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Refinery Investment
Prospects for the US Gulf Coast
Nathaniel Horner
Erin Mayfield
25 October 2015
(billion bbl)
discounted domestic crude supply and 120
6
million barrles/day
5
80
North American light tight production
Annual Production
460 2010
North American heavy shale production 3
40 2020
Domestic refined products demand 20 2030
2
Global refined product demand 0
US net exporter of refined products
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1970 1980 1990 2000 2010 2020 2030 2040
WTI-Brent spread differential
Eu
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Ca
dl
A
ia
id
in
As
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Historic
t
La
US
2014 AEO High Economic Growth Projection
2014 AEO HighRegion
Oil Price Projection
(Thousand bpd)
10000
5000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Gross input Operable capacity
LSC imports fell from 1.6M bpd to Gross inputs at record levels (>17M Shift US refining slate to
0.3M bpd 2011-2015; imports to bpd) in July; avg U.S. utilization >95%. more heavy crude
USGC almost fully eliminated. Additional opportunities to increase Gasoline prices lower or
[EIA] utilization limited. unchanged, depending on
Economic disincentive to process analyst
light oil in heavy refineries
4
Cracking
Less
Coking
expensive
feedstocks
Adapted from: Canadian Fuels Association (2013). The Economics of Petroleum Refining, Fig 3.
Analytical approach
COST DISCOUNTED CASH RESULTS
ASSUMPTIONS FLOW MODEL
NPV
FORWARD PRICE Revenue comparison
SCENARIOS OPEX Breakeven
Separate module
Financing margins
EIA AEO 11
10-yr bonds Sensitivities
@ 5%
Aspen 3 Interpretation
CAPEX
Separate module
ICF 4 Context with
Taxes
Federal, state, other lines of
depreciation evidence
7
October 2014
Independent Statistics & Analysis U.S. Department of Energy Independent Statistics & Analysis U.S. Department of Energy
www.eia.gov Washington, DC 20585 www.eia.gov Washington, DC 20585
8
Financial model
Liquid products value (global)
Refining
WTI value (Cushing) Gross margin (crack spread)
Margin
Crude transport Netback shipping Variable OPEX Net Margin
driven heavily by
$30.00
$15.00
$10.00
Coking spread
2015
$(5.00)
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
WTI-Brent crack spread differen al Coking-Cracking spread differen al
10
$30
$25
Cracking Spread [$/bbl]
$20
$15
$10
$5
$0
2015 2017 2019 2021 2023 2025 2027 2029
AEO Reference Case AEO High Economic Growth
AEO Low Economic Growth AEO High Oil Price
AEO Low Oil Price AEO High Oil and Gas Resource
AEO Low Oil Price and High Oil and Gas Resource AEO Reference Case without Restrictions
AEO Low Oil Price without Restrictions AEO High Oil and Gas Resource without Restrictions
AEO Low Oil Price and High Oil and Gas Resource without Restrictions
11
$5
[$/bbl]
$0
($5)
Refine
light
crude
($10)
2015 2017 2019 2021 2023 2025 2027 2029
AEO Reference Case AEO High Economic Growth
AEO Low Economic Growth AEO High Oil Price
AEO Low Oil Price AEO High Oil and Gas Resource
AEO Low Oil Price and High Oil and Gas Resource AEO Reference Case without Restrictions
AEO Low Oil Price without Restrictions AEO High Oil and Gas Resource without Restrictions
AEO Low Oil Price and High Oil and Gas Resource without Restrictions
12
Refineries have positive NPV across all scenarios;
cracker is almost always more profitable than coker;
lifting export restrictions reduces NPV in some cases
10
Coking refinery more appealing as oil
prices increase
Breakeven refining margin: 8
CE
Center for Climate and Energy Decision Making
Supplemental
Information
From the refiners perspective, we care about17
feedstock supply and refined product demand
Feedstock price drivers for USGC: (effect on price)
Export restrictions: captive domestic LTO supply ()
Domestic production: unconventional LTO supply ()
Keystone XL: LTO supply, transitioning to Canadian heavy ()
Refined liquids price drivers:
Domestic product demand: flat to slow decline ()
International product demand: growth ()
Export ban: marginal price support ()
Brent-WTI spread is $6-$10/bbl in most scenarios 18
KXL assessment
KXL would bring heavy crude from
Western Canadian Sedimentary
Basin oil sands and light crude from
Bakken shale
Low Differential Assumes a low WTI-Brent price differential resulting from a relatively rapid
with Exports accommodation of light sweet crude through the buildout of rail, marine, and
refinery capacity. No export ban.
Low Differential Assumes a low WTI-Brent price differential resulting from a relatively rapid
without Exports accommodation of light sweet crude through the buildout of rail, marine, and
refinery capacity. Assumes export ban.
High Differential Assumes a high WTI-Brent price differential for several years, resulting from
with Exports delays in adaptation to increased crude due to market and policy uncertainty and
risk aversion. No export ban.
High Differential without Exports Assumes a high WTI-Brent price differential for several years, resulting from
delays in adaptation to increased crude due to market and policy uncertainty and
risk aversion. Assumes export ban.
23
CF model example
FINANCIAL CASH FLOW MODEL
CRACKER
Financing Capitalization Operating cash flow Taxes NPV
MISC ASSUMPTIONS
Crude transport Cushing Port Arthur $6/bbl
Hurdle rate 10% - 30%
Bond term (years) 10
24
From: Galveston, TX
Destination Sailing days Cost Cost/barrel
Rotterdam, Netherlands 15 $ 225,000 $ 0.83
Singapore 35 $ 525,000 $ 1.94
Shanghai, China 30 $ 450,000 $ 1.66
Rio de Janeiro, Brazil 16 $ 240,000 $ 0.88
27
DEPRECIATION SCHEDULE
Year 200% DB
1 10%
2 18%
3 14.40%
4 11.52%
5 9.22%
6 7.37%
7 6.55%
8 6.55%
9 6.56%
10 6.55%
11 3.28%
29
Crack Spread
$70
$60
Coking-Cracking Spread Differentials
$50
$40
[$/bbl]
$30
$20
$10
$0
2015 2017 2019 2021 2023 2025 2027 2029
AEO Reference Case AEO High Economic Growth
AEO Low Economic Growth AEO High Oil Price
AEO Low Oil Price AEO High Oil and Gas Resource
AEO Low Oil Price and High Oil and Gas Resource Aspen Institute Reference
Aspen Institute Low Exports Aspen Institute High Exports
ICF Low Differential with Exports ICF Low Differential without Exports
ICF High Differential without Exports ICF High Differential with Exports
AEO Reference Case without Restrictions AEO Low Oil Price without Restrictions
AEO High Oil and Gas Resource without Restrictions AEO Low Oil Price and High Oil and Gas Resource without Restrictions
30
AEO Low Oil Price and High Oil and Gas Resource
($15)
2015 2017 2019 2021 2023 2025 2027 2029
31
WTI-Brent spread
WTI-Brent Price Differential
[$/bbl]
16
14
12
10
8
6
4
2
0
2015 2017 2019 2021 2023 2025 2027 2029
Scenario 1: AEO Reference Case Scenario 2: AEO High Economic Growth Case
Scenario 3: AEO Low Economic Growth Case Scenario 4: AEO High Oil Price Case
Scenario 5: AEO Low Oil Price Case Scenario 6: AEO High Oil and Gas Resource Case
Scenario 10: ICF Low Differential with Exports Case Scenario 11: ICF Low Differential without Exports Case
Scenario 12: ICF High Differential without Exports Case Scenario 13: ICF High Differential with Exports Case
Displacing heavy crude in existing refineries 32