U.S. Crude Exports Where Would They Go?

U.S. Crude Exports Where Would They Go? 2 nd Annual Crude-by-Water Conference Houston, TX November 17, 2015 John R. Auers Executive Vice President

TM&C Overview International consulting practice since 1971 Downstream focus; refinery/chemical engineers Industry and financial clients Strategic Studies FMV Assessments & Venture Analyses National Policy Studies Publish various outlook and multi-client subscription reports Crude and Refined Products Outlook Refinery Construction Outlook North American Crude and Condensate Outlook Several editions World Crude Outlook Released in October 2015 2

TM&C White Paper on Exports Issued Report on September 8 th Analysis of likely U.S. crude export destinations Considered quality, regional demand and logistics, other factors Focused on light crude Available at www.turnermason.com Top of the page under Publications U.S. Light Crude Oil Exports: Likely Destinations 3

Presentation Outline Evolving U.S. Crude Balance Fit into Atlantic Basin Refineries Transportation Costs/Other Factors Final Analysis/Thoughts 4

U.S. Crude Production U.S. Crude Production (Million BPD) 10 9 8 7 6 5 4 3 2 1 U.S. Crude Production (Million BPD) 10 9 8 7 6 5 4 3 2 1 9.8 9.6 9.4 9.2 9 8.8 Jan-15 Feb-15 Mar-15 Apr-15 Growth dominated by LTO production May-15 Jun-15 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Bakken Eagle Ford 0 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 Niobrara 2000 2005 2010 2015 Jul-15 Aug-15 Sep-15 Oct-15 Permian All Other U.S. Production had risen over 90% since 2008 5

Changing U.S. Refinery Crude Slates (1985-2015) Design Basis -> 32.5 Middle Eastern Latin American & Canadian Heavies Domestic Lights 1.6 Gravity, API 32.0 31.5 31.0 30.5 LTO growth has led to a much lighter U.S. crude slate 1.4 1.2 1 0.8 Sulfur, wt. % 30.0 0.6 1985 1990 1995 2000 2005 2010 2015 2015 YTD, API 31.8, Sulfur 1.40 6

U.S. Refiners Geared for Heavy Crude U.S. Refiners had spent billions in the 1990 s and 2000 s to heavy up Significantly increased complexity; more suited to run heavier crudes More recently spending focused on light crude Comparison of U.S. to Global Refiners Region Total Upgrading Cat Cracking Coking Hydrocracking U.S. - 1981 41% 28% 8% 5% U.S. 2015 56% 31% 15% 11% Asia 19% 13% 3% 6% Europe 26% 14% 3% 9% Latin + South America 25% 16% 4% 5% World 28% 16% 5% 7% *O&G Journal, as of Jan. 1, 2015 7

Light Crude Investment - 2012 to 2018 *Millions of $ PADD IV PADD II PADD V 900 1500 800 1100 Spent To Date Total Spent To Date Total 100 200 PADD I Spent To Date Total 50 100 3600 U.S. Total 6800 PADD III 3900 1800 Spent To Date Total Spent To Date Total Drop in Oil Price Could Delay $500 to $1000+ MM of Investments Spent To Date Total 8

Imports Down/Allowable Exports Up 12 10 Light/Medium Imports Decline from 4.8 MMBPD in 2006 & 2007 to 1.5 MMPBD in 2015 700 600 Crude Imports (Million BPD) 8 6 4 Crude Exports (Thousand BPD) 500 400 300 200 2 100 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Medium Light Canadian Heavy PADD V 9 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Processed Condensate Canada

No More Room In Canada 1000 900 Eastern Canadian Imports (Ontario, Quebec, Maritime Provinces) Three-month Rolling Average 800 700 Imports (MBPD) 600 500 400 300 300 MBPD Line 9 reversal startup imminent, will displace U.S. crude with Western Canadian Barrels Heavy Light (Non U.S.) Light (U.S.) 200 100 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 10

Potential Export Volumes 20 Early 2014 Forecast Exports Required 20 Current Forecast 18 18 16 16 Million BPD 14 12 10 8 U.S. Exports 2020: 1.1 MMBPD 2025: 1.3 MMBPD 14 12 10 8 U.S. Exports 2025: 700 MBPD 6 6 4 4 2 2 0 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Other Exports* Splitter Runs U.S. Production Waterborne Imports Canadian Imports Total Refinery Runs *Includes Canadian exports and exports of lightly processed condensate 11

Presentation Outline Evolving U.S. Crude Balance Fit Into Atlantic Basin Refineries Transportation Costs/Other Factors Final Analysis/Thoughts 12

Atlantic Basin Refining Environment Atlantic Basin: 49% Global Refining Capacity Russia 6% U.S. 21% Latin America 9% Europe 19% Africa 4% Middle East 9% Asia- Pacific 29% 13

European Region Three distinct regions: NW, Med, and Eastern Europe Total crude runs of 14.5 MMBPD in 2014; Limited and declining regional production; 60% is imported EU has over 70% imports Northwest Europe 12 Countries 56 Refineries 8.4 MMBPD Mediterranean Europe 10 Countries 43 Refineries 5.5 MMBPD Eastern Europe 9 Countries 28 Refineries 2.8 MMBPD Total Europe 31 Countries 127 Refineries 16.7 MMBPD 14

Designed for Lighter Crudes Imports, Million BPD 5.0 4.0 3.0 2.0 1.0 0.0 European refiners less complex than U.S. counterparts Even PADD I, the least complex U.S. region, has significantly greater cracking capacity Northern Europe Eastern Europe Med Europe Total Light % Light 100% 80% 60% 40% 20% 0% Light Crude, % of Total Imports % of Crude Capacity 15 70% 60% 50% 40% 30% 20% 10% 0% Avg. Northwest Europe Mediterranean Eastern Avg. PADD I U.S. % Coking % Cracking % Hydrocracking Total Upgrading PADD III Almost all crude imports are light (>31 API)

Dependent on Unreliable Suppliers Crude Imports (Thousand BPD) Russia is the largest source Average over 3 MMBPD in 2013/14 Has used energy supply 1800 1600 1400 1200 1000 800 600 400 200 0 Russian Crude Imports (MBPD) as a political weapon 0 0% Africa Middle East Russia FSU LASA Canada 16 NW Europe Mediterranean Eastern Europe 1600 1400 1200 1000 800 600 400 200 Russian Crude Imports MBPD/Concentration, %, by Region 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Northwest Mediterranean Eastern Russian Crude Imports Russian % of Total Imports Other key sources impacted by strife/other factors Libya, Sudan, Nigeria, others % of Total Crude Imports

Declining Volumes From Major Suppliers 7 Crude Production North Sea 12 Crude Production - Africa 6 10 Crude Production (Million BPD) 5 4 3 2 8 6 4 1 2 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Other U.K. Norway - 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Libya Sudan + S. Sudan Angola Algeria Nigeria Rest of Africa 17

European Displacement Analysis Potential ability for U.S. crude to enter market was evaluated based on multiple factors: Quality of imports vs. U.S. LTO Refinery capabilities on a country by country basis Source of existing imports Factors assigned individual values; combined to assess total potential for U.S. crude placement 2020 European Crude Import Demand, All Numbers in MBPD Potential U.S. Market Total Imports Light Imports Northwest Europe 4495 4045 1004 Mediterranean Europe 3167 2528 184 Eastern Europe 1335 1305 29 Total Europe 8997 7878 1218 18

Latin America Home to two OPEC members, Venezuela and Ecuador Region is net long crude; but quality is mismatched with refinery capability Have not been able to execute projects to fix mismatch. Light crude has market as diluent for blending with very heavy. Mexico 6 Refineries 1.5 MMBPD Rest of Latin America 20 Countries 51 Refineries 3.9 MMBPD Total Latin America 22 Countries 70 Refineries 7.4 MMBPD Brazil 13 Refineries 1.9 MMBPD 19

Refinery Complexity Crude Production (Million BPD) Like European refiners, Latin American facilities are less complex than U.S. Avg. 40 MBPD larger Avg. 26% more complex These refiners are well suited to process light crude 12 10 8 6 4 2 Latin American Crude Production Forecast 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Latin American Med+Hvy Latin American Lt. 20 % of Crude Capacity 70% 60% 50% 40% 30% 20% 10% 0% Avg. Mexico Brazil Rest Avg. PADD I PADD III Latin America U.S. % Coking % Cracking % Hydrocracking Total Upgrading Latin American crude production is increasingly heavy Trend forecast to continue

Latin American vs. U.S. Refiners Comparison of Latin American to U.S. Refiners # of Refineries Capacity (MMBPD) Total Upgrading Cat Cracking Coking Hydrocracking U.S. 123 18.02 56% 31% 15% 11% PADD 1 9 1.24 48% 38% 6% 3% PADD 3 55 9.22 60% 31% 16% 13% Latin America 70 7.39 30% 21% 8% 2% Mexico 6 1.54 37% 25% 12% -- Brazil 13 1.92 32% 26% 6% -- Venezuela 5 1.28 29% 18% 11% -- Argentina 10 0.61 40% 22% 15% 3% Netherlands Antilles 1 0.32 16% 16% -- -- Cuba 4 0.30 5% 5% -- -- Colombia 5 0.29 31% 31% -- -- Chile 3 0.23 49% 22% 6% 22% *O&G Journal, As of Jan 1, 2015 21

Latin American Crude Balance Imports (MBPD) 400 300 200 100 0 Overall crude demand increases as there is some refinery expansion Demand will primarily be for lighter crudes as regional production of heavy grows/is exported Mexico Latin America Crude Imports Trinidad/Tobago Jamaica Dominican Republic Brazil Venezuela Chile Peru Uruguay 2014 2020 Latin American Crude Import Sources, 2014 49% 7% 17% 27% Russia Middle East North Africa West Africa Caribbean/Central America South America 22

Latin American Displacement Analysis Smaller market than Europe but expected to grow Transportation advantages vs. current suppliers Backhaul opportunities Analyzed markets in same fashion as for Europe Comparison of Latin American Crude Import Demand, MBPD Total Imports Light Imports Potential U.S. Market Mexico 100 100 100 Brazil 369 369 258 Rest Latin + South America Total Latin + South America 319 309 105 788 778 463 23

Presentation Outline Evolving U.S. Crude Balance Fit Into Atlantic Basin Refineries Transportation Costs/Other Factors Final Analysis/Thoughts 24

Worldwide Shipping Costs $2-3/bbl advantage to stay in Atlantic Basin 25

Worldwide Transit Times 10+ day advantage to stay in Atlantic Basin 26

Middle East/West Africa Costs & Times Middle East sees similar export costs and times to Europe vs. Asia/Pacific West Africa would see greatest impact from U.S. exports, as exports to Asia/Pacific $1-3/bbl higher, up to 15 days longer 27

Other Factors and Considerations Relations between West and Russia on the outs Russia supplies over 3 MMBPD of oil to Europe European dependency a potential political weapon U.S. a secure source of supply for Europe Alternative sources subject to disruption China unlikely to want to be dependent on U.S. China and U.S. are economic competitors LTO from U.S. to Asia logistically disadvantaged U.S. potential supply source for Israel Important Middle Eastern ally, imports about 250 MBPD Russia has been a major source; Gulf producers not an option Synergies between LTO producers and their refineries Several companies have LTO production in U.S. and European refinery assets, potential supply chain optimization 28

Presentation Outline Evolving U.S. Crude Balance Fit Into Atlantic Basin Refineries Transportation Costs/Other Factors Final Analysis/Thoughts 29

Regional Export Prioritization Based on refinery capacity, logistics, other factors 2020 Estimated Volume (MBPD) Cumulative Total (MBPD) Transportation Transit Export Destination Cost ($/bbl) Time (days) Mexico 100 $0.75-1.00 2 100 Rest of Latin America 110 $1.25-$3.50 3-12 210 NWE: France, UK, Ireland 395 $2.00-3.00 14-15 606 Med: Spain, Portugal 149 $2.00-2.50 13-15 755 NWE: Belgium, Netherlands, Germany, Denmark 560 $2.00-3.00 15 1315 Brazil 258 $2.50-3.50 12-16 1573 NWE: Norway, Sweden, Finland 34 $2.50-3.50 15-17 1607 Med: Italy, Balkans, Turkey 35 $2.50-3.25 17-19 1642 NWE: Austria, Switzerland 15 $3.00+* 15+* 1657 Eastern Europe 29 $3.00+* 16+* 1686 Israel 250 $3.00-3.50 20 1936 *Landlocked, requires overland transportation on top of marine transport cost/time 30

Recent Developments House approved oil export bill on October 9 Bipartisan vote of 261 to 159 President threatens veto; 29 votes short of 2/3rds Being Considered in Senate Also unlikely to get 2/3rds majority Possibility does exist for a horse trade Strategy to attach to highway bill failed on 11/5 Mexico swaps have been approved 75 MBPD for next 12 months Multiple applications for swaps to other countries have been denied 31

Final Thoughts U.S. LTO exports fit well into Atlantic Basin Logistics favor Atlantic Basin over Asian markets Sources of light crude to Atlantic Basin declining Country-by-country analysis shows room for > 1.5 MMBPD of light U.S. crude in Europe/LatAm Geopolitical/other factors also support exports to Atlantic Basin Exports will not go exclusively to Atlantic Basin Significant need for exports not necessary until U.S. production >10.5 MMBPD 32

Presenter John R. Auers, P.E. Executive Vice President Univ. of Nebraska Chem. Engr. Univ. of Houston MBA Formerly with Exxon Industry studies/analysis, forecasting, modeling Leads Outlook team Contact Info jauers@turnermason.com Office 214-223-8887 33