Changes to America s Gasoline Pool. Gary Devenish. September 30, Baker & O Brien, Inc. All rights reserved.

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1 Changes to America s Gasoline Pool Gary Devenish September 30, 2016 Baker & O Brien, Inc. All rights reserved.

2 Legal Notice Baker & O Brien, Inc., (Baker & O Brien) prepared this report for the Argus Condensate and Naphtha Markets 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 prepared this report for the sole benefit of this Argus Condensate and Naphtha Markets conference. Any reproduction, distribution, or disclosure of this information is strictly prohibited without Baker & O Brien s prior written authorization. Baker & O Brien expressly disclaims all liability for the use, disclosure, reproduction, or distribution of this information by or to any third party. 2

3 Baker & O Brien: Independent Energy Consultants Capital Project Services Consulting Staff Operations Support Chemical, Mechanical, and Electrical Engineers Consultants average over 25 years industry experience Overview Independently owned and managed Technical and commercial expertise Active over full life cycle of assets: new project development -> business support -> commercial disputes Commercial Analyses Mergers and Acquisitions Dispute Resolution Experienced problem solvers This material is for information only and carries no expressed or implied warranty 3

4 Discussion Points Gasoline Pool Component Review Light Naphtha Surplus Octane Demand and Challenges 4

5 Definitions for this Presentation Naphtha Generic term for light volatile petroleum liquid or low octane gasoline Full Range Naphtha Light Naphtha (Light Straight Run LSR) Mainly C5 (pentanes) and C6 (hexanes) RVP between 12 and 20 psi Heavy Naphtha Best suited for reformers, C6-C7-C8 Natural Gasoline Heaviest liquid stream from a gas plant, maybe called condensate composed of C5 and heavier Condensate Generic term for light raw petroleum that condensed from gas Ranges in quality from natural gasoline to light crude oil Usually meets pipeline vapor pressure specs of psi 5

6 Discussion Points Gasoline Pool Components 6

7 Refiner Blending Capability Drivers and Considerations Driver Crude oil naphtha quality Existence of isomerization unit Reformer size and severity FCC size, conversion level FCC naphtha hydrotreating severity Alkylation unit size, feed quality Hydrocracker naphtha quality (RON, N+A) RVP constraints (seasonality) Considerations Direct blending, reformer yields Ability to upgrade LSR streams Octane needs, economics Base Gasoline Pool Stock Sulfur, octane loss Pool octane, C3/C4 balance Direct blending, reformer yields Light component (nc4, LSR) blending 7

8 Gasoline Pool Components: Large Volume Base Presents Both Challenges and Opportunities to Absorb Changes Gasoline Composition YTD Isomerate 5% Other 11% Ethanol 10% Reformate 33% Alkylate 13% FCC Naphtha 28% Source: PRISM is a trademark of Baker & O Brien, Inc. All rights reserved. 8

9 Discussion Points Light Naphtha Surplus 9

10 Total Crude Oil and Light Naphtha Production: Rapid Growth Followed by Modest Declines U.S. Crude Oil Production Growth Source: EIA and Baker & O Brien Analysis 10

11 Crude Exports: Minimal Impact (so far) Change in Domestic Crude Oil Production since 2010 Export Ban Lifted Crude Exports Source: EIA and Baker & O Brien Analysis 11

12 U.S. Light Tight Oil Distillation Capacity Growth About 600,000 B/D of distillation capacity will come on line by About 80,000 to 100,000 B/D is Light Naphtha. Source: Company Announcements, Baker & O Brien Analysis 12

13 Naphtha Content Range of Light Crude Oils Sample Yields from Crude Oils Average LSR + Nap = 37% Average LSR + Nap = 24% Source: PRISM 13

14 The Challenge of Light Ends: New Crudes Produce More Low Value Streams Relative Economic Value of Condensate Splitter Intermediate Products Lower Values Source: Argus and Baker & O Brien Analysis 14

15 Light Naphtha Consumers: Gasoline Pool Dominates Accounting for Over 75% of Disposition Driving forces for Light Naphtha: Gasoline, Exports, Olefins ~ 2 MMB/D Source: PRISM and Baker & O Brien estimates 15

16 Driving forces for Light Naphtha: Gasoline Blending Light Naphtha Consumers Source: PRISM and Baker & O Brien estimates 16

17 Light Naphtha Consumers Gasoline: Demand Remains Strong Vehicle miles travelled remains at record levels in 2016 Source: U.S. Federal Highway Administration 17

18 Light Naphtha Consumers Gasoline: Record Production Record gasoline production continued into 2016 Source: EIA and Baker &O Brien Analysis 18

19 Driving forces for Light Naphtha: Diluent Exports Light Naphtha Consumers ~ 2 MMB/D Source: PRISM and Baker & O Brien estimates 19

20 Pentanes Plus Exports to Canada Light Naphtha Consumers - Diluent Canadian Production Condensate Exports Source: EIA, Statistics Canada 20

21 Driving forces for Light Naphtha: Olefins Light Naphtha Consumers ~ 2 MMB/D Source: PRISM and Baker & O Brien estimates 21

22 Alternative Value Cracker Feedstock: Competing against NGLs Source: Argus and Baker & O Brien Analysis 22

23 Light Naphtha Surplus Continues to Drive Down Values Declining relative value, increasing seasonal swings Source: Argus and Baker & O Brien Analysis 23

24 Light Naphtha - Summary With the drop in shale-oil production, light naphtha volumes may have peaked, but remain at historically high levels Strong gasoline demand has provided the primary home for light naphtha Alternative markets (i.e., diluent and olefins) provide some relief but are likely to continue to have minimal impact Generally declining value versus gasoline, with large seasonal swings, appear likely to continue in the near future Should inventories continue to climb (and prices fall), exports into foreign markets may increase 24

25 Discussion Points Octane Demand and Challenges 25

26 Octane Demand: Increasing Sales of Premium Gasoline Premium sales increasing (new engine requirements, low prices) % Premium Sales Octane Spread Source: EIA and Baker & O Brien Analysis 26

27 Octane Demand: Impact of Tier 3 Tier 3 limits gasoline sulfur to no more than 10 ppm sulfur on an annual average Octane Loss is a side-effect of FCC Gasoline Sulfur-removal processes Refiners and blenders may have to reject higher-sulfur components from the gasoline pool Full impact may not be felt for several years: Small Refiner (38 Total) Exemption until 2020 Volumes produced prior to 2017 that are below 30 ppm generate credits (five year lives) that are valid until December 31, 2019 Banking and Trading (ABT) of Credits will allow refiners to delay investment 2015 Average Sulfur = 25 ppm 650 Billion credits in 2015 Small Refiners can generate <30 ppm credits until 2020 Source: EPA and Baker & O Brien 27

28 Octane Properties for Blending Streams and Pure Components Description RON MON High Aromatics? Comments Butane High RVP limited during Summer Isomerate Potential RVP issues Reformate (full-range) Large RON/MON Spread Light Reformate Ex. Toluene, Benzene Heavy Reformate Toluene - Pure Higher value in petrochemical market Xylenes/Ethylbenzene Higher value in petrochemical market FCC Naphtha (full-range) Main Gasoline component Light Fraction Heartcut Fraction Heavy Fraction Alkylate (from butylene) ,2,4 Trimethylpentane Ethanol Current practical blend wall of 10 vol% MTBE Banned in U.S. 28

29 Octane Blending Components: Reformate Description RON MON High Aromatics? Comments Butane High RVP limited during Summer Isomerate Potential RVP issues Reformate (full-range) Large RON/MON Spread Light Reformate Ex. Toluene, Benzene Heavy Reformate Toluene - Pure Higher value in petrochemical market Xylenes/Ethylbenzene Higher value in petrochemical market FCC Naphtha (full-range) Main Gasoline component Light Fraction Heartcut Fraction Heavy Fraction Alkylate (from butylene) ,2,4 Trimethylpentane Ethanol Current practical blend wall of 10 vol% MTBE Banned in U.S. 29

30 Increased Octane Contributions by Reformers Source: PRISM 30

31 Octane Contributions by Reformers: High Reformer Margins Naphtha/PUL, % Reformer Margin Source: Argus and PRISM 31

32 Octane Hierarchy for Blending Streams and Pure Components Description RON MON High Aromatics? Comments Butane High RVP limited during Summer Isomerate Potential RVP issues Reformate (full-range) Large RON/MON Spread Light Reformate Ex. Toluene, Benzene Heavy Reformate Toluene - Pure Higher value in petrochemical market Xylenes/Ethylbenzene Higher value in petrochemical market FCC Naphtha (full-range) Main Gasoline component Light Fraction Heartcut Fraction Heavy Fraction Alkylate (from butylene) ,2,4 Trimethylpentane Ethanol Current practical blend wall of 10 vol% MTBE Banned in U.S. 32

33 Octane Contributions - Alkylation Alkylation Margin ic4/rul, % Source: Argus and PRISM 33

34 Octane Hierarchy for Blending Streams and Pure Components Description RON MON High Aromatics? Comments Butane High RVP limited during Summer Isomerate Potential RVP issues Reformate (full-range) Large RON/MON Spread Light Reformate Ex. Toluene, Benzene Heavy Reformate Toluene - Pure Higher value in petrochemical market Xylenes/Ethylbenzene Higher value in petrochemical market FCC Naphtha (full-range) Main Gasoline component Light Fraction Heartcut Fraction Heavy Fraction Alkylate (from butylene) ,2,4 Trimethylpentane Ethanol Current practical blend wall of 10 vol% MTBE Banned in U.S. 34

35 Octane Sources - Aromatics Some petrochemical feedstocks/components may have more value in the gasoline pool due to high Octane, low RVP. Source: Argus and Baker &O Brien Analysis 35

36 Refiners Responses to Increasing Octane Demand Naphtha Reforming increasing utilization, severity Significant tailwinds for Reformer margins Presence of low-octane light naphtha Increasing Premium gasoline demand Low crude prices = low volume loss impact. Alkylation units - maximum throughput, capacity addition Future changes Full impact of Tier 3 Regulations may not be felt for several years Rejection of low octane and/or high sulfur components Naphtha, LSR sales Further optimization of Reformer Feeds Add more aromatics to gasoline vs. petrochemical market Increased Ethanol blending?? 36

37 Conclusions Production of domestic crude with high LSR content has created large discounts for light components Even though production has declined, market will likely remain long LSR Demand for premium, high-octane gasoline has been increasing and may continue to do so given changes to CAFE standards and the response of automakers Oil price is a wildcard higher prices may temper premium demand, decrease Reformer incentives Alkylation remains attractive due to steep nc4/gasoline discounts Tier 3 (Low Sulfur) Regulations in effect starting January 1,2017 Availability of generated credits and small refinery status may ease compliance requirements and delay full impact for several years Ultimately will have pay to more attention to light naphtha and natural gasoline streams Directionally, more sulfur removal in a refinery equals octane loss 37

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