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Baker & O’Brien, Inc. All rights reserved.
Turmoil in RefiningThe “Shakeout” Continues
OPIS National Supply SummitLas Vegas, NevadaOctober 22‐24, 2012
John B. O’BrienExecutive Chairman
1
Conclusions from 2010 OPIS Presentation
• World oil demand growth will be largely in non‐OECD countries as OECD economic growth remains moderate and oil intensity declines.
• Many large, new, high‐conversion refineries East of Suez are targeting exports. Combined with tepid OECD demand, additional refinery shutdowns in Europe and the U.S. are likely.
• Traditional OECD domestic and import suppliers will fight to maintain historical product market shares vs. new non‐OECD exporters.
• Cost competitiveness of new product imports into the Atlantic Basin will be influenced by light‐heavy crude oil spreads. Even with moderate spreads, some European and U.S. conversion refineries may be at risk.
2
• World Oil Demand and Supply
• North American Oil and Gas – A Game Changer
• U.S. Refiners – The “Haves” and the “Have Nots”
• An Increasing Wave of U.S. Product Exports
• European Refining – The Struggle Continues
• Conclusions
Turmoil in Refining
3
OECD vs. Non‐OECD
NOTE: IEA Regions
OECD Non‐OECD
4
• Relatively Slow Growth Continues in Western Hemisphere
• Recession in Most of Europe
• Slowdown in Asia
World Oil Demand (near forecast-to 2015)
5
World Liquids Total Demand (2010‐2020)
SOURCES: IEA and EIA estimates; Baker & O’Brien analysis.
OECD moves down from 55% of demand to 45% in 2020.
6
World Liquids Incremental Demand (2010‐2020)World liquids demand grows by 8 million B/D by 2020 (0.9%/year).
Millions of Barrels per Day
Annual Growth Rate
2010 Demand 87.40
OECD ‐3.00 ‐0.7%
Non‐OECD Growth
China 4.00 3.5%
India 1.75 4.3%
Middle East 2.00 2.3%
Other 3.25 1.5%
2020 Demand 95.40 0.9%
2020 Net Growth in Demand 8.00
SOURCES: IEA and EIA estimates; Baker & O’Brien analysis.
7
Sources of World Total Liquids Supply
Biofuels
Crude Oil
NGLs
Other
SOURCES: IEA estimates; Baker & O’Brien analysis.
Three MMB/D of the new supply will come from NGLs and biofuels.
8
Demand Increase 8,000
LessNon‐Refined NGLs (1,000)
Biofuels (2,000)
Net Crude Oil Required 5,000
LessNew Crude Oil Runs by Chinese Refiners (4,000)
Net Incremental Crude Runs Required exc.‐China 1,000
Only net 5 MMB/D incremental crude runs will be needed to balance product demand in 2020.
SOURCE: Baker & O’Brien analysis.
2020 World Liquids Supply/Demand BalanceThousands of Barrels per Day
China’s stated intention is that new domestic refining capacity will satisfy its incremental 4 MMB/D demand.
Thus, only about 1 MMB/D of new crude runs may be needed to meet world demand in 2020 vs. 2010. Existing refineries could supply!
New refining capacity in East of Suez will create a refining surplus — the extent of which will depend largely on China’s ability to build new refineries.
Do not require refining.
9
• U.S. Oil Production Growing for First Time in Decades
• Condensates and NGLs Increasing
• Additional Heavy Crude from Canada
• Abundant Shale Gas Production
• U.S. Refiners Should Enjoy Long‐Term Crude Oil and Natural Gas Price Advantages
North American Oil and Gas – A Game Changer
10
• After peaking at 9 MMB/D in mid‐80s, and declining to 5 MMB/D in 2008, production will increase for fourth consecutive year – to ~6.2 MMB/D in 2012.
• Growth in Texas and North Dakota more than offsets declines in Alaska and California.
U.S. Oil Production Growing for First Time in Decades
SOURCES: U.S. DOE/EIA; Baker & O’Brien analysis.
11
• U.S. production could approach 7.5 MMB/D in 2015 and 8.5 MMB/D by 2020.• Light, sweet grades from shale plays will drive quality of the incremental barrel;
sour grades predominantly from the GOM and the Permian Basin.
Outlook for U.S. Crude Oil Production
SOURCES: Various company reports, third‐party projections, Baker & O’Brien analysis.
12
• Diluted bitumen blends (primarily “DilBit”) expected to account for most of the incremental supply from Canada.
Growing Imports from Canada Expected to Continue
SOURCE: Canadian Association of Petroleum Producers; Canadian Crude Oil Forecast and Market Outlook, June 2012.
13
Price‐Advantaged Refinery Envelope is Growing With U.S. Domestic Sweet Production Growth
• Some Rocky Mountain refineries have enjoyed price advantage since before 2008.• Immediate area around Bakken has benefited since 2009.• Larger number of PADD 2 refineries benefited as “takeaway” capacity limited in 2011.• Growth in Eagle Ford, Permian, and the GOM production will extend advantages to the USGC
refineries.
Before 2008
2009+
Jan 2011
2012 Expected 2013
LegendRefinery
Price‐advantage crude oil envelope
14
LLS/Brent Differential is Key Signal of U.S. Crude Oil Balance
• LLS has historically traded at about 2‐3 $/Bbl. above Brent.• As these imports are increasingly displaced by new domestic production, this long‐
standing relationship will narrow.
Dated Brent, Sullom Voe
LLS Spot, St. James
15
LLS/Brent Price Differential Narrowing
• Initial signs of “breakdown” during summer of 2011.• Expect LLS to trade near zero price parity with Brent in near to medium term.
16
Low Cost Natural Gas Adds to U.S. Competitive Advantage
U.S. EuropeNatural Gas Price, $/MMBtu 2.50
(Henry Hub)9.22
(UK NBP)
Hydrogen Cost, $/MScf 1.93 7.13
Hydrogen usage, Scf/Bbl. ULSD 400 400
Hydrogen cost, $/Bbl. ULSD 0.77 2.85
U.S. Cost Advantage, $/Bbl. ULSD 2.08
Illustration of U.S. and Europe ULSD Cost Differences due to Natural Gas Price
17
• An Advantage for Inland Refiners
• Competition from the Middle East and Asia
• East Coast Products Supply – “Dodging a Bullet”
• Gasolines vs. Distillates – A Realignment
U.S. Refiners – The “Haves” and The “Have Nots”
18
Inland refiners have benefited enormously from cost‐advantaged crude oils due to transportation bottlenecks at Cushing and other northern locations.
A Cost Advantage for Inland Refiners
SOURCES: U.S. EIA, Platts.
19
Inland refinery cash margins in PADDs 2 and 4 are at historic levels —well above those of their coastal peer groups.
This Advantage has Translated into Historic Margins
SOURCE: PRISM is a trademark of Baker & O'Brien. Inc. All rights reserved.
The “Haves”
The“Have Nots”
20
Foreign CompetitionWorldwide Refinery Capacity Additions
• Almost 6 MMB/D new capacity will be added in 2012‐2016.• Most is focused in Asia‐Pacific & the Middle East – much is government‐owned.• Approx. 560 MB/D of new North American capacity (U.S. and Mexico).
SOURCE: Baker & O’Brien estimates.
21
Can the New Foreign Refineries Compete in the U.S.?
• Most of the new Asian and Middle East refineries are large, complex, heavy crude oil facilities; therefore:– When light‐heavy crude oil differentials are narrow‐‐usually the case
when demand is stagnant and crude oil is plentiful‐‐the new foreign refiners will have difficulty competing in the U.S.
– Instead, after they have saturated the Asian market, they will try to “push” product into the next largest (and closest) market—Europe.
– If light‐heavy crude oil differentials widen‐‐which will only happen if the world oil demand increases and/or a supply disruption occurs in the Middle East, then the new foreign facilities can be more competitive in the U.S. Typically, the light‐heavy differential needs to exceed $7.00/Bbl. for this to happen.
22
Why Foreign Refiners Have Difficulty Competing Today
• East Coast sweet crude cracking refineries are competitive today.• 2nd Quarter 2012: Narrow light‐heavy differential (approx. $3.70/Bbl.).1
Product Transport
Variable Operating Costs
Fixed Operating Costs
Crude Oil Transport
Crude Oil Less Product Credits
SOURCE: Baker & O’Brien estimates using PRISMTM . NOTE: Scale from 70‐130 (increments of 10).
1 LLS minus Arab Heavy
23
• A Reshuffling of Refining‒ Five of eight fuels refineries shut down since 2009—but two restarted (Trainer
and Delaware City) with new owners . Only one refinery had a single owner throughout this period (Linden).
‒ Infrastructure projects implemented or announced for over 500 MB/D of domestic crude oil rail unloading capacity to serve East Coast.
• Expansion and Extension of Import/Transfer Infrastructure‒ Colonial Pipeline expanding capability to transfer light products from PADD 3.‒ Sunoco Logistics pursuing project to transfer light products from PADD 2.‒ Investments in former Yorktown and Westville refinery sites will provide new
import facilities for waterborne barrels into the Northeast pipeline system.‒ Buckeye’s acquisition of the Perth Amboy terminal links BORCO with their
Northeast products system.
East Coast Products Supply – “Dodging a Bullet”
24
• Distillate demand increasing at expense of gasoline.• Distillate prices expected to generally exceed gasoline prices.• This realignment favors refineries oriented towards distillate production.
Gasoline vs. Distillate – A Fundamental Realignment
SOURCE: U.S. EIA, 2012 Annual Energy Outlook. SOURCE: PRISMTM.
25
• The Growth in U.S. Product Exports
• The Export Engine – PADD 3
• Product Export Destinations
• Distillates (ULSD) Offer Most Promise
• Potential Realignment of Atlantic Trade Due to U.S. Refiners’ New Competitiveness
An Increasing Wave of U.S. Product Exports
26
U.S. Refined Product Exports Show Steady Growth
SOURCE: U.S. EIA.
12‐Month Rolling Average
10%
1%
28%
49%26%13%
Annual Growth Rate (AGR) Since Jan. 2010
27
U.S. Gasoline and Distillate Exports
SOURCE: U.S. EIA.
40%
18%
56%
‐4%
AGR SinceJan. 2010
28
PADD 3 – The Export Engine
SOURCE: U.S. EIA.
80% of total
29
Mexico/Latin America are Top Export Destinations
SOURCE: U.S. EIA.
30
Gasoline Exports
• Mexico takes 60% of the gasoline.• But future gasoline exports to Mexico are limited:
– Mexico gasoline demand is relatively flat.– New domestic refinery production.– Limited European imports to displace.
• Exports to Brazil will decline as ethanol supply and demand gets back into balance.
• Some Hovensa volumes can be replaced.• Limited growth elsewhere.
31
Rising ULSD Exports to Latin America
SOURCE: U.S. EIA.
32
ULSD Exports
• Europe still a strong distillate market with high prices.• PADD 3 ULSD spot prices averaged 4‐5 cents per gallon below Europe over last two years.
• Latin American ULSD demand is expected to exceed the region’s production—more countries moving to ULSD.
• PADD 3 is well positioned logistically for supply of any incremental Western Hemisphere ULSD demand.
• Low cost hydrogen provides U.S. refiners with an additional competitive advantage.
• ULSD exports likely to grow in the 20%‐30% range annually through 2013‐2014.
33
Potential Realignment of Atlantic Trade
• Flat U.S. domestic demand, plus recent refinery expansions make export barrels more attractive.
• Low cost shale oils, plus more heavy Canadian supplies improve competitiveness of PADD 3 exports.
• U.S. refiners have potential to displace refined products in Atlantic trade previously supplied by Europe and the Middle East.– U.S. advantage over Europe is over $2.00/Bbl. of ULSD for hydrogen costs alone.
– U.S. refiners almost on equal energy cost footing with Middle East exporters.
34
• Weak business environment reduces demand.
• Cracking plants just above breakeven long‐term.
• Hydroskimming is not profitable.
• U.S. East Coast gasoline shortfall not likely to be sufficient to encourage higher European crude runs.
• More direct competition from Middle East and Asia.
• Result: more potential refinery closures.
European Refining – The Struggle Continues
35
European Demand Decline Continues
• Since 2006, light product demand has declined at the rate of 1.8%/year.
• Gasoline demand has declined at the rate of 3.9%/year—diesel only marginally.
• These trends likely to continue until a solution to the European financial crisis restores higher GDP growth.
SOURCE: Joint Organisations Data Initiative (JODI).
36
European Supply/Demand Mismatch
• European taxes favoring diesel over gasoline have created a product mix necessitating gasoline/naphtha exports and distillate imports.
• But most large gasoline markets are already well supplied‐‐and European refineries are the least competitive.
• Distillate is in short supply in many developing markets, making for expensive imports.
European Light Products (2011)
SOURCE: Joint Organisations Data Initiative (JODI).
37
• Competitively disadvantaged compared to the U.S., the Middle East, and Indian export refineries.‒ High crude oil and natural gas supply costs.
‒ Lower vacuum gas oil and resid upgrading capability.
‒ Upcoming EU carbon emission rules.
‒ Poor economies of scale.
‒ Higher maintenance and operating costs.
• Target market for new, complex export refineries.
• Result: expect more refinery shutdowns.
Problems Continue for Euro Zone Refiners
38
Conclusions
• Surplus worldwide refining capacity through 2020.
• New North American production will give U.S. refiners long‐term competitive advantage.
• Inland refiners (and with focus on distillates) better positioned than coastal facilities.
• Gulf Coast refiners should benefit from export markets in Latin America and West Africa.
• European refiners continue under pressure from both U.S. and new East of Suez facilities.
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