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

AFPM Annual Meeting

March 18, 2019

Will IMO 2020 Dictate Light

Sweet Crude Export

Destinations?

1

Legal Notice

Baker & O’Brien, Inc. (Baker & O’Brien) prepared this presentation for the American Fuels & Petrochemicals Manufacturers (AFPM) Annual Meeting. The opinions and findings in this report are based upon Baker & O’Brien’s experience, expertise, skill, research, analysis, and related work to date. This report relies upon public and proprietary data available to Baker & O’Brien at the time this report was prepared. All forecasts and projections contained in this presentation represent Baker & O’Brien’s best judgment, utilizing its skill, and expertise. However, such forecasts and projections are inherently uncertain due to the potential impact of factors or future events that are unforeseeable at this time or beyond Baker & O’Brien’s control. Baker & O’Brien expressly disclaims all liability for the use, disclosure, reproduction, or distribution of this information by or to any third party. PRISM™ is Baker & O’Brien’s refinery modeling and database system that includes operational and economic performance details for refineries in the U.S., Canada, Europe, and Asia. PRISM is a trademark of Baker & O'Brien, Inc. All rights reserved.

2

Acronyms and Definitions

AGO

ECA

FCC

HDT/HDS

HSB/LSB

HSFO

IMO

LCO

LSVGO

LVGO

MARPOL

MCB

MGO

NYMEX

ULSD

USGC

VLSFO

VGO

Atmospheric Gas Oil

Emission Control Area

Fluidized Catalytic Cracker

Hydrotreater/Hydro-Desulfurizer

High/Low Sulfur Bunker

High Sulfur Fuel Oil

International Maritime Organization

Light Cycle Oil

Low Sulfur Vacuum Gas Oil

Light Vacuum Gas Oil

Marine Pollution

Main Column Bottoms

Marine Gas Oil

New York Mercantile Exchange

Ultra Low Sulfur Diesel

United States Gulf Coast

Very Low Sulfur Fuel Oil

Vacuum Gas Oil

Heavy distillate from an atmospheric distillation unit

Near coastal areas with tighter fuel specifications

Cracks VGO and other intermediates into lighter components

A refinery unit that removes sulfur

Heavy ship fuel with maximum 3.5% / 0.5% sulfur

Heavy fuel for any use with maximum 3.5% sulfur

United Nations organization, no direct police power

Diesel range stream from FCC

Virgin or hydro-treated VGO to cracking units

VGO to diesel or cracking units, sulfur depends on crude

Related to IMO oversight

Heaviest, poor quality stream from FCC

Fuel for ships that is lighter than residual fuel

Market which trades ULSD futures

Diesel with less then 15 ppm sulfur (10 ppm in Europe)

Location of many complex refineries

Meeting 0.5% maximum sulfur specifications

A heavy distillate stream from a vacuum distillation column

3

What is IMO 2020?

• "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

Marine Bunker Fuel Pollution Regulation – MARPOL IMO 2020

Map Source: DuPont

4

Futures Market Expectation of Relative Value

5

The IMO 2020 Conundrum

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

Decisions are being made based on views of forward economics

(pricing, capital availability, supply/demand dynamics)

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

6

Cracking Refinery Compliance Options

PROS CONS

Buy Very Low Sulfur Crude No complexity or blending required Higher price

Growing availability from U.S. Shale Current limited availability

Light ends constraints?

Blend ULSD* into Bunker Almost zero % sulfur Highest priced blendstock

Compatibility concerns

Substitution with LSVGO Lower price than ULSD Higher volume required

Feed for cracking units

*Other distillates might be blended depending on sulfur content and compatibility

OPTIONS TO PRODUCE 0.5% S BUNKER FUEL

7

Baker & O’Brien Estimates of Potential 2020 Compliance

0.7

0.7

0.7 0.2

0.6 0.2

0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

MM

B/D

HSB

3.2

LSB

3.4

Non-Compliance

or Compliance

through Waivers

Scrubbers Blending Refinery

Upgrades

Crude

Slate

Shifts

Energy

Density

Increased

Refinery

Throughput

8

Hypothetical Two-Train Complex Refinery

Hydrogen

Atm Crude Unit

Naphtha HDS

Reformer

HDS 1

VGO Hydrotreater

FCC

Alkylation

Cat Poly

H2 SMR Plant

Hydrocracker

Coker

Atm Crude Unit

Vac Crude Unit

HDS 2

Train 1 Low-Sulfur Crude Oil

Nat Gas Hydrogen for Hydrocracker, HDS units

LCO to HDS2 or Hydrocracker

C5+ Naphtha Coker Naphtha

SR Naphtha

SR Distillate

LVGO

HVGO

Vac Resid

SR Naphtha

LVGO

HVGO

SR Distillate

Coker Heavy Gasoil

Naphtha

Vac Crude Unit

Vac Resid

Coker Gasoil

LCO from FCC

Petcoke

Distillate Blending

Gasoline Blending

C4=, IC4

C3=

Hydrocracker Diesel

Reformate

Asphalt

Isomerization LSR Naphtha Isomerate

Butane

Train 2 High-Sulfur Crude Oil

Hydrogen

Hydrogen

Hydrogen

Blending

ETBE

Atm Resid

To FCC

Heavy Fuel Oil (HFO) Blending

9

• The next two slides will tell us:

– The distillation process that creates High Sulfur Fuel Oil (HSFO)

– Yields of distillate, gas oils, and resid for three commodity crudes

– The typical sulfur in:

Whole Crude

Resid

Distillate plus Resid

• …and answer these questions:

– Does a representative heavy fuel oil blend from light sweet crude meet 0.5% sulfur?

– Can a refinery simply drop straight run distillate into HSFO to meet the 0.5% bunker fuel specification?

Heavy Fuel Oil From Commodity Crudes

10

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Brent37.5 API0.40 % S

Fu

el

Oil S

ulf

ur

(wt.

%)

Yie

ld (

vo

l.%

)

Fuel Oil Yield and Quality*

VR MCB LCO FO Sulfur (RHS→)

Cracking Refinery – Simplified Model BASE CASE - BRENT CRUDE

Crude

Sulfur

Fuel Gas

LPG

Gasoline

Jet/Kero

Diesel/AGO

Atm

os

ph

eri

c T

ow

er

H2

HDT

H2S

H2

H2S

FCC

LVGO

Light Ends Naphtha

Vacuum Resid

1

1

450°F

650°F

Vacu

um

To

wer

Gas Plant -Treating Sulfur Recovery

Reforming Alkylation and Isomerization

Naphtha Hydrotreating

1

HVGO

1050°F+

1050°F

950°F

LCO

MCB/Slurry

Source: PRISMTM

650°F+

0.00

0.50

1.00

1.50

2.00

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Brent37.5 API0.40 % S

Die

sel

Su

lfu

r (w

t.%

) B

EF

OR

E H

DT

Yie

ld (

vo

l.%

)

Middle Distillates Yield and Quality

Diesel/AGO Jet/Kero Diesel Sulfur (RHS→)

*These blends are representative of many possible combinations

11

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Bonny Light35.1 API0.15 % S

Brent37.5 API0.40 % S

Arab Light32.5 API1.93 % S F

uel

Oil S

ulf

ur

(wt.

%)

Yie

ld (

vo

l.%

)

Fuel Oil Yield and Quality*

VR MCB LCO FO Sulfur (RHS→)

Cracking Refinery – Simplified Model CRUDE COMPARISON

Crude

Sulfur

Fuel Gas

LPG

Gasoline

Jet/Kero

Diesel/AGO

Atm

os

ph

eri

c T

ow

er

H2

HDT

H2S

H2

H2S

FCC

LVGO

Light Ends Naphtha

Vacuum Resid

1

1

450°F

650°F

Vacu

um

To

wer

Gas Plant -Treating Sulfur Recovery

Reforming Alkylation and Isomerization

Naphtha Hydrotreating

1

HVGO

1050°F+

1050°F

950°F

LCO

MCB/Slurry

Source: PRISMTM

650°F+

0.00

0.50

1.00

1.50

2.00

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Bonny Light35.1 API0.15 % S

Brent37.5 API0.40 % S

Arab Light32.5 API1.93 % S

Die

sel

Su

lfu

r (w

t.%

) B

EF

OR

E H

DT

Yie

ld (

vo

l.%

)

Middle Distillates Yield and Quality

Diesel/AGO Jet/Kero Diesel Sulfur (RHS→)

*These blends are representative of many possible combinations

12

• Some less complex European refineries run

– North Sea/African crudes similar to Brent (sweet) and

– High sulfur Urals (sour)

• European refineries are now running WTI and Eagle Ford

– Breakeven values versus Brent and Urals set the refining value, which may influence the USGC value

• How could the value of WTI/Eagle Ford change under IMO 2020?

Refining Value of Light Sweet Crude Exports

13

European Refineries

Source: Google Maps, PRISM

Other Refineries

Resid Upgrading Refineries

14

Northwest Europe Non-Coking Refinery

Hydrogen

Atm Crude Unit

Naphtha HDS

Reformer

HDS 1

VGO Hydrotreater

FCC

Alkylation

Cat Poly

H2 SMR Plant

Hydrocracker

Coker

Atm Crude Unit

Vac Crude Unit

HDS 2

Train 1 Low-Sulfur Crude Oil

Nat Gas Hydrogen for Hydrocracker, HDS units

LCO to HDS2 or Hydrocracker

C5+ Naphtha Coker Naphtha

SR Naphtha

SR Distillate

LVGO

HVGO

Vac Resid

SR Naphtha

LVGO

HVGO

SR Distillate

Coker Heavy Gasoil

Naphtha

Vac Crude Unit

Vac Resid

Coker Gasoil

LCO from FCC

Petcoke

Distillate Blending

Gasoline Blending

C4=, IC4

C3=

Hydrocracker Diesel

Reformate

Asphalt

Isomerization LSR Naphtha Isomerate

Butane

Train 2 High-Sulfur Crude Oil

Hydrogen

Hydrogen

Hydrogen

Blending

Visbreaker

ETBE

Heavy Fuel Oil (HFO) Blending

Atm Resid

To FCC

15

What is the incremental value of U.S. shale crudes in a representative European refinery?

1. Model typical crude slate, product yields, and operating costs

2. Apply historical gate prices for feedstocks and products

3. Generate a gross margin

4. Substitute a cargo of shale crude for a cargo of typical crude (e.g., Brent or Urals)

5. Generate a new gross margin with the new crude

6. Repeat with modified price-set for IMO-2020

In addition to gross margins, the model will report changes to product yields, operating costs, octane, hydrogen balance, and sulfur production, among others.

European Crude Oil Substitution

16

What is the substitution value of WTI and Eagle Ford versus Brent in a representative European refinery?

1. Using Pre-IMO 2020 prices (Historical)

2. Using discounted HSFO prices ($15 is similar to 2020 futures)

3. Plus using increased ULSD prices ($4 is similar to 2020 futures)

European Crude Oil Substitution

Source: Baker & O’Brien analysis and PRISMTM, WTI at 42 API, Eagle Ford at 47 API

17

What is the substitution value of WTI and Eagle Ford versus high sulfur Urals in a representative European refinery?

1. Using Pre-IMO 2020 prices (Historical)

2. Using discounted HSFO prices ($15 is similar to 2020 futures)

3. Plus using increased ULSD prices ($4 is similar to 2020 futures)

European Crude Oil Substitution

Source: Baker & O’Brien analysis and PRISM, Urals at 32 API

18

Possible Europe and U.S. Refineries Sulfur Optimization

• 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.

IMO 2020 DRIVING FORCES

19

• Sulfur content of crudes, distillates, and resids will be key value driver

• Commodity prices and demand will be volatile due to unprecedented global changes

– Several technical, environmental, and regulatory changes are untested

– Using Linear Programs for long-term planning may be futile due to numerous and wide-ranging scenarios outside narrow operating boundaries

• Practice the “Art of War” and plan ahead with scenarios, such as:

– IMO 2020 regulation falls apart or is delayed

Ship exhaust scrubber implementation ramps up; or doesn’t

Scrubbers (not just open loop) are restricted due to environmental concerns

– ULSD and LSVGO prices increase due to blending into VLSFO

– Gasoline prices increase due to FCC rate cuts

– HSFO and FCC Slurry inventories reach containment levels

– Price spread between low and high sulfur crudes increases

Conclusions and Recommendations

20

Contact Information

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