Baker & O’Brien, Inc. All rights reserved.

TRENDS IN PETROLEUM REFINING

Air Products and Chemicals, Inc. Management Meeting The Woodlands, Texas

October 24, 2019

1

Baker & O’Brien Overview

• History

– Founded in 1993

– Independently owned and managed

– Combined technical and commercial expertise

– Over 2,000 assignments completed

• Consulting Staff

– Chemical, mechanical, and electrical engineers

– Most have advanced degrees – MBA, economics, or finance

– Consultants average over 30 years experience

– Experienced problem solvers

– Supported by highly-trained analytical staff

2

Baker & O’Brien Consulting Services

NOTE: PRISM is a trademark of Baker & O’Brien, Inc. All rights reserved.

Capital Project Services

Operations Support

Commercial Analyses

Mergers and Acquisitions

Dispute Resolution

• Conceptual Analysis

• Technology Assessment

• Market Studies

• Capital Investment Estimates

• Economic and Financial Modeling

• Contracting Strategy

• Lender’s Engineer

• Construction Monitoring

• Performance Testing

• Plant Operations Analysis

• Maintenance and Reliability Reviews

• Personnel Staffing Analysis

• Energy Audits

• Competitive Analysis and Benchmarking

• Market Studies

• Processing Agreements

• Contract Review and Analysis

• Asset Valuations

• Feedstock and Product Valuation

• PRISM (licensed by 80% of largest U.S. refiners)

• Due Diligence

• Fair Market Valuations

• Capital Cost Estimating

• Working Capital Reviews

• Economic and Financial Analysis

• Construction Disputes

• Asset Valuations

• Insurance Claims

• Commercial Transactions

• Toxic Torts

• Intellectual Property

• Standard of Care

3

U.S. refinery utilization has consistently been higher than other regions of the world

70%

75%

80%

85%

90%

95%

Global Refinery Utilization

World

Europe

Asia

US

60

65

70

75

80

85

90

95

100

U.S. Refinery Utilization by PADD

PADD 1

PADD 2

PADD 3

PADD 4

PADD 5

Within U.S., PADDs 2, 3, and 4 have outperformed PADDs 1 and 5 on a utilization basis

Source: BP Statistical Review of World Energy

Source: EIA

4

U.S. Refining Margins Have Outperformed Other Major Regions

0

2

4

6

8

10

12

14

162

00

0

20

01

20

02

20

03

20

04

20

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20

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20

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20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

$/B

bl

Global Refinery Margins

USGC Medium Sour Coking NWE Light Sweet Cracking Singapore Medium Sour Hydrocracking

Source: BP Statistical Review of World Energy

5

United States Refinery Margins

Source: Platts and Baker & O’Brien Analysis.

6

Crude Oil Prices

Source: Platts and Baker & O’Brien Analysis.

7

Natural Gas Prices

Source: Platts and Baker & O’Brien Analysis.

8

While marginal refineries exist in most markets, European refineries are particularly at risk of closure

USGC: - Low cost access to natural gas - Pipeline and waterborne access

to variety of domestic and foreign crude oils

- Sophisticated refinery infrastructure

NYH: - Low cost access to natural gas - Import market which supports

higher prices - No pipeline access to crude oil

requires market to rely heavily on imported feedstocks

Northwest Europe: - Higher operating costs due to lack of

natural gas and crude oil - Increasing regulations - Crude oil is primarily imported - Threat of increased product imports

from lower cost refining locations - Stagnant or declining demand

Middle East: - Low cost crude oil and natural

gas – likely the global low cost supplier

- New refineries are built with European exports targeted

Asia/Pacific: - Strong consumer demand

growth as economies develop coupled with increasing industrialization

- Japan, South Korea, and Singapore would be marginal supply sources in region

- India and China continually building large refineries to support demand or potential exports

- No pipeline access to crude oil requires market to rely heavily on imported feedstocks

9

United States Refinery Margins

Source: Baker & O’Brien Analysis, PRISM™ PRISM is a trademark of Baker & O’Brien, Inc. All rights reserved.

10

• "IMO 2020" is a global regulation by the International Maritime Organization (IMO), requiring a reduction from 3.5% to 0.5% sulfur content in bunker fuel in the open oceans beginning January 1, 2020

– Emission Control Areas (ECAs), located near coastal areas around the U.S., Canada, and Northern Europe already impose a more stringent 0.1% sulfur cap

What is IMO 2020?

Marine Bunker Fuel Pollution Regulation – MARPOL IMO 2020

Map Source: DuPont

11

Options to Meet IMO 2020

Buy compliant fuel, such as marine gasoil (MGO) or very low sulfur fuel oil (VLSFO)

Install scrubbers to keep running High Sulfur Bunker (HSB)

Switch to alternative fuel, such as LNG

Business as usual

Profit from margin uplift

What are the options? Shippers

Full-Conversion

Refining margins for sour cracking refineries will be under pressure in the near future

Blend existing residual fuel oil (if marginally close to 0.5% ) with low sulfur distillate

Produce low/lower sulfur bunker fuel through adjustments in crude slate

Continue to produce High Sulfur Fuel Oil (HSFO) for ships with scrubbers or resid feedstock to other refineries

Produce low/lower sulfur bunker fuel through adjustments in crude slate

Invest in upgrading capacity

Sweet Cracking Sour Cracking

Refiners

12

• Futures pricing suggests that 3.5% fuel oil (HSFO) pricing in the near term will drop from a discount to Brent from about $4/B to $15-$17/B

• The extent and duration of the pricing drop depends on:

– The reaction of shipping companies to install scrubbers

– Ability of the refiners to produce very low sulfur fuel oil (VLSFO)

• As sour cracking refineries are producing HSFO, we would expect higher sulfur crude oils to follow a similar pricing trend

HSFO Pricing

40

50

60

70

80

90

100IMO 2020 Begins

ULSD NYMEX

Brent

3.5% HSFO HSFO begins slide

Fuel value can be lower

Scrubbers may bring value back up

Source: CME Group

13

Possible Refineries’ Sulfur Optimization

IMO 2020 DRIVING FORCES

• 0.5% fuel oil production will be challenging for low complexity refineries in Europe

• Sweet crude will likely displace sour crude in lower complexity refineries in Europe

• Backhaul freight will lower cost for sour crude and resid to complex refineries in the U.S.

14

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2019 2020 2021 2022 2023 2024 2025

Tho

usa

nd

Bar

rels

pe

r D

ay (

MB

/D)

Estimated Refinery Crude Capacity Additions through 2025

All Announced Projects

Africa

South and Central America

North America

Europe and Eurasia

Middle East

Asia Pacific

Near term refinery capacity additions could put downward pressure on global utilization if projects remain on schedule and there are no closures

Note: Projects have been handicapped based on Baker & O’Brien’s assessment of likelihood of operations. Sources: Refinery news; Baker & O’Brien analysis

Uncertainty magnifies as timeline increases due to lack of partners and financing for projects

Average Global Demand Growth

Indicates OPEC estimates for comparison

15

0

100

200

300

400

500

2019 2020 2021 2022 2023

MB

/D

Speculative CanadaSpeculative USFirm CanadaFirm US

• Crude throughput expansions are linked to processing advantaged crude oils

– Limited number of major projects are expected in the near term

– Speculative projects in U.S. are linked to supporting drilling operations

Economics may be supportive of a single project in the Permian due to diesel shortage – other projects are unlikely

• Expected discounts for heavy crude oils due to IMO 2020 are helping major coker investments (despite downplays to investors)

Access to advantaged crude oil has incentivized crude expansion and bottoms upgrading projects

Crude Throughput Expansions

Note: Excludes unknown incremental expansions (2020) (2021)

Coking

0

10

20

30

40

50

60

2019 2020 2021 2022 2023

MB

/D

Note: Full project listing is contained in the Appendix

16

Project Profile: ExxonMobil Beaumont Expansion

Beaumont/Port Arthur Refineries and Terminals

1

2

3

4

5

6

7

8

9

10

13

12

11

14

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Owner/Location

Refineries

ExxonMobil Beaumont

Total Port Arthur

Motiva Port Arthur

Valero Port Arthur

Terminals

Enterprise Beaumont

Enterprise Beaumont

Sunoco Hebert

Phillips 66 Beaumont

Colonial Port Arthur

Enterprise Pt Arthur

Explorer Port Arthur

Valero PAPS/El Vista

Motiva Beaumont

Howard Energy

Jefferson Energy

Sunoco Nederland

1

2

3

4

5

6

7

8

9

10

11

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13

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• ExxonMobil is expanding the Beaumont refinery by 250 MB/D

– $1.9 Billion investment; >$300 MM/yr earnings

• Project follows ExxonMobil model of integrated value chain:

– ExxonMobil production in the Permian Basin (Est. 1 MMB/D by 2024)

– Pipeline takeaway: 1 MMB/D JV pipeline under development

– Reduces intermediate purchases for XOM Gulf Coast system

• Start-up expected in 2022

17

PADD Unit Capacity (MB/D) Start-Up

3 Alkylation Unit 6.5 1Q2019 3 Alkylation Unit 13 2Q2019 3 Isomerization 25 3Q2019 2 Benfree Unit Repositioning 0.75 2019 3 FCC Upgrade * Mid-2020 3 Alkylation Unit 17 2020 5 Isomerization 6.5 Q12021 2 FCC/Alky * 2021 2 Isomerization * 2021 2 Isomerization 10 2022 2 Debottleneck Reformer * * 5 C5/C6 Isom * *

Gasoline projects are targeted towards high octane blend components and Tier 3 sulfur specification compliance

Gasoline Production Increases Tier 3 Projects

Note: *Details not publicly provided Source: Baker & O’Brien

PADD Unit Capacity (MB/D) Start-Up

2 Naphtha Hydrotreater * 2020

2 Naphtha Hydrotreater * 2022

2 Naphtha Hydrotreater * Q42019

3 Naphtha Hydrotreater * *

5 Naphtha Hydrotreater 6 *

5 Naphtha Hydrotreater 10 Q12021

• Gasoline production increases are through alkylation and isomerization unit investments due to octane desirability

• While Tier 3 went into effect for large refiners on January 1, 2017, many refiners developed surplus credit balances and delayed compliance until 2020 when the full regulation goes into effect

18

Distillate projects focus on incremental yields, renewable diesel, and sulfur compliance

Distillate Production Increases Sulfur Removal

• Standalone distillate yield improvement projects are limited

• Renewable diesel projects are gaining favor as biodiesel and LCFS credits make the projects increasingly economic

• Hydrogen plant investments are being made to support hydrotreating operations

Renewable Diesel*

Note: *Capacity details not publicly provided Source: Baker & O’Brien

PADD Unit Capacity Start-up

5 Hydrogen Plant * 2019

5 Distillate Hydrotreater 7 Q32019

1 Hydrogen Plant * Q12020

3 Hydrogen Plant * 2021

2 Gasoil Hydrotreater * 2022

Renewable Diesel

Renewable Diesel

Renewable Diesel

19

While global oil liquids consumption is expected to increase between 2017 and 2040, U.S. liquids consumption is projected to decline

0.5

0.63

0.35

0.49

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

MM

B/D

International Liquids Consumption Outlooks (Annualized Liquids Demand Growth Between 2017 and 2040)

IEA - New Policies

OPEC WEO

BP 2019

Average

(3.50)

(3.00)

(2.50)

(2.00)

(1.50)

(1.00)

(0.50)

0.00

0.50

1.00

1.50

MM

B/D

U.S. Liquids Consumption Outlooks (Change in Liquids Demand Between 2017 and 2040)

AEO 2019 - Reference

AEO 2019 - Low Oil Price

AEO 2019 - High Oil Price

BP 2018 - EvolvingTransition

IEA - New Policies (excl.bunkers)

20

• IEA shows slower improvements in global fuel economy for light-duty vehicles (LDV) – 1.7%/year improvement globally in the 2005-2017 time period

– Improvement is even worse in advanced economies of only 0.1%/year

• Key drivers are a decrease in diesel LDVs sales, increased sales of SUVS and pickups, and slow growth of electrified LDVs

Fuel Economy

Source: IEA-Fuel Economy in Major Car markets

Advanced Economies improvement limited to 0.1% per year recently

Global improvement below requirement to meet Global Fuel Economy Initiative Requirement

21

• In 2012, NHTSA established passenger and light truck CAFE standards for 2017-2021 at 40.3-41.0 miles per gallon (mpg) and an average of 54 mpg by 2025

– The 54 mpg is equivalent to the EPA issued greenhouse gas emissions (GHG) requirements of 163 grams/mile for model year 2025

– In August 2018, the CAFE standard was frozen at the 2021 levels

• With the frozen CAFE standards, the fuel economy improvement could drop further, slowing the reduction in demand

CAFE Standards

While fleet fuel economy will improve over the long term, fleet turnover effects on fuel economy

are limited in the near term

Source: EIA AEO 2019

22

EPA Final Renewable Quotas for 2019; Up Slightly From 2018

RFS Volume Requirements

2014 2015 2016 2017 2018 2019

Cellulosic Biofuel, Billions of Gallons .033 .123 .230 .311 .288 .418

Biomass Based Diesel, Billions of Gallons 1.63 1.73 1.90 2.00 2.10 2.10

Advanced Biofuel, Billions of Gallons 2.67 2.88 3.61 4.28 4.29 4.92

Renewable Fuel, Billions of Gallons 16.28 16.93 18.11 19.28 19.29 19.92

EPA RFS Volumes

EPA 2019 Percentage Standards 2019

Cellulosic Biofuel 0.230%

Biomass Based Diesel 1.73%

Advanced Biofuel 2.71%

Renewable Fuel 10.97%

Source: EPA

Actual

23

Discussion Draft: The 21st Century Transportation Fuels Act

• Hearing in December 2018, part of the 115th Congress

• The discussion draft eliminates the mandate in the Clean Air Act (CAA) to blend specific volumes of renewable fuel into the fuel supply and replaces the RFS with a national high-octane fuel standard requiring production and sale of fuel with a research octane number (RON) of at least 95.

– Enables the use of higher ethanol blends to produce the high octane fuels

– Prohibits states from requiring use of renewable fuels

95 RON Gasoline

• Recent EIA study completed by Baker & O'Brien demonstrates refineries should have no problem meeting a 95 RON standard in 2022

• Required pool octane is actually lower on average in 2022 with 95 RON with increased octane requirements going forward due to decreasing overall demand and increased 95 RON demand

Source: Baker & O’Brien

24

United States • Carbon pricing, in the form of Cap-and-Trade, is limited to California

• Oregon, Washington, and California have a have a Low Carbon Fuel Standard

– California - 2010 Goal of 10% reduction by 2020

Cap-and-trade with Quebec

– Oregon Goal of 10% reduction by 2025

– Washington – recently passed Expected to begin January 1, 2021

Requires fuel producers to reduce the carbon intensity of fuels 10 % below 2017 levels by 2028

• Transportation & Climate Initiative of Northeast and Mid-Atlantic States announced in late 2018

Consists of 9 states plus DC with goal to design regional low-carbon transportation policy to cap and reduce carbon emissions from combustion of transportation fuels

Goal is to complete policy design within 1 year

U.S. Carbon Costs

Source: Price on Carbon and Baker & O’Brien Analysis

LCFS and Cap-and-trade

LCFS

25

Canada • Passed a universal carbon tax starting at $20 per

tonne in 2019 rising $10/tonne/year to $50/tonne in 2022

– Alberta – Carbon tax implemented in 2017

$20/tonne in 2017 and $30/tonne in 2018

– Ontario – Implemented Cap-and-Trade in 2017

New government canceled it in July 2018

Opposes new federal carbon tax

Saskatchewan – No carbon taxing system

Opposes new federal carbon tax

Challenging the federal mandate in court

Canadian Carbon Costs

– British Columbia – Carbon Tax

Began a carbon taxing system in 2008

Beginning April 1, 2018, B.C.'s carbon tax rate was $35 per tonne of carbon dioxide equivalent emissions. The tax rate increases each year by $5 per tonne until it reaches $50 per tonne in 2021.

– Quebec – Cap-and-trade system since 2013

Cap-and-trade with California

Currently meets new federal Canadian carbon tax provisions

Source: Government of Canada

26

• IMO 2020

• Renewable Diesel

• Tier 3 Gasoline

Hydrogen Demand

• E15

• 95 RON

• Sour Crude Sanctions

27

Possible Discussion Topics

• East Coast Refinery Balances Post PES Fire

• Crude Oil Export Trends

• Refined Products Export Trends

• Saudi Arabia Oil Infrastructure Attacks

• Venezuela Oil Sanctions

28

Contact Information

London Office

146 Fleet Street, Suite 2

London EC4A 2BU Phone: 44-20-7373-0925

Houston Office

1333 West Loop South Suite 1350

Houston, TX 77027 Phone: 1-832-358-1453

Fax: 1-832-358-1498

Dallas Office

12001 N. Central Expressway Suite 1200

Dallas, TX 75243 Phone: 1-214-368-7626

Fax: 1-214-368-0190

www.bakerobrien.com