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Thomson Reuters US Refining Report Annual 2014

Oil Research & Forecasts

Houston

By Krista Kuhl

Senior Analyst

CONTENTS

SUMMARY ........................................................................................... 2

HIGHLIGHTS ........................................................................................ 2

US EAST COAST - PADD I ................................................................. 3

Crude Slate and Runs ....................................................................... 3

Yields ................................................................................................. 4

US GULF COAST - PADD III ............................................................... 6


Yields ................................................................................................. 7

US WEST COAST - PADD V ............................................................... 9


Yields ............................................................................................... 10

US REFINING REPORT– OIL RESEARCH & FORECASTS

Annual 2014 2

Summary

Welcome to the inaugural issue of Thomson Reuters – Oil Research & Forecasts US Refining Report.

For 2014, increased domestic crude production in the US continued to play a large role at East Coast and Gulf Coast refineries. Greater production of Bakken in North Dakota and Eagle Ford and Permian Basin crudes in Texas made their way to East Coast and Gulf Coast refineries via rail, barge, tanker and pipe, replacing imported crudes. Light sweet domestic crudes are beginning to make their way to the West Coast refiners, as they look to replicate the benefits seen at East and Gulf Coast refineries.

All regions have experienced changes in their yields for the year as a result of these changing crude slates. In this report we utilized Thomson Reuters Trade Flows data to assess the imported crude slates into the East Coast (PADD I), Gulf Coast (PADD III) and West Coast (PADD V) and combined this with domestic crude runs through our Refinery Yields Model to calculate major refined product yields for these regions in 2014.

Highlights

Imported crudes on the East Coast and Gulf Coast continued to be pushed out in favor of domestic crudes moving into the region in 2014.

Refineries on the East Coast have looked to maximize their jet yield in 2014, reaching all time highs for the region of over 9%.

On the Gulf Coast, fuel oil yields fell for the fourth year in a row in 2014 and refiners maximized their diesel yield, reaching 31.5%.

The Seaway Pipeline reversal and expansion in 2012 and 2013 allowed for record crude transfers from PADD II into PADD III in 2014 and we expect this trend to continue in 2015 as the Seaway Loop/Twin began operation late last year, increasing total pipeline capacity to 850,000 barrels per day.

Refiners on the West Coast began utilizing North Dakota’s Bakken crude in 2014, and are looking for ways to benefit from increased US crude production.


Annual 2014 3

US East Coast– PADD I

CRUDE SLATE AND RUNS

The East Coast refining market in PADD I has seen turbulent times over the last few years. Several refineries were idled or on the verge of being idled due to diminished profitability in 2011 and 2012. Several of these refineries survived closures, and in recent days, have secured deals for domestic crude deliveries in order to decrease their reliance on high priced light sweet imported crudes.

An example is Monroe Energy’s 185,000 b/d Trainer, PA refinery. In mid-2014, Monroe Energy entered into a five year agreement with Bridger, a midstream crude oil marketing and logistics company, to supply 65,000 b/d of domestic crude. The Delta Air Lines subsidiary purchased the refinery from ConocoPhillips in 2012.

Similarly, Philadelphia Energy Solutions’ (PES) 330,000 b/d Philadelphia, PA refinery faced closure in late 2012 and was able to remain open due to a partnership between the Carlyle Group and Sunoco that began in mid-2012. The PES refinery receives Bakken crude from North Dakota via rail.

Figure 1: PADD I Crude Runs

These changes in the slate can be seen in Figure 1. Over the past few years the volumes of imported crudes run at East Coast Refineries have decreased while volumes of domestic crude have increased, primarily due to Bakken crude from North Dakota

making it to the East Coast via rail and in lesser part to volumes of domestic crude barged in from the US Gulf Coast. However, these waterborne barrels must move via Jones Act vessels so movements of this nature are generally cost prohibitive. Figure 2 shows the increase in transfers via pipeline, tanker and barge from PADD III to I in 2014. Despite the growth seen in 2014, volumes from PADD III to PADD I are not as large as the amount seen in 2011. As the movements of Bakken into the East Coast occur primarily via rail, they do not appear on the US Energy Information Administration’s (EIA) data of PADD to PADD movements.

Phillips 66 receives Bakken crude at its 238,000 b/d Bayway, NJ refinery via rail which is then transferred to barges. The crude appears in the EIA’s company level import data as an import movement from Canada into the US being shipped by Global Co LLC with the final recipient being Phillips 66 in Bayway. The crude enters the US via rail and offloads at Albany, NY. From there it is loaded on a barge and goes down river to the refinery at Bayway.

Figure 2: Crude Transfers into PADD I

Thanks to these inventive ways of getting domestic crudes to the East Coast, light crude imports have been steadily decreasing (Figure 3), faling to 327,000 b/d in 2014, down 38% from 2013.

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2011 2012 2013 2014

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PADD I Crude Runs Imports Domestic Crude Runs

Source: Thomson Reuters Source: Thomson Reuters - Imports, EIA Source: Thomson Reuters Source: Thomson Reuters Source: EIA, Thomson Reuters Source: EIA, Thomson Reuters

Crude Runs, mmb/d 2011: 1.1 2012: 0.96 2013: 1.08 2014: 1.09

Source: Thomson Reuters, EIA

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Crude Transfers into PADD I

PADD II

PADD III

Source: EIA Source: Thomson Reuters Pipeline, Tanker and Barge homson Reuters

PADD III to I Transfers, mb/d 2011: 194 2012: 280 2013: 500 2014: 687

Source: EIA


Annual 2014 4

Figure 3: PADD I Crude Imports

The East Coast experienced shifts in the top ten imported streams for 2014 (Table 1). Middle Eastern light crude volumes decreased, with fewer shipments of Arab Light arriving in the East Coast in 2014 while there were increased volumes of Basrah Light.

The Nigerian light crude Qua Iboe saw the sharpest drop off, delivering only 19,000 barrels per day in 2014, down from almost 90,000 bpd the previous year. Angolan Girassol, another African light crude, fell year to year as well.

Table 1: PADD I Top 10 Imported Crude Streams

East Canadian grades such as Terra Nova, Hibernia, and White Rose make up a large portion of the East Coast imported slate and all saw slight increases in

2014. Mexico’s Isthmus crude saw the highest percent increase in 2014, growing by 86%.

YIELDS

After falling sharply in 2013, Thomson Reuters – Oil Research and Forecasts expects gasoline yields on the East Coast to increase for 2014 to 46.9% (Figure 4). This is likely due to the increased availability of light domestic crudes such as Bakken in the region. We anticipate gasoline yields to remain near this level in 2015.

Figure 4: PADD I Gasoline Yield

Despite this increase in the gasoline yield in 2014, refiners in the region have primarily favored increasing their jet yields in lieu of gasoline and diesel. Only so much heavy naphtha can be pulled from the gasoline stream to increase the jet yield, while the diesel stream offers a greater pool for boosting the jet yield. This transition from producing diesel to jet is likely due in part to the fact that jet production, unlike diesel and gasoline, is not subject to the renewable fuel standards.

As a result of this transition from diesel to jet, the jet yield on the East Coast is likely to reach an all time high in 2014 (Figure 5). According to the EIA, the jet yield for the region averaged over 9% for two months last year, the highest yields on record since the EIA began collecting regional yield data in 1993. This increase began in late 2013 with yields leveling out in mid-2014 between 8.5 and 9.5%. We expect jet yields for PADD I to remain in this range for 2015.

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PADD I Crude Imports Light

Medium

Heavy

Source: Thomson Reuters Source: Thomson Reuters Source: EIA, Thomson Reuters Source: EIA, Thomson Reuters

Light Crude Imports, mb/d 2011: 768 2012: 535 2013: 524 2014: 327

Source: Thomson Reuters

2013 2014 ∆

Basrah Light 9,638 42,735 33,098

Terra Nova 31,854 40,094 8,240

Arab Light 84,480 39,915 (44,566)

Doba 36,564 38,948 2,385

Hibernia 36,032 37,418 1,386

Girassol 36,295 27,943 (8,351)

White Rose 18,714 23,841 5,127

Azeri Light 27,565 23,156 (4,409)

Isthmus 3,013 22,099 19,086

Qua Iboe 89,381 18,967 (70,414)

PADD I Top 10 Imported Crude Streams, b/d

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45

45.5

46

46.5

2011 2012 2013 2014

%

PADD I Gasoline Yield

EIA Historical

Thomson Reuters Forecast

Source: EIA, Thomson Reuters Source: EIA, Thomson Reuters

Average Gasoline Yield 2011: 46.2% 2012: 46.0% 2013: 44.8% 2014: 45.8%

Source: EIA, Thomson Reuters


Annual 2014 5

Figure 5: PADD I Jet Yield

We anticipate this increase in jet yield to cause the diesel yield to fall to 29.1% for the East Coast in 2014 (Figure 6), its lowest yearly average since 2009. According to the EIA, diesel yields fell in mid-2014 to 26% for the region, the lowest monthly average since mid-2009. This dip in the diesel yield coincided with the time when jet was at its record-high 9% yield for the region.

Going forward for 2015, Thomson Reuters – Oil Research and Forecasts anticipates the diesel yield for the East Coast to remain between 29 and 30%.

Figure 6: PADD I Diesel Yield

East Coast residual fuel oil yields returned to 2011/2012 levels after the increase in 2013 and averaged 5.1% for 2014 (Figure 7). These values are all well below the 7% yields the area previously had up until the late 2000’s. We anticipate fuel oil yields for the region to remain around 5% in 2015.

Figure 7: PADD I Fuel Oil Yield

The East Coast coke yield remained relatively flat in 2014, averaging 2.9% for the year (Figure 8). The coke yield on the East Coast is relatively static generally only fluctuating by 0.2% and we expect this to continue in 2015.

Figure 8: PADD I Coke Yield

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2011 2012 2013 2014

%

PADD I Jet Yield EIA Historical



Average Jet Yield 2011: 6.8% 2012: 4.8% 2013: 6.4% 2014: 7.9%


29

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32

2011 2012 2013 2014

%

PADD I Diesel Yield

EIA Historical


Source: EIA, Thomson Reuters Source: EIA, Thomson Reuters Source: EIA, Thomson Reuters

Average Diesel Yield 2011: 30.0% 2012: 31.5% 2013: 31.5% 2014: 29.1%


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PADD I Fuel Oil Yield

EIA Historical



Average Fuel Oil Yield 2011: 4.9% 2012: 4.9% 2013: 5.8% 2014: 5.1%


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2011 2012 2013 2014

%

PADD I Coke Yield

EIA Historical


Source: EIA, Thomson Reuters Source: EIA, Thomson Reuters Source: EIA, Thomson Reuters Source: EIA, Thomson Reuters

Average Petroleum Coke Yield 2011: 3.1% 2012: 3.4% 2013: 2.8% 2014: 2.9%



Annual 2014 6

US Gulf Coast – PADD IIICRUDE SLATE AND RUNS

For 2014, according to the Thomson Reuters Trade Flows data, crude oil imports on the Gulf Coast have fallen steadily since 2011, dropping to 3.2 million b/d in 2014. Light crude imports make up the bulk of the drop in import volumes, primarily grades from West Africa as these volumes are being offset by domestic US crudes. Refinery crude runs on the Gulf Coast are expected to average 8.34 million b/d in 2014 (Figure 9).

Figure 9: PADD III Crude Runs

Increased crude production within the US Gulf Coast combined with greater volumes moving in from PADD II have increased the amount of US domestic crude being run on the Gulf Coast (Figure 10). Increased movements from PADD II began with the reversal of the Seaway pipeline from Cushing, OK to Houston, TX which began in 2012 at initial volumes of 150,000 b/d.

Upgrades were installed and a new pumping station was constructed in Cushing allowing flows to reach 400,000 b/d in early 2013. In late-2014, construction was completed on the Seaway Loop/Twin pipeline that runs alongside the old pipeline bringing total capacity up to 850,000 b/d.

However, according to reporting by Thomson Reuters the expansion was operating at about half of its 450,000 b/d capacity in January 2015. As the price of crude continues to recover from the lows seen last

year, we anticipate utilization to increase in 2015 with higher transfers into the US Gulf Coast from the Midwest (PADD II).

Figure 10: Crude Transfers into PADD III

The top ten imported crude streams into the Gulf Coast saw more losses than gains in 2014 (Table 2). Light grades such as Arab Light and Basrah Light experienced year-on-year losses of around 20%.

Table 2: PADD III Top 10 Imported Crude Streams

Gains in Venezuelan heavy crudes Merey and Hamaca and Arabian Heavy were offset by the losses year on year in Mexican Maya and Colombian Castilla heavy crudes resulting in little net change year on year for heavy crude imports.

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PADD III Crude Runs

Imports Domestic Crude Runs


Crude Runs, mmb/d 2011: 7.69 2012: 7.89 2013: 8.15 2014: 8.34


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Crude Transfers into PADD III

PADD I

PADD II

PADD IV

Source: EIA Source: Thomson Reuters Source: Thomson Reuters Source: EIA, Thomson Reuters Source: EIA, Thomson Reuters

PADD II to III Transfers, b/d 2011: 194,178 2012: 280,232 2013: 499,841 2014: 686,940

Source: EIA

2013 2014 ∆

Maya 696,946 636,933 (60,013)

Arab Medium 410,421 333,940 (76,481)

Arab Light 349,745 288,013 (61,732)

Kuwait Blend 263,966 241,041 (22,924)

Merey 149,045 198,306 49,261

Arab Heavy 106,743 138,161 31,418

Basrah Light 157,578 134,887 (22,691)

Castilla Blend 142,928 109,187 (33,741)

Hamaca Blend 90,253 110,230 19,977

Zuata 30 135,476 97,596 (37,880)

PADD III Top 10 Imported Crude Streams, b/d


Annual 2014 7

The changes seen in the top ten imported crudes are reflected in the overall crude imports of PADD III (Figure 11). Heavy crude imports to the Gulf Coast have increased while light volumes have steadily decreased. In 2014 light crude imports fell by just under 400,000 b/d, a drop of 32% year on year.

Figure 11: PADD III Crude Imports

YIELDS

Thomson Reuters – Oil Research & Forecasts expects the gasoline yield for the Gulf Coast have fallen slightly in 2014 to 41.8% (Figure 12).

Figure 12: PADD III Gasoline Yield

Unlike the East Coast, the Gulf Coast has yet to skew the middle distillate yield in favor of jet. However, the Gulf Coast historically has a 1-2% higher jet yield than the East Coast. We anticipate the jet yield on the US Gulf Coast to fall slightly for 2014 to 9.1% (Figure 13).

Figure 13: PADD III Jet Yield

After two years of flat yields on the US Gulf Coast in 2011 and 2012, the distillate yield increased in 2013 and continued this growth in 2014 to 31.5% (Figure 14). We anticipate higher diesel yields to continue for the Gulf Coast in 2015.

Figure 14: PADD III Diesel Yield

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PADD III Crude Imports Light

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Light Crude Imports, mmb/d 2011: 1.94 2012: 1.76 2013: 1.26 2014: 0.86


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PADD III Gasoline Yield

EIA Historical



Average Gasoline Yield 2011: 41.5% 2012: 41.9% 2013: 42.1% 2014: 41.8%


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PADD III Jet Yield

EIA Historical





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PADD III Diesel Yield

EIA Historical



Average Diesel Yield 2011: 30.5% 2012: 30.5% 2013: 30.9% 2014: 31.5%



Annual 2014 8

Fuel oil is one refined product on the Gulf Coast that has seen the greatest changes to its yield over the past four years. Thomson Reuters – Oil Research & Forecasts expects the US Gulf Coast fuel oil yield to fall to 2.2% in 2014, down 1.4% from 2011 (Figure 15).

Figure 15: PADD III Fuel Oil Yield

Fuel oil yields on the Gulf Coast began falling in 2011 when they had previously averaged around 4% between 2002 and 2010. This drop in fuel oil yields corresponds to the increase in domestic light sweet crude oil production.

Figure 16: Texas Field Production of Crude Oil

As we can see in Figures 16 and 17, crude oil production in Texas, on the Gulf Coast, and in North Dakota, in PADD II, began increasing in 2011 and has continued to do so every year since then. We anticipate crude oil production in North Dakota to have reached above 1 million barrels per day in 2014 and above 3 million barrels per day in Texas.

Figure 17: North Dakota Field Production of Crude

Thomson Reuters – Oil Research and Forecast expects the petroleum coke yield on the Gulf Coast to fall slightly to 5.8% in 2014 (Figure 17).

Figure 18: PADD III Coke Yield

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PADD III Fuel Oil Yield

EIA Historical





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Texas Production of Crude

EIA Historical



Texas Field Production of Crude, mmb/d 2008: 1.11 2010: 1.17 2012: 1.98 2014: 3.16


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North Dakota Production of Crude

EIA Historical



North Dakota Field Production of Crude, mb/d 2008: 172 2010: 310

2012: 666 2014: 1,080 Source: EIA, Thomson Reuters

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PADD III Pet Coke Yield

EIA Historical






Annual 2014 9

US West Coast – PADD VCRUDE SLATE AND RUNS

US West Coast crude runs have remained relatively flat over the last four years. Thomson Reuters – Oil Research and Forecast expects crude runs in the region to average 2.57 million b/d in 2014 (Figure 19).

Figure 19: PADD V Crude Runs

Light crudes make up the bulk of the imported crude streams into the West Coast (Table 3). Middle Eastern light crudes saw the largest increase in imports in 2014 with imports of Arab Light growing by over 73,000 barrels per day.

Table 3: PADD V Top 10 Imported Crude Streams

The Gulf Coast has already successfully replaced much of its imported light crude. Refiners on the West Coast are looking to do the same by increasing their access to domestic crude and are in the early stages of accomplishing just that.

According to the California Energy Commission, California received an average of over 3,300 b/d of crude via rail from North Dakota in 2014; however, this makes up a very small percentage of crude utilized by refineries in the state. Washington’s Department of Ecology estimated that refineries in Washington received about 10,000 b/d of crude oil via rail from North Dakota.

Figure20: PADD V Crude Imports

The US West Coast still imports a large amount of light crude oil from other countries (Figure 20). These imported volumes could be backed out if refineries in the region are able to secure access to domestic supplies.

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PADD V Crude Runs Imports Domestic Crude Runs


Crude Runs, mmb/d 2011: 2.56 2012: 2.52 2013: 2.53 2014: 2.57


2013 2014 ∆

Arab Light 142,652 216,173 73,521

Basrah Light 159,077 171,165 12,088

Oriente 119,956 96,948 (23,007)

Arab Extra Light 69,956 82,632 12,676

Napo 56,307 49,036 (7,271)

Pazflor 24,341 29,466 5,125

Hibernia 23,128 25,475 2,347

Vasconia 22,896 24,670 1,774

Castilla Blend 27,907 24,396 (3,511)

Escalante 7,982 19,095 11,113

PADD V Top 10 Imported Crude Streams, b/d

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PADD V Crude Imports Light Medium Heavy


Light Crude Imports, mb/d 2011: 559 2012: 552 2013: 593 2014: 637



Annual 2014 10

YIELDS

Thomson Reuters – Oil Research and Forecast expects gasoline yield in the West Coast to fall to 46.3% in 2014 (Figure 21).

Figure21: PADD V Gasoline Yield

After flat jet yields in 2014, we anticipate a slight increase in the jet yield for the West Coast in 2014 to 17.3% (Figure 22). While the Gulf Coast produced the greatest volume of jet due to higher overall crude runs, the West Coast has the highest jet yield of the three regions.

Figure 22: PADD V Jet Yield

The West Coast diesel yield increased in 2013 and remained flat in 2014 at 22.9% (Figure 23). If refiners in the region are able to bring in lighter domestic crudes from North Dakota that is likely to push yields more in favor of gasoline in lieu of diesel.

Figure 23: PADD V Diesel Yield

Thomson Reuters – Oil Research & Forecast expects the fuel oil yield on the West Coast to be 5.2% for 2014 (Figure 24). This is up from last year’s yield but still in the range of yields for 2011 and 2012.

Figure24: PADD V Fuel Oil Yield

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PADD V Gasoline Yield

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Average Gasoline Yield 2011: 47% 2012: 47.5% 2013: 46.9% 2014: 46.3%


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PADD V Jet Yield

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PADD V Diesel Yield

EIA Historical



Average Diesel Yield 2011: 22% 2012: 21.8% 2013: 22.9% 2014: 22.9%


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PADD V Fuel Oil Yield

EIA Historical






Annual 2014 11

Petroleum coke yield fell slightly year to year in 2014 to 6.1% for the West Coast (Figure 25).

Figure 25: PADD V Coke Yield

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2011 2012 2013 2014

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PADD V Pet Coke Yield

EIA Historical






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CONTACT LIST

Nicholas Kouchoukos – Head of Oil & Gas Research & Forecasts

Email: [email protected]

Telephone: +44 (0) 20 7542 1317

Joshua Starnes –Director of Americas, Oil Research & Forecasts


Telephone: +01 (713) 210-8519

Krista Kuhl – Senior Analyst, Oil Research & Forecasts


Telephone: +01 (713) 210-8552

Wajih Choudhury – Senior Analyst, Oil Research & Forecasts


Telephone: +01 (713) 210-8523

Alex Garcia – Senior Analyst, Oil Research & Forecasts


Telephone: +01 (713) 210-8521

Shoko Tsuruga –Analyst, Oil Research & Forecasts


Telephone: +01 (646) 223-4974

mailto:[email protected]






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