Reversing flow: How the shale revolution redefined where oil trades, how it moves and how it is priced USAEE Washington, DC

Transcription

1 Reversing flow: How the shale revolution redefined where oil trades, how it moves and how it is priced USAEE Washington, DC Jeff Kralowetz 19 June 2015 London Houston Washington New York Portland Calgary Santiago Bogota Rio de Janeiro Singapore Beijing Tokyo Sydney Dubai Moscow Astana Kiev Porto Johannesburg Market Reporting Consulting Events

2 Topics covered How spot markets work Benchmarks Local physical markets How the rise of light tight oil (shale) production has changed physical market pricing relationships and logistics Where new price discovery hubs are emerging

3 The Argus perspective World s largest independently held energy markets PRA 700 staff in 23 countries Produce > 8,000 daily price assessments Pricing reference for US crude ASCI prices >1.5mn b/d LLS is key benchmark price Swaps/futures settle on Argus pricing Consulting Conferences Training

4 Crude market 101: Benchmark pricing in North America Market Reporting Consulting Events

5 Benchmark-based global oil price system The benchmark/differential system aims to maximize liquidity and accuracy Hundreds of grades of crude exist, but nearly all are priced at a differential to 3 liquid benchmarks: Brent WTI Oman-Dubai System allows basis price to be set by very liquid and transparent markets lay off most risk The differentials allow accurate value adjustments to reflect regional fundamentals address basis risk Argus assesses differentials

6 How it works valuing Permian shale crude at Houston Main North American benchmark is WTI Cushing = WTI at Houston is Permian crude trading at Magellan s East Houston terminal. It trades at a diff to WTI Cushing = WTI = Match highly liquid WTI Cushing base price with the fundamentals of Houston market for Permian light tight oil. Source: Argus Americas Crude, 9 June 2015, p1

7 Global benchmarks big liquidity, broad valuation

8 Brent has surpassed WTI in use as primary benchmark 2,800,000 2,600,000 2,400,000 Physical oversupply in US midcon Bottlenecks and US crude export ban WTI is a less relevant benchmark, less used 2,200,000 2,000,000 1,800,000 1,600,000 Brent rising relevance 1,400,000 1,200,000 Dec 12 May 13 Oct 13 Feb 14 Jul 14 Dec 14 Apr 15 ICE + Nymex WTI ICE + Nymex Brent

9 Effect of shale fields on pricing: A push to the coast Market Reporting Consulting Events

10 Cowboyistan: US output affects global pricing despite export ban Produced by 100s of independents Source: Harold Hamm, CEO Continental Resources, 28 Jan 2015 at Argus Americas Crude Oil Summit, Houston, TX Copyright 2014 Argus Media Ltd. All rights reserved.

11 US Crude output doubled need for new infrastructure Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 crude output (b/d) Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 C3 output (b/d) Crude output has climbed from about 5.4mn b/d in 2010 to about 9.2mn b/d now Most new liquids production is from inland fields North Dakota, Texas, Rockies Source: US EIA

12 Production is inland; Most refining is at coasts Source: EIA Drilling Productivity Report, June 2015

13 Logistics shift to accommodate rising flows to the coasts Crude flow changes: 2012 to 2013 Crude flow changes: 2013 to 2014 Total change 2012 to 2014: US Gulf crude imports Down 1.084mn b/d West Texas to Texas coast Up by 1.58mn b/d Bakken to East Coast Up by 235,000 b/d Bakken to West Coast Up by 181,000 b/d

14 New or reversed pipelines move crude to the coast Texas: Longhorn BridgeTex Permian Express I & II Eagle Ford: KMCC-Double Eagle Enterprise/Plains Cactus Cushing to coast TC Marketlink Seaway/Flanagan South Reversed HoHo/Zydeco Further north: White Cliffs, Pony Express, Enbridge expansions Source: Argus Petroleum Transport, Jan 23, 2015

15 US crude export ban effect: US Gulf merchant refiners convert non-exportable crude to exportable products 165,000 b/d distillates 40,000 b/d gasoline 150,000 b/d distillates 570,000 b/d gasoline 1,150,000 b/d distillates 350,000 b/d gasoline illuminating the markets Copyright 2014 Argus Media Ltd. All rights reserved.

16 Shale boosts use of exceptions to US crude export restrictions; pricing at the coastal export points US crude exports ( 000 b/d) Source: EIA Copyright 2014 Argus Media Ltd. All rights reserved.

17 US Gulf: Potential global price point for heavy crude World s largest heavy crude refining center is US Gulf Increased access by Canadian heavies Also accessible by other global heavy producers Saudi Arabia, Iraq, Mexico, Colombia Unlike light crude market, export ban less of a factor Canadian is exportable Multiple heavy grades converge at US Gulf

18 Re-exports of Canadian crude from US Gulf likely Canada making slow progress on export lines to its coasts export via US ports is an alternative, though expensive Canadian crude may be re-exported from US ports if: It remains segregated throughout its movement across the US - Must be batched if travelling in pipeline - Must be kept in segregated storage Canadian access to US by pipe is growing despite Keystone XL Enbridge Line 67 (Alberta Clipper) expanding from 570kbbd to 800kbd, expected in 3Q15 if US State Department approves

19 How price discovery has gone coastal the rise of secondary price benchmarks Market Reporting Consulting Events

20 Pricing adapts to shale with secondary benchmarks Brent WTI LLS, Mars ASCI ----LLS has the fastest growing open interest used as bridge to WTI ----ASCI and Mars are sour coastal benchmarks

21 LLS: the bridge connecting WTI to global market Soaring LLS open interest from mid 2013 Open interest on LLS on CME & ICE LLS is the defacto light tight (shale) oil benchmark at the coast Used by large refiners in 10Ks to value crude Financial positions on LLS have risen since OPEC strategy to challenge shale

22 WTI Midland used as marker for Texas LTO Until February 2015, there was not a transparent spot price assessment at Houston WTI Midland quality is better than WTI Cushing not a blended barrel Quality and location differences from Cushing prompt Texas shale market to look to secondary benchmark

23 ASCI: A sour crude reference for >1.5mn b/d Argus Sour Crude Index is composite of three offshore high-sulphur (sour) grades: Southern Green Canyon, Mars, Poseidon ASCI remains the benchmark for every barrel of Saudi, Kuwaiti and Iraqi imports Ecuador announced adoption of ASCI based pricing in 2014 Argus VWA and ASCI methodology was overhauled 2014 to include even more transactions Increased benchmark volume an average 7% ASCI grade production is up 100,000 b/d to near 700,000 b/d

24 Other sour price signals: Mars, Castilla and Maya Open interest on Mars on CME & ICE Mars is medium sour; not a perfect match for heavy Canadian at the coast Maya is very similar in quality to Canadian WCS, but a government formula price Castilla is heavy sour and freely traded, but liquidity is variable

25 WCS Created to be a North American sour benchmark Blended by 4 Canadian producers to consistent fungible specification at Hardisty Production of about 350,000 b/d Widely resold on spot markets 2 WCS prices exist: Hardisty and Cushing Act independently (see graph) WCS at Texas coast beginning to trade spot WCS Cushing moves independent of Hardisty

26 Characteristics of an emerging price discovery hub Market Reporting Consulting Events

27 New markets can emerge with new infrastructure WTI at Houston convergence of 500kbd supply from Longhorn and BridgeTex lines; assessment launched Feb 2015 WCS at Nederland (Houston) Flanagan South will support Patoka sees convergence, but a long way from liquid spot market

28 Checklist for new price index Surplus crude, widely accessible/easily transferable Industry consensus on: Location Quality and means for measurement Timing Basis of trade eg diff to WTI Modality pipe, rail, barge, ship Information availability Argus assessments and indices are based on trades done and actual market conditions; not modeled Reported trade Bids/offers/information on related markets

29 Where it has worked: WTI at Houston Location - Magellan East Houston terminal Quality - Permian WTI spec as defined Longhorn and BridgeTex pipelines Segregated from other domestic sweet In-tank trade facilitated by terminal operator Timing monthly US pipeline schedule Basis priced at a differential to WTI Cushing Modality pipeline Spot trade is reported to Argus

30 Easily accessible across Houston Fungible WTI storage receives only Longhorn and BridgeTex WTI In-tank transfer system (Product Transfer Orders) Source: Magellan Midstream Partners Connections to Houston Ship Channel refineries and to Speed, Genoa (and Texas City refineries), Webster, Ho-Ho, Oiltanking and ECHO

31 and to Texas City, Louisiana and water Source: BridgeTex tariff documents

32 Reflecting local fundamentals: WTI Houston vs LLS WTI at Houston does not track LLS exactly Reflects local fundamentals LLS is increasingly disconnected from Texas coast Committed shipper effect: WTI Houston does not always = WTI Midland + pipeline tariff

33 Where will new price discovery hubs emerge? Market Reporting Consulting Events

34 Nederland: The world s new global heavy price signal? Attributes Convergence of pipelines, rail offloading capacity Large amounts of storage Waterborne exit and access Local refinery demand Brings Latin, Mid East, Canadian face to face useful signal of value Liabilities Connectivity still immature Terminal operators not setting aside tanks for fungible grade trade as at Cushing Copyright 2014 Argus Media Ltd. All rights reserved.

35 Rail off-load capacity adds to convergence at Nederland Blocked and delayed pipeline projects have led to more crude-byrail movements from Canada Build-out of receiving terminals for heavy crude/bitumen in US Also may be buying for re-export at Nederland Has waterborne access at Sun Nederland and other terminals

36 WCS survives Enbridge co-mingling as distinct grade Enbridge comingled grades at Superior from mid 2014 to conserve storage and pipeline capacity AWB and WCS remain segregated streams SYN is now either from Syncrude Canada or Suncor LLS, WH, LLK and SC are all comingled under label of CHV (conventional heavy) Copyright 2013 Argus Media Ltd. All rights reserved.

37 Trends we ve seen in Nederland WCS ghost quote Wide swings vs Mars reflects difference in quality from medium sour Mars Recent strength of WCS at Nederland as supply from Canada tighter, competition from Padd II refiners, increased demand for heavy crude to offset abundant lights in feed slates Basis: Trades vs calendar month average rather than prompt WTI

38 WCS Nederland s recent relationship to Maya Diffs to Mexican Maya formula reflect the fact that Maya is a government-set formula, not a traded spot price Recent price has been very close to Maya qualities are similar

39 Is WCS at Texas coast needed? Already a swaps contract on ICE based on Argus WCS Cushing Cushing has more optionality and liquidity But Nederland reflects more exactly the higher coastal value of heavy Canadian crude WCS Nederland could come to reflect the influence of re-export potential given its dock access

40 Eagle Ford s hurdles on path to spot price index Location(s): Corpus, Gardendale, Three Rivers, ECHO, other no agreed place to trade or value it; often valued at refinery gate Quality: API gravity varies from high 30s to 70s Assays from fields continue to change New routes being opened for Permian crude to get into Eagle Ford pipelines (Plains Cactus) Timing: US Gulf pipeline nomination schedule Basis: Trades vs WTI, LLS, posted price, Brent Modality: Pipe, rail, barge, ship illuminating the markets Copyright 2014 Argus Media Ltd. All rights reserved.

41 Corpus Christi Developing waterborne infrastructure Quality has not been uniform Pipelines largely batched Multiple destinations value EF differently petchems, splitters, refiners, Canadian diluent market Copyright 2014 Argus Media Ltd. All rights reserved.

42 Bakken: Clearbrook doesn t tell the whole story

43 Bakken fob rail price relevance in question Bakken is only major producing basin where rail spot price is widely watched Argus provides commentary without a daily published price Volumes of Bakken crude moving by rail have declined Pipelines have taken more share as play matures But movement to east and west coasts is likely to remain on rail

44 Patoka lots of connections, but limited trade Current liabilities Limited commercial storage Limited connections to Canada and Bakken Future potential Potential blending center for lights from Capline, Canada and Bakken with Canadian heavies Enbridge Express/Platte Growing storage New/expanded pipelines in-bound Copyright 2014 Argus Media Ltd. All rights reserved.

45 East coast unlikely home for price discovery Increased flows of Bakken and Canadian heavy Insufficient storage, market participants for robust spot market US crude arriving at east coast is constrained by US export ban Copyright 2014 Argus Media Ltd. All rights reserved.

46 US West Coast also hard to price West coast is isolated, has no pipeline connections to US Gulf/midcon ANS (Alaska North Slope crude) prices off Brent No other dominant baseload grade Latin American grades compete in USWC About half of all Escalante produced goes to USWC (1mn bl/month) - Prices at 30-cent discount to ANS Colombian South Blend, loading at Tumaco, competes in USWC Colombian Vasconia occasionally goes to California

47 Conclusions Market Reporting Consulting Events

48 Rising US crude output changes how crude prices Rising light tight oil (shale) output has rerouted US logistics toward the coasts US crude export ban means crude demand is at US Gulf coast merchant refining center With pricing at coast, secondary benchmarks have arisen Secondary coastal benchmarks pair the financial transparency of WTI with the accuracy of coastal market fundamentals Nederland/Port Arthur could be the key global pricing center for heavy crude Canadian, Mideast Gulf and Latin heavies converge there

49 London Houston Washington New York Portland Calgary Santiago Bogota Rio de Janeiro Singapore Beijing Tokyo Sydney Dubai Moscow Astana Kiev Porto Johannesburg

50 Jeff Kralowetz Vice-President, Business Development Phone: Office: Web: Houston Copyright notice All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus. Trademark notice ARGUS, ARGUS MEDIA, the ARGUS logo, DEWITT, FMB, FUNDALYTICS, METAL-PAGES, JIM JORDAN & ASSOCIATES, JJ&A, ARGUS publication titles and ARGUS index names are trademarks of Argus Media Limited. Disclaimer All data and other information presented (the Data ) are provided on an as is basis. Argus makes no warranties, express or implied, as to the accuracy, adequacy, timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any party s reliance on the Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.