Pricing of Canadian Oil Sands Blends Presented to: Edmonton CFA Society Investing In Alberta s Oil Sands Conference Edmonton, Alberta June 8, 2006 Steve Fekete Senior Principal Calgary, Alberta 403-266-7086 snfekete@purvingertz.com
Purvin & Gertz and Oil Sands International Energy Consultancy Private and Independent Firm established in 1947 Maintained office in Calgary since 1973 30 years in oil sands Economic feasibility, technical evaluations, market studies Canada and Venezuela Refining and upgrading Technologies Costs / Economics Independent Engineer for banks/investors Initial project reviews and project reports Project monitoring and certification of progress Performance monitoring and certification Maintain short-term and long-term forecasts Supply / Demand Pricing 2
Oil Sands Products Have Become More Diverse, Targeting Different Refining Market Segments Condensate Refining Heavy SCO DilBit WCS Heavy Crude Refineries SynDilBit Bitumen Production (Mining or In-Situ) Upgrading Medium SCO SynBit SCO/SynBit Blend Light Synthetic Crude Oil (SCO) Medium Crude Refineries Light Crude Refineries 3
Distillation Comparison Light Sweet Crude 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Volume Percent Condensate SCO MSW LLS WTI Bonny Light Bottomless Resid Vac Gas Oil Distillate Naphtha Note: Missing fraction is light ends 4
Distillation Comparison Heavy Sour Crude SynBit blends have a distillate / VGO bubble compared to conventional heavy sour crude oils Volume Percent 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Bitumen DilBit (30% Cond) SynBit (50/50) SynDilBit (19% SCO, 16% Cond) Lloyd Blend Bow River Maya Resid Vac Gas Oil Distillate Naphtha Note: Missing fraction is light ends 5
Refining Basics - Cracking vs. Coking Crude pricing typical determined based on the marginal refinery configuration for a specific region Cracking vs. Coking Configurations Crude A D U Long Resid AGO V D U Vacuum Gas Oil (VGO) Fluid Catalytic Cracking (FCC) 1) Cracking Refinery 95% - 105% Light Fuels 5% Heavy Fuels BLENDING Asphalt (100%) Fuel Oils (100%) 2) Coking Refinery Short Resid COKER Light Fuels (80%) Coke Cracking Facility: Residue to heavy fuels market Coking Facility: Residue upgraded to light fuels 6
Refinery Conversion Capacity Limits Important in Establishing Oil Sands Crude Values Crude C R U D E U N I T FCCU / HCK Coker Naphtha to gasoline blending / reforming Distillate to hydrotreating % of Crude Capacity PADD II PADD III PADD V 34% 33% 32% 11% 17% 22% Source: Oil & Gas Journal 7
The Destination Market is Key in Establishing Crude Value Traditional Markets Developing Markets Potential Markets Pipelines Existing Proposed PADD II is the current price setting region for Canadian crudes Expanding markets may result in a shift of the price setting region 8
Oil Sands Product Disposition Demonstrates Growing Importance of Alternative Markets Canadian Heavy Crude 1,400 1,200 1,000 800 600 400 200 0 Thousand Barrels per Day PADD V/Other PADD IV PADD II PADD I Canada 1990 2000 2010 Most heavy crude blends go to the US Midwest (PADD II) Continued growth expected New markets in California, U.S. Gulf Coast and Asia probable Synthetic Crude Oil 1,400 1,200 1,000 800 600 400 200 0 Thousand Barrels per Day PADD V PADD IV PADD II Canada 1990 2000 2010 Most SCO has been used in Canada Most future SCO growth will go to the US Northern Tier Asia may emerge as an incremental market 9
Price Drivers for Oil Sand Blends World Light Crude Canadian Light (Chicago) Light / Heavy Differential World Production of Crude Type of Crude Produced World Heavy Crude Light/Heavy Differential Minus: Transportation Cost Diluent Cost Bitumen Blend (Wood River) Bitumen Netback (Alberta) Bottoms Content of Crude Residual Fuel Oil & Asphalt Demand Demand for Light Products Conversion Equipment Availability Local Supply / Demand Market Outlets Market Discounts 10
Over the long-term product light/heavy spreads are mirrored in the crude oil markets... 30 25 20 15 10 Light Products - Fuel Oil, US$/bbl 5 0 1985 1987 1989 1991 1993 1995 11 1997 1999 2001 WTI Maya, US$/bbl 2003 2005 20 15 10 5 0
Oil Sands Blend Pricing Ultimately Dependent on Global Light / Heavy Crude Spread 35 30 25 US Dollars per Barrel MSW less Cold Lake Blend, Chicago WTI Cushing less Maya, USGC 20 15 10 5 0 Jan-00 Jun Nov Apr Sep Feb Jul Dec May 12 Oct Mar Aug Jan-05 Jun Nov Apr
USGC incremental coking returns are at all time highs, but will moderate... 100 Simple Return Before Tax Return, % 80 60 Average 1985-2004 40 20 0 1985 1990 1995 2000 2005 13
Announced Coker projects should help Canadian Heavy Crude (Bitumen Blend) Pricing ANNOUNCED COKER PROJECTS Region Company Location Capacity Startup PADD I United Warren 15,000 2008 PADD II ConocoPhillips Wood River 18,000 2008 PADD II Marathon Ashland Catlettsburg 37,000 2010 PADD II Marathon Ashland Detroit 20,000 2010 PADD II Valero (Premcor) (1) Lima 60,000 2008 PADD III ConocoPhillips Borger 25,000 2007 PADD III Valero (Premcor) (2) Port Arthur 25,000 2006 PADD IV Cenex Laurel 15,000 2008 PADD V Tesoro Anacortes 25,000 2007 Alberta Petro-Canada Edmonton NA 2008 Total (1) Negotiations discontinued in December 2005 (2) Not Canadian crude related 180,000 BPD Flint Hills has announced a capacity expansion project of 50,000 B/D, including VGO H2CK, assumed linked to Canadian heavy crude supply Other PADD II refiners (BP, Sun) have indicated plans for increasing runs of heavy crude or SCO 14
Diluent Choice Leverages Bitumen Netback Bitumen netback depends on value of bitumen blend and the cost of diluent SynBit is more leveraged due to the higher diluent ratio, lowering netback Lower diluent costs increases the bitumen netback $/B Bitumen (70%)/Condensate (30%) $/B Bitumen (50%) / SCO (50%) (Cold Lake DilBit) (Athabasca SynBit) Cold Lake Bitumen Value DilBit Value C5 + Diluent Cost Athabasca Bitumen Value SynBit Value SCO Diluent Cost 0% 100% % C5 + 0% 100% % SCO 15
Diluent Supply One Key to Future Bitumen Growth More diluent will be needed with Alberta Condensate supply at peak Blending options SCO blended with bitumen ( SynBit ) SCO and available condensate blended with bitumen ( SynDilBit ) Potential diluent import from West Coast Recycle from Chicago Upgrading Eliminates diluent need, except for recycle Could produce synthetic diluent 16
SCO as Diluent Likely To Grow Due To Limited Condensate Availability Outlook would change if alternative sources of diluent become available 2,500 Thousand Barrels per Day 2,000 1,500 SCO Diluent C5+ Diluent Bitumen Heavy Crude 1,000 500 0 1995 2000 2001 2002 2003 2004 2005 2006 17 2007 2008 2009 2010 2015 2020
Synthetic Crude / Condensate Pricing Alberta condensate price forecast to be based on import parity Synthetic crude oil production to grow substantially Discounts likely to grow 20 Condensate Diff., US$/bbl SCO Diff., US$/bbl 5 15 10 Condensate less MSW SCO less MSW 4 3 2 5 1 0 0 (5) (1) Jan-03 Source: Postings Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 18 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06
Bitumen Netbacks Bitumen netback dependent on heavy / light price spread, diluent choice, and diluent requirement Recent bitumen netbacks have been highly volatile Cold Lake Blend bitumen netbacks from DilBit maintain premium over Athabasca netbacks from SynBit Lower diluent requirements, Athabasca bitumen quality versus Cold Lake Bitumen netbacks from SynBit / DilBit may converge over time 45 40 35 30 25 20 15 10 5 0-5 US Dollars per Barrel SynBit Basis (MacKay River) DilBit Basis (Cold Lake Blend) MSW-Lloyd Jan 2004 Mar Source: Postings May Jul Sep Nov Jan 2005 Mar 19 May Jul Sep Nov Jan 2006 Mar
Summary Canadian heavy crude oil prices are generally set by Midwest refining economics Global light / heavy crude spread ultimately sets the price for oil sands blends Large discounts relative to the USGC based on increases in supply and high utilization of conversion capacity Large number of announced conversion projects may compress light / heavy spread Synthetic crude discounts will likely increase SCO will move further away from source to clear the market Provides incentive for additional VGO conversion capacity A diluent solution is key for continued expansion of the Canadian Oil Sands Recycle line, imported supplies, synthetic diluent 20
About this Presentation The marketability of various Oil Sands Blends and synthetic crudes, light/heavy crude price differentials, and economics of upgrading is analyzed in Purvin & Gertz recently completed multi-client study, Global Markets for Canadian Oil Sands Crudes. This presentation has been prepared for the sole benefit of the participants of the Edmonton CFA Society Investing in Alberta s Oil Sands Conference. Neither the analysis nor any part of the analysis shall be provided to third parties without the written consent of Purvin & Gertz. Any third party in possession of the analysis may not rely upon its conclusions without the written consent of Purvin & Gertz. Possession of the analysis does not carry with it the right of publication. Purvin & Gertz conducted this analysis utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY. Some of the information on which this analysis is based has been provided by others. Purvin & Gertz has utilized such information without verification unless specifically noted otherwise. Purvin & Gertz accepts no liability for errors or inaccuracies in information provided by others. 21