US EXPORTS · Cove Point LNG-0.8-0.6-0.4-0.2 0.0 0.2 0.4 0.6 0.8 1.0 d Cove Point, PA (East Coast)...

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US EXPORTS

FundamentalEdge | May 2018


Introduction and Key Takeaways 3

Crude Oil 4

Historical Production and Exports 5

Exports by Destination 6

Production Growth and Exports Outlook 7

Natural Gas 9

US Becomes a Net Exporter 10

LNG: Infrastructure and Outlook 11

Mexico: Exports via Pipeline 15

NGLs 18

Ethane Exports by Origin and Destination 19

LPG Supply, Demand and the Role of Exports 20

Pentanes Plus Exports Overview 22

Contents


Introduction and Key Takeaways

▪ Growth in US oil and gas supply persists on the back of continued improvement in production economics by E&P companies. This growth is outpacing domestic demand and therefore forcing market players to find new homes for their commodities outside the US.

▪ The goal of this month’s update to the FundamentalEdge report series is to understand the role of US Exports for crude oil, natural gas and NGLs and how infrastructure additions are being developed to allow the supply surplus to find a market overseas.

▪ Crude oil exports have grown since lifting the export ban in Dec 2015. Going forward most incremental growth in oil production is expected to be exported. Lighter quality crude produced in US shale basins is better suited for refinery fleets in Asia and Europe. As such, continued US supply growth is likely to be exported rather than displacing currently imported volumes.

▪ The US became a net exporter of natural gas in early 2017. On an annual basis, pipeline flows to Mexico and LNG exports now surpass total volumes imported from Canada. Further LNG liquefaction capacity additions will be the largest contributor to US exports in the near term.

▪ For NGLs, strong production growth coupled with high prices in destination markets has prompted significant export development projects for Ethane, LPGs and Pentanes plus. This will entice more NGLs to find a market outside of the US.

US Exports | FundamentalEdge | May 2018

Crude Oil

US Exports © 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 5

Crude Oil Production Growth and Exports Implications

8,000

8,500

9,000

9,500

10,000

10,500

11,000

0

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1,000

1,500

2,000

2,500

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Cru

de

Oil P

rodu

ctio

n (M

Bb

l/d)C

rude

Oil

Exp

ort

s (

MB

bl/d

)

Exports Production

Historical crude oil exports and production

CHART 1

Source: EIA

According to the EIA’s Weekly Petroleum Status Report, exports have been steadily increasing since early 2017.

The chart shows the crude oil production in blue corresponding to the right axis increasing since late 2016 and corresponding almost one to one with exported crude oil volumes.

This confirms that all incremental barrels that are being produced are being exported instead of pushing out more imported barrels.

This is a further indication that the lighter crude oils that the US is producing is not as good a fit in the domestic refining slate as it is in the rest of the world’s refining slate.


Destinations of US Exports

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600

800

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1,200

1,400

1,600

1,800C

rude

Oil

Exp

ort

s (

MB

bl/d

)

Rest of World Canada China Netherlands Korea Italy UK

Crude oil exports by destination

CHART 2

Source: EIA

So far, exports have targeted Asia (in particular China & Korea) and Europe.

These are the refining centers that are going to continue to be destinations for US exports, as the refining capacity in these countries is of relatively low complexity, lending itself to demand for lighter, sweeter crudes.

As the Middle East builds out their own refining capacity over the coming years, Middle East grades will start to stay in region to feed their domestic slate. The US will be able to find more room in these markets to export additional volumes.


US Production and Exports Outlook

1.40

3.49

5.05

1.67

3.36

4.84

0

1

2

3

4

5

6

2018 2020 2025

Pro

du

ction

Gro

wth

/Exp

ort

s (

MM

Bb

l/d

)

Production Growth (vs. Avg. 2017) Avg. Exports

Crude oil production growth and exports forecast

CHART 3

Source: DI ProdCast and Analysis

As US crude oil production grows, all incremental barrels are (and will continue to be) exported. The US production growth is largely in lighter crude oils, which will be the ones exported as it is a better fit in non-US refining fleets (see next slide).

To facilitate this rapid increase in exports, additional infrastructure will be necessary.

Most of this infrastructure will be built in Houston and Corpus Christi. Corpus Christi is expected to be the leading point of export moving forward, thanks to its proximity to the Permian & Eagle Ford basins and less congested port.


Exports – Base Case

0.0

9 0.3

70.6

6

1.8

7

2.8

2

1.0

1 1.4

0 1.6

5

1.6

7

3.3

6

4.8

4

0.0

1.0

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6.0

2018 2020 2025

Exp

ort

s (

MM

Bb

l/d

)

35-42°API 42-50°API 50+°API Total

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7

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1

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9

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1

1.8

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0.3

6 0.4

9

0.7

9

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2018 2020 2025

Exp

ort

s (

MM

Bb

l/d

)

Beaumont Corpus Christi Houston Lake Charles

Crude oil exports forecast by quality and terminals

CHARTS 4 & 5

Source: DI Analysis

Natural Gas



US Natural Gas Exports

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

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6.0

US

im

port

s (

-), e

xp

ort

s (

+)

in B

cf/

d

Net Exports Canada LNG Mexico

Natural Gas Net Exports

CHART 6In February 2017, the U.S. become a net exporter of natural gas, per EIA.

Historically, the U.S. has been a net importer of natural gas (mainly from Canada) with import volumes reaching over 8 Bcf/d.

Increasing domestic supply coming on the back of development of unconventional resources has transformed the US into a net exporter. Reduced imports from Canada, increased pipeline exports to Mexico and the construction of LNG liquefaction terminals enabled this transition.

By 2022, The U.S. is expected to net export ~8 Bcf/d of natural gas on an annual basis. This consists of 5 Bcf/d to Mexico via pipelines and 8 Bcf/d via LNG; offset by 5 Bcf/d of continued imports from Canada to meet seasonal demand in the Northeast and Midwest markets.

Source: EIA


LNG Exports 5-Year Outlook

0.62.0

3.2 3.04.3

6.57.8 8.0

0.0

2.0

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6.0

8.0

10.0

2016 2017 2018 2019 2020 2021 2022

Bcf/

d

Historical, 2018TD DI Forecast

LNG exports will add 5.0 Bcf/d by 2022 over 2018 levels.

This forecast is based on LNG terminals currently under construction and listed in Table 1.

DI applies utilization factors (~65%) based on the amount of gas contracted by end users.

LNG Terminal Operator/Owner LocationCapacity

(Bcf/d)

Expected In-

Service Date

Corpus Christi – Train 1 Cheniere Corpus Christi, TX 1.07 Late 2018

Elba Island Southern LNG Elba Island, GA 0.35 Early 2019

Corpus Christi – Train 2 Cheniere Corpus Christi, TX 1.07 2H 2019

Freeport - Train 1 Freeport LNG Development Freeport, TX 0.70 Sept 2019

Sabine Pass – Train 5 Cheniere Sabine, LA 0.60 Q’3 2019

Cameron Sempra Hackberry, LA 2.10 2019

Freeport - Train 2 Freeport LNG Development Freeport, TX 0.70 Jan 2020

Freeport – Train 3 Freeport LNG Development Freeport, TX 0.70 May 2020

Total Capacity Under-Construction 7.30

LNG Exports (Bcf/d)

CHART 7

Corpus Christi,

Elba Island

Freeport, Sabine Train 5,

Cameron

TABLE 1

LNG Terminals Under-Construction


0

5

10

15

20

25

30

35

40

45

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Bcf/

d

Online Under Construction Approved Proposed

All Proposed LNG Export Capacity

Sabine Pass, Cove Point

Corpus Christi, Elba Island, Cameron, Freeport

Lake Charles, Magnolia, Golden Pass

Rio Grande, Gulf, Calcasieu, Port Arthur, G2,

Jordan Cove, Others

CHART 8

All Proposed LNG Export Capacity

Drillinginfo’s 5 year forecast for LNG exports only includes projects currently under construction.

Additionally, there are 4 projects already approved but not under construction and many others announced.

In total, there is currently about 40 Bcf/d of LNG liquefaction capacity that could be brought online over the next 10 years.

Source: FERC, DI Analysis


Sabine Pass LNG

Source: Genscape flow data, DI Analysis

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0B

cf/

d

Sabine Pass, LA (Gulf Coast)

Creole Trail Transco NGPL Capacity

Sabine Pass Historical Activity

CHART 9

Train 1

Train 2

Train 4

Train 3

* Volumes above the capacity line represent commissioning volumes

Sabine Pass exported its first commissioning cargo in February 2016. Since then, three additional trains have been placed online for a total export capacity of ~3.4 Bcf/d.

Per Cheniere, approximately 350 cargoes have been exported since start-up and LNG has been delivered to 26 countries.

Two additional trains are expected to be brought online:

▪ Train 5 is 89% complete and expected to be in service during 3Q2019.

▪ Train 6 is fully permitted and being commercialized


Cove Point LNG

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Bcf/

d

Cove Point, PA (East Coast)

Imports(-)/Exports(+) Export Capacity

LNG Imports

Commissioning Volumes

LNG Exports

In April 2018, Dominion’s Cove Point terminal came online to become the 2nd LNG export facility in the U.S.

It is also the first export facility to operate on the East Coast (in close proximity to the prolific Marcellus/Utica supply basins).

The capacity is under 20-year take or pay export contracts with the joint venture of Sumitomo Corporation and Tokyo Gas and an affiliate of GAIL.

Cove Point LNG

CHART 10


Mexico Supply/Demand Overview

0.0

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2016 2017 2018 2019 2020 2021 2022

Bcf/

d

Other Industrial

Oil Power

Domestic Production-HighCase Domestic Production-LowCase

Mexico Supply and DemandCHART 11

Source: SENER

Natural gas is primarily used in Mexico to support power generation.

In 2017, power demand accounted for 55% of total natural gas demand. Following that, the crude oil sector (25%) and industrial demand (19%) make up the rest.

By 2022, total demand is expected to grow by 17% or 1.4 Bcf/d.

SENER (Secretaría de Energía) presents 2 scenarios for domestic production. A low case estimate based on 2P reserves (proved and probable) and a high case estimate using 3P reserves (proved, probable and possible). either scenario, demand growth outpaces supply.

Mexico imports gas via LNG and via pipeline from the US. There are 3 terminals (Costa Azul, Altamira and Manzanillo) currently importing < 1.0 bcf/d, mostly at Manzanillo. As pipelines become available, LNG imports should decline further. At least one of these facilities, Sempra’s EnergiaCoast Azul is evaluating developing liquefaction capabilities to export from the site.


Mexico Exports

Mexican Gas Exports (Bcf/d)

2.9 3.7 4.2 4.3 4.3 4.7 4.8 4.9 5.0

4.3

5.7

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6.15.8 6.0

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4.64.9

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7.0

2015 2016 2017 2018 2019 2020 2021 2022

Bcf/

d

Historical DI ForecastMX - Low Prod Case MX - Base CaseMX - High Prod Case

Source: EIA, SENER, DI Analysis

Natural gas exports from the US to Mexico are expected to reach 5.0 Bcf/d in 2022, an increase of 0.8 Bcf/d from 2017 levels.

The majority of the growth occurs in 2019 assuming key infrastructure projects (listed in Table 2-next page) come online during 2018.

SENER presents a base case scenario for Mexico imports reaching 6 Bcf/d by 2022 (and sees a possible range of 4.9 to 6.5 Bcf/d depending on their high and low domestic production forecasts).

Drillinginfo foresees upside risk to its current forecast, but remains conservative on its estimate as power demand growth has been slow to materialize mainly due to delays in infrastructure buildout.

.

CHART 12

* 2018 historical figures include EIA Jan-Feb actuals and modeled volumes Mar-May.


Key Projects Adding US Export Capacity to MX

TABLE 2

Project Name Operator StatusIn-Service Date

Capacity (Bcf/d)

Basin Notes

Nueva Era Pipeline Howard MexicoUnderConstruction

10/1/2018 0.50 Eagle Ford Pushed back start date from 2017

South Texas Expansion Project (STEP)

EnbridgeUnder Construction

10/1/2018 0.40Eagle Ford (US project)

Initially expected to come online in May2017

Valley Crossing (Nueces-Brownsville)

EnbridgeUnder Construction

10/1/2018 2.60 Eagle FordInitially expected to come online in June2018. Construction started in April 2017

Sur de Texas-Tuxpan Pipeline

CFE Announced 1/1/2019 2.60MX from Eagle Ford

Initially expected to come online in June2018.

Key Projects Adding US Export Capacity to MX

NGLs



0

50

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Jan

-14

Mar

-…M

ay-…

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p-1

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d

Gulf Coast (PADD 3)

Williston/Utica (PADD 2)

Northeast (PADD 1)

Ethane Exports by Origin and Destination

Ethane Exports by US RegionCHART 13

Historically, pipeline to Canada was the only source for exporting ethane. Until 2016, the Williston and Utica accounted for all of the ethane exports, sending it North to Canada via the Mariner West and Vantage pipelines. It wasn’t until 2016 when Marcus Hook and Morgan’s Point went into service, adding waterborne export demand out of the Northeast and the Gulf Coast. Utopia East, in-service in January ’18 allows 50 MBbl/d (expandable to 75 MBbl/d) from the Northeast to Canada.

Ethane demand is anticipated to outpace supply at current recovery rates. This has and will continue to incentivize more ethane recovery. With full ethane recovery, however, supply will outpace demand and more infrastructure will be needed to place the ethane. Global prices vs. local prices will drive whether this infrastructure will be new world scale crackers or export facilities.

The export facilities mentioned above allow for ethane to be sent waterborne from the US to mainly Europe and Asia. As Utopia and future projects come online, exports to North America, Europe, and Asia are expected to continue to grow.

CHART 15

Sources: DI ProdCast, EIA, Hodson

Ethane Exports by Destination

32%

29%

28%

1%

Asia

Europe

Canada

South America

Morgan’s Point

Marcus

Hook

0

500

1,000

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2,500

3,000

Mb

/d

Supply w/o Rej. Ethane Supply

Ethane Demand Outlook Exports after Demand

CHART 14

Ethane Supply vs. Demand

Utopia to

Canada

Average from Feb ’17 to Feb ‘18


0

500

1000

1500

2000

2500

2014 2015 2016 2017 2018

West Coast (PADD 5)

Rockies (PADD 4)


Northeast (PADD 1)

Gulf Coast (PADD 3)

LPG Exports by Origin and Destination

LPG Exports by US Region (MBbl/d)

CHART 16US LPGs are primarily exported from the Gulf Coast. However, expected capacity expansions in the Northeast are targeting the growing supply in Marcellus / Utica.

Sunoco’s Mariner East 2 (275 MBbl/d expandable to 450 MBbl/d) and Mariner East 2X (250 MBbl/d) will feed the Marcus Hook export facility. ME2 is expected in 3Q 2018, while ME2X will be pushed out until the second half of 2019.

Propane exports have driven stocks down almost to levels last seen in 2014. Since that drop, exports have slowed as prices have increased.

This trend is not expected to continue. The majority of US LPG exports are heading to Asian markets, where demand far outpaces supply.

As more US infrastructure is built, exports to Asia will continue to grow.

LPG Exports by Destination

CHART 18

Source: EIA

Average from Feb ’17 to Feb ‘18

3%

50%

12%

25%

1%9% Africa

Asia

Europe

North America

Oceania

South America

Propane Stocks (MBbl)

CHART 17

-

20,000

40,000

60,000

80,000

100,000

120,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MIN 5 Yr Range 2014

2015 2016 2017

2018 5 Yr Avg 2013


LPG Supply/Demand Forecast

Propane

CHART 19

Source: EIA

Butanes

CHART 20

Domestic propane demand has declined slightly, losing market share to cheaper natural gas as a heating fuel.

Butane(s) domestic demand is also slightly declining. It is primarily used for blending in gasoline and US gasoline demand is declining as vehicles become more efficient.

Exports for both propane and butane are expected to absorb both the drop of US demand and incremental US production.

0

400

800

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1,600

2,000

Mb/d

Domestic Demand Exports DI Propane Supply

0

400

800

1,200

Mb/d

Domestic Demand Exports DI Butane Supply


Pentanes Plus Exports by Origin and Destination

Pentanes Plus Exports by US Region (MBbl/d)

CHART 21 The overwhelming majority of pentanes plus exports have been sent from the Williston and Utica basins to Canada as diluent.

Pentanes plus supply in the US will continue to grow alongside growing crude and natural gas production. That coupled with flat local demand and flat-to-declining Canadian demand, will incentivize waterborne exports as long as global prices support.

Pentanes Plus by Destination

CHART 22

Source: EIAAverage 2017

99%

1%

Canada

Other

Pentanes Plus Supply/Demand

CHART 23

0

50

100

150

200

250

300

350

2010 2011 2012 2013 2014 2015 2016 2017 2018

West Coast (PADD 5)

Gulf Coast (PADD 3)

Northeast (PADD 1)

Rockies (PADD 4)


0

400

800

Mb/d

Exports Domestic Demand

DI Pentanes+ Supply


Contact

Drillinginfo, Inc.

1221 W. Mineral Ave., Suite 101

Littleton, CO 80120

Market Intelligence Team Direct [email protected]

1-888-290-7697, ext 3

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