The Game Shifts: The North American Crude Boom and Its Impacts Downstream - PowerPoint Presentation

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The Game Shifts: The North American Crude Boom and Its Impacts Downstream

John

R. Auers

Turner

, Mason & Company

Dallas

AIChE October Section MeetingOctober 23, 2012

Presented by

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International consulting

practice since 1971

Downstream focus; refinery/chemical engineers

Industry and financial clientsPublish

various outlook and forecast productsCrude and Refined Products OutlookRefinery Construction Outlook

World Crude Oil OutlookThe Great NGL Surge! (with BENTEK Energy)Special Studies2Turner, Mason & Company

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Detailed regional production forecasts

Updates of refinery demand by facility/region

Analysis of required logisticsEvaluate challenges and opportunities for producers and refiners and midstream operators

Initial publication – June 2012

Update issued in October 2012

32012 North American Crude Study

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US Refining Industry Largely Balanced Until 1970

Run domestic crude to supply domestic demand

Limited imports of either crude or products

Growing Dependence on Imports after 1970

Falling production/growing demand led to rapidly growing crude importsANS discovery/recession temporarily reversed trend in early 80’s

Low prices accelerated trend after 1985; Imports more than tripled to over 10 million BPD by 2005Somewhat similar story on product imports – gasoline imports grew from just over 300 MBPD in 1995 to almost 1.2 million BPD by 2007. 4

Historical Perspective

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US Production Makes a U-Turn Towards Strong Growth

Canadian Production Growth Accelerating

New Crude Production Is Causing Regional Imbalances

Crude Quality is Different from Previous ForecastsNet Effects:

Pricing DislocationsIncentives for Finding Midstream OptionsUS Appetite for Imports Receding

Regulatory Implications Yield/Processing/Operating/Investment Issues at RefineriesLower supply costs/contribute to US ability to become major product exporter5

What’s Happening Now?

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Today’s Presentation

Crude Production

Changes in Crude Quality

Crude Supply Balance

Impacts on Refiners

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History of NA Crude Production

U.S. production up by over 1.5 MMBPD since 2008

Reverses 20+ year trend of declines

Comes despite slowdown in Gulf after

MacondoCanadian crude on upward trend for 3 decades

Up by almost 1 million MBPD in the last decadeLargest reserve base in the world/unconventional resources Almost all reserves located in Western CanadaDriven by high prices and technology advances

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Production Forecasts

US forecasts differ widely

Official EIA LT forecast for 2020 = 6.7 MMBPD

IEA and OPEC forecast higher levels

Some analysts have production over 10 MMBPDAll credible forecasts shows continued growth

Canadian production forecasts less variableResource base is better understoodDependent on price/ability to remove logistical limits8

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TM&C Forecasts

Total US/Canada increase of 4.6 MMBPD by 2020 (from 2011 levels)

U.S. growth of 3.1 MMBPD (to 8.8 MMBPD)

Canadian growth of 1.5 MMBPD (to 4.5 MMBPD)

U.S. growth mostly in PADDs 2 and 3Declines in Alaska/California to continue

Canadian growth primarily in the WestRevision in upward direction is more likelyForecast assumptionsCrude prices (LLS/Brent) remain in $90 to $120 rangeAssumes some limitations (manpower, materials, regulatory, etc.)

Limited production from some high potential prospectsLogistical assets are built to move crude to markets in a timely fashion9

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U.S. Crude Production Forecast

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U.S. Crude Production Change by PADD

2011 to 2020

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U.S. Crude Production Change by Area

2011 to 2020

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Canadian Crude Production Forecast

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Presentation Agenda

Crude Production Forecast

Changes in Crude Quality

Crude Supply Balance

Impacts on Refiners

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Gravity

°

API

Sulfur

Wt.%

Super Light≥ 40.0

AllLight Sweet31.0 – 39.9

≤ 0.99

Light Sour

31.0 – 39.9

≥1.00

Medium Sweet

24.1 – 30.9

≤ 0.99

Medium Sour

24.1 – 30.9

≥1.00

Heavy

≤ 24.0

All

TM&C Crude Quality Categories

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U.S. Change in Crude Production by Grade

2011 to 2020

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Shale Crude

vs Displaced Light Imports Key Qualities

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Property

Bakken

Eagle FordSoyo

Bonny LightAPI Gravity4145

39

34

Sulfur,

wt%

0.20

0.60

0.14

0.24

Distillation Yield, volume %

Lt. Ends, C

1

-C

4

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

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Heavy Canadian Crude Quality Shift

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Property

Current

2020

ChangeAPI

Gravity20.320.3- -

Sulfur,

wt%

3.4

3.4

- -

TAN, mg KOH/gm

1.15

1.50

0.35

Distillation Yield, volume %

Lt. Ends, C

1

-C

4

2.7

6.0

3.3

Naphtha

14.0

13.1

-0.9

Middle

Distillates

21.7

18.6

-3.1

Gas

Oil

33.8

32.1

-1.7

Vacuum Residue

27.8

30.2

2.4

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Future Quality of U.S. Crude Oil Production

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Crude Run Gravity Change for U.S. Refineries

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Crude Production Forecast

Changes in Crude Quality

Crude Supply Balance

Impacts on Refiners

Presentation Agenda

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PADD I/East

Coast 2011 crude runs at 1.1 MMBPD (down from 1.6 in 2005)

98% imported; 20% from Canada/Most of rest from Africa

80% light or super light

Very limited pipeline accessPADD II/Mid-Continent

2011 crude runs at 3.2 MMBPD (very steady year to year)Canadian imports 45%; In-PADD production and movements from PADD III about equal at 25%Non-Canadian imports at 150 MBPD (down from 700 MBPD in 1999 and over 1 MMBPD in early 90’s.66% light/27% heavy/7% medium

22US Regional Crude Slates

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PADD III/Gulf Coast

2011 crude runs at 7.4 MMBPD (very steady year to year)

65% imported; 35% produced in PADD

44% light/24% medium/32% heavy

Total light and medium imports at 2.6 MMBPD; down by 900 MBPD in last four years

PADD IV/Rocky Mountains2011 crude runs at 532 MBPD (very steady year to year)Canadian imports 44%; In-PADD production 56%; no non-Canadian imports47% light/13% medium/40% heavy23US Regional Crude Slates

(cont.)

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PADD V/West Coast

2011 crude runs at 2.3 MMBPD (down by 300 MBPD since 2005)

8% Canadian; 50% other foreign; 42% produced in PADD

54% light/13% medium/33% heavy

Crude imports constant at 1.1-1.2 MMBPD for last six yearsLimited pipeline access from Canada/none from rest of US

24US Regional Crude Slates (cont.)

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Crude Flow Timeline

Crude Oil Milestones

Midstream

Devopments

2012

Lt/Med foreign imports to PADD II end

Seaway Expansion to 400 MBPD

Keystone Cushing to USGC Startup

Longhorn Pipeline Startup

Lt

Swt

foreign imports to PADD III end

Reversal of Enbridge Line 9

Seaway Expansion to 850 MBPD

ONEOK

Bakken

Crude Express Startup

Keystone XL Startup

Lt Sour foreign imports to PADD III end

Med

Swt

foreign imports to PADD III end

Lt

Swt

movements to PADD I increase

Med Sour foreign imports to PADD III end

Lt/Med Sour imports to PADD I end

Canadian crude to PADD V increases

KM Trans Mountain Expansion to 750 MBPD

2013

2014

2015

2016

2017

2019

2018

2020

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U.S. Crude Balance

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Non-Canadian Imports

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PADD I

Bakken

replaces over 80% of non-Canadian importsCanadian imports relatively steady/move to heavier grades

Crude slate significantly lighter (1.6 API gravity)

PADD II

No non-Canadian importsCanadian non-heavy imports replaced by in-PADD productionPADD III crude replaced by in-PADD productionCrude slate lighter by about 0.5 API gravity/much lighter than capabilityPADD IIIAlmost all but heavy imports replaced by domestic crude

Canadian dilbits replace significant volume of Latin heaviesOverall crude slate lighter by almost 1.0 API gravity28Changes in Regional Crude Slates

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PADD IV

Canadian non-heavy production replaced by in-PADD crude

Only region with production greater than demandSignificant export of crude to other PADDs

Crude run quality relatively constant

PADD V

Canadian imports increase to over 20% PADD IV, PADD II and possibly PADD III crude reaches refineries These make up for production decreases and start to displace waterborne importsCrude run quality relatively constant29

Changes in Regional Crude Slates(cont.)

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Limited Remaining US Destinations

PADD I Non-Canadian imports less than 150 MBPD

PADD III heavy imports displacement slows as most remaining Latin imports are contractually/economically “locked-in”

PADD V still importing almost 1 million BPD

PADD V Challenges

LCFS could limit/prevent heavy Canadian importsLimited logical mid-stream options from Continental USReturn of in-PADD crude production growth possibleExportsNot forbidden/requires export license in most casesPolitically controversial

Potential destinations – Asia/Europe30What Happens After 2020?

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U.S. Crude Oil Exports

1990 to 2011

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Crude Oil Exports

Liquid hydrocarbons from

underground reservoirs thathave not been processed through a crude distillation unit

Pre Approved

Export

LicenseRequired

Crude OilAlaska Cook InletTo Canada for consumption thereHeavy California crude up to 25 MBPD

Case by Case

Presidential determination that it is consistent with national interest

1979 Congressional Act, expired in 1994 but extended each year by Presidential Notice

Export

License

Not Required

Intermediates/

Products

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Crude Production Forecast

Changes in Crude Quality

Crude Supply Balance

Impacts on Refiners

Presentation Agenda33

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US refiners will enjoy crude cost advantage

As light imports disappear, LLS flips to permanent discount vs. BrentDomestic light crudes priced to incentivize USGC refiners to replace imported medium crude barrels

Regional differentials

Inland refiners continue to be most advantaged

Pipeline access to USGC will decease WTI/LLS spreadSt. James becomes price setting locationEconomics for EC and WC refiners improve as they gain access

Heavy crude discount increases when Canadian crude arrives on USGC34

Price Impacts

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Influx of light/super light crude could reduce capacity

Loss could be 10%+ at refineries designed for heavier crudes

Units impacted include crude and vacuum units, gas plants, and debutanizers

Displacement of higher sulfur crude will impact sulfur unitsUS refining system could lose the equivalent of 2 or 3 average refineries if capital investment is not made

Other concerns

Higher TAN from Canadian dilbits will require capital/treating costsPotential compatibility issuesLoss of access to imports will decrease crude slate flexibilityBenefits

Lower resid yield/metals content of shale oil will facilitate resid crackingSulfur plant limited refineries will benefit from sweeter crudes

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Operating Impacts

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Yield Concerns

“

Dumbbelling

” of Crude Slate

Higher NGL and naphthaLower middle distillateResid

yield yields up in Canadian heavy crudesImplicationsHigher NGL yield adds to surplus from field productionHigher naphtha runs counter to declining domestic gasoline demand/potential lower aromatics limitsDistillate demand growing faster than gasoline Remedies

Construction of hydrocracking units – very capital intensiveDevelopment of NGL and gasoline export markets36

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Change in U.S. Product Yields

2011 to 2020

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U.S. Net Product Export Forecast

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Concluding Thoughts

US refiners will see a major shift in their crude slates over the next 10 years

Almost all non-Canadian and non-heavy crude imports will be

be

displaced except in PADD VAbility to move new crudes into PADD I, PADD V and ultimately offshore will be important

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Concluding Thoughts

(cont.)

Domestic surplus will lead to crude cost advantages for all US refiners

“

Dumbbelling” of crude slate will provide numerous yield and processing challengesWill have to spend significant capital to maintain capacity

Ability to maintain distillate production will require hydrocrackersDevelopment of gasoline export markets will be important 40

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John R. Auers – Senior Vice President

Turner Mason & Company

Email: jauers@turnermason.com

Telephone: 214-754-0898

Presenter41