saudi Arabia 550,000

10Formosa Petrochemical Co.

Mailiao, Taiwan 540,000

Top 10 List: Largest US Refineries

Rank Corporation State Site Barrels per Calendar Day

1 Motiva Texas Port Arthur 600,0002 ExxonMobile Texas Baytown 584,0003 Marathon Louisiana Garyville 522,0004 ExxonMobile Louisiana Baton Rouge 503,0005 Marathon Texas Texas City 451,0006 PDV AMERICA INC Louisiana Lake Charles 427,8007 BP PLC Indiana Whiting 405,0008 Chevron Corp Mississippi Pascagoula 370,0009 ExxonMobile Texas Beaumont 348,500

10 Sunoco / ETP Pennsylvania Philadelphia 335,000

Top 10 List: Petroleum Refining States

Rank State Operating Crude Oil Distillation Capacity (1000/day)

# of Operating Refineries

1 Texas 4,241 24

2 Louisiana 2,534 16

3 California 2,005 20

4 Illinois 904 4

5 Pennsylvania 770 5

6 New Jersey 655 6

7 Washington 624 5

8 Ohio 511 4

9 Oklahoma 487 5

10 Indiana 433 2

Did You Know…

…U.S. oil demand in 2013 was 18.5 million barrels per day?

…every day the US consumes enough oil to cover a football field with a column of oil 2500 feet tall? That's 121 million cubic feet.

… the current U.S. refining capacity is 16.1 Million BPD

The Largest U.S. Refiners Are…

Company Name (2013 Fortune 500) Rank Revenues ($b) Profits ($mm)

Exxon Mobil 2 449.9 44,880

Chevron 3 233.9 26,179

Phillips 66 4 169.6 4,124

Valero Energy 9 138.3 2,083

Marathon Petroleum 33 76.8 3,389

Hess 75 38.4 2,025

Tesoro 95 32.5 743

Murphy Oil 104 28.8 971

PBF Energy 142 20.1 2

HollyFrontier 143 20.1 1,727

Western Refining 283 9.5 399

What to Know About Gas Prices

As this year’s driving season begins, gas prices this week reached a nationwide average of $3.17 per gallon, four cents per gallon higher than the previous record set last year.

The media stories are increasing, and as friends and family start to ask about gas prices, it’s important to understand the facts about what goes into the price at the pump:

Crude price drives the price of gasoline

Gasoline is a global product

Taxes take a toll

Consumers are in control

Refining Take Aways – Remember these…

Refined products are designed with specific properties based on engine requirements.

Refineries convert crude oil into finished products.

Distillation separates hydrocarbons into fractions using different boiling temperatures.

Quality improvement operations increase gasoline octane and remove sulfur impurities.

Conversion operations break larger hydrocarbons (fuel oil) into smaller ones (gasoline).

Refineries are built using combinations of different processing units.