Baker & O’Brien, Inc. All rights reserved.

Argus Americas Crude Summit

January 28, 2015

Refining America’s Light Tight

Oil (LTO) Production

1

• The Growth of U.S. LTO Production

• The Industry’s Response to Date

• What Happens Next?

• Impact on Refined Products and Intermediates

• Other Considerations

Note: This presentation assumes that current restrictions on crude oil exports will continue for at least the next several years, and does not address the pros/cons or

impacts of lifting or keeping those restrictions.

Overview

2

0 20 40 60 80 100 120

Robert W. Baird Morgan Stanley US Investment Goldman Sachs Credit Suisse Average

Update

Bakken

Eagle Ford

Permian – Delaware

Permian - Wolfcamp

Marcellus/Utica

Uinta

Niobrara

Texas Panhandle

Mississippi Lime

$/B

Major Shale Plays

WTI Price, January 15,

2015

Marginal Production Economics of Major U.S. Shale Plays

Note: Some companies report estimates for subplays such as “Uinta-Green River”, “Uinta-Vertical”, and “Uinta-Horizontal”. For this analysis, those estimates have been grouped together in the major play.

3

US Crude Oil Production

Source: EIA and Baker & O’Brien Analysis

US Crude Oil Production MB/D

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Jan

-20

05

Jun

-20

05

No

v-2

00

5

Ap

r-2

00

6

Sep

-20

06

Feb

-20

07

Jul-

20

07

Dec

-20

07

May

-20

08

Oct

-20

08

Mar

-20

09

Au

g-2

00

9

Jan

-20

10

Jun

-20

10

No

v-2

010

Ap

r-2

01

1

Sep

-20

11

Feb

-20

12

Jul-

20

12

Dec

-20

12

May

-20

13

Oct

-20

13

Mar

-20

14

Au

g-2

01

4

Other PADD 5

Other PADD 3

Other PADD 2

PADD 1

CA

Alaska

CO/WY/UT

Louisiana

ND/SD/MT

TX/NM

GOM

4

The Industry’s Response

Displacement of Imports

Crude Oil Exports Begin Upward

Climb

Increased Crude Runs

Source: EIA

13,000

14,000

15,000

16,000

17,000

Jan 01, 2010 Jan 01, 2011 Jan 01, 2012 Jan 01, 2013 Jan 01, 2014

U.S

. C

rud

e R

un

s M

B/D

6,500

7,500

8,500

9,500

10,500

11,500

Jan 01, 2010 Jan 01, 2011 Jan 01, 2012 Jan 01, 2013 Jan 01, 2014

U.S

. C

rud

e Im

po

rts

MB

/D

0

100

200

300

400

500

Jan 01, 2010 Jan 01, 2011 Jan 01, 2012 Jan 01, 2013 Jan 01, 2014

U.S

. C

rud

e E

xpo

rts

MB

/D

5

The Industry’s Response (continued)

Expansions in Domestic

Refining Capacity

New Investments in Logistics

Infrastructure

Expansion of Product Exports

Source: EIA

0

500

1,000

1,500

2014 2015 2016 2017 2018

Cu

mu

lati

ve E

xpan

sio

ns,

M

B/D

Start-up Year

Firm Planned

Source: Baker & O’Brien Analysis

1,000

2,000

3,000

4,000

Jan 01, 2010 Jan 01, 2011 Jan 01, 2012 Jan 01, 2013 Jan 01, 2014

U.S

. P

rod

uct

Exp

ort

s M

B/D

6

How Much More LTO Was Expected?

Source: EIA. Incremental production is calculated using EIA‘s forecast for Lower 48 onshore crude oil production minus Q4 2013 actual production.

-

500

1,000

1,500

2,000

2,500

3,000

-

500

1,000

1,500

2,000

2,500

3,000

2014 2015 2016 2017 2018

MB

/D

U.S. LTO Production Increase Since Q4 2013

EIA Reference Case EIA Low Resource Case EIA High Resource Case

7

How Much More LTO Can We Now Expect?

Source: EIA. Incremental production is calculated using EIA‘s forecast for Lower 48 onshore crude oil production minus Q2 2014 actual production.

(500)

-

500

1,000

1,500

2,000

2,500

2015 2016 2017 2018 2019 2020

MB

/D

U.S. LTO Production Increase Since Q2 2014

AEO 2014 Reference Case AEO 2014 Low Case AEO 2014 High Case EIA STEO (Jan-15)

8

Displacement of U.S. Crude Oil Imports

Source: EIA

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

MB

/D

Lower 48 Waterborne Crude Oil Imports (January 2008 - September 2014)

Light Medium Heavy

>35 26-35 <26

9

Medium Crude Imports

Source: EIA

0

500

1,000

1,500

2,000

2,500

3,000

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

MB

/D

U.S. Waterborne Medium Crude Oil Imports - Top 5 Sources (January 2008 - September 2014)

KUWAIT

ANGOLA

NIGERIA

IRAQ

SAUDI ARABIA

10

• Expect some “capacity creep” in ability to run more LTO.

• Medium grades are likely to be backed out.

• West Coast LTO logistics bottlenecks are overcome.

• More stabilized condensates will be exported.

What Can the Industry do Next?

11

The Key LTO Processing Constraint: Light Ends Handling

• Refineries designed to process medium and/or heavy crude oils often cannot handle the naphtha and lighter material (<350°F) contained in LTO.

7% 8% 10% 20%

33% 37% 42% 16%

23% 24%

27%

31% 35%

37%

34%

34% 34%

30%

22% 18%

19%

44% 36% 33%

23% 14% 10%

3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Eagle Ford Bakken WTI Avg. MediumImport

Avg. HeavyImport

Railbit Rawbit

Crude Oil Distillation Yields

<350 F

350-650 F

650-1000 F

1000 F+

Vo

lum

e %

12

Typical LTO Handling Constraints

STILL GAS TO SATURATED GAS PLANT

Crude vaporization capacity

Saturated gas plant capacity

Light product cooling and hydraulics

Crude column diameter

Overhead hydraulics and cooling

Naphtha treating and processing

Preheat train configuration

Source: Petroleum Fractionation Overview, University of Oklahoma and Baker & O’Brien.

• Physical constraints to processing LTO vary by refinery but are generally centered around crude oil distillation and light ends handling.

* Note: “PA” = pumparound circuit

13

• Direct substitution of medium crude with LTO:

– Refiners would generally need to sacrifice some throughput in order to substitute light for medium without some additional investment.

Options for Replacing Medium Crude Oil with LTO

• LTO/heavy blends can substitute for some medium grade imports:

– Advantages: Enables refiners to maintain crude throughput and keep downstream units full.

– Challenges:

Blending exact substitute for medium grades

Asphaltene precipitation issues

Crude oil blending facilities

Availability of heavy crude oil

Possible high acid (TAN) constraints

14

Options for Replacing Medium Crude Oil with LTO

33%

8%

23% 20%

31%

22%

27% 27%

22%

34%

27% 30%

14%

36%

23% 23%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Avg HeavyImport

LTO 41% LTO, 59%Heavy

Avg MediumImport

Distillation Yields, vol %

<350 F

350-650 F

650-1000 F

1000 F+

Blend

15

• Case Study: A 100,000 Bbl/day refiner of imported medium crude oil, constrained by the volume of naphtha and lighter material that can be processed.

• As the proportion of LTO in a substitute LTO/Heavy blend increases above 40%, crude throughput declines and feedstock available for downstream conversion units declines.

• Unit turndown constraints become a factor when downstream feedstock (VGO and heavier) falls to <70% of downstream capacity, suggesting 65% maximum LTO in the blend

– Conversion units might be partially filled with atmospheric tower bottoms available from new condensate splitters

Case Study: Replacing Medium Crude with LTO/Heavy Blend

0

10

20

30

40

50

60

70

80

90

100

40% 50% 60% 70% 80% 90%

MB

/D

% LTO

Naphtha and Lighter

Distillates

VGO and Heavier

Constant Light Ends Constraint

Turndown Constraint

16

• Direct substitution of LTO for heavy crude imports obviously has turndown limitations. This turndown limit could be alleviated by blends of LTO and bitumen.

Alternative for Replacing Heavy Crude Oil with LTO

• Blends of LTO with Canadian “rawbit” or “railbit” (10-25% diluent) could substitute for some heavy crude imports:

– Advantages: Similar to that for displacement of medium grades

– Challenges:

Getting the right blend

Asphaltene precipitation

Crude blending facilities

Availability of rawbit and railbit

Possible high acid (TAN) constraints.

17

Alternative for Replacing Heavy Crude Oil with LTO

42%

8%

30% 33%

37%

21%

31% 31%

19%

34%

24% 22%

3%

36%

14% 14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Rawbit LTO 34% LTO,66% Rawbit

Avg HeavyImport

Distillation Yields, vol %

<350 F

350-650 F

650-1000 F

1000 F+

Blend

18

• U.S. production of refined product and intermediates will be influenced by a number of factors:

– LTO production volume and timing

– U.S. refinery capacity additions and timing

– Crude oil and condensate export volumes

– Availability of heavy crude oil and bitumen and logistics for bringing it to market

– LTO absorption mechanisms chosen by individual refiners

• Given these uncertainties, three scenarios for processing LTO were modeled.

How Will Refined Products and Intermediates be Impacted?

SCENARIO 1 2 3

LTO Production EIA

Reference EIA High Resource

EIA High Resource

+ 20%

% LTO in Blended Medium Crudes Base (41%) Base (41%) High (70%)

19

• In all LTO absorption scenarios, LPG, naphtha, and distillate production increase.

• Surplus virgin naphtha may be exported (similar to processed condensate).

• Distillate exports will increase in all scenarios.

Implications for Refined Products

0

100

200

300

400

500

600

700

2014 2015 2016 2017 2018

MB

/D

Naphtha and Lighter Production versus 2013

Scenario 1 Scenario 2 Scenario 3

0

100

200

300

400

500

600

700

2014 2015 2016 2017 2018

MB

/D

Distillate Production versus 2013

Scenario 1 Scenario 2 Scenario 3

20

• VGO and Resid production would grow with moderate LTO growth

– There are almost 400 MB/day of VGO imports, and over 450 MB/day of heavy fuel imports that have the potential to be displaced

• In the short term, VGO and vacuum resid (VR) production may decline until condensate splitters and crude unit expansions come online

How LTO Affects the Bottom of the Barrel

(100)

(50)

0

50

100

150

200

250

300

2014 2015 2016 2017 2018

MB

/D

AGO/VGO Production versus 2013 Scenario 1 Scenario 2 Scenario 3

(100)

(50)

0

50

100

150

200

250

300

2014 2015 2016 2017 2018

MB

/D

Vac Resid Production versus 2013 Scenario 1 Scenario 2 Scenario 3

21

The Case for Investment – Other Factors

Source: Baker & O’Brien Analysis

-10

0

10

20

30

40

50

Re

al 2

01

4 G

ross

Mar

gin

($

/B)

USGC Historical Refining Gross Margins (LLS Cracking Gross Margin, Maya Coking Gross Margin)

Real LLS Cracking Margin 12-Month Moving Average (Cracking) Real Maya Coking Margin 12-Month Moving Average (Coking)

22

The Case for Investment – Other Factors

Source: PRISM

Q3 2014 Refining Cash Margins by PADD $/B

23

0 20 40 60 80 100 120

Robert W. Baird Morgan Stanley US Investment Goldman Sachs Credit Suisse Average

The Case for Investment – Other Factors

Bakken

Eagle Ford

Permian – Delaware

Permian - Wolfcamp

Marcellus/Utica

Uinta

Niobrara

Texas Panhandle

Mississippi Lime

$/B

Major Shale Plays

WTI Price, January 15,

2015

Marginal Production Economics of Major U.S. Shale Plays

Note: Some companies report estimates for subplays such as “Uinta-Green River”, “Uinta-Vertical”, and “Uinta-Horizontal”. For this analysis, those estimates have been grouped together in the major play.

24

• Diesel:

– LDV diesel sales up ~40% from 2013

– Emissions match those of gasoline-powered vehicles

– Lags Europe – and likely to continue

• Diesel Uptake Lags Europe

– Availability

– Price

– Emissions Regulations

– Government Actions

The Case for Investment – Others Factors

25

The Case for Investment – Others Factors

-5

0

5

10

15

20

25

-2,500

0

2,500

5,000

7,500

10,000

12,500

Jan

-10

May

-10

Sep

-10

Jan

-11

May

-11

Sep

-11

Jan

-12

May

-12

Sep

-12

Jan

-13

May

-13

Sep

-13

Jan

-14

May

-14

Sep

-14

$/B

MB

/D

US Gasoline and Distillate Consumption vs Differential

ULSD - RUL US Gasoline Consumption US Distillate Consumption

-2,500

0

2,500

5,000

7,500

10,000

12,500

AEO 2014 Projected US Consumption of Gasoline and Distillate

US Gasoline Consumption US Distillate Consumption

26

The Case for Investment – Others Factors

0%

10%

20%

30%

40%

50%

60%

70%

USGC Average NWE Average New Middle East Refinery

Per

cen

t o

f C

rud

e C

har

ge

Conversion/Upgrading Units - USGC vs. NW Europe and Middle East

FCC

Hydrocracking

Coking

27

• US crude oil production has increased significantly since 2010 and is expected to continue to rise.

• Continued investigation of displacement of crude imports.

• Opportunistic capital options for overcoming light ends limitations.

• Light virgin products will increase.

• The case for investment will continue to evolve.

Summary

28

Baker & O’Brien – Independent Energy Consultants

www.bakerobrien.com

Dallas Headquarters

12001 N. Central Expressway Suite 1200

Dallas, TX 75243 Phone: 1-214-368-7626

Fax: 1-214-368-0190

Houston Office

1333 West Loop South Suite 1350

Houston, TX 77027 Phone: 1-832-358-1453

Fax: 1-832-358-1498

London Office

146 Fleet Street Suite 2

London EC4A 2BU Phone: 44-20-7373-0925