Makai Marine Advisors LLC
Panama Canal ExpansionShipping Domestic Crude from the US Gulf to the USWC
04 February 2015
Crude-by-Water North America Conference
Houston, Texas
2Makai Marine Advisors LLC February 2015
Topics for discussion
• Motive -- Why move it?
• Means -- What would move it?
• Opportunity -- Will there be a chance to move it?
3Makai Marine Advisors LLC February 2015
USWC Refiners &
Motivation for USG Crude
4Makai Marine Advisors LLC February 2015
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After two years of stability, renewed declines in Alaskan crude
production leads PADD5 output lower
Sources: EIA, Makai Marine Advisors
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2003 2007 2011 2015F 2019F 2023F
mb
pd
Alaska
CA Offshore
CA Onshore
Other
2014-19 Change
-183 kbpd
-3.5% CAGR
PADD5 Crude Production
California
-64 kbpd
Alaska
-118 kbpd
5Makai Marine Advisors LLC February 2015
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Stable crude runs and declining regional production would boost
PADD5 crude import requirements
Sources: EIA, Makai
PADD5 Crude Runs by Source
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2003 2006 2009 2012 2015F 2018F 2021F
mb
pd
Non-Canadian Canada Alaska Calif Bakken
6Makai Marine Advisors LLC February 2015
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PADD5 refineries have the heaviest crude slate in the US, given
the quality of Californian crude production…
US Crude Intake Gravities by PADD PADD5 Average Gravities by Source
Sources: EIA, Makai Sources: EIA, Makai
22
24
26
28
30
32
34
36
2000 2003 2006 2009 2012 2015F 2018F 2021F
De
gre
es
AP
I
PADD1
PADD2
PADD3
PADD5
23
24
25
26
27
28
29
30
31
32
33
2000 2003 2006 2009 2012 2015F 2018F 2021FD
eg
ree
s A
PI
Imported Domestic Total Inputs
Bakken
Loss of
ANS
7Makai Marine Advisors LLC February 2015
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…but have the refinery configuration to deal with it, with highest
concentration of cokers in US, relative to distillation capacity
Coking Capacity as Pct of Atm Distillation Crude Assay Yields for Various Crudes
Sources: EIA, Makai Sources: Various, Makai
0% 5% 10% 15% 20% 25% 30% 35%
TX Gulf Coking
LA Gulf Coking
CA Coking
PADD4 Avg
PADD3 Avg
PADD2 Avg
PADD1 Avg
US Avg
WA
CA
PADD5 Avg
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
ANS Kern R MWSS Syncrude Bakken EF CondT
BP
Yie
ld, V
olu
me
Pe
rce
nt
Resid HVGO Gasoil Kero Naphtha LPG
8Makai Marine Advisors LLC February 2015
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With lower coking capacity, Washington refineries feature a
lighter crude import slate than California
California Crude Imports by Grade Washington Crude Imports by Grade
Sources: EIA, Makai Sources: EIA, Makai
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1q02 1q04 1q06 1q08 1q10 1q12 1q14
mb
pd
Super Lt/Cond Light Sweet Light Sour Medium Heavy
0
50
100
150
200
250
300
350
1q02 1q04 1q06 1q08 1q10 1q12 1q14kb
pd
Super Lt/Cond Light Sweet Light Sour Medium Heavy
9Makai Marine Advisors LLC February 2015
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Expanded imports of AG and Latin American grades most likely
replacements for declining ANS and CA heavy production
Sources: EIA, Makai
PADD5 Crude Imports by Source
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2003 2006 2009 2012 2015F 2018F 2021F
mb
pd
FSU/Europe Africa
AG Latin Amer
Canada
10Makai Marine Advisors LLC February 2015
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Verdict: West Coast refiners seeking new crudes, but have limited
interest in surplus USG light crudes and condensates
• USWC refining system faces rising import requirements from declining production of ANS and California heavy crudes
• Eagle Ford condensate not a good match for California refining system, with heavy crude configuration and negligible naphtha demand
• Washington refineries run a lighter crude slate, but Bakken-by-rail a better match for refiners and regional demand
• California refineries can replace local heavy grades with Latin American, but need medium/sour replacement for ANS besides AG grades
• Possible interest in blending lighter USG grades with heavier crudes to mimic ANS
• Condensate processing might be favourable if surplus naphtha provides triangulation trade with Asian jet/diesel imports, once CA economy recovers and product deficits return
11Makai Marine Advisors LLC February 2015
Panama Canal Expansion
12Makai Marine Advisors LLC February 2015
New Panama Canal lock dimensions would allow all Aframaxes
and most Suezmaxes to transit physically
Source: ACP
12.04-metre draft has been a
constraint
15.2-metre draft remains a constraint for larger Afras
Current Beam32.3 metres
New Beam49.0 metres
13Makai Marine Advisors LLC February 2015
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Draft restrictions for new locks would imply deadfreight for all
Suezmaxes, but unlikely for normal Aframax/LR2 cargo sizes
Tanker Beam vs Deadweight Tanker Draft vs Deadweight
Sources: Clarksons, SeaWeb Sources: Clarksons, SeaWeb
25
30
35
40
45
50
55
60 80 100 120 140 160 180
Be
am
, me
tre
s
Vessel Size, kdwt
Existing
Newbuildings
Current Locks Restriction
New Locks Restriction
10
11
12
13
14
15
16
17
18
60 80 100 120 140 160 180
Dra
ft,
me
tre
sVessel Size, kdwt
Existing
Newbuildings
New Locks Restriction
Current Locks Restriction
14Makai Marine Advisors LLC February 2015
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Proposed Panama Canal tolls to charge tankers usual capacity
charge, plus a cargo carried charge, for new locks
Sources: ACP, Makai
Proposed Panama Canal Tolls by Vessel Size
0
50
100
150
200
250
300
350
50 70 90 110 130 150
Co
st, U
S$
00
0s
kdwt
Laden - Px Locks
Laden - NeoPx Locks
Ballast - Both
For vessels above 105kdwt, cargo size
reflects arrival draft below 15.2 metres
Panama Canal Universal Measurement System (PC/UMS)
based roughly on total vessel volume
15Makai Marine Advisors LLC February 2015
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New Panama Canal locks offer economies of scale for vessels up
to average Aframax size, then deadfreight limits gains
Sources: ACP, Makai
Proposed Panama Canal Tolls by Vessel Size, US$/tonne
1.00
1.50
2.00
2.50
3.00
3.50
4.00
50 70 90 110 130 150
Co
st, U
S$
/to
nn
e o
f C
arg
o
kdwt
Laden - Px Locks
Laden - NeoPx Locks
For vessels above 105kdwt, cargo size
reflects arrival draft below 15.2 metres
Deadfreight limits economies of scale
Deadfrieght for larger Panas hits unit costs
16Makai Marine Advisors LLC February 2015
Jones Act Suspects
17Makai Marine Advisors LLC February 2015
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Deliv Deliv Age LOA Beam Draft
Vessel Name dwt Year Mo Yrs Shipyard m m m Owner Trade
ALASKAN EXPLORER 193,049 2005 3 9.9 NASSCO 287.25 50.00 18.75 Alaska Tanker (OSG/Keystone/BP) AK/USWC
ALASKAN FRONTIER 193,049 2004 8 10.5 NASSCO 287.25 50.00 18.75 Alaska Tanker (OSG/Keystone/BP) AK/USWC
ALASKAN LEGEND 193,048 2006 8 8.5 NASSCO 287.25 50.00 18.75 Alaska Tanker (OSG/Keystone/BP) AK/USWC
ALASKAN NAVIGATOR 193,048 2005 11 9.2 NASSCO 287.25 50.00 18.75 Alaska Tanker (OSG/Keystone/BP) AK/USWC
POLAR ADVENTURE 141,740 2004 9 10.4 Avondale 272.70 46.20 17.52 Polar (ConocoPhillips) AK/USWC
POLAR DISCOVERY 141,740 2003 9 11.4 Avondale 272.69 46.20 17.52 Polar (ConocoPhillips) AK/USWC
POLAR ENDEAVOUR 141,740 2001 4 13.8 Avondale 272.69 46.20 17.52 Polar (ConocoPhillips) AK/USWC
POLAR ENTERPRISE 141,740 2006 1 9.0 Avondale 272.70 46.20 17.52 Polar (ConocoPhillips) AK/USWC
POLAR RESOLUTION 141,740 2002 5 12.7 Avondale 272.69 46.15 17.52 Polar (ConocoPhillips) AK/USWC
EAGLE FORD (ex-KODIAK) 124,644 1978 5 36.7 Sun Shipbuilding 264.88 41.46 16.77 Seacor/Access (ex-XOM) USG
SIERRA 125,133 1979 1 36.0 Sun Shipbuilding 264.88 41.46 16.76 Keystone (ex-XOM) AK/USWC →USG
LIBERTY BAY 115,000 2014 6 0.6 Aker Philadelphia 251.10 43.80 15.00 ExxonMobil AK/USWC
EAGLE BAY 115,000 2015 1 0.0 Aker Philadelphia 251.10 43.80 15.00 ExxonMobil AK/USWC
Nine of the large Jones Act vessels could transit the new Panama
Canal locks, but seven would face significant deadfreight
Sources: SeaWeb, Alaska Tanker, ConocoPhillips
18Makai Marine Advisors LLC February 2015
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Higher vessel volume for larger Jones Act vessels would boost
canal costs versus typical fleet dimensions
Sources: ACP, Makai
Proposed Panama Canal Tolls by Vessel Size
0
50
100
150
200
250
300
350
400
50 70 90 110 130 150
Co
st, U
S$
00
0s
kdwt
Laden - Px Locks
Laden - NeoPx Locks
Ballast - Both
For vessels above 105kdwt, cargo size
reflects arrival draft below 15.2 metres
Polar
Tankers
Sierra,
Kodiak
XOM Liberty
Class
19Makai Marine Advisors LLC February 2015
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1.00
1.50
2.00
2.50
3.00
3.50
4.00
50 70 90 110 130 150
Co
st, U
S$
/to
nn
e o
f C
arg
o
kdwt
Laden - Px Locks
Laden - NeoPx Locks
Combined with higher canal capacity charges, deadfreight
producing substantial unit costs for Jones Act vessels
Sources: ACP, Makai
Proposed Panama Canal Tolls by Vessel Size, US$/tonne
Polar
Tankers
Sierra,
Kodiak
XOM Liberty
Class
For vessels above 105kdwt, cargo size
reflects arrival draft below 15.2 metres
20Makai Marine Advisors LLC February 2015
Opportunity:
Potential for USG crude
movement to USWC
21Makai Marine Advisors LLC February 2015
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Declining ANS production and distribution to USWC refineries to
provide 33% drop in tonne-mile demand for Alaska fleet by 2019
Sources: EIA, CA Energy Commission, Company Reports, Makai
ANS Tonne-mile Demand, by Destination
0
10
20
30
40
50
60
70
2003 2006 2009 2012 2015F 2018F 2021F
To
nn
e-m
ile
s b
illion
s
Calif
Wash
Hawaii
2014-19 Change
-7.6% CAGR
Bakken to WA
pushes ANS to CA
22Makai Marine Advisors LLC February 2015
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Sliding ANS tonne-mile demand would allow release of 300 kdwt
from the Alaska fleet by 2021, under constant utilisation
Sources: EIA, CA Energy Commission, Company Reports, Makai
ANS Tonne-mile Supply & Demand
Supply under
constant
utilisation
0
2
4
6
8
10
12
14
16
1q12 1q14 1q16F 1q18F 1q20F
To
nn
e-m
ile
s b
illion
s
Hawaii Wash
Calif Capacity
23Makai Marine Advisors LLC February 2015
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Surplus tonnage on Alaska/USWC trade could potentially move
40-50 kbpd of USG crude to West Coast refiners
Sources: Makai
Potential USG/USWC Movements, kbpd
0
10
20
30
40
50
60
70
80
90
1q15F 1q17F 1q19F 1q21F
kb
pd
Quarterly
4-qtr Mov Avg
24Makai Marine Advisors LLC February 2015
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Polar Sierra XOM Aker
Age, years 11.5 30.5 0.5
FOC Vessel Value, US$ millions 38.0 N/A 57.0
Vessel Value, $US millions 133.0 33.3 200.0
Scrap Age, years 35 40 35
ROIC 9.00% 9.00% 9.00%
Current Opex, US$/day 32,200 40,300 28,500
Breakeven TCE, US$/day 76,000 72,000 90,800
Jones Act tonnage could deliver USG crude and condensate to
USWC refiners for $5/bbl
Valuation & Cost Assumptions Indicative Freight Costs, US$/bbl
Source: Makai Source: Makai
0
1
2
3
4
5
6
7
8
USG/WA USG/SF USG/LA
US
$/b
bl
Polar 141 kdwt Sierra 125 kdwt Aker 115kdwt FOC Afra
25Makai Marine Advisors LLC February 2015
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Jones Act freight costs for USG/USWC crude trade would exceed
typical spreads between ANS and USG light marker grades
Sources: Bloomberg, Platts, Argus, Makai
ANS Premium/(Discount) to LLS St. James, Weekly
-20
-15
-10
-5
0
5
10
Dec-08 Dec-10 Dec-12 Dec-14
US
$/b
bl
ANS-LLS Weekly
13-week Mov Avg
Future Freight Costs using
Jones Act Vessels
26Makai Marine Advisors LLC February 2015
Kinder Morgan resurrecting Freedom Pipeline, with new focus on
delivering ANS-like crude mix preferred by USWC refiners
Source: Kinder Makai
• First attempt cancelled in May13 on lack of shipper interest -- Bakken-by-rail preference and
limited appeal for light Permian Basin grades
• Delays in crude-by-rail permitting sparking increased shipper interest in 250 kbpd line
• Includes plans for 150 kbpd topping unit to remove lights ends
• 200 kbpd blended crude mimicking ANS• 100 kbpd condensate for export
Topping
Unit
Potential Tariff
$5/bbl
27Makai Marine Advisors LLC February 2015
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Conclusions
• USWC refiners need replacements for declining ANS and California heavy crude
• USG light crude and condensates not their first choice
• Panama Canal expansion will allow Suezmaxes to transit with deadfreight, but Aframax becomes optimal size for new locks
• Nine of larger Jones Act vessels could transit the new Panama Canal locks, but most would face significant deadfreight
- ExxonMobil’s new Aframaxes would be optimal, but unclear if any surplus capacity- High vessel volumes relative to typical dimensions, boosts Panama Canal costs for
larger Jones Act candidates
• Demand for Alaska/USWC fleet would drop 33% by 2019, potentially releasing 300 kdwt, that could move 40-50 kbpd from USG to USWC
• Jones Act cost structure and higher Panama Canal costs would make it difficult for USG/USWC movements to overcome ANS/LLS differentials
28Makai Marine Advisors LLC February 2015
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Disclaimer
This memorandum is for informational purposes and is not intended as an offer or solicitation with
respect to the purchase or sale of any security. This report and the information contained herein may
not be reproduced or redistributed, in whole or in part, without the written permission of Makai Marine
Advisors LLC (Makai). Although the statements of fact have been obtained from and are based upon
sources Makai believes reliable, we do not guarantee their accuracy, and any such information may be
incomplete. All opinions and estimates included in this report are subject to change without notice.
Makai, its affiliates and their respective officers, directors, members and employees, including persons
involved in the preparation of this memorandum, may from time to time maintain may act in the
capacity as advisor(s) of companies mentioned in this memorandum. Neither Makai nor any officer or
employee of Makai, or any affiliate thereof, accepts any liability whatsoever for any direct, indirect or
consequential damages or losses arising from any use of this memorandum or its contents.
29Makai Marine Advisors LLC February 2015
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Contact Information
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5200 Martel Avenue
Dallas, Texas 75206
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www.makaimarine.com
Twitter: @MakaiMarine
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