The Changing Dynamics of the US Atlantic Coast Joshua Starnes, Associate Editor June 11, 2013

© 2013 Platts, McGraw Hill Financial. All rights reserved.

Falling Demand in the Northeast

Fuel Oil Demand Losing Ground To Gas New York: Gas vs. Residual Fuel Oil Prices $40.00

$35.00

$30.00 $ $25.00 / M M $20.00 B T $15.00 U $10.00

$5.00

$0.00 1-Nov-12

1-Dec-12

1-Jan-13

1-Feb-13

Fuel oil No. 6 0.3%S HP

Source: Platts

1-Mar-13

1-Apr-13

1-May-13

1-Jun-13

Transco Zn6 NY spot gas

3

Non-bunker Demand Continues to Fall

Source: New York Independent System Operator

4

Power Generation Moving to Gas

• EIA estimates fuel oil makes up less than 1% of New York power generation fuel mix. • Approximately 30% of Northeast power generation is dual fuel natural gas/fuel oil • Fuel oil will remain in the Northeast as peak fuel, but overall demand levels will not return 5

Power Generation Moving to Gas • Cheap natural gas values making switch from fuel oil to gas for power generation demand attractive. • Florida Power & Light fuel oil demand has dropped from 10 million b/year to less than 1 million b/year. – Just finished conversion of Cape Canaveral plant to gas – Conversion of Riviera Beach plant in 2014 – Conversion of Port Everglades plant in 2016

6

Bunker Market Now Drives Domestic Demand • Declining demand in other sectors has made bunker market primary domestic demand driver • Annual US bunker demand estimated at approximately 17 million mt/year Port

Annual Demand (mt/year)

New York Harbor

3.5 million

Houston

4-4.8 million

Los Angeles/San Francisco

3 million

Others

5.7 million

7

Global Bunker Market Driving Fuel Oil Demand • Exports to Europe and Asia for marginal bunker demand the major non-domestic bunker demand driver. • Atlantic Coast exports generally flow to the Caribbean or to Rotterdam to feed European market • After middle of decade spike, Atlantic Coast exports to Europe are beginning to fall as bunker demand there falls • Except for feed to Caribbean, Atlantic Coast unable to export to Asian market 8

Feb-13

Mar-12

Apr-11

May-10

Jun-09

Jul-08

Aug-07

Sep-06

Oct-05

Nov-04

Dec-03

Jan-03

Feb-02

Mar-01

Apr-00

May-99

Jun-98

Jul-97

Aug-96

Sep-95

Oct-94

Nov-93

Dec-92

Jan-92

Feb-91

Mar-90

Apr-89

May-88

Jun-87

Jul-86

Aug-85

Sep-84

Oct-83

Nov-82

Dec-81

Jan-81

Fuel Oil Export Demand Rising East Coast (PADD 1) Exports of Residual Fuel Oil

6000

5000

4000

3000

2000

1000

0

East Coast (PADD 1) Exports of Residual Fuel Oil

Source: US Energy Information Administration 9

Exports to Rotterdam Falling East Coast (PADD 1) Exports of Residual Fuel Oil by Destination 3000.00

2500.00

2000.00

1500.00

1000.00

500.00

Dec-12

May-12

Oct-11

Mar-11

Aug-10

Jan-10

Jun-09

Nov-08

Apr-08

Sep-07

Feb-07

Jul-06

Dec-05

May-05

Oct-04

Mar-04

Aug-03

Jan-03

Jun-02

Nov-01

Apr-01

Sep-00

Feb-00

Jul-99

Dec-98

May-98

Oct-97

Mar-97

Aug-96

Jan-96

Jun-95

Nov-94

Apr-94

Sep-93

Feb-93

0.00

-500.00 U.S. Exports to Panama of Residual Fuel Oil

U.S. Exports to Netherlands of Residual Fuel Oil

Source: US Energy Information Administration 10

The Changing Supply Picture

Multiple Recent Refinery Closures Number and capacity of petroleum refineries 30

25

20

15

10

5

0 1982

1987

1992

1997

2002

2007

2012

East Coast (PADD 1) Number of Idle Refineries as of January 1 East Coast (PADD 1) Number of Operating Refineries as of January 1 East Coast (PADD 1) Number of Operable Refineries as of January 1

Source: US Energy Information Administration 12

Supply falling in reaction to lower demand • Multiple refinery closures in Northeast over last three years – Approximately 150,000 b/d of production capacity removed from region • Gerard Point, Marcus Hook

– Vacuum distillation capacity down 21% – Less production from PES Refinery

• Fuel oil refinery & blender production at all time low. • Bunker quality fuel oil (more than 1% sulfur) production at all time highest share of fuel oil production • Imports not closing the gap 13

Multiple Recent Refinery Closures Refinery & Blender Net Production 7000 6000 5000 4000 3000 2000 1000

Nov-12

Apr-12

Sep-11

Feb-11

Jul-10

Dec-09

May-09

Oct-08

Mar-08

Aug-07

Jan-07

Jun-06

Nov-05

Apr-05

Sep-04

Feb-04

Jul-03

Dec-02

May-02

Oct-01

Mar-01

Aug-00

Jan-00

Jun-99

Nov-98

Apr-98

Sep-97

Feb-97

Jul-96

Dec-95

May-95

Oct-94

Mar-94

Aug-93

-1000

Jan-93

0

-2000 East Coast (PADD 1) Refinery and Blender Net Production of Residual Fuel Oil 0.31 to 1.00% Sulfur East Coast (PADD 1) Refinery and Blender Net Production of Residual Fuel Oil Less than 0.31% Sulfur East Coast (PADD 1) Refinery and Blender Net Production of Residual Fuel Oil Greater Than 1% Sulfur East Coast (PADD 1) Refinery and Blender Net Production of Residual Fuel Oil

Source: US Energy Information Administration 14

Falling Imports Are Not Making Up For Lower Production Levels East Coast (PADD 1) Imports of Residual Fuel Oil 35000

30000

25000

20000

15000

10000

5000

Jan-81 Nov-81 Sep-82 Jul-83 May-84 Mar-85 Jan-86 Nov-86 Sep-87 Jul-88 May-89 Mar-90 Jan-91 Nov-91 Sep-92 Jul-93 May-94 Mar-95 Jan-96 Nov-96 Sep-97 Jul-98 May-99 Mar-00 Jan-01 Nov-01 Sep-02 Jul-03 May-04 Mar-05 Jan-06 Nov-06 Sep-07 Jul-08 May-09 Mar-10 Jan-11 Nov-11 Sep-12

0

East Coast (PADD 1) Imports of Residual Fuel Oil

Source: US Energy Information Administration 15

Fuel Oil Stocks at Lowest Ever Levels PADD 1 Fuel Oil Stocks 25000

20000

15000

10000

5000

Nov-12

Apr-12

Sep-11

Feb-11

Jul-10

Dec-09

May-09

Oct-08

Mar-08

Aug-07

Jan-07

Jun-06

Nov-05

Apr-05

Sep-04

Feb-04

Jul-03

Dec-02

May-02

Oct-01

Mar-01

Aug-00

Jan-00

Jun-99

Nov-98

Apr-98

Sep-97

Feb-97

Jul-96

Dec-95

May-95

Oct-94

Mar-94

Aug-93

Jan-93

0

East Coast (PADD 1) Ending Stocks of Residual Fuel Oil East Coast (PADD 1) Ending Stocks of Residual Fuel Oil Greater Than 1% Sulfur East Coast (PADD 1) Ending Stocks of Residual Fuel Oil 0.31 to 1.00% Sulfur East Coast (PADD 1) Ending Stocks of Residual Fuel Oil Less than 0.31% Sulfur

Source: US Energy Information Administration 16

Where Does This Leave Bunker Market?

Effect of ECA on Bunker Demand • On August 1, 2012, the North American Emissions Control Area came into effect limiting sulfur levels to 1% Sulfur. • This has not added demand to the US bunker market as low sulfur demand has come from existing 3.5% Sulfur RMG 380 demand. • Atlantic Coast 1% Sulfur RMG 380 demand is estimated at 20% of current bunker market 18

Domestic Fuel Oil/Bunker Demand Falling

• Loss of domestic power generation and weak global shipping market have combined to further dampen bunker demand in the Atlantic Coast. • Despite falling supply, demand still falling faster than supply • With bunker demand making up such a large percentage of US fuel oil demand, this is visible in the widening spread between fuel oil and Brent crude futures. 19

Low Sulfur Crack Spreads 1%S Spot vs Brent Crude Futures 140

120

100

80

60

40

20

0

Brent crude futures ($1/b)

NYH 1.0%S fuel oil cargo ($1/b)

Source: Platts 20

High Sulfur Crack Spreads 3%S Spot vs Brent Crude Futures 140

120

100

80

60

40

20

0

Brent crude futures ($1/b)

New York Harbor 3.0%S fuel oil cargo ($/b)

Source: Platts 21

-2.00

NYH 3.0%S FO Cargo vs RMG 380 Spot 5/2/2013

3/2/2013

1/2/2013

11/2/2012

9/2/2012

7/2/2012

5/2/2012

3/2/2012

1/2/2012

11/2/2011

9/2/2011

7/2/2011

5/2/2011

3/2/2011

1/2/2011

11/2/2010

9/2/2010

7/2/2010

5/2/2010

3/2/2010

1/2/2010

11/2/2009

9/2/2009

7/2/2009

5/2/2009

3/2/2009

1/2/2009

11/2/2008

9/2/2008

7/2/2008

5/2/2008

3/2/2008

1/2/2008

Weak Demand leads to Tightening in Fuel Oil/Bunker Spread NYH 3%S FO Cargo vs RMG 380 Spot

16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00

-4.00 Linear (NYH 3.0%S FO Cargo vs RMG 380 Spot)

Source: Platts 22

Ease of Access to LSFO • Existing low sulfur refining capacity in the Northeast and Eastern Canada has kept region well supplied in low sulfur bunker material compared with the rest of the country. – Phillips 66 Bayway refinery – New Jersey – Valero Ultramar refinery – Montreal – Kildare refinery - Newfoundland

• Other regions relying on imports for low sulfur bunker material 23

New York Maintains Low 1% Sulfur Price • Ease of access to supply of 1% Sulfur fuel oil has kept 1% Sulfur RMG 380 values competitive in New York Harbor compared with the rest of the US • Average premium to RMG 380 for low sulfur bunker fuel since June 1, 2012: Port

Average premium for 1%S RMG 380

New York Harbor

$62.58

Houston

$92.42

Los Angeles

$141.71

Source: Platts 24

Looking to the Future Lower Sulfur Limits Coming

Next Round of MARPOL Emission Changes • On January 1, 2015, sulfur limits within ECA zones will drop from 1% Sulfur to 0.1% Sulfur. • Dependent on further postponement, in 2020 sulfur limits in all other waterways will drop from 3.5% Sulfur to 0.5% Sulfur. • Ability for fuel oil market to supply sub-1% Sulfur fuel oil in abundance is questionable. • Market looking to options: – Gasoil – LNG – Scrubbing technology for fuel oil engines 26

Northeast sub-1%S supply situation • Northeast has access to sub-1% Sulfur fuel oil production the rest of the US doesn’t – PES’ Philadelphia refinery – Trainer refinery – Imported low sulfur African crude and straight run

• The move away from fuel oil for power and heat in the Northeast has led to a sharp drop in supply of sub-1% Sulfur fuel oil. – Sub-1% Sulfur production approx. 25,000 b/month – Winter demand can rise as high as 25,000 b/d 27

Is there a room for fuel oil in an ultra low sulfur world? • The spread between Atlantic Coast 0.3% Sulfur high pour fuel oil spot and New York ULSD spot barge price has generally been $13-15/b. • During high demand periods in the winter that spread has dropped as low as $5/b. • Blending fuel oil to 0.1% Sulfur while maintaining viscosity levels is problematic

28

Fuel oil No. 6 0.3%S HP 2-May-13

2-Mar-13

2-Jan-13

2-Nov-12

2-Sep-12

2-Jul-12

2-May-12

2-Mar-12

2-Jan-12

2-Nov-11

2-Sep-11

2-Jul-11

2-May-11

2-Mar-11

2-Jan-11

2-Nov-10

2-Sep-10

2-Jul-10

2-May-10

2-Mar-10

2-Jan-10

2-Nov-09

2-Sep-09

2-Jul-09

2-May-09

2-Mar-09

2-Jan-09

2-Nov-08

2-Sep-08

2-Jul-08

2-May-08

2-Mar-08

2-Jan-08

Demand Tightens ULSFO/ULSD Spreads New York: 0.3%S HP Fuel Oil vs. ULSD Barge Prices

200

180

160

140

120

$/b 100

80

60

40

20

0

ULSD New York Harbor barge

Source: Platts 29

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