U.S. Crude Oil: The Upside & The Other Side · U.S. Crude Oil: The Upside & The Other Side ... GIS...

U.S. Crude Oil: The Upside & The Other Side

Greg Haas [email protected]

Director of Research, Integrated Oil & Gas

Houston, Texas

March 13, 2014

Disclaimer

Reports by Hart Energy Research & Consulting, including the North American Shale Quarterly (NASQ) and the North American Unconventional Oil report (NAUO) and related appendices, presentations, and attachments (“the report”) are provided on an “as is,” “as available” basis and Hart Energy Research & Consulting does not make and hereby specifically disclaims any representations, endorsements, guarantees, or warranties, express or implied, including, without limitation, any warranties of merchantability, fitness for a particular purpose, title, or non-infringement of intellectual property rights. Hart Energy Research & Consulting makes no representation that the report will be error free and makes no representation as to its completeness or accuracy. No part of the report constitutes any form of advice (investment, tax, or legal), recommendation, representation, or endorsement or should be relied upon by any person for any reason, including, without limitation, in connection with any investment decision.

2 © 2014 Hart Energy. All rights reserved.

© 2014 Hart Energy. All rights reserved. 3

Agenda

U.S. Crude Oil – The Other Side: Crude Competition, Flaring, Rail Safety Initiatives, Fuel Demand Declines

U.S. Crude Oil – The Upside: Upstream, Midstream, Downstream

U.S. Crude Oil – The Integrated Effects

Questions and Answers


Who We Are, How We Work


Hart Energy Research & Consulting Bridging the gap between data and results-oriented action

At Hart Energy Research & Consulting, we deliver strategic insights across the energy value chain that take into account the interlinkages and the macro-level factors

The strategic insights allow our customers to differentiate their presence and strengthen their businesses

Midstream Processing Fuel & Transport Upstream


New York

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Hart Energy Research & Consulting Global understanding and presence


North American Shale Quarterly Service (NASQ)

Timely ▪ Comprehensive ▪ Independent ▪ Consistent

Operator and play activity

GIS and valuation maps

Company acreage data

Infrastructure tracking


North American Unconventional Oil (NAUO)

Our comprehensive research suite:

Ties together Upstream, Midstream and Refining aspects of the shale and tight oil phenomenon.

Provides an outlook to 2017 for the U.S. and Canada.

Includes accompanying data in Excel spreadsheets.


The Upside


U.S. Crude – The Upstream Upside

One year later, what we are saying/seeing:

Our peak crude oil production forecast is higher and earlier

Our 2015 production forecast is up 170 Mb/d

Our playwide peak production forecast of 1,285 Mb/d arrives in 2022 vs. 1,145 Mb/d in 2025

Cumulative estimated recovery by 2030 is up 1 billion barrels, from 7.2 Bbbls to 8.2 Bbbls

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1,200

1,400

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2014E

2015E

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2025E

2026E

2027E

2028E

2029E

2030E

NASQ Bakken/Three Forks Crude Oil Forecasts

4Q12 4Q13

Mb/d

Source: Hart Energy Research & Consulting - North American Shale Quarterly Service (NASQ)



Expanding Resources

USGS doubled its

Bakken/Three Forks estimate of undiscovered technically recoverable reserves to 7.4 Bbbls

ND’s most recent total OOIP resource estimate is 300 Bbbls with 7 Bbbls to 15 Bbbls recoverable - Lynn Helms, ND State Dept. of

Mineral Resources to Congress, 7/14/12

Hart Energy Research & Consulting’s 4Q13 NASQ estimated Bakken recovery through 2030 is 8.5 Bbbls, up from an estimated 7.5 Bbbls in 4Q12

Source: USGS



Still running room to back out offshore imports

Based on our estimates of future crude oil production, midstream deliverability and refinery utilization, we expect imported crude oil volumes to decline significantly

Canada can access U.S. discounted crude as well to back out costlier offshore imports of light, sweet crude oil

Logistics must be available to clear any overhang and to distribute crude across the continent so that U.S. benchmark WTI & LLS prices avoid significant decline

(thousand b/d)

Source: Hart Energy Research & Consulting - North American Unconventional Oil (NAUO 2014)

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1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2012 2013F 2014E 2015E 2016E 2017E


U.S. Crude - The Midstream Upside: Crude By Rail

Announced investments in loading/unloading facilities, unrisked

5-Year Forward NAUO

2014 Forecast

(thousand b/d)

Rail loading – U.S. 4,695

Rail loading – W. Canada, unrisked 1,102

Rail loading – U.S. Bakken, unrisked 1,623

Rail loading – Niobrara, unrisked 1,159

Rail loading – Utica, unrisked 228

Rail loading – Permian/Panhandle, unrisked 937

Rail loading – Eagle Ford, unrisked 380

Rail loading – Cushing Area, unrisked 141

Rail loading – Woodford, unrisked 226

Rail offloading – PADD U.S. 6,657

Rail offloading – E. Canada 290

Rail offloading – PADD 1 1,494

Rail offloading – PADD 2 846


Rail offloading – PADD 4 35


We expect crude by rail (CBR) to remain a dynamic midstream contributor to the N. American logistics portfolio

We see more developers building interconnected multi-modal terminals to transload pipelined barrels onto railcar for delivery to end-use refiners

We expect CBR operators to realize operating-cost efficiencies to offset the increased costs of new safety standards (or else we expect lower rail shipments and higher pipeline use)



U.S. Crude – The Midstream Upside Bakken reaching all refining markets

Rail is taking Bakken crude to all major refining markets

Movements to East Coast markets are ideally geared for light Bakken crudes

Refiners accessing Bakken via CBR are likely to continue backing out higher-cost foreign imports in both the U.S. and Canada


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Bakken to East Coast Discounts vs. Estimated Rail Fees ($/bbl)

Bakken to Brent Rail Cost High Rail Cost Low


U.S. Crude – The Downstream Upside Incremental refining expansion - especially light oil capacity

North Dakota state refining capacity could at least double

Additional micro-refinery developers could add small incremental local crude demand (~10 Mb/d to 15 Mb/d each)

Other U.S. developers announced projects to take on 470 Mb/d of light crude in new distillation capacity and 780 Mb/d of condensate at new splitter capacity

The continental downstream industry offers upside to the Bakken crude oil industry thanks to the competitive advantages that refiners realize by accessing and running discounted Bakken feedstock in plants fueled by discounted shale gas


Facility Location

Capacity at

Start of 2013,

thousand b/d

Capacity at

2017 Year-end,

thousand b/d

est.

Dakota Oil Processing Trenton, ND 0 20 in 2015

Thunder Butte Petroleum

Services Makoti, ND 0 20 in 2014

Dakota Prairie Refining Dickinson, ND 0 20 in 2014

Bison Oil / American Energy

Holdings LLC Devils Lake, ND 0 20 in 2016

Announced Refining Capacity Expansion in North Dakota, Unrisked


U.S. Crude – The Downstream Upside

U.S. refinery advantage drives fuel exports around Atlantic/Caribbean

We see fuel exports from U.S. refiners as competitively advantaged due to discounted domestic crude oil feedstock and low-cost natural gas fuels

European gasoline demand and refining margins are likely to decline while surplus output grows. Dumping excess gasoline into the U.S. could pressure U.S. East Coast refiners.

European distillate demand ramp-up should offer some opportunity for increased exports from PADD 3 but must compete against new Middle Eastern refinery output

Latin American fuel demand growth (up 840 Mb/d by 2017) will offer incremental export potential, but the U.S. must compete against pending new Brazilian refinery output


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Diesel Gasoline

Change in Net Exports (thousand b/d)


The Other Side


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2012 2013 2014 2015 2016 2017

Crude oil Condensate NGL

U.S. Crude – The Upstream’s Other Side Crude producers selling into an increasingly flush market

Total 2017 liquids production is projected at more than 12 MMb/d in the U.S. and 5 MMb/d in Canada

Light crude oil production is likely to exceed 9.8 MMb/d

We estimate NGLs will likely exceed 3.9 MMb/d while lease condensate will likely exceed 1.1 MMb/d

Heavy oil to market is likely to exceed 3 MMb/d, mostly Canadian

(th

ou

sa

nd

b/d

) (t

ho

usa

nd

b/d

)

United States

Canada

Source for above images: Hart Energy Research & Consulting - North American Unconventional Oil (NAUO 2014)

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2012 2013 2014 2015 2016 2017

Crude Oil NGL Condensate


U.S. Crude – The Upstream’s Other Side Canadian crude surplus aiming at U.S.

The traditional home for crude oil from Western Canada has been PADD 2 and PADD 4

We forecast Western Canadian production gains are double the PADD 2+4 demand gain (1.0 MMb/d supply gain vs. a demand gain under 500 Mb/d)

Mb/d


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2012 2013F 2014E 2015E 2016E 2017E

Western Canada Oil Production PADD 2 & 4 Canadian Oil Imports


U.S. Crude – The Midstream’s Other Side Associated natural gas flaring must be addressed

More oil drilling/production means more associated gas production, and that could mean more gas flaring (29% of gas production today)

Flaring Task Force and North Dakota move to require drillers to submit a Gas Capture Plan when they apply for a drilling permit

Now capturing 71%, but Task Force set a goal of capturing 85% by 2016, then 90% by 2020, toward an ultimate goal of 95%

Gas production forecasts continue to rise. Our peak forecast has almost doubled.

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2018E

2019E

2020E

2021E

2022E

2023E

2024E

2025E

2026E

2027E

2028E

2029E

2030E

NASQ Bakken/Three Forks Gas Forecasts

4Q12 4Q13

MM

scf/

d

Source: Hart Energy Research & Consulting - North American Shale Quarterly Service (NASQ)


U.S. Crude – The Midstream’s Other Side Reducing flaring means investing in midstream infrastructure

This upstream challenge is an opportunity for the midstream

New investment in gathering, processing capacity and takeaway pipeline opportunities

Likely local end-use markets for incremental natural gas will be

1) Oilfield equipment repowered for natural gas and/or

2) Gas-fired electric generation facilities to meet local electricity demand growth

New Infrastructure Since 2006

Wet gas gathering pipelines @ 9,555 mi.

Gas processing fleet @ 1.259 Bcf/d

Dry gas takeaway @ 2.0+ Bcf/d

NGL takeaway @ ~150 Mb/d

$1.7B announced for 2014-2015 + 1,000 mi. wet gas gathering pipe

+ 400 MMcf/d gas processing + 75 Mb/d NGL takeaway + 400 MMcf/d gas export

+ 775 mi. dry gas inter/intrastate p/l

Source: North Dakota Flaring Task Force, 2014


U.S. Crude – The Midstream’s Other Side Heightened Bakken crude oil takeaway competition

Utilization of existing pipelines?

Viability of new pipeline projects?

Utilization of manifest loading facilities?

Utilization of unit train loading facilities, new and pending?

Impact of new safety rules and costs?

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YE08 YE09 YE10 YE11 YE12 YE13E

Pip

elin

e C

apac

ity (

thou

sand

b/d

)

% CBR Takeaway Share

Bakken Pipeline Takeaway Capacity

Rai

l Tak

eaw

ay S

hare


The Bakken Logistics Portfolio: CBR Skyrockets as Pipeline Takeaway Doubles


U.S. Crude – The Other Side: Crude Competition Macro-level factors will drive regional crude preferences and distribution

Ramping volumes peg Bakken and W. Canadian Select as key marginal crudes for the continent while Eagle Ford is becoming the key marginal crude in PADD 3

PADD 1 PADD 2 PADD 3 PADD 4 PADD 5

Tranche

1

Regional/local

crudes Very limited Bakken

Growing:

Eagle Ford Niobrara

Totally

consumed

includes ANS,

California

local

Declining:

WTI, LLS

Tranche

2

Interregional

crudes

Bakken by

rail

Declining:

WTI, LLS

Growing:

Bakken n/a Bakken

Tranche

3

Canadian light

and heavy

Limited

volume WCS

Growing:

WCS

Growing:

WCS

Limited

volume WCS

Limited light

and heavy

Tranche

4

Other imported

crudes

Declining

balance

Declining as

Canadian and

Bakken

increase

Declining as

Western

Canadian

Select and

Eagle Ford

increase

n/a

Balance with

PG, Asia, LA,

Russian



U.S. Crude – The Downstream’s Other Side U.S. fuels demand will stagnate and then decline

Gasoline demand drops 100 Mb/d lower by 2017 when accelerated declines begin

Demand for middle distillates (including jet fuel) to increase slightly

We expect combined total U.S. fuel demand to begin structurally declining post-2015

(thousand b/d)


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2012 2013 2014 2015 2016 2017

Total

LPG/Gas

Gasoline

Jet Fuel

Distillate

Residual Fuel

Other


The Integrated Effects


The Impact of U.S. Crude Oil

Light Crude Supply

Across the value chain

Upstream

Midstream

Refining

Crude Oil Logistics

Light Crude Refining


The Impact of U.S. Crude Oil

U.S. unconventional crude production has rocketed from essentially zero in 2005 to more than 3 MMb/d a decade later.

Bakken/Three Forks alone now outputs more barrels than the four North Sea streams that go into the global benchmark blended Brent crude oil.

The development of unconventional liquids has reversed the U.S. production decline that started in the 1980s. Multi-decade supply records are falling.

Across the value chain

Upstream


The Impact of U.S. Crude Oil Across the value chain

Midstream

Ramping production and wide differentials are altering crude oil flow dynamics. Potentially wider U.S. crude exports (including potentially from SPR) may upend world oil market structures.

Investments in logistical assets are required to align with the new flow dynamics and to alleviate bottlenecks. New pipelines, unit train facilities and marine multimodal logistics are underwritten by wide differentials.

A unit train crude terminal investment wave is now underway after earlier manifest facilities proved the concept. For rail, 2013 was The Year of the Terminal. 2014 is The Year of the Tanker.


The Impact of U.S. Crude Oil Across the value chain

Refining

Ramping unconventional production and new logistics are altering the supply landscape for feed & fuel while upping refinery competitive advantage.

In five years, the U.S. has rotated from the world’s largest fuel importer to the largest fuel exporter.

U.S. advantaged unconventional oil/gas is driving future refining investments and altering global refining markets (Atlantic and Caribbean first).


Questions & Answers

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