Winner and Losers in the Dynamic Downstream Sector...CONFIDENTIAL 20 Will Competition Increase? 0...

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

Winner and Losers in the

Dynamic Downstream Sector

Onshore Energy Conference

01 November 2017

2 CONFIDENTIAL

Legal Notice

Baker & O’Brien, Inc., (Baker & O’Brien) prepared this presentation for the Aegis Onshore Energy Conference. The opinions and findings herein are based upon Baker & O’Brien’s experience, expertise, skill, research and analysis, and rely upon public and proprietary data available to Baker & O’Brien at the time this presentation was prepared. All forecasts and projections contained in this presentation represent Baker & O’Brien’s best judgment. 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. Any reproduction, distribution, or disclosure of this information is strictly prohibited without Baker & O’Brien’s prior written authorization. Baker & O’Brien expressly disclaims all liability for the use, disclosure, reproduction, or distribution of this information by or to any third party.

3 CONFIDENTIAL

• What defines “competitive”?

• Asset and Location Factors

• Competitive Landscape

• Possible Winners and Losers

• Hurricane Harvey

Agenda

4 CONFIDENTIAL

Refining and Petrochemical Value Chain: Overview

5 CONFIDENTIAL

• Refining

– Crude oil transport fuels

– Boiling ranges of molecules

– Key word - “Margin”

• Petrochemical

– Convert refinery gases, naphtha and NG to chemicals

– Chemical species

– Ethylene/propylene expensive to ship; plastics integration at site

– Key word – “Cost of production”

• Common Themes

– Capital intensive; scale and high utilization are key

– Feedstock costs comprise 80%+ of cash cost structure

– Globally competitive industries

Refining and Petrochemicals Characteristics

6 CONFIDENTIAL


Agenda

7 CONFIDENTIAL

• Return on Investment?

• Gross Margin

– Supply versus Demand – Price Structure (“Cracks”)

– Conversion capability (“Complexity”)

• Cash Operating Cost (OPEX)

– Economy of Scale

– Efficiencies

– Regulations

• Net Margin (NM)

– The results

The Metrics

Location

8 CONFIDENTIAL

20

40

60

80

100

120

140

Do

llars

Pe

r B

arre

l

Brent

WTI

Maya

Yields and Prices of Crude Oils

0

20

40

60

80

100

Brent WTI Maya

Yie

ld P

erc

en

tage

Naphtha andLighter

Kerosene

AtmosphericGas Oil

AtmosphericResidue

Source: PRISM™ Source: Platts and Baker & O’Brien analysis.

9 CONFIDENTIAL

• Is oil refining profitability determined by the price of oil?

Wisdom of Crowds – Question #1

A

B

C

Yes

No

Sometimes

10 CONFIDENTIAL

Crack Spreads: A Proxy for Refining Gross Margin

Pri

ce ($

/Bb

l.)

Products Crude Oil

Crack

11 CONFIDENTIAL

Crack Spreads

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00Ja

n-0

7

Jun

-07

No

v-0

7

Ap

r-0

8

Sep

-08

Feb

-09

Jul-

09

Dec

-09

May

-10

Oct

-10

Mar

-11

Au

g-1

1

Jan

-12

Jun

-12

No

v-1

2

Ap

r-1

3

Sep

-13

Feb

-14

Jul-

14

Dec

-14

May

-15

Oct

-15

Mar

-16

Au

g-1

6

Jan

-17

Jun

-17

Do

llars

Pe

r B

arre

l

USGC Maya Coking U.S. East Coast W. Africa Resid Crack NWE Brent VBR-FCC

Source: Platts and Baker & O’Brien analysis.

12 CONFIDENTIAL



Agenda

13 CONFIDENTIAL

Asset Factor – Representative Oil Refining Economies of Scale

1.5

2.0

2.5

3.0

3.5

100 125 150 175 200 225 250 275 300 325 350 375 400

No

n-V

olu

me

Co

sts,

Do

llars

Pe

r B

arre

l

Capacity, Thousands of Barrels Per Day

14 CONFIDENTIAL

Asset Factor - Heavy Oil Upgrading Capability

0%

10%

20%

30%

40%

50%

60%

70%

New Middle East Refinery USGC Average USEC Average NWE Average

Pe

rce

nta

ge o

f C

rud

e C

har

ge

FCC

Hydrocracking

Coking

15 CONFIDENTIAL

Location Factor - Natural Gas Costs 2016

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

NWE USGC Middle East

Nat

ura

l Gas

Co

st, $

/MM

Btu

Source: World Bank and Baker & O’Brien analysis.

16 CONFIDENTIAL

US West Coast US East Coast NWE Middle East

Local Crude

Growing Market

Isolated Market

Complex Refineries

Low Regulatory Burden

Low Operating Expenses

Large Margins

Location Factors

17 CONFIDENTIAL




Agenda

18 CONFIDENTIAL

Refining and Petrochemical Growth Rates

Oil Refining, Oil Consumption

Petrochemicals, Ethylene

Source: BP Statistics and Baker & O’Brien Analysis.

OECD Non-OECD

Gasoline/jet/diesel Residue

OECD Non-OECD

19 CONFIDENTIAL

• Refining Capacity Additions

• Regulations

• Other Headwinds

Topics

20 CONFIDENTIAL

Will Competition Increase?

0

500

1,000

1,500

2,000

2,500

3,000

0

500

1,000

1,500

2,000

2,500

3,000

2017 2018 2019 2020 2021 2022

Tho

usa

nd

Bar

rels

per

Day

(M

B/D

)

Estimated Refinery Crude Capacity Additions through 2022 Africa

South and Central America

North America

Europe and Eurasia

Middle East

Asia Pacific

All Announced Projects

Up to 8 MMB/D

Note: Projects have been handicapped. All potential projects shown with dashed outline

21 CONFIDENTIAL

76.0%

78.0%

80.0%

82.0%

84.0%

86.0%

-3,500

-1,500

500

2,500

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Uti

lizat

ion

, %

MB

/D

Capacity Additions Relative to Consumption and Utilization

Consumption Change - Capacity Change Utilization Utilization w/o Closures

Competitive Landscape - Refinery Capacity Additions/Shutdowns

Demand declined or capacity additions were greater than demand change

Forecast =>

Utilization drops triggering shutdowns (1.00)

(0.50)

0.00

0.50

1.00

1.50

2.00

2017 2018 2019 2020 2021 2022

MB

/D

Estimated Net Capacity Additions

B&O'B Estimated Additions Speculative Additions/Shut Downs Net Additions

Long Term Average

Timing of these additions could shift

22 CONFIDENTIAL

• Clean Air

– Cleaner Transport Fuels

• Climate Change / Energy Security

– Carbon Dioxide emissions

– Bio-diesel / ethanol mandates

– Efficiency

• Process Safety

Regulations

23 CONFIDENTIAL

Regulations – Diesel Fuel Sulphur Levels

Source: United Nations Environment Programme.

24 CONFIDENTIAL

Regulations Clean Fuels - Marine Bunker Fuels - MARPOL

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2005 2010 2015 2020 2025

% S

ulp

hu

r C

on

ten

t In

Mari

ne F

uel

Open Oceans(Global)

Coastal Seas(SECAs)

25 CONFIDENTIAL

Refinery & Petrochemical Headwinds

• Global Headwinds

– Anaemic oil demand growth (~1% per year)

– Expansions lead to over-capacity

– Environmental

Cleaner air (2020 MARPOL, engine type regulations)

Reduced carbon emissions

Transport: Shift to low emission vehicles

Industrial: Energy efficiency and decarbonization plans

Waste disposal - Focus on plastic recycling, alternatives to plastics

• Atlantic Basin Demand Headwinds

– Population growth and demographics

– Attitudes towards vehicle ownership

26 CONFIDENTIAL





Agenda

27 CONFIDENTIAL


– Refining

– Petrochemicals

• Winning Characteristics

Topics

28 CONFIDENTIAL

Indicative Atlantic Basin Cash Margin Estimates

Source: Baker & O’Brien PRISM™

29 CONFIDENTIAL

Marginal Refinery Market

30 CONFIDENTIAL

Estimated Regional Cost of Production for Ethylene

300

350

400

450

500

550

600

650

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120

Co

st o

f P

rod

uct

ion

, Do

llars

Pe

r To

nn

e

Cumulative Production, Millions of Tonnes Per Year

North America Ethane Plant

Middle East Ethane Plant

Middle East LPG Plant

NWE LPG Plant

NWE Naphtha Plant

31 CONFIDENTIAL

Petrochemical Capital Investment Growth

2013 2017 • 100 Capital Projects • Over $70 billion in Capital Investment

• Over 300 Capital Projects • Over $175 billion in Capital Investment

32 CONFIDENTIAL

• Location – Access to advantaged feedstock

e.g., US, Canada, Russia & Middle East

– Strategic access to a growing market e.g., Asia

• Assets – Value-Adding

Refineries - High percentage of upgrading capacity e.g. Inland Europe, USGC refineries.

Petrochemicals - Derivative integration - speciality chemicals, polymers

– Economies of scale – Synergy exploitation

Refinery-petrochemical integration (e.g., Korea, NWE, USGC)

Winning Characteristics

33 CONFIDENTIAL

2010 2011 2012 2013 2014 2015 2016

North America 275,000 325,000 675,000 88,000 140,000

Europe 447,000 96,000 717,000 272,000 379,000

Asia 140,000 265,000 140,000 777,000 302,000

Total Shutdown Capacity

862,000 686,000 1,392,000 500,000 1,296,000 302,000

Refinery Shutdowns

Refinery Crude Distillation Capacity (Barrels Per Day)

34 CONFIDENTIAL

• If you were to invest, say, $500 million, in the refining and/or petrochemical industry, which would you prefer?

Wisdom of Crowds – Question #2

A

B

C

D

E

NWE Refining

ME Refining

ME Petrochemical

USWC Refining

Asia Petrochemical

35 CONFIDENTIAL





• Hurricane Harvey

Agenda

36 CONFIDENTIAL

The Path: Harvey Took a Tour of U.S. Refineries and Petrochemical Facilities

Source: Petroleum Economist

37 CONFIDENTIAL

Impact on Eastern US

Source: EIA

No refineries – relies heavily on pipeline/barge movements from

USGC

38 CONFIDENTIAL

Impact of Hurricanes on U.S. Gulf Coast Refineries

0

1

2

3

4

5

6

7

8

9

10

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

Gro

ss In

pu

ts t

o U

.S. G

ulf

Co

ast

Ref

ine

rie

s (M

illio

ns

of

Bar

rels

Pe

r D

ay)

Weeks Before / After Storm Landfall

Hurricane Harvey

Hurricane Katrina

Hurricanes Gustav & Ike

Source: EIA

39 CONFIDENTIAL

Refining & Petchem Impacts

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Wee

kly

Ave

rage

Reg

ula

r U

nle

aded

Gas

olin

e P

rice

, D

olla

rs P

er G

allo

n

Shu

tdo

wn

Ref

iner

y C

apac

ity

(MB

/D)

USGC

New York Harbor

Lost Refining Capacity

40 CONFIDENTIAL

Baker & O’Brien, Inc.

Project Development

Engineering and Construction

Transportation and Storage

Refining

Product

Offsites

Marketing

Distribution

Petrochemicals

Product

• Litigation and Arbitration Support Expert Services – Engineering, Procurement, and Construction

(EPC)

– Property Damage and Business Interruption Insurance Claims

– Asset Valuations

– Accident/Incident Investigation

– Commercial Contracts

– Standard of Care

• Strategic Consulting and Industry Advisory Services

– Markets and Strategy

– Due Diligence and Advisor to Lenders and Investors

– Merger and Acquisition Support

– Competitive Position Analysis

– Supply Logistics

– Market Value Assessments

– Project Monitoring

– Economic Modeling

– Work Out Assistance

– Market Studies

– Offtake Logistics

– Feasibility Studies

– Independent Engineering

– Witness Performance Testing

– Due Diligence

– Optimization Studies

• PRISMTM Industry Modeling and Database

41 CONFIDENTIAL

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 Headquarters

12001 N. Central Expressway Suite 1200

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

Fax: 1-214-368-0190

www.bakerobrien.com

Winner and Losers in the Dynamic Downstream Sector...CONFIDENTIAL 20 Will Competition Increase? 0...

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