Defining the Debate: Crude Oil Exports

Trisha Curtis, Director of Research Upstream and Midstream Energy Policy Research Foundation, Inc. (EPRINC) Brookings Task Force February 28th, 2014

About EPRINC

• www.eprinc.org

• Infrastructure Paper http://eprinc.org/wp-content/uploads/2013/10/EPRINC-PIPELINES-TRAINS-TRUCKS-OCT31.pdf

• Rin App http://eprinc.org/2014/02/rins-around-rosy-app-available-ios/

2

Nature of Topic

3

Timeline of Discussion • Talk during past few years in analyst and think tank community • Adam Seminski publically talks about crude oil exports in 2012 • During the course of 2013 several new pipelines came online to alter the flow of

crude from the Permian to the Gulf Coast (historically Permian to Cushing) in addition to new pipeline capacity from the Cushing to the Gulf, Eagle Ford production passes 1 mbd, and refinery maintenance coupled with rising production pressures LLS prices in Nov 2013

What’s Happening

• Large volumes of light sweet crude and condensate of varying grades (in addition to NGLs) came on the market with limited infrastructure options

• Refineries in the Gulf are beginning to see the pressure of too many light ends and their capability to handle increasing volumes of light sweet crude

• Gasoline demand is relatively flat in the U.S. so there is only so much need for gasoline blending components and condensate

• Natural gasoline from NGLs is in more demand from Canada as a diluent

The Debate, Speculative Impacts, Issues

4

• Major producers such as Shell and Exxon have come out in support of lifting the ban on exports, but refiners are mixed. Both PES and PBF of the East Coast have come out against crude oil exports while AFPM has come out in support of lifting the ban. • East Coast refineries benefit from discounts and have invested in crude by rail • Gulf Coast refineries export a considerable amount of product

• While discussion and debate on this topic is beginning to take place in both the U.S. and abroad, word from the actual regulatory bodies has been limited. Current discussions around crude oil exports and their direct impact are therefore highly speculative

• Should exports be allowed the impact on the market would depend on the nature of the export permits and their transparency. What type of hydrocarbons exported? i.e. crude or condensate and the volumes allotted

• Trouble defining “crude oil” and “condensate” • While there is potential to export small volumes from the East Coast and the West

Coast, the bulk of exports would likely be dispatched from the Gulf Coast

Impacts and Issues.....continued

5

• Both crude and condensate exports would advantage Gulf Coast producers in the Eagle Ford and the Permian Basin where there would be a relatively low cost to transport crude or condensate to the Gulf and then export it

• Condensate exports would highly benefit Eagle Ford (Gulf Coast) producers and potentially condensate production in the Utica (Ohio)

• WTI prices would likely increase, however, the degree to which the Brent WTI spread would narrow depends on the volume and market impact of exports

• Gulf Coast prices would likely move up and stay at parity with Brent prices • Crude exports would not likely solve the infrastructure dilemmas facing northern

landlocked crudes in the Bakken and in Canada due to the lack of pipeline capacity from the region to the coasts • While WTI prices would likely increase there would still be a pricing differential

for those crudes without adequate transportation means to Cushing or the Gulf Coast.

• It could alter incentives to move crude oil into Cushing • Crude by rail issues remain • There are winners and losers in the upstream, midstream, and downstream

North American Oil Production and Forecast

6

Source: EIA, Canadian CAPP forecast, EPRINC U.S. forecast, EPRINC Mexico , and EPRINC estimates

Dec 2013 Oil Production U.S. 7.9 mbd Canada 3.7 mbd

0

2000

4000

6000

8000

10000

12000

14000

16000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Jan

-Oct

201

3

2014

2015

2016

2017

2018

2019

2020

Tho

usa

nd

Bar

rels

Per

Day

Canada OilProduction

U.S. OilProduction

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Periphery

Permian

Eagle Ford

Bakken

EPRINC's May 2013 Forecast

Jan 2014 EPRINC’s Forecast for Major U.S. Shale Plays

Source: HPDI data with EPRINC forecast estimates

EPRINC forecasts an additional 2.5 mbd by 2020

7

0

2000

4000

6000

8000

10000

12000

Tho

usa

nd

Bar

rels

Per

Day

U.S. Importsfrom Canada ofCrude Oil Mbbl/d

U.S. FieldProduction ofCrude Oil Mbbl/d

U.S. Imports ofCrude Oil Mbbl/d

8

U.S. Total Imports, U.S. Production, U.S. Canadian Imports

Source: EIA

Dec 2013 U.S. Imports 7.8 mbd U.S. Production 7.9 mbd

Canadian Imports 2.8 mbd

9

Shale Oil Play Production

Source: HPDI Feb 2013

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

Jan

-07

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Jul-

13

Oct

-13

THO

USA

ND

BA

RR

ELS

PER

DA

Y

THO

USA

ND

BA

RR

ELS

PER

DA

Y

North Dakota Permian Basin Eagle Ford Combined Production

0

10

20

30

40

50

60

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

PADD 1East Coast

PADD 2Midwest

PADD 3Gulf Coast

PADD 4Rockies

PADD 5West Coast

Nu

mb

er

of

Re

fin

eri

es

Bar

rels

Per

Cal

end

ar D

ay

OperableAtmosphericCrude OilDistillationCapacity

ThermalCrackingCokingDownstreamChargeCapacity

OperatingRefineries

Simple vs. Complex

Source: AFPM map, EIA data for graph

Total Coking Capacity vs. Atmospheric Crude Distillation Capacity by PADD

Cokers = Heavy refining capability

10

Domestic vs. Imported RAC

Source: EIA

11

0

20

40

60

80

100

120

140

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

$/B

arre

l

Rocky Mountain(PADD 4) Crude OilDomesticAcquisition Cost byRefiners $/bbl

Midwest (PADD 2)Crude Oil DomesticAcquisition Cost byRefiners $/bbl

Gulf Coast (PADD 3)Crude Oil DomesticAcquisition Cost byRefiners $/bbl

West Coast (PADD5) Crude OilDomesticAcquisition Cost byRefiners $/bbl

East Coast (PADD 1)Crude Oil DomesticAcquisition Cost byRefiners $/bbl

0

20

40

60

80

100

120

140

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

$/B

arre

l

Rocky Mountain(PADD 4) Crude OilImportedAcquisition Cost byRefiners $/bblGulf Coast (PADD 3)Crude Oil ImportedAcquisition Cost byRefiners $/bbl

East Coast (PADD 1)Crude Oil ImportedAcquisition Cost byRefiners $/bbl

Midwest (PADD 2)Crude Oil ImportedAcquisition Cost byRefiners $/bbl

West Coast (PADD5) Crude OilImportedAcquisition Cost byRefiners $/bbl

Regional Pricing Disparities

Source: Flint Hills, EIA, CME Group, and estimates

• Western Canadian Select -$25 to WTI

12

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

Jan

-08

Jun

-08

No

v-08

Ap

r-0

9

Sep

-09

Feb

-10

Jul-

10

De

c-1

0

May

-11

Oct

-11

Mar

-12

Au

g-12

Jan

-13

Jun

-13

No

v-13

WTI

Bakken (North Dakota Light Sweet FlintHills)WCS (Western Canadian Select)

13

Geology of the Eagle Ford = Varying Liquid Grades

Source: Momentum Oil and Gas LLC, DUG Eagle Ford Conference Presentation Oct 2011; EOG Investor Presentation Feb 2014;

14

Those differences are impacting prices

Source: Flint Hills Resources

15

Source: ITG Investment Presentation Nov 2012

Regional Discounts Matter with High Cost Production

15

16

Total U.S. Crude Oil Exports

Source: EIA

North Dakota accounts for almost 10% of US Production Almost all new production is from the Bakken/Three Forks

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Jan

-07

Ap

r-07

Jul-

07

Oct

-07

Jan

-08

Ap

r-08

Jul-

08

Oct

-08

Jan

-09

Ap

r-09

Jul-

09

Oct

-09

Jan

-10

Ap

r-10

Jul-

10

Oct

-10

Jan

-11

Ap

r-11

Jul-

11

Oct

-11

Jan

-12

Ap

r-12

Jul-

12

Oct

-12

Jan

-13

Ap

r-13

Jul-

13

Oct

-13

North Dakota

Eastern Montana

South Dakota

TOTAL

0

50

100

150

200

250

Jan

-93

Oct

-93

Jul-

94

Ap

r-9

5

Jan

-96

Oct

-96

Jul-

97

Ap

r-9

8

Jan

-99

Oct

-99

Jul-

00

Ap

r-0

1

Jan

-02

Oct

-02

Jul-

03

Ap

r-0

4

Jan

-05

Oct

-05

Jul-

06

Ap

r-0

7

Jan

-08

Oct

-08

Jul-

09

Ap

r-1

0

Jan

-11

Oct

-11

Jul-

12

Ap

r-1

3

THO

USA

ND

BA

RR

ELS

PER

DA

Y

U.S. Exports to Canada of Crude Oil Mbbl/d

17

U.S. Exports of Petroleum and Petroleum Product

Source: EIA

0

500

1000

1500

2000

2500

3000

Tho

usa

nd

Bar

rels

per

Day

U.S. Exports

U.S. Exports ofOther LiquidsMbbl/d

U.S. Exports ofFinishedPetroleumProductsMbbl/d

U.S. Exports ofCrude OilMbbl/d

U.S. Exports ofNatural GasLiquids andLiquid RefineryGases Mbbl/d

0

500

1000

1500

2000

2500

3000

Tho

usa

nd

Bar

rels

per

Day

U.S. Petroleum Products Exports

U.S. Exports ofKerosene-Type JetFuel

U.S. Exports ofPetroleum Coke

U.S. Exports ofResidual Fuel Oil

U.S. Exports ofFinished PetroleumProducts

U.S. Exports ofDistillate Fuel Oil

U.S. Exports ofFinished MotorGasoline

18

Infrastructure Challenges will Remain

Source: EPRINC Maps using Hart Energy data and ArcGIS Mapping software

• Severely limited due to lack of Keystone XL and lack of historical build out to the coasts – system designed to import into the Gulf and move up

18

• New markets • Diversification • Neat Barrels • Nimble - Quickly adjustable • Optionality for Canadian and U.S. crude, NGLS,

and other petroleum products