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1 Don t Expect the U.S. to Start Loading VLCC Export Crude at a Dock Any Year Soon A Charles R. Weber Research Report 10/26/17 John M. Kulukundis The Port of Corpus Christi & The U.S. Army Corps of Engineers Sign Project Partnership Agreement for Deepening & Widening of the Corpus Christi Ship Channel A long way to go beforee VLCCs are alongside On October 20 th the Port of Corpus Christi Authority (PCCA) Commission and the U.S. Army Corps of Engineers (USACE) celebrated the execution of a Project Partnership Agreement (PPA) for the deepening and widening of the Corpus Christi Ship Channel (CC Ship Channel). The PPA was approved unanimously at a September special meeting of the Port of Corpus Christi Commission upon which Port Commissioners also approved the acceleration of $32 million in Port funds to the USACE to expedite the construction of Phase 1 of the Project. The CC Ship Channel Improvement Project (CIP) will widen the CC Ship Channel to 530 feet, plus add additional barge shelves, to allow for two way vessel and barge traffic, and deepen the CC Ship Channel to 54 feet MLLW (Mean Lower Low Water). The Port of Corpus Christi has grown tired of waiting for the federal government to provide funding for the proposed deepening and widening of its ship channel. The Port Commission voted unanimously to provide $32..2 million in advance funding to pay for the first phase of a project that s been in the works for 27 years. It was in 1990 that Congress gave authorization to study channel improvements. Since then, the project has had a lot of starts and stops along the way according to John LaRue, Executive Director of the Port of

2 Corpus Christi. It was originally approved as part of the Water Resources Development Act of 2007 and was delayed because, LaRue said, the Army Corps of Engineers had taken a conservative view, treating each of the six contracts as separate items. Under that understanding, the projects would have to be individually approved and budgeted for in order to move forward. This new agreement allows the Corpus Christi Ship Channel project to finally move forward. While the PCCA and the USACE have worked to finalize the agreement, the different levels of cost sharing, contractor bidding and scope of work and availability of Federal contribution funds are still outstanding. Of the agreed initial total cost for the project of $327m, the PCCA has agreed to contribute $102.4m while the Federal government, if they allocate funds, have promised $224.6m. Over the years, port officials had hoped to see funding allocated in Congress for the project, but they have decided now to get on with the project and hope Federal finance is forth coming. Our concern is that the way things are working in Washington now or not working this could take seven years (to complete), and we don t want to wait seven years, John LaRue, executive director of the Port of Corpus Christi, said. We want to get this thing done in three to four years. The PPA agreement sets a limit on that type of accelerated funding, that the PCCA can contribute, capping it at $102.4 m. Sean Strawbridge, deputy executive director and chief operating officer for the port, said there was an option to advance funding for the ship channel project above the port s $102.4m portion. The issue with that move is that the federal government would essentially put the port on the hook to pay the remaining balance of the entire $327m project, or $224.6m. There s a high risk, if we go into advance funding, that we would not get reimbursed for that, he said. So then this commission would have to make a determination into what the financial impacts of that are and how that money could be recouped through other means. Port officials said they are still hopeful that federal funding will help pay for the remaining five phases of the ship channel work, but they are prepared to issue debt, if necessary. We re still optimistic that we re going to get federal money, and then that relieves us of putting up all the money ourselves, John LaRue said. We ve got to bring certainty to the project, Strawbridge later added. What we expect is the federal government to hold up its end of the bargain.

3 Sean Strawbridge, deputy executive director and chief operating officer for the port said the port would seek $50m in appropriations for the project in the next federal budget cycle. Based on his use of next Federal Budget Cycle we estimatee that the $50m appropriation could possibly be requested in the fall of 2018 with a decision by beginning of the fiscal year October 1, (see image) Based on the PCCA voting unanimously and the terms of the agreement with the USACE, the port of Corpus Christi will provide $32.2m in accelerated funding to pay for Phase 1 of the project within the next 30 days. The port s executive director, John LaRue currently estimates thatt the first phase of the ship channel work will go out for bids before the end of 2017, and the second phase in 2018 as quickly as they can, he said. The third phase would hopefully get underway shortly afterward, officials said. According to published reports, in 1968 Congress approved the dredging to 45 of the entire CC Shipping Channel, in 1978 dredging commenced ( after bid analysis, vendor selection) to eventually increase the channel draught to 45 from the US Gulf to the Viola Turning Basin. This was completed in 1989 and took about 11 years (21 years from Congressional approval), without any channel widening and in a much less environmentally restrictive couple of decades. This equates to about 1 year and 9 months per phase if we divide the project into six phases. Add the bidding process, vendor negotiation and channel widening of 130 to this and calling each phase 2 years (for bidding, scope of work analysis, and any environmental permitting) is being VERY hopeful in our opinion. But bearing in mind that this is the U.S. Gulf, not the U.S. West Coast it may be close to doable at 2 years per phase. Though, if we were betting men, we wouldn t love those odds. This would mean that if phase 1 does go out for bid by end 2017, possible completion could be end 2019 The Port of Corpus has allotted $32.2m for this phase, so it s already paid for. Based on a total project cost of $327m, with the PCCA committed to $102.4m and the Federal Government committed to a possible $224.6m, with the PCCA committing to $32.2m total estimated cost for Phase 1 that leaves the PCCA committed to $70.2m and the USACE to $224.6m, giving us a total estimated remaining budget of $294.8m. If we divide this by the five remaining phases, we get a very inexact budget amount of $59m per remaining phase. If phase 2 goes out for bid mid 2018, possible completion could be mid The bidding for phase 2 would be prior to any $50m Federal appropriation being approved, so the PCCA could possibly be on the hook for the phase 2 total budget, which

4 may be as high as $59m. This would mean that to complete both phase 1 & 2 could cost the PCCA $91.2m, leaving them with $11.2m in their allotted budget. If phase 3 goes out for bid end 2018 this would possibly be in line for the Federal appropriation of $50m if it is granted, if it is not granted then possibly Phase 3 will have to be financed by the PCCA and may cost $59m but they only have $11.2m left in their allotted funds if they go over then they could be liable for the entire $327m project (as above). Whichever way it gets funded, phase 3 could be completed very conservatively and without any previous delays, by the end of 2020, early 2021, though we think this is very doubtful. Phase 3 is key as it actually gets us to customers who can use it, John LaRue said. There s two customers there Oxy and Flint Hills who, when we get 54 feet to them, can start making use of that right away. They don t have to wait, so that s a key stretch for us to get to that component. It ll make them much more efficient and able to compete in world markets, not just in U.S. markets, he added. To be clear a draught of 54 and safety width of 530 will enable both Occidental Petroleum (OXY Ingleside Energy Center) and Flint Hills Resources (Koch Industries) plus any others utilizing their facilities, to cut out three reverse aframax lighterings. These would have an associated cost of about $250k each for 500k bbls, equivalent to $0.50 per bbl. Instead charterers could load their 1.5 million barrels onto VLCCs alongside, with the final aframax reverse lightering taking place out in the US Gulf. Thus saving $750,000 per cargo. Based on the same estimated timeline for the previous phases, if phase 4 goes out to bid mid 2019, completion could be mid 2021, if phase 5 bids end 2019, completion could be end 2021 and phase 6 bids mid 2020 it could completes mid We believe that this is a somewhat conservative timeline, not allowing for environmental challenges or project time and funding overruns from commencement of bidding phase 1 to completion of phase 6 could be about 5 years, compared to 11 years (minus the bidding) about forty years ago. While dredging technology has advanced in forty years, so has red tape and environmental permitting. We would probably realistically push the project to around a six to seven year undertaking, that being said, the projects value is obviously enormous. The channel dredging project is expected to be an economic boon for US oil exports at the port. With a tenant list that reads like a who s who of the oil industry all interested in the project because of growing domestic oil production volumes from areas such as the Permian Basin and, to some extent, Eagle Ford. They see the benefit of the extra depth making them much more competitive on the world market, stated John LaRue. Danny Oliver, Senior Vice President of marketing and business development for NuStar is quoted as saying: The cost of the vessel is set whether you load it fully or partially, so obviously your cost per unit goes down the more barrels you load along side Oliver added that with congestion hampering operations in Houston, more Permian oil companies want to send crude to Corpus Christi. To meet the demand, San Antonio based Howard Energy Partners (see image) is reportedly building a $150 million storage and export facility for fuels and crude oil.

5 Additionally the EPIC crude pipeline (see image) is estimated in service 1Q The EPIC (Eagle, Permian, Ingleside, Corpus) Crude Pipeline is a 730 mile crude oil pipeline providing an initial 550,000 barrels per day of capacity from the Permian and Eagle Ford Basins to both refining and export markets in and around Corpus Christi, Taft and Ingleside. Nearly 3 years in the making, the EPIC Crude Pipeline will provide upstream producers and marketers with a takeaway solution for export to the newly dredged PCCA. With connections to the Eagle Ford Shale transporting more than 150,000 barrels per day nearly 600,000 bpd of crude and condensate will flow through the pipeline. As U.S. production ramps up, Port Corpus Christi s role continues to strengthen especially as more product is expected to trade on the water borne market. The Corpus Ship Channel project will also improve safety by adding areas on either side of the main channels for barges, allowing them to move on the outside of the main channel to avoid accidents with larger, self propelled ships. The project as a whole is being hailed as a monumental step forward for the Port of Corpus Christi, as it will expand the type and size of vessels able to move in and out of the port. Additionally the facility is poised to grow its operations for exporting crude oil, expanding on efforts that began two years ago, port officials said. It s not just a Corpus Christi or regional project this is really a national project because the product that will be moving through here and what we re doing has a significant impact nationally, John LaRue of the PCCA added. According to the PCCA this new certainty as to the timing for completing the Corpus Christi ship channel improvement project could result in construction of new Permian Basin to Corpus Christi crude oil pipeline capacity, with potentially $30 Billion per year of incremental crude oil export value (assuming $50/barrel crude oil price) as well as about $500 Million in annual shipping cost savings (assuming $0.75/barrel shipping cost savings using larger tankers). The priority is to keep momentum for the project going, now that the first batch of funding has been approved. The proposed channel improvements have been anticipated by the port s customers for years and if completed, could help further the port s growth for years to come. The port s never seen this type of growth in its 91 year history, Strawbridge said.