Rebalancing Global Crude Flows John R. Auers Executive Vice President AIChE Dallas Chapter April Section Meeting April 28, 2015 Page 1
TM&C North American Crude & Condensate Outlook TM&C began publishing North American Crude & Condensate Outlooks in 2012 Early editions focused primarily on impacts to North American crude flows An important subject in the 2014 edition was the impact on global crude supply and demand Page 2
Millions of BPD North American Production Gains 14 12 10 8 6 4 2 0 2005 2007 2009 2011 2013 U.S. crude oil production grew by 3.6 million BPD from 2008 to 2014 The U.S. had its greatest oil growth in 2014 at 1.2 million BPD Canadian production grew by 1.1 million BPD between 2008 and 2014 U.S. Canada Source: EIA Page 3
Millions of BPD Global Crude Production Growth from 2008-2014 4.0 3.0 2.0 1.0 0.0-1.0-2.0 U.S. World Canada Iraq Russia Saudi Arabia Source: EIA, JODI, TM&C China Mexico U.K. Norway World (excl. U.S.) Libya Iran Page 4
Millions of BPD Initial U.S. and Canadian Crude Projections U.S. production to peak 2022 at 12.1 million BPD Canadian production to grow to 5.7 million BPD in 2025 20 18 16 14 12 10 8 6 4 2 0 2014 2016 2018 2020 2022 2024 U.S. Canada Page 5
Millions of BPD Initial Global Crude Supply and Demand Implications 90 88 86 84 4.7 million BPD Supply overhang grows to 4.7 million BPD around 2019 82 80 78 76 74 2014 2016 2018 2020 2022 2024 Supply Demand Crude production growth flattens after 2020 Assumes Saudi production at 9.7 million BPD Page 6
Millions of BPD Saudi Production as Traditional Global Balancer Output declines from 9.7 million BPD to low of 5 million BPD Output rises after 2020 due to flattening of global supply growth 10 9 8 7 6 5 4 2014 2016 2018 2020 2022 2024 Page 7
Conclusions from Initial Global Balance Global crude supply grows faster than demand in the near term Required Saudi output to balance are unrealistically low A new crude supply/demand/price equilibrium point was calculated Page 8
Saudi Production, Million BPD Saudi Percent of OPEC Recent Saudi Production Levels 10.5 10.0 9.5 9.0 8.5 8.0 32 31 30 29 28 27 Low of 7.6 million BPD in 2002 Saudi market share of OPEC at low in 2009 at 26.8% 7.5 2000 2003 2006 2009 2012 Saudi Production Percent of OPEC Source: EIA 26 Page 9
Rebalance Assuming Saudi Arabia Will Defend Stated Price Range Minimum Saudi production of 8.25 million BPD Maximum Saudi production at 11.0 million BPD Minimum Saudi OPEC share at 25% Focus on high production cost regions Re-evaluate global product demand at lower prices Re-evaluate alternate fuels growth Objective new crude supply/demand balance Page 10
Supply/Demand Responses Needed to Rebalance MMBPD Increased product demand 1.3 Reduce Alternate Fuels 0.4 Crude Reductions Saudi Arabia 1.3 Other OPEC 1.0 Non-OPEC 0.7 Total 4.7 Page 11
Petroleum Demand, Million BPD Change in Demand, Million BPD Cumulative Product Demand Response to Lower Price Regime Incremental demand rises to 1.3 million BPD in 2019 110 105 100 2.5 2.0 1.5 95 1.3 million BPD 1.0 90 0.5 85 2014 2016 2018 2020 2022 2024 Base Adjusted Change 0.0 Page 12
Petroleum Demand, Million BPD Change in Demand, Million BPD Cumulative Product Demand Response to Lower Price Regime Incremental demand peaks at 2.0 million BPD Adjustment declines after 2023 Incremental demand occurs mostly in developed economies 110 105 100 95 90 85 2014 2016 2018 2020 2022 2024 Base Adjusted Change 2.5 2.0 1.5 1.0 0.5 0.0 Page 13
Million BPD Revised Alternate Fuels Demand 12 10 8 6 4 2 Most alternate fuels production is mandate driven Greatest reduction will be seen in NGL output 0 2014 2016 2018 2020 2022 2024 Refinery Gain Alternate Fuels NGLs Page 14
Million BPD Revised Global Production Growth: 2014 to 2025 6 5 4 3 2 1 0-1 -2 North America South America Europe Middle East Africa FSU Asia Pacific Page 15
Saudi Production, Million BPD Saudi Percent of OPEC Revised Hypothetical Saudi Forecast 11.5 11.0 32 31 10.5 10.0 9.5 9.0 8.5 30 29 28 27 26 8.0 2014 2016 2018 2020 2022 2024 Saudi Production Percent of OPEC 25 Page 16
OPEC Crude Production 1980-1985 Production MBPD Decline MBPD 1980 1985 MBPD Percent Saudi Arabia 9,900 3,388 6,512 66 Other OPEC 15,483 11,979 3,504 23 25,383 15,367 10,016 Source: EIA Page 17
Why OPEC Can Make It Work This Time Over-supply volume is less than 1980s Third party verification of production volumes - JODI Hybrid approach compared to only quota reductions to maintain price Saudi Arabia has demonstrated willingness to allow price declines but does desire higher price levels long term Page 18
What Really Happened Oil price fell as Saudi Arabia defended its global market share November 2014 OPEC meeting declined to set production quotas Next OPEC meeting scheduled for June 5, 2015 Early U.S. demand response looks encouraging Prices and rig counts have fallen; actual production has been slower to respond Page 19
Million Barrels Cushing Crude Inventory 70 60 50 40 30 20 10 Logistic Constraints Stocks have been building at 275 MBPD since Nov. EIA states working capacity at 70 million barrels Cushing predicted to be full in May 0 Jan-12 Jan-13 Jan-14 Jan-15 Source: EIA Page 20
Dollars per Barrel Recent NYMEX WTI Forward Curve 64 62 60 58 56 54 52 50 Jun 14 Jul Aug Sep Oct Nov Dec Jan 15 Feb Mar Apr May Jun Page 21
Million Barrels U.S. Crude Inventory (Excluding SPR) Crude inventories are building across U.S. Vessel time charters for floating storage are increasing 500 480 460 440 420 400 380 360 340 320 Jan-12 Jan-13 Jan-14 Jan-15 Source: EIA Page 22
BPD U.S. Crude Production Forecast Revised forecast shows declines over near term Will take longer to achieve peak Long term forecast should be similar 2014 Years Forecast Before Price Decline Current Forecast Page 23
Conclusions Tight oil development in the U.S. has changed the world crude supply dynamic N.A. production growth has overwhelmed demand and led to an oversupplied market Saudi s first move has been to defend market share rather than price, leading to price collapse Ultimately, we do expect the Saudi s/opec to adopt a dual strategy of output and pricing reductions This will be supported by more cohesion than in 1980s Page 24
Conclusions (cont.) Supply overhang/low prices will persist in near term 2015 crude prices likely to be very volatile Eventually supply and demand responses will bring market back into balance Our longer term price environment has Brent at $80+ U.S. oil production by 2025 will likely be comparable to forecasts prior to price collapse Page 25
Presenter John R. Auers jauers@turnermason.com Executive Vice President Turner, Mason & Company 2100 Ross Ave., Suite 2920 Dallas, Texas 75201 turnermason.com 214-754-0898 Page 26