Crude Markets and Storage Summit

July 2015

Topics

�  Introduction to First River Energy

�  Crude Oil Marketing Fundamentals

�  Impact of Market Structure on Netbacks

�  Optimization Options

�  Conclusion

Introd

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First River Energy Overview

�  First River Energy is a midstream energy company providing crude oil gathering & marketing services to independent producers throughout North America �  Focused on crude oil midstream market and producers who are not

pipeline connected

�  Gathering in this segment is characterized by a high volume of small transactions, a shortage of infrastructure

�  First River Energy invests in and operates: �  Crude oil logistics infrastructure (trucks, terminals, pipelines), and

�  Proprietary web-based systems to simplify the back-office and create a significant efficiency gains

Introd

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First River Energy’s Current Operations

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•  FRE contracts with oil producers* to buy oil at their oil-well

•  Purchase is negotiated on typically the same basis as the sale, locking in a margin

•  FRE sends 180-220 bbl. trucks to pick up the oil and takes title to the product

•  FRE provides critical logistic data back to the producer through our websites

•  FRE contracts with 3rd party truck operators to move oil to markets and take custody of the product

•  3rd party truck vendors must meet all regulatory, insurance and other FRE standards

•  FRE works with truck operators to optimize their logistics and extract data, which FRE then provides back to the producer

•  FRE contracts with oil buyers*, typically pipeline marketers and refiners, to sell the oil at their facilities

•  Typically a access agreement without a volume commitment

•  FRE dispatched trucks delivers the oil and transfers title of the product to the buyer

•  Through our websites, oil buyers can easily track their purchases 24/7

Introd

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* First River Energy considers both crude oil suppliers and crude oil buyers its “customers”.

What is my oil worth? What someone is willing to pay for it.

Fundam

entals

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Traditional Crude Oil Gathering for The Small Guy

Fundam

entals

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Lease Truck Pipe / Refinery

$$$

Fundam

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Price of Oil Received by Producer = Price of Oil Paid by Refiner – Transportation

�  Price of Oil Paid by Refiner

�  Competing Options

�  Quality

�  Reliability

�  Term

�  Transportation

�  Competing Options

�  Distance

�  Mode of Transportation

�  Tanker $

�  Pipe $$

�  Barge $$$

�  Rail $$$$

�  Truck $$$$$

�  Blending and Treatment

�  Storage

�  Term and Reliability

�  Transloading between transportation modes

�  How many times does product change hands

Some High Level Economics

�  Frequently the cost of getting out of a geographic region is relatively fixed and very hard to influence

�  Function of type of transportation infrastructure, distance and competing options

�  Pipe: $2.00 – $5.00 per barrel

�  Rail: >$5.00 per barrel

�  Cost of first 50 miles can vary greatly, and is expensive

�  Gathering pipeline system is ideal solution for larger volumes that are geographically concentrated <$2.00 per barrel

�  Not an option for lower volume wells or dispersed production

�  Takes time to develop, and may need contractual support

�  Truck gathering frequently is only option

�  Typical truck gathering economics ~$4.00 – $5.00 (assumes ~50 mile haul)

�  Direct costs (Salaries, fuel, maintenance etc.): $3.00

�  Marketing Expenses (terminal fees, salaries): $1.00

�  G&A (Salaries, depreciation etc.): $1.00

�  FRE is focused on optimizing the truck gathered piece of the market

Fundam

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What Every Producer Should Know

�  As a midstream company, we frequently see an information disconnect between the field and the corporate office when developing solutions and pricing

�  Recent average daily production

�  Recent quality

�  Gravity

�  BS&W

�  H2S

�  Locations from which they sell crude

�  Tank batteries

�  Leases

�  Understand the crude markets around production

�  How does the markets price oil (WTI, LLS, Brent, Cushing)?

�  What is the current basis in my market from WTI?

�  How volatile is my market compared to WTI. What drives volatility?

�  What is my next best alternative to my current market?

�  Demand that your midstream partner provide current and relevant information in a convenient manner

Fundam

entals

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Single Market Scenario - Monopoly

�  One pipeline, rail terminal, barge terminal or refiner dominates

�  Buyer’s market

�  Frequently the case in new geographic areas

�  Who buys at pipeline?

�  Single shipper, buyer’s market

�  Multiple shippers, How are prices set?

�  Quality specifications �  Single specification vs. batch options

�  Single market option could be a result of unusual crude quality

�  Options to Improve Netbacks

�  Focus on costs of getting to pipeline

�  Demand price transparency from midstream partner

�  Work with midstream partner to explore and develop additional market locations

�  Understand next best option. May have to truck >100 miles

�  Provide contracted support for additional flexible infrastructure (only option for larger producers)

�  Consider supporting the development of rail options

Market S

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Development of Market Options

�  Producers benefit from working with their midstream partner to maximize sales market options through infrastructure development

�  The firmer the commitment, the more efficient the infrastructure that may be developed

�  Long distance pipelines offering direct market access cost more and take longer to develop, and as such typically require firmer and longer term commitments

�  Costs hundreds of millions to build and may takes >3-year from concept to operation

�  Short distance pipelines offer indirect market access but reduces the cost of trucking and does not require firm contract support

�  Costs tens of millions to build and may take as little as 1-year from concept to operation

�  On the other end, pipeline access points (LACT) and small terminals, may developed quicker but typically only offer indirect market access

�  Cost range: $250 thousand to $2 million

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Market S

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Dual Market Scenario

�  Two options: pipeline(s), rail terminal(s), barge terminal(s) or refinery

�  Competitive market �  Work with midstream partner to frequently evaluate both options

�  Understand costs of getting to market

�  Understand number of buyers at each market location

�  Market locations may be controlled by same buyer

�  Understand where these markets go �  Market locations may be tied in to same end market

�  Quality optimization

�  More options are better

�  Consider blending options to optimize for both markets

�  Options to Improve Netbacks �  Midstream partner should provide transparent and frequent reporting of state of

markets, and be prepared to switch between markets

�  Support the development of additional flexible markets through term contracts

Market S

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Case Study: Longview Market C

ase Stu

dy

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�  Midstream business gathers a few thousand barrels a day from a diverse group of producers around Longview Texas

�  Purchase oil at lease, pick-up, transports and delivers via truck to to station on Sunoco’s Mid-Valley pipeline, and sells to various refiners at pipeline

�  Trucking distances average approximately 50 miles ($2.50 - $3.50 in transportation costs)

�  In late 2014, the pipeline experienced issues and the midstream business had to find new home for volumes

�  Had limited options for this amount of oil but selected a Lake Charles market, 215 miles away for most of the volumes ($5.00 - $10.00 in transportation costs)

�  Mid-Valley is a WTI based market and Lake Charles is a WTI + WTI vs. LLS spread market

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$1.00$

$2.00$

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$5.00$

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9/1/14$ 10/1/14$ 11/1/14$ 12/1/14$ 1/1/15$ 2/1/15$ 3/1/15$ 4/1/15$

Argus$LLS/WTI$Differen>al$(Daily)$ Value$Used$In$Pricing$During$Period$(SeJlement)$

Case Study: Longview Market (cont.)

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“Normal” range

Case Study: Longview Market (cont.)

�  Result:

�  Midstream company faced additional costs of an unplanned 200 mile haul

�  Impact was compounded by weak LLS market in early 2015

�  In March & April WTI vs. LLS market strengthened improving net profits

�  The Twist �  The Mid-Valley pipeline restored volumes in May

�  As a result of a strong WTI vs. LLS market, the midstream company continues to move barrels to Lake Charles to provide producers with a better netback

�  Optionality matters: Depending on market pricing, sometimes a 200 mile haul results in a better netback to producers than a 40 mile haul

Case S

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Multiple Market Scenario

�  Seller’s market

�  Many options �  Your midstream partner should frequently evaluate and report on all options

�  Options to Improve Netbacks

�  Getting to market as efficiently as possible. Demand transparency

�  Be prepared to allow midstream partner to switch based on market changes

Other Considerations

�  Reliability and Predictabilities

�  Barge markets may suffer from delays due to weather, droughts etc.

�  Rail markets have suffered from interruptions due to railroad operational issues

�  Pipeline maintenance and repairs

�  Working Capital Requirements �  Both barge and rail are effectively bulk build and ship operations

�  Depending on where you sell, you may have 30,000 – 70,000 barrels in transit

Market S

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Case Study: Market Full

�  Midstream company purchases approximately 1,000 bpd of crude oil in South Texas from a diverse group of small producers

�  Midstream company buys the oil at the lease, picks-up, hauls and delivers oil to a barge terminal with a large storage tank (~80kbbls), and sells oil to a refinery at the barge

�  Due to barge operations and regulatory issues, barges was delayed and inventory rapidly built to maximum

�  Once terminal tank was full, Midstream company had to reroute crude to alternative market, with weaker pricing in Corpus area

�  Midstream company had to manage slight increased costs of hauling, and more significantly weaker sales market

�  Additionally, midstream company had additional working capital tied up in inventory in the tank

Case S

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Truck Gathering is an “Old-School” Business with Limited Use of Information Technology

�  In many small truck-based gathering businesses, a white board is used for dispatch

�  Handwritten tickets are stored locally and processes on a monthly cycle

�  Many opportunities for mistakes

Optim

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The Low Hanging Fruit: Electronic Run Tickets O

ptim

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�  The crude oil truck ticket (“run-ticket”) is the key custody transfer document for oil pickups and deliveries

�  Tickets are frequently manually prepared by drivers and suffer from poor handwriting, in accuracies, getting lost and processing delays

�  Crude suppliers, buyers and midstream companies need ticket proof as part of their financial settlement process

First River Energy Solution “Old-school” methods

�  Data inputted on smart tablet- which prints an electronic ticket in the field

�  Real time data upload from the field and incorporated into website

�  Crude suppliers can approve run tickets, manage multiple wells and know their economics

First River Energy’s Proprietary Crude Supplier Website is Live

Optim

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•  FRE developed a proprietary crude supplier facing web-based portal where crude suppliers can conveniently access transaction and logistics information

•  The website allows suppliers to query individual well metrics or multiple wells at once

•  Analysis tools currently available includes ticket and logistic data

•  FRE continually adds features to the website based on supplier feedback and internal logistics experience

Conclusion

�  Producer netbacks is a function of refinery economics and transportation costs

�  Transportation costs is a function of distance, the type of infrastructure, but also competition in the market

�  The first 50 miles is a major component of total transportation costs and in many cases can be better managed by the right midstream partner

�  Producers benefit from partnering with a midstream company to �  Provide real-time production, market and logistics information

�  Develop multiple market options

�  Switch destinations as markets change

�  Demand transparent and timely market information from your midstream partner

Q&A

Con

clusion

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