BENZINGA PRO U.S. OIL REPORT

JULY 2015

The Libya Government will seize any tanker that attempts to enter its Ras Lanuf port according

to Reuters. Battling parties for government power in Libya had been responsible for the closure

of the port. Marine Traffic shows some fishing, tanker, and livestock vessels in ports in Libya

but most, including large tankers, are avoiding the area (Image).

The Libyan Petroleum Facilities Guard has orders to "intercept any tankers trying to approach

the oilfields for security and technical reasons" according to Reuters citing NOC Chairman

Yousef Bu Saifi. The Libyan refusal to let most ships enter its ports suspected of bringing aid

to enemy combatants is just another annoyance the industry has to deal with. One month ago

almost to the day Benzinga reported on the Singapore pirates attacking ships and stealing

cargo, even going as far as to repaint one.

A review of the US crude import and transportation data is prudent as the oil industry prepares

to move stored oil and as the idled tanker ships storing oil come to center stage slow, with

Irans storage release impact already being discussed.

Since 2010 Non-OPEC countries Landed Costs of Imported Crude have run below those of

OPEC and Persian countries according to the EIA.

The Landed Crude Oil Cost refers to the price of crude at the port from which it departs. This

cost does include purchasing, transporting, and insuring the cargo but does not include things

like tariffs and import fees incurred at the arrival port. Breaking down the chart below it is

evident the US's cheapest import cost comes from Canada ($45.69/brl), then Mexico

($51.60/brl), followed by Venezuela ($52.51/brl), Colombia ($56.70/brl), and Saudi Arabia

($58.80/brl) as of April 2015 according to EIA data.

The United States pipeline infrastructure is roughly 2.6 million miles in length and operated by

nearly 3,000 companies according to the US DOT. These pipes run throughout the US and

connect the five Petroleum Administration For Defense Districts or PADD for short, along with

various logistics lines including rail.

Fridays rig count report shows a second

week of increasing rigs, generating

excitement for bulls that the decline may be

over. Julys investor letter from Andrew Hall

of Astenbeck recognizes improving

fundamentals for oil going forward: Despite

the lackluster price action, underlying

fundamentals for oil continue to improve. It

is becoming increasingly clear that the huge

oil surplus that most analysts predicted for

the first 6 months of 2015 failed to

materialize. Refiner acquisition costs which include transportation and other refiner fees have

collapsed recently, driven primarily by the spot price decrease, making refiner margins all the

more appealing for the bulls.

The US has brought new projects on-line in the past couple years allowing more oil to flow into

& out of Cushing, enabling large capacity for pumping to the Gulf Coast for export. The

transportation out of the Gulf and up to the Northeastern US tacks an extra $5-$6 onto each

barrel due to Jones Act shipping regulations which essentially covers the liability of workers

recouping wages from employees if injured. The US DOT lists the vessels the Jones Act applies

to and Chevron (NYSE: CVX) owns 4 of these militarily useful vessels:

Two recent outbound projects have boosted the movement of product through Cushing: (1)

TransCanada Gulf Coast Project officially came online to pipe product January 22, 2014 and

(2) Enbridges Seaway pipeline twinning (doubling up) came alive in December 2014. The

other major region in the US, Bakken in North Dakota, is increasing its pipeline capacity and

rail capital investments to increase rail capacity for transport.

According to Brown Brothers Harriman & Co Bakken should be able to move nearly 90 percent

of its production by the end of 2016. CSX (NYSE: CSX), third largest operator in the US by

market-cap lacks any access to this rail game in PADD 2 according to images on the companys website. Burlington

Northern Santa Fe, the rail

line purchased by Warren

Buffett in 2009, is the only

major rail operator

connected in the Bakken

region. Publicly traded

Canadian Pacific company

(NYSE: CP) does have a

line running through the

state into Canada that

allows a stop off at Dakota

Plains refinery and may

offer some exposure to

the regions need to move its supply.

Choosing what method to

transport depends on how

you view the impacts of oil

spills. Do you consider damage to the environment or perhaps the size of the spill or maybe

the number of deaths as the most important factor?

If human deaths were the main indictor, it would follow that Trucks are worse than Pipes are

worse than Boats according to a Forbes 2014 article. When measuring size of spillage Trucks

are worse than Pipes are worse than Rails are worse than Boats. When measuring

environment, Boats are worse than Pipes are worse than Trucks are worse than Rails. So

there are many ways to skin this cat. Rail is not the worst way to transport oil but recent

problems with derailing and explosions have not helped eased any public concern regarding

the transportation of oil. According to EIA data Tanker Car usage is growing as Tanker ship

use declines. Barges and Trucks are also seeing an increase in use as are pipelines.

A 2014 Kansas City FED report lays out a comparison of pipelines, rails, barges, and trucks in

terms of Capital Cost, Operating Cost, Coverage, and Shipment Size. A recent decline in the

materials required for pipeline

construction has helped to boost

spending. For pipe diameters of

8-inch, 12-inch, 16-inch, and

20-inch construction has

exploded according to data from

the Federal Energy Regulatory

Committee Form 6. Form 6 complies operational and financial information of oil pipeline

companies with jurisdictional operating revenues in excess of $500,000. From 2013 to 2014,

Labors portion of estimated costs for land

pipeline rose from 38.84 percent to 42.36

percent. Materials over the same period fell

from 23.2 percent in 2013 to 13.6 percent in

2014. Materials as a percent of land

construction costs have been on a decline in

2009 (see image on next page). New pipelines

have been built and they are going to be used.

While these pipelines were being built rails became the chosen mode for transportation. The

Kansas City notes in that same 2014 report The fastest-growing alternate mode of oil

transportation has been railroads. Rail transportation is somewhat more expensive than

barges, and not quite as flexible as trucks. But overall, as an option during pipeline construction

and periods of high oil-price differential, rail may have the best combination of attributes of

the alternative modes. The use of rail grew much faster than either barges or trucks in 2012

and that strong growth continued in 2013, according to industry data. And as other shale plays

emerge, especially if they are far from the coasts, rail may become even more important to

the oil transportation network.

The oil market is still looking for its equilibrium and with it being on nearly every financial

market participants radar, the opinions of the market are far and wide making for volatile

price swings. For the short-term, the consensus from analysts on Wall Street points to a focus

on refiner crack margins and capital expenditures. Over the longer-term the focus shifts to

M&A and its potential impact on transportation and transportation costs.