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0 Baker & O’Brien, Inc. All rights reserved.
Assessing the Impact of the Changing Crude Oil
Landscape in North America
Baker & O’Brien, Inc.
November 5, 2013
1
• Introduction
• U.S. and Canada Sulfur Production Trends and Overview
• Crude Oil / Refining Evaluation Framework
– U.S Refining Inputs of Sulfur
– U.S. Heavy Oil Conversion Activity (Coking)
– Fuel Regulatory Impacts
• Outlook
Discussion Topics
2
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electrical engineers
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– Experienced problem solvers
Introduction
3
-
10
20
30
40
50
60
70
80
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
• U.S. and Canada declines both driven by reduced sour gas processing
U.S. and Canada Sulfur Production Trending Down Amid Global Growth
U.S.
Rest of World
U.S., Canada, and Global Sulfur Production Trends, million tonnes/year
Sources: U.S. Geological Survey, (USGS), Natural Resources Canada, Baker & O’Brien analysis
Canada
Trends & Overview
4
• U.S. is net short sulfur; primary import sources are Canada (80+%) and Mexico (12%)
• Refineries account for 88% of produced supply; gas plants only account for 12%
U.S. Sulfur Balance Overview
`
`
` Gas Plants 1,040
Imports
2,930
Refineries
7,320
Exports 1,850
Consumption
9,490
U.S. Sulfur Balance – 2012 (000 tonnes)
Sources: USGS, Baker & O’Brien analysis
Su
pp
ly S
ou
rce
s
Dis
po
sit
ion
Recent Trends
Trends & Overview
5
• Sulfur from gas processing has trended lower with declining conventional production
• Refinery sulfur production has been generally flat
U.S. Sulfur Production Decline Driven by Gas Side of Equation
Source: USGS
-
2,000
4,000
6,000
8,000
10,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
U.S. Sulfur Production, 000 tonnes/year
Gas Processing
Refining
U.S. Sulfur Production, 000 tonnes per year
Trends & Overview
6
• Sour natural gas and oil sands upgrading are primary sources
• Sulfur production greatly exceeds domestic needs; excess sulfur is exported
Canada Sulfur Balance Overview
`
`
`
Gas Plants
2,900
Oil Sands
Upgraders /
Heavy Refineries
2,200
Refineries 460
Exports
4,650
Consumption
850
Canada Sulfur Balance – 2012 (000 tonnes)
Sources: Natural Resources Canada, Canadian Association of Petroleum Producers, PentaSul, Baker & O’Brien analysis
Su
pp
ly S
ou
rce
s
Dis
po
sit
ion
Recent Trends
Trends & Overview
7
-
1
2
3
4
5
6
7
8
9
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
• Sulfur produced from gas processing has declined by about 45%
• Sulfur from heavy oil upgrading has continued to grow
• Total Canada gas production has declined 17% in the past 5 years (2007-2012); Alberta gas production has declined 24% over the same period
Canada Sulfur Production Decline Driven By Declining Gas Production
Alberta
British Colombia
Canada Gas Production (Net), TCF
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Natural Gas
Upgrading
Refining All other
Canada Sulfur Production, 000 tonnes
Trends & Overview
Sources: Natural Resources Canada, CAPP, PentaSul, Baker & O’Brien analysis
8
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2011 2012 2015 2020
U.S. + Can Sulfur Production, 000 tonnes
Upgrading-Can
Gas Proc-Can
Refining-Can
Gas Proc-US
Refining-US
• U.S. refining accounts for over 50% of total production, followed by Canadian sour gas (20%) and oil sands upgraders (15%)
Putting it all Together: U.S. + Canada Sulfur Sources
U.S. and Canada Sulfur Production Summary, 000 tonnes
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2011 2012 2015 2020
U.S. + Can Sulfur Production, 000 tonnes
Upgrading-Can
Gas Proc-Can
Refining-Can
Gas Proc-US
Refining-US
Trends & Overview
Sources: Natural Resources Canada, CAPP, PentaSul, EIA, USGS, Baker & O’Brien analysis
9
• PADD 3 accounts for over 60% of total sulfur production, driven by refinery processing capacity and gas production sources
PADDs 3,4, 5 Are Dominant U.S. Sulfur Production Sources
Legend
Sulfur from natural gas processing, 000 tonnes
Sulfur from petroleum refining, 000 tonnes
PADDs 4 and 5
PADD 2 PADD 1
44
Sources: EIA, USGS, Baker & O’Brien analysis
U.S. Sulfur Production by PADD in Q1 2013, 000 tonnes
Trends & Overview
275 263
1,127 1,120
316306
117 109
167102
275 263
1,127 1,120
316306
117 109
167102
275 263
1,127 1,120
316306
117 109
167102
275 263
1,127 1,120
316306
117 109
167102PADD 3
4
3
10
Gasoline, diesel, heating oil, jet fuel account for less than 1%; jet fuel is about 60% of the total
Other large sulfur “sinks” include petcoke (20% of inputs) and asphalt (7%).
Two-thirds of sulfur input to U.S. refining system is recovered as elemental sulfur.
Inputs 000 tonnes % of Total Input
Crude Oil 10,856 98%
Feedstocks 246 2%
Total 11,102 100%
Outputs
Elemental Sulfur 7,320 66%
Petcoke 2,220 20%
Asphalt 794 7%
Other 372 3%
Residual Fuel Oils 322 3%
Light Refined Products 75 1%
Total 11,102 100%
U.S. Refining System Sulfur Balance
U.S. Refining System Sulfur Balance - 2012
Trends & Overview
Sources: PRISM refinery database system, Baker & O’Brien analysis
11
• Refinery sulfur production is a function of crude slate and configuration
• Large coking refineries produce sulfur volumes that are 1-2 orders of magnitude higher than simpler refineries
• For most refineries, recovered sulfur will likely be in the range of 60-70% of input sulfur, unless there are large yields of asphalt and residual fuel oil.
Refinery Sulfur Balances Dominated by Heavy Sour Coking Refineries
Large Heavy-Sour Coking
Refinery
Medium-Heavy Sour Asphalt
Refinery
Light-Sweet Cracking Refinery
Refinery A Refinery B Refinery C
Elemental Sulfur,
000 tonnes/year
327 21 4
Fraction of Total U.S. 4.5% 0.3% < 0.1%
Sulfur Disposition, % of input
Elemental Sulfur 64% 38% 70%
Petcoke, Asphalt, Fuel Oil 36% 62% 21%
Light Transportation Fuels 0.3% 0.6% 8.8%
Sources: PRISM refinery database system, Baker & O’Brien analysis
Trends & Overview
12
A. Total Inputs of Sulfur
– Refinery run rates
Global supply/demand
U.S. competitive advantage
– Crude slate sulfur levels
U.S. growth of light/sweet
Canadian oil sands growth
Heavy/Sour imports
B. Conversion of Bottom of Barrel
– Coker; refinery expansion projects
– Petcoke gasification
C. Sulfur Regulatory Activity
– EPA Tier 3 (gasoline)
– Northeast States Heating Oil
U.S. Refinery Sulfur Production: Evaluation Framework
A
B
C
Image courtesy of Marathon Petroleum Company presentation
Framework
13
United States
Alberta, Canada
Mexico
Venezuela
Brazil
Colombia
Bakken
Eagle Ford Permian
Ecuador
Crude Oil Dynamics in Americas Impacting the Sulfur Supply Equation
• Country crude oil production profiles will influence the sulfur production outlook, among other factors
– Growing: U.S., Canada, Colombia, Brazil
– Flat-to-Declining: Mexico, Venezuela, Ecuador
A. Inputs
Primary growth regions
Gulf of Mexico
14
-
5
10
15
20
25
2008 2009 2010 2011 2012
Crude Oil Production, MM BPD
Colombia
Brazil
Canada
United States
Ecuador
Venezuela
Mexico
Changes in the U.S. and Canada Most Impactful
United States
Canada
Brazil
Colombia
Mexico
Venezuela
Ecuador
Petroleum Production, MMB/D
Growing Regions
Flat or Declining Regions
Source: EIA
A. Inputs
15
• Generally flat crude slate sulfur content within range of 1.4-1.5 wt%
Sulfur Inputs to U.S. Refineries Rebounding to 2008 Levels
9,600
9,800
10,000
10,200
10,400
10,600
10,800
11,000
11,200
11,400
2000 2002 2004 2006 2008 2010 2012
Sulfur Input to U.S. Refineries, 000 tonnes
1.26
1.28
1.30
1.32
1.34
1.36
1.38
1.40
1.42
1.44
1.46
1.48
2000 2002 2004 2006 2008 2010 2012
U.S. Crude Slate Sulfur Content, wt%
13,800
14,000
14,200
14,400
14,600
14,800
15,000
15,200
15,400
15,600
2000 2002 2004 2006 2008 2010 2012
U.S. Refinery Crude Inputs, MB/D
• Generally flat crude oil charge rates around 15 million B/D
Lower
utilization due
to recession
Reduced
heavy, sour
crude runs
Compound effect
of run cuts and
crude quality
Sources: EIA, Baker & O’Brien analysis
6% decline
‘08 to ‘09
4% decline
‘08 to ‘09
2% decline
‘08 to ‘09
A. Inputs
16
• Overall U.S. sulfur content has been relatively flat and slightly increasing
• PADD 3 sulfur content has been declining, but PADDs 2, 4, and 5 have been increasing
PADD Crude Slate Sulfur Trends Have Been Mixed
-
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
U.S. PADD 1 PADD 2 PADD 3 PADD 4 PADD 5
Crude Slate Sulfur Content by PADD, wt%
2000 to 2013
Declining Alaskan
production
Alberta Oil sands effect
Declining Mexican, Venezuelan imports
Sources: EIA, Baker & O’Brien analysis
A. Inputs
17
• The top five crude oil source countries – Canada, U.S., Venezuela, Saudi Arabia, and Mexico – account for 85% of total sulfur inputs
• Future projections a “mixed” bag: increased imports of heavy, sour diluted bitumen from Canada, offset to some degree by low-sulfur tight oil production growth
Country Sources of Crude Oil Sulfur: Current and Future Expectations
Canada
USA
Venezuela
Saudi Arabia
Mexico
Iraq
Kuwait
Ecuador
Colombia
All Others
Canada
USA
Ecuador
• Increasing heavy, sour grades
Colombia
• Increasing sweet (Bakken, Eagle Ford, Permian)
• Increasing sour (GOM, Permian), but less so than sweet grades
• Flat to declining production
• Flat to declining imports; lighter grades displaced
• Flat to declining production
• Declining imports?
Iraq
Sources of Sulfur Inputs (Q1 2013) and Expected Trends
All Others
Sources: EIA, PRISM refinery database system, Baker & O’Brien analysis
A. Inputs
18
• After peaking in the mid-1980s at 9 MMB/D, and reaching a low of 5 MMB/D in 2008, total U.S. production projected to average 7.4 MMB/D in 2013.
U.S. Oil Production Growing for First Time in Decades
Source: EIA
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Cru
de
Oil
Pro
du
ctio
n, M
B/D
U.S. Crude Oil Production
All Other
Rocky Mountains
Kansas, Oklahoma
California
Alaska
N. Dakota
Gulf of Mexico
Texas
U.S. Crude Oil Production Trends
Texas
Gulf of Mexico
Alaska California
North Dakota
All other Rocky Mountains Kansas, Oklahoma
7.4 MMB/D projected this year (2013)
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
A. Inputs
19
• U.S. production may exceed 10 MMB/D early next decade before peak/plateau
• Combined with Canada, incremental growth of over 5 MMB/D expected vs. 2013
Outlook for U.S. and Canada Crude Oil Production
Sources: Canadian Association of Petroleum Producers, (CAPP), Baker & O’Brien analysis
Note: Canadian crude oil supply includes diluent which is imported for blending of DilBit (diluent/bitumen blend).
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
An
nu
al A
vera
ge, M
B/D
Crude Oil Production and Supply
U.S. Production Canada Supply (including diluent)
Actual Forecast
U.S. and Canada Supply Outlook
U.S.
Canada
A. Inputs
20
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Dec-12 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Dec-12 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Drastically Changing North American Crude Mix
Incremental Crude Oil Supply, MB/D
Changes vs. 2012 2015 2020
Light-Sweet Grades 96 133
Medium Grades (1,286) (1,930)
Heavy-Sour Grades 1,560 1,949
Difference 370 153
Projected Crude Oil Imports, MB/D
• Over the near term (to 2015), the U.S. will see more light-sweet grades and heavy-sour grades, displacing medium grades
• After 2015, light supplies grow further as heavy oil runs plateau
• Sulfur input into the U.S. refining system increases
Light Sweet
Heavy Sour
Heavy Sour
Light Sweet
Medium
Medium
Sulfur Input Changes, 000 tonnes/year
Source: Baker & O’Brien analysis
A. Inputs
21
Company-Location Investment Timing Notes
Flint Hills-Corpus Christi $250 MM 2015 Sat gas plant; new and modified tankage;
only modest increase to existing capacity
Valero-Corpus Christi $240 MM Late 2015 70 MB/D topping unit
Valero-Houston $290 MM Late 2015 90 MB/D topping unit
Valero-McKee Mid 2015 25 MB/D expansion
Valero-Meraux, Port
Arthur
Evaluating low-cost projects to unlock light
crude oil capacity
Lyondell-Houston Minor modifications during Q1 2013
turnaround to increase light crude capacity
Marathon – Texas City Will discuss modifications at investor day
meeting in December
Phillips 66-Lake Charles,
Sweeny
Making modifications to enable processing
of more advantaged crude oil
Refiners Shifting Gears to Process More Light-Sweet
• Flint Hills (Corpus Christi) and Valero (Corpus Christi, Houston) are early movers
A. Inputs
22
$-
$2
$4
$6
$8
$10
$12
$14
$16
$18
0
1
2
3
4
5
6
7
8
LL
S -
Maya,
$/B
Maya C
okin
g C
ash
Marg
in, $/B
LLS - Maya (LHS) Maya Coking Cash Margin (RHS)
Record Coking Margins and Anticipated Oil Sands Growth Drove Massive Investments in Delayed Cokers
• Over $30 billion has been invested in U.S. coker-related refinery expansions over the past 5-7 years
Sources: Platts, Baker & O’Brien Analysis
Historical Perspectives on Light-Heavy Spreads and Coking Margins
High margins triggered
“super-cycle” in
conversion and
expansion investments
B. Conversion
23
0
1,000
2,000
3,000
4,000
5,000
6,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Colombia
Brazil
Canada
Mexico
Venezuela
• Declining imports from Mexico, Venezuela have contributed to under-utilized cokers
• Growth in Canada, Colombia, and Brazil have helped to offset decline somewhat, but have not been enough to fill current and projected coking capacity
However, Limited Availability of Heavy Oil Has Resulted in Poor Coking Margins
U.S. Crude Oil Imports from Countries with Heavy Oil, MB/D
Venezuela
Mexico
Canada
Brazil Colombia
Source: EIA
B. Conversion
24
0%
10%
20%
30%
40%
50%
60%
70%
80%
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Sulf
ur
Re
cove
ry U
nit
Uti
lizat
ion
00
0 t
on
ne
s p
er
ann
um
Refiner Sulfur Capacity & Production
SRU Capacity (LHS)
Sulfur Produced (LHS)
Implied SRU Util (RHS)
• Deep conversion (coking) projects were developed in anticipation of increased heavy oil production in Canada and, generally, to increase competitiveness
• These projects required extensive increases to sulfur removal capacity
• However, sulfur production has been relatively flat and utilization of SRU capacity has trended lower
Refiners Anticipated Higher Sulfur Recovery Needs
U.S. Refinery Sulfur Capacity & Production
Sources: EIA, Baker & O’Brien analysis
Utilization
B. Conversion
25
• Sulfur production should increase by 300,000-400,000 tonnes/yr (4-5% of total U.S.) once design rates are achieved at Motiva Port Arthur and BP Whiting.
Sulfur Production to Grow Further After Last of Large Expansion Projects are in Operation
U.S. Refinery Sulfur Production, 000 tonnes/year (Top 65 refineries shown, accounting for 95% of total sulfur)
Recent coker project Planned coker project
WRB Wood River
Total Pt Arthur
MPC Detroit
BP Whiting – Q4 2013
Motiva Pt Arthur (ramping up to design rates)
MPC Garyville
Sources: PRISM refinery database system, Baker & O’Brien analysis
B. Conversion
26
• Asphalt and fuel oil production have declined while petcoke production (coking) is only slightly above levels from 8 years ago
• Availability of heavy crude oil has limited coker throughputs
Asphalt Production Has Declined Due to Soft Demand and Coker Projects
0
200
400
600
800
2005 2006 2007 2008 2009 2010 2011 2012
Asphalt, Residual Fuel Oil and Petcoke Production, MB/D
Asphalt Petcoke Resid Fuel Oil
Source: EIA
Asphalt, Residual Fuel Oil and Petcoke Production, MB/D (Note: Petcoke volumes shown in oil equivalent barrels)
B. Conversion
27
• Light Products
– Reduced sulfur in home heating oil (driven primarily by northeast states)
– Reduced sulfur in gasoline (EPA Tier 3)
– Although highly impactful to refinery capital requirements, the total sulfur contained in all light refined products (including jet fuel and high-sulfur exports) is less than 1% of total supply
• Reduced Sulfur in Bunker Fuels
– By 2015, sulfur content of marine fuel oil consumed in certain emission control areas must be reduced to 0.1% from current 1%
– By 2020 aggressive reductions in bunker fuel sulfur levels are being sought: targeting 0.5% vs. 3.5% (current sulfur levels), subject to a feasibility review to be completed no later than 2018.
– Sulfur in global bunker volumes (3.5% down to 0.5%) estimated at 8 million tonnes/yr or ~11% of global sulfur production
– Potential to be highly impactful to global supply-demand; however, seems likely that timeline will be extended
Regulatory Factors Not Likely to “Move the Needle” on Total Sulfur Production in Medium Term
C. Regulatory
28
A. Total Inputs of Sulfur
– Refinery run rates to get marginally higher with Motiva Port Arthur at full steam, expansion “creep” projects, and small new-builds
– Crude slate sulfur levels to go up in near term and decline slightly in outer years
B. Conversion of Bottom of Barrel
– The last two mega-projects will result in sulfur production increases in near-term, but that will be the end of the investment cycle for a while
C. Sulfur Regulatory Activity
– Not impactful over medium term
Outlook Recap
A
B
C
Image courtesy of Marathon Petroleum Company presentation
Outlook
29
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2011 2012 2015 2020
U.S. + Can Sulfur Production, 000 tonnes
Upgrading-Can
Gas Proc-Can
Refining-Can
Gas Proc-US
Refining-US
• U.S. refinery and Canadian upgrader sulfur production should trend higher with increased heavy oil processing and reduced imports of lower-sulfur grades
• Natural gas sulfur production expected to continue to trend lower
• Total sulfur production likely to continue slow decline
Dynamic Shifts in Refining, but… Relatively Static Total Sulfur Output
Projected
U.S. and Canada Sulfur Production Outlook, 000 tonnes
Source: Baker & O’Brien analysis
Outlook
30
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