The Future of Crude Oil in the U.S. and Canada Trisha Curtis, Director of Research Upstream and Midstream Energy Policy Research Foundation, Inc. (EPRINC) BNSF’s  Crude  By  Rail  Summit June 18, 2014

About EPRINC •

www.eprinc.org

•

Infrastructure Paper http://eprinc.org/wpcontent/uploads/2013/10/EPRINCPIPELINES-TRAINS-TRUCKS-OCT31.pdf

•

Oil and Gas Journal

•

Embassy Series

•

Presentations at Imperial College London, Colombia University, Wyoming Pipeline Authority

•

Department of Energy – Quadrennial Energy Review

•

Department of Defense

•

Rin App http://eprinc.org/2014/02/rinsaround-rosy-app-available-ios/

2

The  entire  strip…

Source: HPDI May 2014

3

North American Oil Production 12000

Thousand Barrels Per Day

10000

8000

Canadian Crude Oil Production

6000 U.S. Field Production of Crude Oil Mbbl/d 4000

2000

U.S. 8.2 mbd Canada 3.7 mbd

0

Source: EIA, Canadian CAPP forecast, EPRINC U.S. forecast, EPRINC Mexico , and EPRINC estimates

4

Permit Activity Williston Basin Powder River Basin

DJ Basin

Uinta Basin

Anadarko Basin

(Mississippian, Granite Wash, Mississippi Lime and other stacked plays)

(Niobrara Reservoir)

Utica

Permian Basin Eagle Ford Reservoir

Source: HPDI June 2014, Past 90 Days

5

EPRINC’s  Jan  2014  Forecast  for Major U.S. Shale Plays 7,000,000

6,000,000

EPRINC forecasts over 2 mbd by 2020

Barrels Per Day

5,000,000

Periphery

4,000,000

Permian

Eagle Ford 3,000,000

Bakken EPRINC's May 2013 Forecast

2,000,000

1,000,000

2020 U.S. 10 mbd

0 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: HPDI data with EPRINC forecast estimates

6

CAPP’s  Canadian  Crude  Oil  Forecast

Source: CAPP  2014,  “Crude  Oil  Forecast.  Markets,  and  Transportation”

7

CAPP’s  Canadian  Crude  Oil  Forecast

Source: CAPP  2014,  “Crude  Oil  Forecast.  Markets,  and  Transportation”

8

U.S. Total Imports, Production, Canadian Imports 12000

Thousand Barrels per Day

10000

8000

U.S. Imports from Canada of Crude Oil Mbbl/d U.S. Imports of Crude Oil Mbbl/d

6000

4000

2000

0

U.S. Field Production of Crude Oil Mbbl/d

Canadian Imports 2.7 mbd or 38%

Source: EIA

9

U.S. Imports from Abroad Steadily Decline 4500 4000

THOUSAND BARRELS PER DAY

3500 3000 2500

2000 1500 1000 500 0

Africa

Middle East

South America

Europe

North America

Eurasia

10

Drilling Activity and Production

11

U.S. Rig Count 2500

# of Rigs

2000

1500

1000

500

0

Oil

Gas

Total

Source: Baker Hughes

12

1/7/2014

1/7/2013

1/7/2012

1/7/2011

1/7/2010

1/7/2009

1/7/2008

1/7/2007

1/7/2006

1/7/2005

1/7/2004

1/7/2003

1/7/2002

1/7/2001

1/7/2000

# of Rigs

State Rig Count ND: 184

1200

1000

800

600 Texas

North Dakota

400 Colorado

Wyoming

200

0

Source: HPDI March 2014, Baker Hughes

13

North Dakota Eastern Montana South Dakota Mar-14

Jan-14

Nov-13

Sep-13

Jul-13

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-12

May-12

Mar-12

Jan-12

Nov-11

Sep-11

Jul-11

May-11

Mar-11

Jan-11

Nov-10

Sep-10

Jul-10

May-10

Mar-10

Jan-10

Nov-09

Sep-09

Jul-09

May-09

Mar-09

Jan-09

Nov-08

Sep-08

Jul-08

May-08

Mar-08

Jan-08

Nov-07

Sep-07

Jul-07

May-07

Mar-07

Jan-07

Barrels Per Day

Williston Basin Production

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0

TOTAL

Source: NDPA

14

Jan-07

Eagle Ford North Dakota Permian Basin Wyoming

Mar-14

Jan-14

Nov-13

800,000

Sep-13

Jul-13

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-12

May-12

Mar-12

Jan-12

Nov-11

Sep-11

Jul-11

May-11

Mar-11

Jan-11

Nov-10

Sep-10

Jul-10

May-10

Mar-10

Jan-10

Nov-09

Sep-09

Jul-09

May-09

Mar-09

Jan-09

Nov-08

Sep-08

Jul-08

May-08

Mar-08

Jan-08

Nov-07

Sep-07

Jul-07

May-07

Mar-07

Barrels Per Day

Shale Oil Play Production

1,600,000

Permian 1.5

1,400,000

1,200,000

Eagle Ford 1.2 mbd

1,000,000

North Dakota 977,000 b/d

600,000

400,000

Colorado 184,000 b/d

200,000

-

Wyoming 181,000 b/d

Colorado

Source: HPDI May 2013, EIA, NDPA

15

Reassessing the Bakken

Source: Cosima Theloy and Steve Sonnenberg, SPE Paper 168870, presented Denver Aug 2013, “Integrating  Geology  and  Engineering:  Implications  for  Production  in  the  Bakken  Play,  Williston  Basin”

16

Increased Density

Source: Triangle Petroleum Corporation, Presentation Bakken Product Markets and Take-Away Denver Jan 31-Feb 1 2012

Source: Continental Resources March Investor Presentation, Permission granted

17

Possible Production Figures 1,600,000 1,400,000 1,200,000

Barrels Per Day

1,000,000 800,000 600,000 400,000 200,000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: NDPA

18

Pad Drilling

Source: From NDIC Lynn Helms presentations

19

North Dakota Decline Rates 450 400 350

Barrels Per Day

300 250 200 150 100

50 0

1

3

5

7

9

11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59

Source: HPDI data

20

Infrastructure and Pricing

21

North Dakota Crude Oil Transport January 2012 Estimates

March 2014 Estimates

Source: North Dakota Pipeline Authority

22

March 2014 Williston Basin Crude Transportation Williston Basin Production: 1,054,776 b/d North Dakota: 977,051 b/d South Dakota: 4,712 b/d Eastern Montana: 73,013 b/d

Tesoro Refinery: 68,000 b/d

Truck to Canadian Pipeline: 7,000 b/d

Rail: 715,000,000 b/d

Pipeline: 293,776 b/d Source: NDPA, EPRINC Estimates

23

Pipeline  Capacity  Ample,  But… • Plenty of pipeline capacity now, but if more crude should move back to pipe (rail concerns) could see prices further decline in Clearbrook and in Wyoming

Source:  EPRINC’s  article  in  Oil  and  Gas  Journal  March  2014  

24

Where does Bakken end up? • • • • • •

1 mbd Williston Basin Production Plus 28,000 b/d Canadian imports 7,000 b/d trucked to Canada 68,000 b/d to refinery 300,000 b/d into pipelines – Rockies, Midwest, and Canada 715,000 onto rail • 400,000 b/d East Coast – 150,000 b/d Albany • 100,000 b/d to 150,000 b/d Gulf Coast • 150,000 to b/d to West Coast, mainly Washington • 50,000 to 100,000 b/d to Canada Source: EPRINC ESTIMATES and some NDPA data

25

U.S. Crude Oil Exports 300

• All exports of crude oil from the U.S. are sent to CANADA

THOUSAND BARRELS PER DAY

250

• Canada imported a total of 331,000 b/d (oil and refined products) from the U.S. in Jan 2013

200

150

• 110,000 b/d from ND alone 100

50

Sep-13

Jan-13

May-12

Sep-11

Jan-11

May-10

Sep-09

Jan-09

May-08

Sep-07

Jan-07

May-06

Sep-05

Jan-05

May-04

Sep-03

Jan-03

May-02

Sep-01

Jan-01

May-00

Sep-99

Jan-99

May-98

Sep-97

Jan-97

May-96

Sep-95

Jan-95

May-94

Sep-93

Jan-93

0

Source: EIA

26

Pipeline Choke Points

Source: EPRINC Choke Point Map using Hart ArcGIS Mapping software

27

Market Saturation

Source: CAPP  2014,  “Crude  Oil  Forecast.  Markets,  and  Transportation”

28

2014 vs. 2013

Source: CAPP Crude Oil Forecast June 2013

29

All Canadian Pipeline Export Options are Full •

•

Source: Canadian Energy Pipeline Association

Kinder  Morgan’s  Transmountain line off BC coast - currently 300,000 b/d capacity- planned expansion up to 900,000 b/d (early 2017) (Now Spectra) Platte line to Wood River 280,000 b/d-full

•

Enbridge mainline system currently transporting over 1.5 mbd with potential capacity around 2.5 mbd— Northern Gateway off BC coast planned 525,000 b/d, several other planned expansions, light oil access +400,000 b/d to eastern U.S. and Canada

•

TransCanada’s  Keystone 581,000 b/d-full—XL would add 700,000 b/d, Energy East Pipeline Project up to 1 mbd 30

Supply vs. Take-Away Capacity is Risky at Best

AT RISK

Source: CAPP  2014,  “Crude  Oil  Forecast.  Markets,  and  Transportation”

31

Regional Pricing Disparities

Source: Map from AFPM, Flint Hills, EIA, CME Group, and estimates

32

Price Comparison $140.00

$120.00

$100.00

$80.00

$60.00

$40.00

$20.00

$5/1/2013

6/1/2013

7/1/2013

8/1/2013

WTI Cushing

9/1/2013

10/1/2013

WTI Midland

11/1/2013

12/1/2013

Bakken Clearbrook

1/1/2014 WCS

2/1/2014 LLS

3/1/2014

4/1/2014

5/1/2014

Brent

Source: Bloomberg Data

33

Daily Crude by Rail Shipment in U.S. and Canada 1,600,000

Barrels Per Day

1,400,000

1,200,000

U.S. Average Barrels Per Day of Petroleum and Petroleum Product

1,000,000

Canadian Average Barrels Per Day of Petroleum and Petroleum Product

800,000

EPRINC's U.S. Daily Crude by Rail Estimate - 815,000 b/d

600,000

EPRINC's Canada Daily Crude by Rail Estimate - 160,000 b/d

400,000

200,000

0 Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13 13 13 14 Source: AAR; Crude and petroleum product includes liquefied gases, asphalt, fuel oil, lubricating oil, jet fuel, etc. U.S. operations exclude U.S. operations of CN and CP. Canadian operations include CN and CP and their U.S. operations. One carload holds 30,000 gallons (or 714.3 barrels).

34

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

Oct-10

Jul-10

Apr-10

Jan-10

Oct-09

Jul-09

Apr-09

Jan-09

Oct-08

Jul-08

Apr-08

Jan-08

Oct-07

Jul-07

Apr-07

Jan-07

Barrels Per Day

Williston Basin Rail Estimates

900,000

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

-

Source: NDPA

35

Pipeline vs. Rail Costs • From Bakken to Coasts between $10 - $15 • Slight increases due to fees by railroads for older tank cars and testing fees • From Alberta to Gulf $20

Source: CAPP 2014 Forecast

Source: EPRINC Maps using Hart Energy data and ArcGIS Mapping software

36

Canadian Crude by Rail Movements

Source: CAPP  2014,  “Crude  Oil  Forecast.  Markets,  and  Transportation”

37

Refineries

38

Where  light  sweet  Bakken  and  heavy  (blended  bitumen)  needs  to  go… Total Coking Capacity vs. Atmospheric Crude Distillation Capacity by PADD 9,000,000

Barrels Per Calendar Day

8,000,000 7,000,000

Cokers = Heavy refining capability

60

50

40

6,000,000 5,000,000

30

4,000,000 20

3,000,000 2,000,000

10

1,000,000 -

Operable Atmospheric Crude Oil Distillation Capacity Number of Refineries

10,000,000

Thermal Cracking Coking Downstream Charge Capacity Operating Refineries

0 PADD 1 PADD 2 PADD 3 East Coast Midwest Gulf Coast

PADD 4 PADD 5 Rockies West Coast

Source: AFPM map, EIA data for graph

39

Canadian vs. Total Foreign Imports by PADD

East Coast (PADD 1) Imports from Canada

1500 Midwest (PADD 2) Total Foreign Imports

1000 500

0

Midwest (PADD 2) Imports from Canada

Rocky Mountain (PADD 4) Total Foreign Imports Rocky Mountain (PADD 4) Imports from Canada

Thousand Barrels per Day

Thousand Barrels per Day

6000 5000 4000 3000 2000 1000 0

Gulf Coast (PADD 3) Total Foreign Imports Gulf Coast (PADD 3) Imports from Canada

PADD V

PADD IV 300 250 200 150 100 50 0

Thousand Barrels per Day

0

2000

2008 2009 2010 2011 2012 2013 Jan-Mar 2014

500

Thousand Barrels per Day

East Coast (PADD 1) Total Foreign Imports

1000

PADD III

PADD II

1500

2008 2009 2010 2011 2012 2013 Jan-Mar 2014

Thousand Barrels per Day

PADD I

1400 1200 1000 800 600 400 200 0

West Coast (PADD 5) Total Foreign Imports West Coast (PADD 5) Imports from Canada

Source: EIA Data

40

Bakken Product Yield Comparison

Source: Continental Resources March Investor Presentation, Permission granted

41

Bakken Quality Comparison

Source: Continental Resources March Investor Presentation, Permission granted

42

Refinery Expansions and Adjustments • Not really about the Bakken • To accommodate rising volumes of light sweet crude and condensate from the Eagle Ford and the Utica: • Flint Hills and Valero in the Gulf making expansions this year and the next; Marathon near Utica (around 200,000 b/d plus) • Phillips 66 has plans but not explicit • Some more opportunity driven expansions in North Dakota, Montana, and Texas in 2015 (around 60,000 b/d), topping plants etc. • Only one condensate splitter active to date in Gulf – BASF/Total • Kinder Morgan and Trafigura under construction in Gulf – 2014/2015 • Several proposed projects in the Gulf

43

Domestic vs. Imported RAC $140

$140 East Coast (PADD 1) Crude Oil Domestic Acquisition Cost by Refiners $/bbl

$120

$100

Midwest (PADD 2) Crude Oil Domestic Acquisition Cost by Refiners $/bbl

$80

Gulf Coast (PADD 3) Crude Oil Domestic Acquisition Cost by Refiners $/bbl

$60

Rocky Mountain (PADD 4) Crude Oil Domestic Acquisition Cost by Refiners $/bbl

$40

West Coast (PADD 5) Crude Oil Domestic Acquisition Cost by Refiners $/bbl

$20

$100

Midwest (PADD 2) Crude Oil Imported Acquisition Cost by Refiners $/bbl

$80

Gulf Coast (PADD 3) Crude Oil Imported Acquisition Cost by Refiners $/bbl

$60

Rocky Mountain (PADD 4) Crude Oil Imported Acquisition Cost by Refiners $/bbl

$40

West Coast (PADD 5) Crude Oil Imported Acquisition Cost by Refiners $/bbl

$20

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Jul-12

Oct-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

$0 Jan-11

$0

East Coast (PADD 1) Crude Oil Imported Acquisition Cost by Refiners $/bbl

$120

Source: EIA

44

“‘The  nature of the oil we're producing may not be wellmatched to our current refinery capacity,’  Mr. Moniz said Tuesday after an energy conference in Seoul. The administration is studying the issue, though government officials declined to comment on its scope or timing. The statements, paired with similar comments by senior Obama counselor John Podesta last week, mark a notable policy shift inside the administration over the past six months.”

45

Crude Exports Timeline of Discussion • Talk during past few years in analyst and think tank community • Adam Seminski publically talks about crude oil exports in 2012 • During the course of 2013 several new pipelines came online to alter the flow of crude from the Permian to the Gulf Coast (historically Permian to Cushing) in addition to new pipeline capacity from the Cushing to the Gulf, Eagle Ford production passes 1 mbd, and refinery maintenance coupled with rising production pressures LLS prices in Nov 2013 • April 2014 Senators Murkowski (R-Alaska) and Landrieu (D-Louisiana) request EIA to look into crude oil exports • May 2014 - White House officials and Energy Secretary Moniz comment on crude oil exports, EIA says they will be working on more detailed production data with API gravities What’s  Happening • Large volumes of light sweet crude and condensate of varying grades (in addition to NGLs) came on the market with limited infrastructure options • Refineries in the Gulf are beginning to see the pressure of too many light ends and their capability to handle increasing volumes of condensate and light sweet crude • Gasoline demand is relatively flat in the U.S. so there is only so much need for gasoline blending components and condensate • Natural gasoline from NGLs is in more demand from Canada as a diluent 46

Geology of the Eagle Ford = Varying Liquid Grades

Source: Momentum Oil and Gas LLC, DUG Eagle Ford Conference Presentation Oct 2011; EOG Investor Presentation Feb 2014;

47

Those differences are impacting prices

June 13, 2014 WTI $107 Brent $113

48

Regional Discounts Matter with High Cost Production

Source: ITG Investment Presentation Nov 2012

49

49

Cash Flow of the Shalers • Discounts and transportation issues matter when considering high cost of production, debt, and cash flow • Can be argued production still in infancy

Source:  WSJ,  April  20,  2014,  Russel  Gold  Theo  Francis  “The  New  Winners  and  Losers  America’s  Shale  Boom”

50

50

U.S. Exports of Petroleum and Petroleum Product U.S. Exports

U.S. Petroleum Products Exports

3000

1200

600

U.S. Exports of Petroleum Coke Mbbl/d

U.S. Exports of Other Liquids Mbbl/d

400

U.S. Exports of Residual Fuel Oil Mbbl/d

200

U.S. Exports of KeroseneType Jet Fuel Mbbl/d

U.S. Exports of Crude Oil Mbbl/d

2013

2010

2007

2004

2001

1998

0 1983

0

U.S. Exports of Natural Gas Liquids and Liquid Refinery Gases Mbbl/d

1995

500

U.S. Exports of Finished Motor Gasoline Mbbl/d

1992

1000

800

1989

1500

U.S. Exports of Distillate Fuel Oil Mbbl/d

1986

2000

1000 U.S. Exports of Finished Petroleum Products Mbbl/d Thousand Barrels per Day

Thousand Barrels per Day

2500

Source: EIA

51

Regulatory Uncertainty

52

53

Issues and Regulatory Concerns • • • • • • •

Rail Safety Pipeline and Rail Spills Flaring Water: Spilling, disposing, fracking usage Oil prices/costs/discounts Infrastructure delays Regulatory uncertainty: midstream companies trying to forecast crude exports etc. • Waste disposal • Environmental Concerns

54

Water Issues “The  analysis suggests that a likely contributing factor to the increase in earthquakes is triggering by wastewater injected into deep geologic formations. This phenomenon is known as injection-induced seismicity, which has been documented for nearly half a century, with new cases identified recently in Arkansas, Ohio, Texas and Colorado.”

55

Colorado Fracking Ban • Initiative to change constitution in November statewide ballot • Give communities to choose what type of activity would take place despite state laws

Source:  Images  directly  from  “In  Colorado  Local  Fracking   Debate Holds National Implications, theenergycollective.com, Kate Rosow Chrisman, May 12 2014

56

Crude by Rail Accidents • •

•

•

• •

July 6, 2013, a run-away train crashed and exploded in Lac-Mégantic, Quebec, killing 47 people and destroying parts of the town November 8, 2013, about 12 cars derailed in a unit train of 90 cars carrying crude oil near Aliceville, Alabama (45 miles SW Tuscaloosa). Nobody was injured, but three of the cars exploded. December 30, 2013, a train hauling grain derailed near Casselton,(SE) ND hitting a 106 car unit train of crude oil which caused 18 crude tank cars to derail causing a massive explosion and fireball January 7, 2014, a Canadian National train jumped tracks in Plaster Rock, New Brunswick. 15 cars derailed and caught fire. The train was carrying propane and crude oil from Western Canada January 20, 2014, a CSX train derailed in Pennsylvania on a railroad bridge and close a busy expressway (Schuylkill), but did not leak any crude oil. April 30, 2014, oil tanks cars on CSX derailed and caught fire in Lynchburg, VA (3 of 15 cars that derailed caught fire). Nobody was injured by 300 people were evacuated temporarily

LAC MAGENTIC: AP PHOTO/THE CANADIAN PRESS, PAUL CHIASSON

http://usnews.nbcnews.com/_news/2013/12/30/22113442-mile-long-traincarrying-crude-oil-derails-explodes-in-north-dakota?lite

57

Many Entities Involved Issues • labeling • volatility • rail safety • tank car strength

Groups Involved • producers • truckers • shippers • marketers • refineries • railroads • tank car manufacturers

58

Not on the same page

Instead, attention should shift to the rail industry's safety record, said Charles Drevna, president of the oil-refiner trade group, some of whose members have made big investments in crude-by-rail infrastructure such as tank cars. "The debate should now focus on the remaining issues—track integrity and maintenance and training for rail operators and responders," Mr. Drevna said.”

Rail executives, including Mr. Harrison, have criticized the moves, warning that such regulation could prove costly and onerous. "Those bureaucrats have no transportation experience," he said, adding that reducing speed further for all cargo, including crude and other hazardous materials, as has been proposed, would be a "nightmare" for the railroad. WSJ,  “CP’s  Boss:  A  Too-Tough  Love?,”  David  George-Cosh, May 13, 2014

“Kari  Cutting, vice president of the North Dakota Petroleum Council, said she didn't know what had changed since her group met with PHMSA last week…’Our  Bakken characterization study is not indicating that Bakken crude oil is more hazardous than other crude oil, and we're thinking that Bakken crude oil is being singled out for political reasons,’  Cutting said in an interview yesterday. EEnews,  “DOT  crude  by  rail  orders  close  in  on  Bakken  oil,”  May  8  2014

59

New York Moratorium •

NY’s  Albany  County  placed   a moratorium on crude oil processing expansions in the Port of Albany until health investigations and environmental impacts could be assessed

•

Global Partners and Buckeye in Albany hub Global had received permits to double facility in 2012

•

•

In January Gov Cuomo signed order for top bottom safety review of crude by rail and water and writes letter to Obama

Source:  New  York  Times,  Jad  Mouawad,  “Bakken  Crude,  Rolling  Through  Albany,”  Feb  27,  2014

60