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

Assessing the Impact of the Changing Crude Oil

Landscape in North America

Baker & O’Brien, Inc.

November 5, 2013

1

• Introduction

• U.S. and Canada Sulfur Production Trends and Overview

• Crude Oil / Refining Evaluation Framework

– U.S Refining Inputs of Sulfur

– U.S. Heavy Oil Conversion Activity (Coking)

– Fuel Regulatory Impacts

• Outlook

Discussion Topics

2

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electrical engineers

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– Experienced problem solvers

Introduction

3

-

10

20

30

40

50

60

70

80

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

• U.S. and Canada declines both driven by reduced sour gas processing

U.S. and Canada Sulfur Production Trending Down Amid Global Growth

U.S.

Rest of World

U.S., Canada, and Global Sulfur Production Trends, million tonnes/year

Sources: U.S. Geological Survey, (USGS), Natural Resources Canada, Baker & O’Brien analysis

Canada

Trends & Overview

4

• U.S. is net short sulfur; primary import sources are Canada (80+%) and Mexico (12%)

• Refineries account for 88% of produced supply; gas plants only account for 12%

U.S. Sulfur Balance Overview

`

`

` Gas Plants 1,040

Imports

2,930

Refineries

7,320

Exports 1,850

Consumption

9,490

U.S. Sulfur Balance – 2012 (000 tonnes)

Sources: USGS, Baker & O’Brien analysis

Su

pp

ly S

ou

rce

s

Dis

po

sit

ion

Recent Trends

Trends & Overview

5

• Sulfur from gas processing has trended lower with declining conventional production

• Refinery sulfur production has been generally flat

U.S. Sulfur Production Decline Driven by Gas Side of Equation

Source: USGS

-

2,000

4,000

6,000

8,000

10,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

U.S. Sulfur Production, 000 tonnes/year

Gas Processing

Refining

U.S. Sulfur Production, 000 tonnes per year

Trends & Overview

6

• Sour natural gas and oil sands upgrading are primary sources

• Sulfur production greatly exceeds domestic needs; excess sulfur is exported

Canada Sulfur Balance Overview

`

`

`

Gas Plants

2,900

Oil Sands

Upgraders /

Heavy Refineries

2,200

Refineries 460

Exports

4,650

Consumption

850

Canada Sulfur Balance – 2012 (000 tonnes)

Sources: Natural Resources Canada, Canadian Association of Petroleum Producers, PentaSul, Baker & O’Brien analysis

Su

pp

ly S

ou

rce

s

Dis

po

sit

ion

Recent Trends

Trends & Overview

7

-

1

2

3

4

5

6

7

8

9

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

• Sulfur produced from gas processing has declined by about 45%

• Sulfur from heavy oil upgrading has continued to grow

• Total Canada gas production has declined 17% in the past 5 years (2007-2012); Alberta gas production has declined 24% over the same period

Canada Sulfur Production Decline Driven By Declining Gas Production

Alberta

British Colombia

Canada Gas Production (Net), TCF

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Natural Gas

Upgrading

Refining All other

Canada Sulfur Production, 000 tonnes

Trends & Overview

Sources: Natural Resources Canada, CAPP, PentaSul, Baker & O’Brien analysis

8

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2011 2012 2015 2020

U.S. + Can Sulfur Production, 000 tonnes

Upgrading-Can

Gas Proc-Can

Refining-Can

Gas Proc-US

Refining-US

• U.S. refining accounts for over 50% of total production, followed by Canadian sour gas (20%) and oil sands upgraders (15%)

Putting it all Together: U.S. + Canada Sulfur Sources

U.S. and Canada Sulfur Production Summary, 000 tonnes

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2011 2012 2015 2020

U.S. + Can Sulfur Production, 000 tonnes

Upgrading-Can

Gas Proc-Can

Refining-Can

Gas Proc-US

Refining-US

Trends & Overview

Sources: Natural Resources Canada, CAPP, PentaSul, EIA, USGS, Baker & O’Brien analysis

9

• PADD 3 accounts for over 60% of total sulfur production, driven by refinery processing capacity and gas production sources

PADDs 3,4, 5 Are Dominant U.S. Sulfur Production Sources

Legend

Sulfur from natural gas processing, 000 tonnes

Sulfur from petroleum refining, 000 tonnes

PADDs 4 and 5

PADD 2 PADD 1

44

Sources: EIA, USGS, Baker & O’Brien analysis

U.S. Sulfur Production by PADD in Q1 2013, 000 tonnes

Trends & Overview

275 263

1,127 1,120

316306

117 109

167102

275 263

1,127 1,120

316306

117 109

167102

275 263

1,127 1,120

316306

117 109

167102

275 263

1,127 1,120

316306

117 109

167102PADD 3

4

3

10

Gasoline, diesel, heating oil, jet fuel account for less than 1%; jet fuel is about 60% of the total

Other large sulfur “sinks” include petcoke (20% of inputs) and asphalt (7%).

Two-thirds of sulfur input to U.S. refining system is recovered as elemental sulfur.

Inputs 000 tonnes % of Total Input

Crude Oil 10,856 98%

Feedstocks 246 2%

Total 11,102 100%

Outputs

Elemental Sulfur 7,320 66%

Petcoke 2,220 20%

Asphalt 794 7%

Other 372 3%

Residual Fuel Oils 322 3%

Light Refined Products 75 1%

Total 11,102 100%

U.S. Refining System Sulfur Balance

U.S. Refining System Sulfur Balance - 2012

Trends & Overview

Sources: PRISM refinery database system, Baker & O’Brien analysis

11

• Refinery sulfur production is a function of crude slate and configuration

• Large coking refineries produce sulfur volumes that are 1-2 orders of magnitude higher than simpler refineries

• For most refineries, recovered sulfur will likely be in the range of 60-70% of input sulfur, unless there are large yields of asphalt and residual fuel oil.

Refinery Sulfur Balances Dominated by Heavy Sour Coking Refineries

Large Heavy-Sour Coking

Refinery

Medium-Heavy Sour Asphalt

Refinery

Light-Sweet Cracking Refinery

Refinery A Refinery B Refinery C

Elemental Sulfur,

000 tonnes/year

327 21 4

Fraction of Total U.S. 4.5% 0.3% < 0.1%

Sulfur Disposition, % of input

Elemental Sulfur 64% 38% 70%

Petcoke, Asphalt, Fuel Oil 36% 62% 21%

Light Transportation Fuels 0.3% 0.6% 8.8%

Sources: PRISM refinery database system, Baker & O’Brien analysis

Trends & Overview

12

A. Total Inputs of Sulfur

– Refinery run rates

Global supply/demand

U.S. competitive advantage

– Crude slate sulfur levels

U.S. growth of light/sweet

Canadian oil sands growth

Heavy/Sour imports

B. Conversion of Bottom of Barrel

– Coker; refinery expansion projects

– Petcoke gasification

C. Sulfur Regulatory Activity

– EPA Tier 3 (gasoline)

– Northeast States Heating Oil

U.S. Refinery Sulfur Production: Evaluation Framework

A

B

C

Image courtesy of Marathon Petroleum Company presentation

Framework

13

United States

Alberta, Canada

Mexico

Venezuela

Brazil

Colombia

Bakken

Eagle Ford Permian

Ecuador

Crude Oil Dynamics in Americas Impacting the Sulfur Supply Equation

• Country crude oil production profiles will influence the sulfur production outlook, among other factors

– Growing: U.S., Canada, Colombia, Brazil

– Flat-to-Declining: Mexico, Venezuela, Ecuador

A. Inputs

Primary growth regions

Gulf of Mexico

14

-

5

10

15

20

25

2008 2009 2010 2011 2012

Crude Oil Production, MM BPD

Colombia

Brazil

Canada

United States

Ecuador

Venezuela

Mexico

Changes in the U.S. and Canada Most Impactful

United States

Canada

Brazil

Colombia

Mexico

Venezuela

Ecuador

Petroleum Production, MMB/D

Growing Regions

Flat or Declining Regions

Source: EIA

A. Inputs

15

• Generally flat crude slate sulfur content within range of 1.4-1.5 wt%

Sulfur Inputs to U.S. Refineries Rebounding to 2008 Levels

9,600

9,800

10,000

10,200

10,400

10,600

10,800

11,000

11,200

11,400

2000 2002 2004 2006 2008 2010 2012

Sulfur Input to U.S. Refineries, 000 tonnes

1.26

1.28

1.30

1.32

1.34

1.36

1.38

1.40

1.42

1.44

1.46

1.48

2000 2002 2004 2006 2008 2010 2012

U.S. Crude Slate Sulfur Content, wt%

13,800

14,000

14,200

14,400

14,600

14,800

15,000

15,200

15,400

15,600

2000 2002 2004 2006 2008 2010 2012

U.S. Refinery Crude Inputs, MB/D

• Generally flat crude oil charge rates around 15 million B/D

Lower

utilization due

to recession

Reduced

heavy, sour

crude runs

Compound effect

of run cuts and

crude quality

Sources: EIA, Baker & O’Brien analysis

6% decline

‘08 to ‘09

4% decline

‘08 to ‘09

2% decline

‘08 to ‘09

A. Inputs

16

• Overall U.S. sulfur content has been relatively flat and slightly increasing

• PADD 3 sulfur content has been declining, but PADDs 2, 4, and 5 have been increasing

PADD Crude Slate Sulfur Trends Have Been Mixed

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

U.S. PADD 1 PADD 2 PADD 3 PADD 4 PADD 5

Crude Slate Sulfur Content by PADD, wt%

2000 to 2013

Declining Alaskan

production

Alberta Oil sands effect

Declining Mexican, Venezuelan imports

Sources: EIA, Baker & O’Brien analysis

A. Inputs

17

• The top five crude oil source countries – Canada, U.S., Venezuela, Saudi Arabia, and Mexico – account for 85% of total sulfur inputs

• Future projections a “mixed” bag: increased imports of heavy, sour diluted bitumen from Canada, offset to some degree by low-sulfur tight oil production growth

Country Sources of Crude Oil Sulfur: Current and Future Expectations

Canada

USA

Venezuela

Saudi Arabia

Mexico

Iraq

Kuwait

Ecuador

Colombia

All Others

Canada

USA

Ecuador

• Increasing heavy, sour grades

Colombia

• Increasing sweet (Bakken, Eagle Ford, Permian)

• Increasing sour (GOM, Permian), but less so than sweet grades

• Flat to declining production

• Flat to declining imports; lighter grades displaced

• Flat to declining production

• Declining imports?

Iraq

Sources of Sulfur Inputs (Q1 2013) and Expected Trends

All Others

Sources: EIA, PRISM refinery database system, Baker & O’Brien analysis

A. Inputs

18

• After peaking in the mid-1980s at 9 MMB/D, and reaching a low of 5 MMB/D in 2008, total U.S. production projected to average 7.4 MMB/D in 2013.

U.S. Oil Production Growing for First Time in Decades

Source: EIA

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Cru

de

Oil

Pro

du

ctio

n, M

B/D

U.S. Crude Oil Production

All Other

Rocky Mountains

Kansas, Oklahoma

California

Alaska

N. Dakota

Gulf of Mexico

Texas

U.S. Crude Oil Production Trends

Texas

Gulf of Mexico

Alaska California

North Dakota

All other Rocky Mountains Kansas, Oklahoma

7.4 MMB/D projected this year (2013)

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

A. Inputs

19

• U.S. production may exceed 10 MMB/D early next decade before peak/plateau

• Combined with Canada, incremental growth of over 5 MMB/D expected vs. 2013

Outlook for U.S. and Canada Crude Oil Production

Sources: Canadian Association of Petroleum Producers, (CAPP), Baker & O’Brien analysis

Note: Canadian crude oil supply includes diluent which is imported for blending of DilBit (diluent/bitumen blend).

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

An

nu

al A

vera

ge, M

B/D

Crude Oil Production and Supply

U.S. Production Canada Supply (including diluent)

Actual Forecast

U.S. and Canada Supply Outlook

U.S.

Canada

A. Inputs

20

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Dec-12 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Dec-12 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Drastically Changing North American Crude Mix

Incremental Crude Oil Supply, MB/D

Changes vs. 2012 2015 2020

Light-Sweet Grades 96 133

Medium Grades (1,286) (1,930)

Heavy-Sour Grades 1,560 1,949

Difference 370 153

Projected Crude Oil Imports, MB/D

• Over the near term (to 2015), the U.S. will see more light-sweet grades and heavy-sour grades, displacing medium grades

• After 2015, light supplies grow further as heavy oil runs plateau

• Sulfur input into the U.S. refining system increases

Light Sweet

Heavy Sour

Heavy Sour

Light Sweet

Medium

Medium

Sulfur Input Changes, 000 tonnes/year

Source: Baker & O’Brien analysis

A. Inputs

21

Company-Location Investment Timing Notes

Flint Hills-Corpus Christi $250 MM 2015 Sat gas plant; new and modified tankage;

only modest increase to existing capacity

Valero-Corpus Christi $240 MM Late 2015 70 MB/D topping unit

Valero-Houston $290 MM Late 2015 90 MB/D topping unit

Valero-McKee Mid 2015 25 MB/D expansion

Valero-Meraux, Port

Arthur

Evaluating low-cost projects to unlock light

crude oil capacity

Lyondell-Houston Minor modifications during Q1 2013

turnaround to increase light crude capacity

Marathon – Texas City Will discuss modifications at investor day

meeting in December

Phillips 66-Lake Charles,

Sweeny

Making modifications to enable processing

of more advantaged crude oil

Refiners Shifting Gears to Process More Light-Sweet

• Flint Hills (Corpus Christi) and Valero (Corpus Christi, Houston) are early movers

A. Inputs

22

$-

$2

$4

$6

$8

$10

$12

$14

$16

$18

0

1

2

3

4

5

6

7

8

LL

S -

Maya,

$/B

Maya C

okin

g C

ash

Marg

in, $/B

LLS - Maya (LHS) Maya Coking Cash Margin (RHS)

Record Coking Margins and Anticipated Oil Sands Growth Drove Massive Investments in Delayed Cokers

• Over $30 billion has been invested in U.S. coker-related refinery expansions over the past 5-7 years

Sources: Platts, Baker & O’Brien Analysis

Historical Perspectives on Light-Heavy Spreads and Coking Margins

High margins triggered

“super-cycle” in

conversion and

expansion investments

B. Conversion

23

0

1,000

2,000

3,000

4,000

5,000

6,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Colombia

Brazil

Canada

Mexico

Venezuela

• Declining imports from Mexico, Venezuela have contributed to under-utilized cokers

• Growth in Canada, Colombia, and Brazil have helped to offset decline somewhat, but have not been enough to fill current and projected coking capacity

However, Limited Availability of Heavy Oil Has Resulted in Poor Coking Margins

U.S. Crude Oil Imports from Countries with Heavy Oil, MB/D

Venezuela

Mexico

Canada

Brazil Colombia

Source: EIA

B. Conversion

24

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Sulf

ur

Re

cove

ry U

nit

Uti

lizat

ion

00

0 t

on

ne

s p

er

ann

um

Refiner Sulfur Capacity & Production

SRU Capacity (LHS)

Sulfur Produced (LHS)

Implied SRU Util (RHS)

• Deep conversion (coking) projects were developed in anticipation of increased heavy oil production in Canada and, generally, to increase competitiveness

• These projects required extensive increases to sulfur removal capacity

• However, sulfur production has been relatively flat and utilization of SRU capacity has trended lower

Refiners Anticipated Higher Sulfur Recovery Needs

U.S. Refinery Sulfur Capacity & Production

Sources: EIA, Baker & O’Brien analysis

Utilization

B. Conversion

25

• Sulfur production should increase by 300,000-400,000 tonnes/yr (4-5% of total U.S.) once design rates are achieved at Motiva Port Arthur and BP Whiting.

Sulfur Production to Grow Further After Last of Large Expansion Projects are in Operation

U.S. Refinery Sulfur Production, 000 tonnes/year (Top 65 refineries shown, accounting for 95% of total sulfur)

Recent coker project Planned coker project

WRB Wood River

Total Pt Arthur

MPC Detroit

BP Whiting – Q4 2013

Motiva Pt Arthur (ramping up to design rates)

MPC Garyville

Sources: PRISM refinery database system, Baker & O’Brien analysis

B. Conversion

26

• Asphalt and fuel oil production have declined while petcoke production (coking) is only slightly above levels from 8 years ago

• Availability of heavy crude oil has limited coker throughputs

Asphalt Production Has Declined Due to Soft Demand and Coker Projects

0

200

400

600

800

2005 2006 2007 2008 2009 2010 2011 2012

Asphalt, Residual Fuel Oil and Petcoke Production, MB/D

Asphalt Petcoke Resid Fuel Oil

Source: EIA

Asphalt, Residual Fuel Oil and Petcoke Production, MB/D (Note: Petcoke volumes shown in oil equivalent barrels)

B. Conversion

27

• Light Products

– Reduced sulfur in home heating oil (driven primarily by northeast states)

– Reduced sulfur in gasoline (EPA Tier 3)

– Although highly impactful to refinery capital requirements, the total sulfur contained in all light refined products (including jet fuel and high-sulfur exports) is less than 1% of total supply

• Reduced Sulfur in Bunker Fuels

– By 2015, sulfur content of marine fuel oil consumed in certain emission control areas must be reduced to 0.1% from current 1%

– By 2020 aggressive reductions in bunker fuel sulfur levels are being sought: targeting 0.5% vs. 3.5% (current sulfur levels), subject to a feasibility review to be completed no later than 2018.

– Sulfur in global bunker volumes (3.5% down to 0.5%) estimated at 8 million tonnes/yr or ~11% of global sulfur production

– Potential to be highly impactful to global supply-demand; however, seems likely that timeline will be extended

Regulatory Factors Not Likely to “Move the Needle” on Total Sulfur Production in Medium Term

C. Regulatory

28

A. Total Inputs of Sulfur

– Refinery run rates to get marginally higher with Motiva Port Arthur at full steam, expansion “creep” projects, and small new-builds

– Crude slate sulfur levels to go up in near term and decline slightly in outer years

B. Conversion of Bottom of Barrel

– The last two mega-projects will result in sulfur production increases in near-term, but that will be the end of the investment cycle for a while

C. Sulfur Regulatory Activity

– Not impactful over medium term

Outlook Recap

A

B

C

Image courtesy of Marathon Petroleum Company presentation

Outlook

29

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2011 2012 2015 2020

U.S. + Can Sulfur Production, 000 tonnes

Upgrading-Can

Gas Proc-Can

Refining-Can

Gas Proc-US

Refining-US

• U.S. refinery and Canadian upgrader sulfur production should trend higher with increased heavy oil processing and reduced imports of lower-sulfur grades

• Natural gas sulfur production expected to continue to trend lower

• Total sulfur production likely to continue slow decline

Dynamic Shifts in Refining, but… Relatively Static Total Sulfur Output

Projected

U.S. and Canada Sulfur Production Outlook, 000 tonnes

Source: Baker & O’Brien analysis

Outlook

30

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