Roger Diwan Managing Director, IHS Energy Insight

Presentation at CSIS

February 2014

Roger Diwan

Managing Director, IHS Energy Insight

US Crude Production and Exports | © PFC Energy | | January 2014

U.S. Light Crudes: How Long Can Refiners

Absorb the Shale Oil Tsunami


The Supply Light Surge and a Static Crude Slate

U.S. crude production grew close to 1 million b/d in 2013, and ~830 mb/d in 2012. Since

early 2011, U.S. production grew from around 5.5 mmb/d to some 8 mmb/d currently.

The qualitative makeup of U.S. production has changed, with light crude production

increasing by 3 mmb/d from 2008 to 2013 (share of U.S. production from 50% to +70%)

2,956

5,523

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

mb/d

US Crude Oil Production by Quality

Light Medium Heavy

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

mb/dUS Crude Oil Production

PADD 5 PADD 4 PADD 3 PADD 2 PADD 1


Import Changes: Light Imports Hit the Hardest Infrastructure constraints buffer the decline…for now

• Domestic crude now accounts for over half of total U.S. inputs.

• PADDs 2 and 3 have already displaced almost all their light non-Canadian imports.

• PADDs 1 and 5 have faced infrastructure constraints and have been slower to receive domestic crude. This should be alleviated in 1H2014.

40%

45%

50%

55%

60%

65%

70%

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

2011 2012 2013 2014

mmb/d Reliance on Imported Crude Steadily Decreasing

Net Imports

US Production

% Demand Covered by Imports (R axis)

-500

0

500

1000

1500

2000

mb/d Quarterly Average Light Sweet Crude Imports

PADD 3 Total Remainder PADD 1

Forecast


U.S. Imports Composition Changing, Not Refining Input

26.0

27.0

28.0

29.0

30.0

31.0

32.0

1.20 1.70 2.20

API

Sulfur

US Import Characteristics

2010

2011

2012

2013

29.0

29.5

30.0

30.5

31.0

31.5

32.0

1.2 1.3 1.4 1.5 1.6 1.7

API

Sulfur

US Input Characteristics

2010

2011

2012

2013

29.0

29.5

30.0

30.5

31.0

31.5

32.0

1.4 1.5 1.6 1.7 1.8 1.9

API

Sulfur

PADD 3 Input Characteristics

2010

2011

2012

2013

24.0

25.0

26.0

27.0

28.0

29.0

30.0

1.40 1.90 2.40

API

Sulfur

PADD 3 Import Characteristics

2010

2011

2012

2013


Outlook for U.S. Light Balances

When Will the Levee Break?


Where Is Light Absorption Capacity Still Available?Limited “Relief Valves”

1

2

3

4

Complete Import Substitution in PADDs 1 & 5

Refining Capacity Additions

Exports to Canada

Lightening of Slates or Blending


PADD 1: A Relief Valve at Work

Light, sweet imports to PADD 1 continue to decline. They averaged 375 mb/d in 3Q-13 versus an average 168 mb/d in October and November

PADD 1 reliance on imported crude oil fell to 53% in November (from virtually 100% in 2010)

30.5

31.5

32.5

33.5

34.5

35.5

0.45 0.65 0.85 1.05 1.25

API

Sulfur

PADD 1 Import Characteristics

2010

2011

2012

2013

0100200300400500600700800900

1,000

mb/dBakken Crude Transport by Type

Rail Truck to Canada Tesoro Refinery Pipeline Export

Nov

0

200

400

600

800

1000

1200

mb/d PADD 1 Imports

Light Sweet & Sour Medium Sweet & Sour Heavy Sweet & Sour


0

100

200

300

400

500

600

Oc

t-1

3

No

v-1

3

Dec-1

3

Ja

n-1

4

Fe

b-1

4

Ma

r-1

4

Ap

r-1

4

Ma

y-1

4

Ju

n-1

4

Ju

l-14

Au

g-1

4

Se

p-1

4

Oc

t-1

4

No

v-1

4

De

c-1

4

Ja

n-1

5

Fe

b-1

5

Ma

r-1

5

Ap

r-1

5

Ma

y-1

5

Ju

n-1

5

Ju

l-1

5

Au

g-1

5

Se

p-1

5

Oc

t-1

5

No

v-1

5

De

c-1

5

mb/d Waterborne Light Imports by PADD

PADD 5

PADD 3

PADD 1

U.S. Light Imports Likely Fully Backed Out by 4Q14

Import picture using crude processing + import substitution +

grassroots light crude processing investment

Total US light crude imports effectively minimized by 3Q14

Minimal imports into PADD 3 and Hawaii continue after 1Q15


Refining Capacity Additions: Too Little Too Late

Projects coming online mostly in PADDs 2 & 3, no game-changers

there with most coming towards end-2015

Type Location Region Owner Capacity In-Service

Condensate Splitter Pasadena, TX PADD 3 BP/Kinder Morgan 50 1Q14

Condensate Splitter Pasadena, TX PADD 3 BP/Kinder Morgan 50 1Q15

Crude Unit Dickinson, ND PADD 2 Calumet 20 1Q15

Condensate Splitter Canton, OH PADD 2 Marathon 15 1Q15

Crude Unit Woods Cross, UT PADD 4 HollyFrontier 14 1Q15

Crude Unit McKee, TX PADD 3 Valero 15 2Q15

Condensate Splitter Catlettsburg, KY PADD 2 Marathon 20 3Q15

Crude Unit Makoti, ND PADD 2 Three Affiliated Tribes 20 4Q15

Crude Unit Houston, TX PADD 3 Valero 90 4Q15

Crude Unit Corpus Christi, TX PADD 3 Valero 70 4Q15

Crude Unit El Paso, TX PADD 3 HollyFrontier 25 4Q15

2015


Exports to Canada: Already Well Under WayUS crude nearly half of Atlantic Canada’s light import in November

426

209

28

0

100

200

300

400

500

600

700

2012

mb/d

Atlantic Canada Imported Crude Slate

Heavy

Medium

Light

0

50

100

150

200

250

Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13

mb/dU.S. Crude Exports to Canada

-1

-1

0

1

1

2

2

Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14

Average of Eastern Canadian Crude Differentials to Brent

$/b

050

100150200250300350400450500mb/d US Exports to Canada

PADD 3 PADD 2


When Will The Levee Break?How much is too much?

*Baseline Forecast Assumptions: Light import substitution in PADDs 1,3 & 5, light processing capacity increases, 200 mb/d

exports to Canada (based on 4Q13 historical data)

Structural

Oversupply

0

200

400

600

800

1,000

1,200

Oct-

13

No

v-1

3

De

c-1

3

Ja

n-1

4

Fe

b-1

4

Ma

r-1

4

Ap

r-1

4

Ma

y-1

4

Ju

n-1

4

Ju

l-1

4

Au

g-1

4

Se

p-1

4

Oct-

14

No

v-1

4

De

c-1

4

Ja

n-1

5

Fe

b-1

5

Ma

r-1

5

Ap

r-1

5

Ma

y-1

5

Ju

n-1

5

Ju

l-1

5

Au

g-1

5

Se

p-1

5

Oct-

15

No

v-1

5

De

c-1

5

mb/d Monthly US Light Crude “Oversupply” Based on Baseline Relief Valve Assumptions*

PADD 3 Onshore

Bakken & Other PADD 2

Remaining

Canada Light

Substitution

Capacity


Could All Surplus Crude Be Absorbed Domestically?

Implications of “Oversupply”

It would likely be challenging for US refiners to absorb the projected light crude growth at present

Assuming PADD 3 refiners swapped imported medium crude for light domestic blends, the average

API of the industry’s slate would exceed 33 degrees by end-2015

30.0

30.5

31.0

31.5

32.0

32.5

33.0

33.5

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

mb/dPADD 3 Crude Slate Assuming Full

Absorption

Heavy RunsMedium RunsLight RunsPADD 3 Slate Avg. API

Degrees API

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

mb/d How Light is Too Light ?

Waterborne Medium Imports

Waterborne Light Imports

PADD 3 Light Processing (Imports + Domestic)


Displacing Medium Imports: Easier Said Than Done

A number of US refineries have been optimized to run medium crudes, most of them originating in

the Middle East

As long as these crudes are available on competitive, refiners will keep them, reducing

incentives to invest to change their crude diets

0

200

400

600

800

1000

1200

Ja

n-1

0

Ma

r-1

0

Ma

y-1

0

Ju

l-1

0

Se

p-1

0

No

v-1

0

Ja

n-1

1

Ma

r-1

1

Ma

y-1

1

Ju

l-1

1

Sep-1

1

No

v-1

1

Ja

n-1

2

Ma

r-1

2

Ma

y-1

2

Jul-12

Se

p-1

2

No

v-1

2

Ja

n-1

3

Ma

r-1

3

May-1

3

Ju

l-1

3

Se

p-1

3

No

v-1

3

mb/dPADD 3 Saudi Imports

Saudi MotivaImports

PADD 3 SaudiMedium Imports


-30

-25

-20

-15

-10

-5

0

5

10

$/b US Crude Spreads to Brent

LLS Thunderhorse Mars WTI

Implications of OversupplyWhat does it mean for prices?

The ease with which U.S. refiners can absorb the “surplus” will eventually determine the magnitude of

the price discount witnessed across domestic light grades.

This “near-saturation” environment implies that domestic crude pricing will become increasingly

correlated to stock builds and seasonality of refining throughputs in US VS global trends

High ThroughputMaintenance MaintenanceHigh Throughput


Impact of Prices on US ProductionAttractive Economics in the Bakken and Eagle Ford Likely to Prop Up Production

$-

$25

$50

$75

$100

$125

$150 Dollars per Barrel

Breakeven Prices by Play Quintile (PV-10)

Majority of US Production Growth Marginal Production Plays


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Roger Diwan Managing Director, IHS Energy Insight

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