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Patrick Long and Steve RobertsMay 2014 Overview of Midstream and Downstream: Highlighting Current Events and Their Impact on the Back Office.

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Presentation on theme: "Patrick Long and Steve RobertsMay 2014 Overview of Midstream and Downstream: Highlighting Current Events and Their Impact on the Back Office."— Presentation transcript:

1 Patrick Long and Steve RobertsMay 2014 Overview of Midstream and Downstream: Highlighting Current Events and Their Impact on the Back Office

2 Did You Know… …the 42 gallon barrel originated with John D. Rockefeller? Some oil was spilled during one of his early shipments. The result was 50 gallons a barrel now being 42…

3 Agenda  Introduction to Opportune Process & Technology  Downstream Overview  Crude Origin  Logistics  Refining  Final Thoughts

4 Introduction to Opportune Opportune at a glance Opportune is a leading energy consulting firm, serving clients throughout North America and Europe from offices in Houston, Denver, and London. We are unique in that we have the deep energy expertise of a large firm, but the nimbleness of a smaller firm. We bring heavily experienced teams to deliver value to our clients in addressing complex strategic, transaction, process and technology issues. Practice Areas Process and Technology Corporate finance Complex financial reporting Strategy and organization Restructuring & Bankruptcy Strategic Tax Energy Segments Energy trading and risk management Upstream oil & gas Refining & marketing Power generation Transport/distribution and storage

5 How Downstream Fits Into Oil Production UPSTREAM MIDSTREAM DOWNSTREAM

6 Downstream’s Role Within the Industry Midstream Downstream Upstream Integrated Oils Representative Companies

7 Energy is in the News 7 Senate Asks EIA to Study Crude Oil Export Crude by Rail Costs Rival Pipeline Administration Delays Keystone XL Decision Environmental Groups Want Extensive Oil Review

8 North American Unconventional Basins

9 Crude Origin  Crude at the Wellhead  Almost no value without the ability to get it to market  First Purchaser usually makes initial logistical move towards liquid market  Small pipeline gathering system or limited well-site storage and truck transport to pipeline or storage  Complexities  Geographically dispersed supply  Divisions of interest  Economics of transportation  Leased Crude

10 Crude Origin The increase in drilling technology has outpaced the industry’s ability to absorb the change efficiently. Complexities / Challenges Leased Crude Limited infrastructure to support boom Health and safety uncertainty around methods of drilling (e.g., fracking debate) Inventory tracking and reconciliation New Suppliers with Limited Credit History New Logistical Processes (Transloading) New crude types Current Events Shale boom has generated production in new regions Fracking technologies have generated increased production in existing regions

11 Crude Origin – Accounting Impacts New crude sources have created opportunities for many new companies to emerge almost overnight in this space. Accounting Impacts Boom has created new companies to support the value chain, many of which are focused on operations and have limited accounting capabilities Secondary costs are often “invisible” to commercial deal teams, and only reveal themselves during actual transactional flow Significant transactional volume for royalty, tax, and other associated payments Increased regulatory reporting requirements (permitting, first purchaser reports)

12 Crude Logistics Two primary modes of logistics from initial gathering to market: BulkNon-Bulk Complexities / Challenges Pipelines have limited and fixed operating locations and throughput Vessels / barges are limited by access Trucks have flexible operating locations, but high costs and limited per truck volume Rail has wide operating range, similar capacity to barge Current Events New oil production onshore has outpaced the available pipeline capacity in the region Cyclical swings in marine utilization has current costs very high Wellhead gathering demand has driven up truck costs High profile rail incidents have increased scrutiny on operations

13 Crude Logistics – Accounting Impacts Two primary modes of logistics from initial gathering to market: BulkNon-Bulk Accounting Impacts Most pipelines very automated and provide volumetric and invoice integration, but work on a monthly cycle Marine movements have numerous line item costs, events to manage, and mode of transport is highly paper based Limited tank car capacity leads to high number of transactions for equivalent volume of crude (vs bulk) Crude by rail is relatively new in industry, and organizations are slow to evolve processes to support the transactions

14 Rail is in the News 14 Oregon oil train shipments increased 250% in 2013 Railroad Fills Void as Oil Pipelines Fall Short Rail Delivery System Under Lots of Pressure Railway Car Manufacturers Won’t Talk Safety Despite Concerns

15 Rail Specific Complexities…in Accounting Hydrocarbon Pricing, Costs, Commercial Terms Transloading Costs Inspections Railcar Leases and Riders Car Location Messages (CLM): Locations, Sight Codes, Dates / Times, Destinations, Railroads, ETA’s Freight Costs Fuel Surcharge Customs Charges Equipment Surcharge Destination Offloading Costs Cleaning Track Repair Yard Fees Crude rail creates many complexities not typically seen with other modes of bulk transportation…they all have accounting implications!

16 40 35 30 25 20 15 10 5 0 00.511.522.533.5 High Low High Light Heavy API Gravity (API) Sweet Sour Sulfur (%) Libyan USA WTI North Sea Brent Nigerian Forecados Indonesian Duri Arab Light Dubai Arab Medium Arab Heavy Alaskan North Slope Venezuelan BCF-17 Mexican Maya Venezuelan Pilon Ural Crude Types Around the World Different regions of the world have different crude types... Bakken

17 Crude Properties Light or heavy designation depends on the average molecular weight of the crude oil.  Heavy oils are high in either tar (asphaltic) compounds, polyaromatics, or both.  Light oils are high in low molecular weight compounds, like small alkanes. Light crude is easier to process which brings a higher price. Sweet or sour depends on the sulfur content.  Sweet crudes have a low sulfur content.  Sour crudes have a high sulfur content.  Sweet crude is easier to process which brings a higher price.

18 Converting Crude to Refined Product Refineries convert crude oil into finished (refined) products Processes Separation Conversion Blending Treatment With Assistance of Heat Pressure Catalysts Additives Oil Refinery

19 What Goes Into the Cost of Gasoline?

20 Refinery Types and Crude Optionality Every refinery is different in terms of what units it has and how big each unit is. Major groups: margin vs investment  Topping plant  Cracking plants  Coking plants Determined by crudes to be run and products to be produced  Far East: run light crude to produce distillates  West Coast: run heavy crude to make gasoline  Rocky Mountain: limited crude access  East Coast: must produce home heating oil

21 Crude Conversion Happens in Different Ways Hydrocraking  Breaks up the next heavies components using hydrogen / catalysts Fluidized Catalytic Cracking (FCC)  Breaks up diesel quality components using catalysts Alkylation  Combines light ends from crude tower with by products from FCC

22 Refining Current Events  North American domestic oil production has increased, adding to the crude optionality for refineries  In US, Jones Act restricts export of domestically produced crude  Anything that is processed can be exported, leading to new construction of splitters that run crude through a single process then export the refined products  Global political instability has a constant impact on crude and refined product markets

23 Accounting Impacts  Numerous sources of crude coming into refinery must be tracked and measured  Changing economic landscape is bringing new counterparties with which to transact  Inventory Reconciliation  Yield Accounting  Production or increased supply from new areas brings new locations  Master Reference Data impact  Potential new tax implications  New points at which to hold inventory

24 Final Thoughts  Transaction Processing and Scaling Organization and Processes to Support  Focus on larger trends and analysis  Health Checks to catch issues early  (Over) Communicate with the Business

25 Appendix

26 PADD: Petroleum Administration for Defense Districts Source: eia.gov

27 Key Numbers and Stats to Remember Gallons of Oil per Barrel 42 Barrels of Oil per Metric Ton (U.S.) 7.33 U.S. Petroleum Consumption 18.5 million barrels/day Dependence on Net Petroleum Imports 45.6% Motor Gasoline Retail Prices U.S. City Average $3.41/gallon Regular Grade Motor Gasoline Retail Prices U.S. City Average (2011) $3.32/gallon Premium Motor Gasoline Retail Prices U.S. City Average $3.68/gallon Federal Motor Gasoline Tax 18.3 cents/gallon U.S. Motor Gasoline Consumption 9,120,000 barrels/day (383 million gallons/day) Share of US Oil Consumption for Transportation 69% U.S. Average Home Heating Oil Price $4.23/gallon (excluding taxes) Number of U.S. Operable Petroleum Refineries 148 Largest U.S. Refinery by Capacity – Port Arthur, TX (Motiva) 600,000 barrels/day Top U.S. Petroleum Refining States - Texas 4,717,199 barrels/day

28 Did You Know… …U.S. oil demand in 2013 was 18.5 million barrels per day? …every day the US consumes enough oil to cover a football field with a column of oil 2500 feet tall? That's 121 million cubic feet. … the current U.S. refining capacity is 16.1 Million BPD

29 What to Know About Gas Prices As this year’s driving season begins, gas prices this week reached a nationwide average of $3.17 per gallon, four cents per gallon higher than the previous record set last year. The media stories are increasing, and as friends and family start to ask about gas prices, it’s important to understand the facts about what goes into the price at the pump:  Crude price drives the price of gasoline  Gasoline is a global product  Taxes take a toll  Consumers are in control

30 What Are the Most Common Refined Products? Refined ProductApplicationSpecifications GasolineTransportation Octane, Vapor Pressure, Oxygen & Sulfur Jet Fuel Power Generation & Transportation Freeze, Flash & Smoke Points Diesel Fuel Power Generation & Transportation Sulfur, Cetane Index, Viscosity & Pour Point Home Heating OilHeatingSulfur, Viscosity & Pour Point Residual Fuel Oil Industrial Uses, Power Generation & Transportation Sulfur, Viscosity & Pour Point Others – LPG, Lubricants, Naphtahs, Greases, Asphalt, Coke & Waxes Heating, Industrial Uses, Transportation & Petrochemicals

31 Measuring Crude Oil Using Density and Gravity The lighter the crude, the more desirable the components it naturally contains are.  Measured in degrees API  Light crude > 30 API / Heavy crude < 30 API  EX: Roofing Tar = 8 API; Motor Oil = 40 API

32 Quality and Price of Various Marker Crudes GravitySulfurPrice WTI39.60.24%$100.32 Brent38.30.37%$111.30 ANS30.01.09%$110.46 Maya21.83.33%$107.05

33 Classifying Refineries by Major Processes When looking at an oil refinery from a technical perspective items are the most relevant.  Complexity - an oil refinery’s ability to process feedstocks, such as heavier and higher sulfur content crude oils, into value-added products. Generally, the higher the complexity and more flexible the feedstock slate, the better positioned the refinery is to take advantage of the more cost effective crude oils. The result is incremental gross margin opportunities for the refinery.  Capacity – is a measurement of how much crude oil can be processed on a daily basis. The measurement is determined based on the standard crude slate that is run through the refinery. By adjusting the crude slates, there is the ability to slightly adjust the maximum amount that a refinery can run on a daily basis.

34 Each type of crude has a unique distillation curve that characterizes the kinds of chemical compounds in that crude Petroleum Refining: Leffler Crude oil boils at 150 o … 450 o … 750 o … 900 o... 150450750900 BOILING TEMPERATURE of 0 100 200 300 400 500 600 700 800 900 1000 102030405060708090100 LIGHT NAPHTHA BUTANES & LIGHTER HEAVY NAPHTHA GAS-OIL CAT PLANT FEED RESIDUE CUMULATIVE PERCENT VOLUME Crude Oil Distillation Curve and Its Fractions KEROSENE Distillation: A Boiling Process Crude oil boils at a number of temperatures…

35 Major Components of Distillation: Crude Tower  Vaporizes crude oil  Separates components  Sends lighter gas to top  Settles heavier liquid to bottom  Directs components to other processes  Keeps chemical nature the same

36 Major Components of Distillation: Vacuum Tower  Receives heavier crude from the crude tower  Heats crude again  Distills under a vacuum to prevent decomposition  Distills lighter vapor into gas oil  Sends heavier crude to coker unit  Produces Fuel Oil

37 Major Components of Distillation: Summary  The outputs of these two units are sent throughout the refinery, either as finished products or components that need more refining  Going from lightest to heaviest distilled component, natural gas (or methane) comes first  Methane is used as fuel in the refinery

38 Major Components of Conversion: Delayed Coker  Receives heavy crude from the vacuum tower  Breaks up the heaviest components with high temperature and pressure  Makes heavy components lighter  Sends some components for further processing  Produces solid industrial fuel called coke

39 Improving Octane Through Conversion Low Octane – Molecules in straight line Higher Octane – Molecules in shape or branch Two processes for reshaping molecules Reforming Forms a ring of molecules Isomerization Rearranges molecules geometrically

40 De-sulfurization: Getting It Out Removes sulfur using catalysts and pressurized hydrogen  Low pressure – 600 to 800 psi (reduces sulfur to 500 ppm)  Medium pressure – 800 to 1,200 psi (reduces sulfur to 50 ppm)  High pressure – 1,200 to 1,800 psi (reduces sulfur to 5 ppm)

41 Gasoline Blending: Getting the Right Mix Mixes components from:  Crude / vacuum tower  Hydrocracker  FCC  Alkylation And creates products with specifics, desired characteristics  Regular  Premium  Aviation gasoline

42 Top 10 List: Largest Global Refineries

43 Top 10 List: Largest US Refineries RankCorporationStateSiteBarrels per Calendar Day 1 MotivaTexasPort Arthur600,000 2 ExxonMobileTexasBaytown584,000 3 MarathonLouisianaGaryville522,000 4 ExxonMobileLouisianaBaton Rouge503,000 5 MarathonTexasTexas City451,000 6 PDV AMERICA INCLouisianaLake Charles427,800 7 BP PLCIndianaWhiting405,000 8 Chevron CorpMississippiPascagoula370,000 9 ExxonMobileTexasBeaumont348,500 10 Sunoco / ETPPennsylvaniaPhiladelphia335,000

44 Top 10 List: Petroleum Refining States RankState Operating Crude Oil Distillation Capacity (1000/day) # of Operating Refineries 1Texas4,24124 2Louisiana2,53416 3California2,00520 4Illinois9044 5Pennsylvania7705 6New Jersey6556 7Washington6245 8Ohio5114 9Oklahoma4875 10Indiana4332

45 Did You Know… …U.S. oil demand in 2013 was 18.5 million barrels per day? …every day the US consumes enough oil to cover a football field with a column of oil 2500 feet tall? That's 121 million cubic feet. … the current U.S. refining capacity is 16.1 Million BPD

46 The Largest U.S. Refiners Are… Company Name (2013 Fortune 500) RankRevenues ($b)Profits ($mm) Exxon Mobil 2449.944,880 Chevron 3233.926,179 Phillips 66 4169.64,124 Valero Energy 9138.32,083 Marathon Petroleum 3376.83,389 Hess 7538.42,025 Tesoro 9532.5743 Murphy Oil 10428.8971 PBF Energy 14220.12 HollyFrontier 14320.11,727 Western Refining 2839.5399

47 What to Know About Gas Prices As this year’s driving season begins, gas prices this week reached a nationwide average of $3.17 per gallon, four cents per gallon higher than the previous record set last year. The media stories are increasing, and as friends and family start to ask about gas prices, it’s important to understand the facts about what goes into the price at the pump:  Crude price drives the price of gasoline  Gasoline is a global product  Taxes take a toll  Consumers are in control

48 Refining Take Aways – Remember these…  Refined products are designed with specific properties based on engine requirements.  Refineries convert crude oil into finished products.  Distillation separates hydrocarbons into fractions using different boiling temperatures.  Quality improvement operations increase gasoline octane and remove sulfur impurities.  Conversion operations break larger hydrocarbons (fuel oil) into smaller ones (gasoline).  Refineries are built using combinations of different processing units.


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