north american refining trends and mid-term forecast · a refinery is just a wide spot in the line...

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North American Refining Trends and Mid-term Forecast11th ICIS Pan American Base Oil & Lubricants Conference

Karl D. Bartholomew, PE, ASA, MRICSVice President, Americas

Powered by Data, Driven by Insight.

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Crude oil production: current scenario and future outlookRefinery feedstock analysis: tight oil and VGO supply; feedstock import trendsFuel exports as refinery profit driversImpact of capital investment decisions in refineries on lighter feedstock processingHow does this compare to the global refining landscape?

Topics

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Unless building a thermonuclear device, ensure a material balance (lbs. in = lbs. out)Economics beats technology – every timeYou cannot forecast historyThose who forget the lessons of history are doomed to repeat themRising tides float all shipsCorrelation does not automatically mean causalityStewart’s corollary: Politics beats economics – every timeZiesmer’s axiom – Remember there’s math, then there’s government math

A refinery is just a wide spot in the line between a producer and a consumer

Refining industry rules to consider...

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Oil Production

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2012 – Key crude oil production

Source: ENI 2012 World Oil & Gas Report; ICIS Consulting analysis

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2014 – See the impact of Light Tight Oil

Source: ENI 2014 World Oil & Gas Report; ICIS Consulting analysis

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U.S. Light Tight Oil Plays

Source: Energy Information Administration

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LTO production

From 350,000 bpd to 3.5 million bpd in 8 years

In addition, Permian basin has risen from 850,000 bpd to 2.0 million bpd during same time period

Source: EIA

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LTO gas production

Not limited to oil – gas has experienced similar growthrates, just different basins

10 BCF/D to 42 BCF/D

Driving substantial new petrochemical investment1

Ethylene crackersPDHPE, PP

1 At least until the 2014 crude price drop

Source: EIA

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U.S. oil production

Not quite at 10 million bpd during 4Q70

Delayed response to oil price drop

April ’15 peak

While LTO has peaked, offshore (Gulf of Mexico) has grown

Source: EIA

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Heavy gas oil processing

2 changes in past 5 years:Motiva crude expansion

project - 2012Pascagoula - 2014

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Oil market price implications

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What impacts the crude oil market?

U.S. Energy Information Administration highlighted 7 key factors:1. Geopolitical and economic events2. Economic growth3. Changes in non-OPEC production4. Saudi Arabia production5. Unplanned supply disruptions6. Inventory builds / draws7. Financial / commodity markets

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Geo-political impacts

Two major events1. OPEC spigot on/off2. Financial crisis

Source: EIA; historical data from ICIS Pricing

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Even before 1970s, geo-political events mattered

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Production - 2010 vs. 2014

What has been leading up to the current oil price collapse?

Only a 1.6 million bpd increase from these countries

Source: EIA, ICIS Consulting analysis

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Production - 2010 vs. 2014

1.6 million bpd from most large producers, except...

With US added – difference is now 5.85 million bpd!

Source: EIA, ICIS Consulting analysis

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Financials impact on oil price

Sentiment adding to more volatility with more paper barrels traded compared to physical barrels

Source: Cornerstone Analytics (Dec 2014); historical data from ICIS Pricing

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Oil price – where to now?

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Eagle Ford can produce profitably at $40/barrel!

Source: Rystad Energy, November 2015 Shale newsletter

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Why oil production increased while price dropped

What we forget is the variable cash cost

Marginal cost to produce much lower than full-in investment costs

Source: Business Insider, December 2014

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Fiscal Breakeven Oil Price by Country

One alternate forecast suggests price has to go up to fund OPEC country social spending

Thank goodness we don’t think that way in the US!

Source: IMF, Deutsche Bank, Fitch Ratings (Dec 2014)

$106

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EIA long-term forecasts sometimes optimistic?

Source: EIA, ICIS Consulting analysis

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Many differing opinions on price path – which will determine production!

Source: Company reports, presentations

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What’s Different with LTO?

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Large production difference within one LTO play

As in most real estate, location, location, location!

Source: drillinfo published in the Wall Street Journal, June 25, 2014

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Bakken vs. Other Crudes Processed in the U.S.

Bakken has more naphthaSubstantially less yield

of VGO, residChallenge for Midwest,

Gulf Coast coking refineries

Best fit for Bakken type crude – FCCU processing ATBs

Source: McKinsey & Company; Turner Mason & Co; Kimmeridge Energy (2013)

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Refining Investment

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Key drivers impacting U.S. refining investments

Availability of LTOs will impact future refinery configurationNew capacity in Latin America, Asia could impact trade flows, reversing recently

changed U.S. position as net export to net importer? U.S. refiners will be impacted by several major regulations:

Tier 3 gasoline sulfur (10 ppm) by 2017New ozone standard – 70 ppb – October 2018MARPOL Annex VI – 0.5% S bunker fuel – decision in 2018

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U.S. Import/Export Balance

Over last 5 years, U.S. has moved from net import to net export position on refined products

Source: Energy Information Administration

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U.S. Import/Export Balance

Biggest swing in distillate fuel oils, followed by propane

Source: Energy Information Administration

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Changes in distillation capacity

Biggest growth globally in NE AsiaCapacity in U.S.

geared toward running LTO, condensate

Source: ICIS Global Supply & Demand Database

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Changes in coking capacity

Because U.S. refiners are tooling up to run more LTO, condensate, very little increase in cokingFSU, ME, NE Asia,

Europe showing much more growth with heavier incremental crude supplies

Source: ICIS Global Supply & Demand Database

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Changes in VGO conversion capacity

Again, biggest growth globally in NE Asia, followed by FSU, ME, Asia/PacificOnly minor increases

in N. America conversion

Source: ICIS Global Supply & Demand Database

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U.S. Refining Investment

Over 2015-2016, new refining construction ~ $3.6 B Crude / vacuum~ $1.1 B Bottoms processing~ $800 MM Hydrocracking~ $400 MM FCC~ $400 MM Reforming

Future big spend on AB 32; octane loss; bunker fuel; wastewater

Source: IIR / Refining Capital Projects conference November 16-17, 2015

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One final note: the same data can be interpreted differently

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Karl Bartholomew

Vice President, AmericasKarl.Bartholomew@icis.com

Ee Foong Ewe

Vice President, AsiaEefoong.Ewe@icis.com

Mike Perkins

Vice President, EMEAMike.Perkins@icis.com