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

OPPORTUNITY CRUDES CONFERENCE

OCTOBER 22, 2018

Growing U.S. Light Crude

Exports and IMO 2020 Driven

Discounts: Who Benefits?

1

Legal Notice

Baker & O’Brien, Inc. (Baker & O’Brien) prepared this report for the 2018 Opportunity Crudes Conference. The opinions and findings in this report are based upon Baker & O’Brien’s experience, expertise, skill, research, analysis, and related work to date. This report relies upon public and proprietary data available to Baker & O’Brien at the time this report was prepared. All forecasts and projections contained in this presentation represent Baker & O’Brien’s best judgment, utilizing its skill, and expertise. 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. Baker & O’Brien expressly disclaims all liability for the use, disclosure, reproduction, or distribution of this information by or to any third party. PRISM™ is Baker & O’Brien’s refinery modeling and database system that includes operational and economic performance details for refineries in the U.S., Canada, Europe, and Asia. PRISM is a trademark of Baker & O'Brien, Inc. All rights reserved.

2

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Introduction

3

IMO 2020 Summary

Marine Bunker Fuel Pollution Regulation– MARPOL International Maritime Organization – “IMO 2020”

Key Questions Can refineries make 0.5% sulphur fuel oil?

What will happen to 3.5% sulphur fuel oil (HSFO)? How will commodity prices respond?

4

U.S. Crude Supply Trends and Outlook

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, August 2018

5

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jan

-07

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

No

v-1

7

Ap

r-1

8

Sep

-18

MB

/D

Permian

Eagle Ford

Permian and Eagle Ford Crude Oil Production

Permian and Eagle Ford Crude Oil Production

Current Permian Pipeline Takeaway Capacity

Current Eagle Ford Pipeline Takeaway Capacity

Source: EIA

6

Existing USGC Onshore Pipeline Infrastructure

Cushing

Denver

St. Louis

El Paso

Corpus Christi

Hou/TX City/Freeport

Bmt/Pt A.

St. James

Refinery/Refining Center

Key City/Town

WTG, 340

Wink

McCamey

Midland

Co. City

Wortham

Crane

Wichita Falls

Shale Play

Gardendale

Source: Baker & O’Brien

7

Planned USGC Onshore Pipeline Infrastructure

Cushing

Denver

St. Louis

El Paso

Corpus Christi

Hou/TX City/Freeport

Bmt/Pt A.

St. James

Refinery/Refining Center

Key City/Town

WTG, 340

Wink

McCamey

Midland

Co. City

Wortham

Crane

Wichita Falls

Shale Play

Gardendale

ETP/Magellan/Delek, 600 (2020)

BridgeTex Expansion, 40 (Q1-19)

XOM/PAA, 1,000 (Est. Q4-2020)

Gray Oak, 700 (Q4-19) EPIC, 440-675 (Q3-2019)

Cactus 2, 585-670 (Q4-19) Cactus 3, 200-400 (Est. Q4-20)

Jupiter, 500 (Est Q4-2020)

ETP NGL Conversion, 200 (Q2-20)

Sunrise – Upper, 500 (2020+) Sunrise - Lower, 500 (Q2-19)

8

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

MB

/D

Permian Production Forecasts versus Takeaway Capacity

Jupiter

Cactus III

XOM/PAA

Seminole NGL Conv

ETP-Permian

Gray Oak

EPIC

Cactus II

Sunrise

BridgeTex Exp

Existing @ 90%

PAA (6/18)

Jeffries-Base Case (4/18)

EIA AEO 2018 (1/18)

By 2020, Permian Pipeline Bottlenecks are Removed

Existing Pipelines and Local Refineries*

Source: Baker & O’Brien Analysis, PAA Note: Existing pipelines and local refineries shown at 90% due to constraints

To Brownsville

To Houston/Nederland

To Corpus Christi

To Cushing

9

• Shale crude oil production from the Permian Basin and Eagle Ford shale plays has grown substantially since 2010

• Crude oil pipeline infrastructure was rapidly expanded to accommodate new production but has not kept pace in the Permian Basin

• USGC refineries are limited on additional light crude processing capability without substantial discounts in pricing or additional refinery capital investments, leaving incremental production for exports

Permian and Eagle Ford Production and Pipelines Summary

10

Pipelines from the Permian and Eagle Ford are Currently Directed to the USGC, Providing Access to Refineries and Waterborne Export Markets

Sources: Capacity data is from Baker & O’Brien PRISM. Inset refinery map is sourced from the EIA.

• USGC is home to 8.4 MMB/D of refinery capacity with significant deep conversion and sulfur removal capabilities

• Strategic market location with access to water for imports/exports, regional trade through large interstate pipelines supplying the East Coast and Central U.S., integrated petrochemical facilities, and business friendly environment

11

Hypothetical Two-Train Complex Refinery

Hydrogen

Atm Crude Unit

Naphtha HDS

Reformer

HDS 1

VGO Hydrotreater

FCC

Alkylation

Cat Poly

H2 SMR Plant

Hydrocracker

Coker

Atm Crude Unit

Vac Crude Unit

HDS 2

Train 1 Low-Sulfur Crude Oil

Nat Gas Hydrogen for Hydrocracker, HDS units

LCO to HDS2 or Hydrocracker

C5+ Naphtha Coker Naphtha

SR Naphtha

SR Distillate

LVGO

HVGO

Vac Resid

SR Naphtha

LVGO

HVGO

SR Distillate

Coker Hvy Gasoil

Naphtha

Vac Crude Unit

Vac Resid

Coker Gasoil

LCO from FCC

Petcoke

Distillate Blending

Gasoline Blending

C4=, IC4

C3=

Hydrocracker Diesel

Reformate

Asphalt

Isomerization LSR Naphtha Isomerate

Butane

Train 2 High-Sulfur Crude Oil

Hydrogen

Hydrogen

Hydrogen

Blending

ETBE

Atm Resid

To FCC

Heavy Fuel Oil (HFO) Blending

12

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018(YTDJuly)

MB

/D Light Swt

Light Sr

Medium Swt

Medium Sr

Heavy Swt

Heavy Sr

• Quality of crude oil produced in the Eagle Ford and Permian Basin is typically light (40+ API) and sweet (<0.5%S)

• USGC refineries are limited on additional light crude processing capability without substantial discounts in pricing or additional refinery capital investments

– Only major Gulf Coast project announced is the expansion of ExxonMobil’s Beaumont refinery by 350 MB/D

Additional Light Crude Processing is Constrained at Gulf Coast Refineries

Light Sweet crude oil imports backed out of USGC by 2013

Light Sour and Medium Sweet crude oil imports declined by 250 and 150

MB/D respectively vs 2008

Texas Gulf Coast Imports of Foreign Crude Oil by Quality*

*For Corpus Christi, Beaumont/Port Arthur, and Houston Source: EIA Company Level Imports, Baker & O’Brien Analysis

13

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

MB

/D

U.S. Gulf Coast Crude Exports by Port

LOUISIANA

BEAUMONT

HOUSTON AREA

CORPUS CHRISTI

BROWNSVILLE

• USGC refineries are not configured to process 100% light crude oil

• Congress lifted the long-standing crude oil export ban in December 2015 and since then exports have increased rapidly

• The Houston Area (Houston, Texas City, Freeport) surpassed Corpus Christi exports

U.S. Gulf Coast Crude Oil Exports Have Increased Rapidly

Hurricane Harvey

Source: ClipperData, Baker & O’Brien Analysis

14

U.S. Gulf Coast Crude Oil Exports to Europe and Far East

Freight (1H 2018) $13.79/tonne – 80 dwt $8.25/tonne – 135 dwt

Freight (1H 2018) $17.90/tonne – 130 dwt $15.52/tonne – 150 dwt

The delivered value of U.S. Light Tight Oil has absorbed freight costs to become the incremental crude in global markets

~$1 – 1.80/B

~$2 – 2.40/B

15

• The next two slides will tell us:

– The distillation process that creates heavy fuel oil

– Yields of distillate, gas oils, and resid for three commodity crudes

– The typical sulfur in:

Whole crude

Resid

Distillate plus Resid

• …and answer these questions:

– Does a representative heavy fuel oil blend from light sweet crude meet 0.5% sulfur?

– Can a European refinery simply drop virgin distillate into Heavy Fuel Oil (HFO) to meet the 0.5% bunker fuel specification?

Heavy Fuel Oil From Commodity Crudes

16

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Brent37.5 API0.40 % S

Fu

el O

il S

ulf

ur

(wt.

%)

Yie

ld (

vo

l.%

)

Fuel Oil Yield and Quality*

VR MCB LCO FO Sulfur (RHS→)

Basic FCC Cracking Refinery – Simplified Model BASE CASE - BRENT CRUDE

Crude

Sulfur

Fuel Gas

LPG

Gasoline

Jet/Kero

Diesel/AGO

Atm

os

ph

eri

c T

ow

er

H2

HDT

H2S

H2

H2S

FCC

LVGO

Light Ends Naphtha

Vacuum Resid

1

1

450°F

650°F

Va

cu

um

To

wer

Gas Plant -Treating Sulfur Recovery

Reforming Alkylation and Isomerization

Naphtha Hydrotreating

1

HVGO

1050°F+

1050°F

950°F

LCO

MCB/Slurry

Source: PRISMTM

650°F+

0.00

0.50

1.00

1.50

2.00

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Brent37.5 API0.40 % S

Die

se

l S

ulf

ur

(wt.

%)

BE

FO

RE

HD

T

Yie

ld (

vo

l.%

)

Middle Distillates Yield and Quality

Diesel/AGO Jet/Kero Diesel Sulfur (RHS→)

*These blends are representative of many possible combinations

17

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Bonny Light35.1 API0.15 % S

Brent37.5 API0.40 % S

Arab Light32.5 API1.93 % S F

ue

l O

il S

ulf

ur

(wt.

%)

Yie

ld (

vo

l.%

)

Fuel Oil Yield and Quality*

VR MCB LCO FO Sulfur (RHS→)

Basic FCC Cracking Refinery – Simplified Model COMPARE CRUDES

Crude

Sulfur

Fuel Gas

LPG

Gasoline

Jet/Kero

Diesel/AGO

Atm

os

ph

eri

c T

ow

er

H2

HDT

H2S

H2

H2S

FCC

LVGO

Light Ends Naphtha

Vacuum Resid

1

1

450°F

650°F

Va

cu

um

To

wer

Gas Plant -Treating Sulfur Recovery

Reforming Alkylation and Isomerization

Naphtha Hydrotreating

1

HVGO

1050°F+

1050°F

950°F

LCO

MCB/Slurry

Source: PRISMTM

650°F+

0.00

0.50

1.00

1.50

2.00

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Bonny Light35.1 API0.15 % S

Brent37.5 API0.40 % S

Arab Light32.5 API1.93 % S

Die

se

l S

ulf

ur

(wt.

%)

BE

FO

RE

HD

T

Yie

ld (

vo

l.%

)

Middle Distillates Yield and Quality

Diesel/AGO Jet/Kero Diesel Sulfur (RHS→)

*These blends are representative of many possible combinations

18

• Roughly, how much Brent-blend based middle distillate do we need to blend into heavy fuel oil to meet 0.5% sulfur?

– From previous slide

Brent-blend based fuel oil is about 1.0% sulfur

Brent middle distillates are about 0.25% sulfur

At a 66% blend ratio, heavy fuel oil blending will consume all of the virgin middle distillates

If ULSD is used (~0% sulfur), then the ratio is 50%

Conclusion: Using middle distillates to dilute sulfur in fuel oil will be costly, especially if ULSD supply decreases

• Can a European refinery blend crudes to meet the 0.5% bunker fuel specification?

– See next slide

Heavy Fuel Oil From Commodity Crudes

19

Basic FCC Cracking Refinery – Simplified Model CRUDE BLEND WITH VGO DOWNGRADE

Crude

Sulfur

Fuel Gas

LPG

Gasoline

Jet/Kero

Diesel/AGO

Atm

os

ph

eri

c T

ow

er

H2

HDT

H2S

H2

H2S

FCC

LVGO

Light Ends Naphtha

Vacuum Resid

1

1

450°F

650°F

Va

cu

um

To

wer

Gas Plant -Treating Sulfur Recovery

Reforming Alkylation and Isomerization

Naphtha Hydrotreating

1

HVGO

1050°F+

1050°F

950°F

LCO

MCB/Slurry

Source: PRISMTM

650°F+

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

BL : Brent50 : 50

BL : Brent75 : 25

BL : Brent75 : 25

FCC BYPASS

Fu

el O

il S

ulf

ur

(wt.

%)

Yie

ld (

vo

l.%

)

Fuel Oil Yield and Quality*

VR MCB LCO LVGO FO Sulfur (RHS→)

LVGO (0.3%) S

*These blends are representative of many possible combinations

20

• Brent Crude is the Atlantic Basin benchmark crude

– Brent and WTI prices are commonly compared

• Many European refineries run North Sea/African crudes similar to Brent (sweet) and Urals (sour)

– European refineries compete with U.S. refineries’ product exports

• European refineries are now running WTI and Eagle Ford

– WTI and Eagle Ford compete with Brent

– Breakeven values versus Brent set the refining value

– Breakeven value in Europe minus freight may influence the USGC value

Refining Value of Light Sweet Crude Exports

21

European Refineries

Source: Google Maps, PRISM

Coking Refineries

Non-Coking Refineries Sweden Norway

Finland

22

Northwest Europe Representative Refinery

Hydrogen

Atm Crude Unit

Naphtha HDS

Reformer

HDS 1

VGO Hydrotreater

FCC

Alkylation

Cat Poly

H2 SMR Plant

Hydrocracker

Coker

Atm Crude Unit

Vac Crude Unit

HDS 2

Train 1 Low-Sulfur Crude Oil

Nat Gas Hydrogen for Hydrocracker, HDS units

LCO to HDS2 or Hydrocracker

C5+ Naphtha Coker Naphtha

SR Naphtha

SR Distillate

LVGO

HVGO

Vac Resid

SR Naphtha

LVGO

HVGO

SR Distillate

Coker Hvy Gasoil

Naphtha

Vac Crude Unit

Vac Resid

Coker Gasoil

LCO from FCC

Petcoke

Distillate Blending

Gasoline Blending

C4=, IC4

C3=

Hydrocracker Diesel

Reformate

Asphalt

Isomerization LSR Naphtha Isomerate

Butane

Train 2 High-Sulfur Crude Oil

Hydrogen

Hydrogen

Hydrogen

Blending

Visbreaker

ETBE

Heavy Fuel Oil (HFO) Blending

Atm Resid

To FCC

23

• What is the refining value of WTI and Eagle Ford versus Brent in Northwest Europe?

– Using 2017 prices (“Current” relationships)

– Using discounted HFO prices ($15 is similar to 2020 futures)

– And using increased ULSD prices ($4 is similar to 2020 futures)

European Crude Oil Price Analysis

Source: Baker & O’Brien analysis and PRISMTM , Freight is assumed constant, WTI at 42 API, Eagle Ford at 47 API

24

• What is the refining value of WTI and Eagle Ford versus Urals in Northwest Europe?

– Using 2017 prices (“Current” relationships)

– Using discounted HFO prices ($15 is similar to 2020 futures)

– And using increased ULSD prices ($4 is similar to 2020 futures)

European Crude Oil Price Analysis

Source: Baker & O’Brien analysis and PRISM, Freight is assumed constant; Urals at 32 API

25

• Using current price relationships, WTI has about $1/B more value than Brent and about $2/B more value than Urals

– Likewise Eagle Ford has $1.70/B and $2/B more value than Brent and Urals respectively

• Using discounted HFO prices and increased ULSD prices:

– Versus Brent: WTI stays flat and Eagle Ford increases slightly

– Versus Urals: WTI and Eagle Ford values increase dramatically

Summary of European Crude Oil Price Analysis

Source: Baker & O’Brien analysis and PRISM , Freight is assumed constant

26

• Post 2020: Distillate and crude sulfur value scales will be steep

– 3.5% Fuel Oil price will be heavily discounted

• Complex refineries with residual fuel upgrading (coking) will benefit from high sulfur crude discounts

• Many European refineries do not have the hardware to upgrade high sulfur residual fuel oil

– Project schedules to meet 2020 timelines are past

• U.S. Light Tight Oil will be valued highly in non-complex European refineries to lower volume and sulfur content of residual fuel

• Assuming unconstrained export logistics by 2020, wellhead prices of U.S. Light Tight Oil will likely be influenced by demand at foreign refineries

Conclusions

27

Possible Europe and U.S. Refineries Sulfur Optimization

IMO 2020 DRIVING FORCES

• 0.5% fuel oil production will be challenging for low complexity refineries in Europe

• Sweet crude will likely displace sour crude in lower complexity refineries in Europe

• Backhaul freight will lower cost for sour crude and resid to complex refineries in the U.S.

28

• Why haven’t more coker projects been announced?

• How much sour crude can U.S. refiners absorb?

– Reversal of today’s challenge: absorbing light, sweet crude

• Can U.S. crude oil export infrastructure support 2020+ volumes?

• How much HSFO can be consumed globally for power generation?

• Will refinery runs increase to meet displaced HSFO?

Key Questions and Studies-in-Progress

29

For a similar analysis of IMO 2020 impacts

on heavy Canadian crude,

see Baker & O’Brien’s presentation at the

Crude Oil Quality Association Conference “Looming IMO 2020 and Resulting Impact on Crude”

October 25, 2018

Curtis Ruder

Canadian Crude Oil Price Analysis

30

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