The North American Crude Boom: How Changing Quality Will Impact Refiners

John R. Auers

Turner, Mason & Company

EPRINC Embassy Series May 22, 2013

Norwegian Embassy Washington, D.C.

Presented by

! International consulting practice since 1971

! Downstream focus; refinery/chemical engineers

! Industry and financial clients

! Publish various outlook and forecast products !  Crude and Refined Products Outlook !  Refinery Construction Outlook !  World Crude Oil Outlook !  Special Studies

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Turner, Mason & Company

! Detailed regional production forecasts – focus on changing quality of crude

! Evaluation of refinery capabilities on a plant by plant basis

! Analysis of required logistics

! Evaluate challenges and opportunities for producers and refiners and midstream operators

!  Initial publication – June 2012

! Update issued in October 2012

! Next edition scheduled for release in June 2013

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2013 NACCO Production Forecasts

! North American crude oil production forecasts • Annual forecasts from 2013 through 2022 • High and low production cases for US

• Low Case – 9.5 MMBPD by 2022 • High Case – 12.0 MMBPD by 2022

• Canadian production forecast – 5.5 MMBPD by 2022

! Forecast assumptions •  Absolute crude prices (Brent) remain in $80 to $120 range •  Assumes some limitations (manpower, materials, regulatory, etc.) •  Limited production from some high potential prospects •  High case would require significant crude exports

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U.S. Production Forecast

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10"

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12"

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Million"BPD"

Low" High"

Gravity °API

Sulfur Wt.%

Condensate ≥ 55.0 All

Super Light ≥ 42.0 All

Light Sweet 31.0 – 42.0 ≤ 0.99

Light Sour 31.0 – 42.0 ≥1.00

Medium 24.0 – 31.0 All

Heavy ≤ 24.0 All

TM&C Crude Quality Categories

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Change in Crude Production by Grade 2012 to 2022"

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41000"

0"

1000"

2000"

3000"

4000"

5000"

6000"

7000"

Condensate/"Light"

Sweet"

Light"Sour" Medium" Heavy"

MBPD"

US"Low" US"High" Canada"

0.2"

0.4"

0.6"

0.8"

1.0"

1.2"

1.4"

31"

32"

33"

34"

35"

36"

37"

2000" 2002" 2004" 2006" 2008" 2010" 2012" 2014" 2016" 2018" 2020"

Sulfur,"wt."%

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API"Gravity"

API"Gravity" Sulfur,"wt."%"

Quality of U.S. Crude Oil Production

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Low"Cases"

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Region"

Cat"

Cracking"

Capacity"

Hydro4

cracking"

Capacity"

Coking"

Capacity"

Total"

Upgrade"

"Capacity"

U.S."7"1981" 28%" 5%" 8%" 41%"

U.S."–"2012" 34%" 10%" 15%" 59%"

Asia" 14%" 5%" 3%" 22%"

Europe" 12%" 6%" 2%" 20%"

World" 17%" 6%" 5%" 28%"

Upgrading"ability"is"total"conversion"capacity"as"percentage"of"distillation"capacity" 9"

PADD II Heavy Crude Projects:

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Refinery

Year

Crude Demand Impact

MBPD

Light Heavy

COP/Cenovus Wood River End of 2011 -95 +130

Marathon Detroit End of 2012 -65 +80

BP Whiting Mid to Late 2013

-170 +205

NCRA/McPherson 2015 -15 +30

BP/Husky Toledo 2018 -45 +60

Total -390 +505

!  API gravity/sulfur not especially meaningful to refiners •  Easy to measure and categorize

•  More valuable as commercial parameter

!  Distillation yields most important •  Determine how much finished product can be made

•  Determine how much can be processed based on unit capacity limits

!  Finished product blending qualities/feedstock properties •  Impact finish product make/operating yields at downstream units

•  Seasonality can be important

!  Properties impacting processing •  TAN, salt, chlorides, impurities, BS&W, others

!  Others •  Consistency, etc. 11"

Component Property Purpose

Light Straight Run RON RVP

Gasoline Blending

Heavy Naphtha N+A Reformer Feed

Kerosene Sulfur Freeze

Smoke Pt. Jet Fuel Blending

Diesel

Sulfur API Gravity

Cetane Cloud Pt.

Diesel Blending

Gas Oil

Sulfur API Gravity

K Factor/Aniline Pt. Nitrogen Metals

FCCU or Hydrocracker Feed

Resid

API Gravity Sulfur

Concarbon Metals

Viscosity Penetration

Asphaltene Content

Coker Feed, Fuel Oil Blending,

Asphalt Blending, Resid Cracker Feed

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Shale Crude vs Displaced Light Imports

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Property

Bakken

Eagle Ford

Soyo

Bonny Light

API Gravity 41 45 39 34 Sulfur, wt% 0.20 0.20 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 3.5 0.1 TAN, mg KOH/gm 1.15 1.50 0.35 Distillation Yield, volume % Lt. Ends, C1-C4 2.7 4.9 2.2

Naphtha 14.0 14.9 0.9

Middle Distillates 21.7 17.8 -3.9

Gas Oil 33.7 31.2 -2.5

Vacuum Residue 27.8 31.1 3.3

Canadian Heavy vs. Latin Heavies

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Property

Canadian

Heavy (Current)

Canadian

Heavy (2020)

Mexican

Maya

Venez. Merey

API Gravity 20.3 20.3 20.5 16.0 Sulfur, wt% 3.4 3.5 3.7 2.5 TAN, mg KOH/gm 1.15 1.50 0.20 0.70 Distillation Yield, volume % Lt. Ends, C1-C4 2.7 4.9 0.9 0.1 Naphtha 14.0 14.9 16.0 7.1 Middle Distillates 21.7 17.8 23.1 24.1 Gas Oil 33.7 31.2 27.0 34.2 Vacuum Residue 27.8 31.1 33.0 34.5

!  Heavy crude imports from Latin America to USGC •  Estimate floor of about 1 MMBPD

•  PDVSA and PEMEX control about 600 MBPD of heavy capacity

•  Additional heavy capacity is either contractually “locked-in” or logistics for Canadian crude is difficult

•  Overall Latin American heavy production will grow/natural home is USGC

!  West coast imports •  California refineries also designed for heavier crudes; locally produced heavy is declining

•  Requires new mid-stream projects to access PADD II/III/IV crude

•  LCFS will limit heavy Canadian imports

•  Production from high potential Monterrey Shale is a “wild card”

!  Other structural imports •  Crude to other refineries controlled by foreign producers – Motiva (Aramco) and PRS (Petrobras)

•  Imports for specific quality requirements – lubes/asphalt, etc.

•  Hawaii 16"

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!  “Dumbbelling” of Crude Slate !  Higher LPG and naphtha yields !  Lower middle distillate yields !  Resid yields up in Canadian heavy crudes; still generally lower than in Latin heavy

!  Implications !  Higher LPG 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 !  Will lead to increasing exports of LPG’s/gasoline; decreasing ability to export diesel

!  Remedies !  Construction of hydrocracking units – very capital intensive !  Development of LPG and gasoline export markets !  Export of particularly problematic crudes – export limitations; condensate splitting !  Incentivize high distillate yielding GTL projects

!  Influx of light/super light crude could reduce capacity !  Loss could be 10%+ at refineries designed for heavier crudes !  Units impacted include crude units, gas plants, debutanizers, naphtha units, others !  Displacement of higher sulfur crude will impact sulfur units !  We do expect economic incentives will result in necessary investment being made !  Solutions will be refinery specific; could require new crude units, preflash towers,

expansion of naphtha HDS, etc.

!  Other concerns !  Higher TAN from Canadian dilbits will require capital/treating costs; could limit volumes

at certain refineries

!  Potential compatibility issues associated with blending dissimilar crudes

!  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 18"

!  Eagle Ford !  Probably the most challenging for refiners; rapid growth/high volume of lights

!  Condensate (> 55 API) particularly difficult; contains over 60% naphtha or lighter

!  Refining value several dollars per barrel below LLS; condensate even less valuable

!  Bakken !  Very high level of reformer feed (30%) causes naphtha handling issues !  Does have decent distillate yield and blending properties !  Good resid cracker feed properties; fits well with East Coast refineries !  Refining value a bit higher than Brent and WTI, lower than LLS

!  Others !  Growing Permian production lighter; USGC getting access to unblended streams

!  Niobrara appears to have both heavier (<40 API) and condensate barrels

!  Utica likely to be similar to Eagle Ford; very light/significant condensate 19"

!  US refiners will enjoy crude cost advantage !  As light imports disappear, LLS flips to permanent discount vs. Brent this year !  Domestic light crudes priced to incentivize USGC refiners to replace imported medium crude barrels !  If exports continue to be restricted, discount grows when all possible imports are displaced

!  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 grows when Canadian crude arrives on USGC •  With KXL in doubt, ability to find alternate ways to get heavy to USGC could be critical

!  Profitable opportunities for light/heavy crude blending have developed

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Presenter

John R. Auers – Senior Vice President Turner, Mason & Company jauers@turnermason.com

Telephone: 214-754-0898

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