FUELSNews 360 Q1 - 2014

M A R K E T N E W S & I N F O R M A T I O N

QQ22

QQ33Q4

Q1

1st QUARTER

JANUARY– MARCH

2 0 1 4

The industry rang in the New Year with a positive outlook. The global economy showed signs of a slow, but steady, recovery — growing by 3 percent in 2013 and set to achieve 3.7 percent this year, according to the International Monetary Fund (IMF). U.S. fundamental economicindicators were nearing pre-recession levels, and both domestic crude and natural gas production reached new highs.

Shortly after the start of the year, domestic production and distribution networks were stretched to their breaking points as a seemingly endlessstring of polar vortexes descended upon the Midwest and Northeast regions causing record low temperatures responsible for disruptingproduction at several key refineries, quickly draining existing inventories, curtailing natural gas usage, and driving diesel and natural gasprices to the highest in the nation. Remaining refineries, unprepared for the rapid drop in temperature, struggled to meet demand for cold-resistant distillate products. In addition to the cold, heavy snowfall and icy conditions caused delays in transportation as carriers were urged bylocal and state officials to stay off the roads. Average heating degree days rose as much as 19 percent over last year and were 10 percentabove the 10-year average, costing propane users in the Midwest roughly 34 percent more than previously forecasted to heat their homes.

As winter weather raged on in the northern states, China’s economic situation seemed to worsen with each passing month — year-over-yearexports suffered their greatest decline in five years and crude imports dropped significantly when compared to previous years. China’seconomic decline raised concerns of the effect on other countries if the second-largest economy and largest net importer of crude oil enters arecession. Chinese officials worked quickly to stem talk of a Chinese recession, but have yet to offer noteworthy measures.

At the start of March, Russia surprised the global community with their “liberation” of Ukraine’s southern territory of Crimea following thesudden ousting of Ukrainian President Viktor Yanukovych. With Russia being Europe’s top supplier of natural gas and the third largest producerof crude worldwide, the market reacted violently to initial reports, but calmed after investors realized it wasn’t a full-scale invasion as they’dbeen led to believe. Since Crimea’s annexation, European leaders have threatened energy sanctions, but have yet to act for fear of cripplingthemselves with no real punitive effect on Russia.

Finally, non-commercial traders increased their net long position during the first quarter to the highest on record based on speculation of risingWTI crude values. Now, we’re waiting with baited breath for the ensuing avalanche of selling trades as they exit these positions. It may be fastand painful for some when the music stops.

Despite the negative events shrouding the year’s first quarter, investors and consumers can rely on the strength of industry fundamentals tokeep prices elevated as the IMF still believes global crude demand should increase in 2014 by an estimated 1.5 percent — revised upwardmid-March to a record-setting 92.7 million barrels a day in spite of the troubles listed above. Our new Federal Reserve Chairwoman, JanetYellen, has expressed confidence in the inflation rate, an improving job market, and the economy’s ability to stand on its own. Lastly, domesticproduction of oil and natural gas are still going strong and we can expect infrastructure to make great strides this quarter.

Q1 2014 Executive Summary

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QQ3Q44

Q1

FUELSNews 360° Quarterly Report Q1 2014

Index

FUELSNews 360°, published four times annually by Mansfield Energy Corp., analyzes and summarizes the prior quarter’s activity

in the oil, natural gas and refined products industries. The purpose of this report is to provide industry market data, trends and

reporting both domestically and globally as well as provide insight into upcoming challenges facing the energy supply chain.

4 Overview

4 January through March 2014

5 First Quarter Summary

7 Economic Outlook

7 Global Economic Outlook

9 U.S. Economic Outlook

11 Fundamentals

11 OPEC Production Forecast

13 Domestic Production, Consumption, and Exports

16 Domestic Infrastructure

18 FUELSNews 360° Commentaries

18 Commentaries; Andy, Sara and Dan

19 Commentaries; Evan and Jessica

20 Commentaries; Chris, Evan and Fernando

22 Regional View

22 PADD 1A, New England

25 PADD 1B & 1C, Central & Lower Atlantic

28 PADD 2, Midwest

28 PADD 3, Gulf Coast

30 PADD 4, Rocky Mountain

32 PADD 5, West Coast, AK and HI

34 Canada

36 Alternative Fuels

36 Renewables 39 Natural Gas

42 Urea (Diesel Exhaust Fluid)

44 Transportation & Logistics

45-46 FUELSNews 360˚ Supply Team

WTI’s bullish climb began in mid-January and continued strong through late February largely thanks to high distillate demandcaused by ongoing winter storm conditions. Significant inventory drawdowns following the completion of TransCanada’s KeystoneGulf Coast Pipeline also contributed to the rise in index values. WTI started March by hitting the high of the quarter on news ofRussia’s militaristic move into Crimea. Finally, support failed in mid-March when temperatures warmed and it became evidentRussia wouldn’t commit to a full military incursion.

Overview

January 2014 through March 2014

4 © 2014 Mansfield Energy Corp.

Source: Bloomberg Finance L.P.

U.S. unemployment falls to lowest rate since Ocober 2008

WTI inventory stocks fall to lowest levels since March 2012

Distillate supplies depletedon extreme weather

Russia Invades Crimea

First SPR releasesince August 1990

101.58

First Quarter 2014

FN360o

Russian soldiers guarding a Ukrainian naval base in Perevalne, Crimea, Ukraine. On February 28, 2014 Russian military forces invaded the Crimea peninsula.

Hi: 327.94

Low: 289.08

Hi: 302.03

Low: 259.51

Hi: 104.22

Low: 91.69

Hi: 16530.94

Low: 15372.80

Overview

First Quarter Summary


291.10

Summary, First Quarter 2014

NYH ULSD futures hit a high at the end of January based on the winter usage and severe storms that plagued the Northeast.Meanwhile, crude and gas futures hit their highs much later in the quarter with demand picking up as we move into spring.Looking across the board, ULSD, RBOB and WTI contracts all had different reactions over the quarter with ULSD being the mostviolent in the quarter. Of course, despite all the noise, ULSD futures ended the quarter right where they started.

101.58

293.20

16457.66

Source: Bloomberg Finance L.P.

FN360o

A 10” snow storm with sub-freezing temperatures, January 21, 2014 the Bronx, New York.

“Most estimates show China leading the charge at roughly 7 percent GDP growth—still down from 7.5 percent in 2013— followed by the U.S. at roughly 3 percent and Europe bringing up the rear at 1.5 percent.”

Container port in Hong Kong, China


According to the International Monetary Fund (IMF), the globaleconomy is still on track to expand at a rate of 3.7 percent this year.Most estimates show China leading the charge at roughly 7 percentGDP growth—still down from 7.5 percent in 2013—followed bythe U.S. at roughly 3 percent and Europe bringing up the rear at 1.5percent. Fears of deflation in both Europe and Japan have investorsworried, thereby slowing their expected growth rates.

China’s economy—second largest globally and a key factor in thepetroleum industry—has been a roller coaster ride this quarter. First,its currency, the yuan, rose to a 20-year high, garnering 6.0406yuan to the dollar. By mid-February, however, it faltered and lostmore ground than in any previous quarter going back to 1994 whenChina’s unification of its dual exchange rates resulted in the yuanlosing 33 percent of its value overnight. Furthermore, China’s exportsand crude imports both slowed by as much as 18 percent in the firstquarter—casting doubt on the Communist Party’s plans for 7.5

percent economic growth in 2014 and raising concerns as theInternational Energy Agency ( IEA) attributes 11 percent of globalcrude oil demand to China.

Following the Crimean incursion, Russia’s equity market has fallenroughly 18 percent and the ruble 9 percent on fears the globalcommunity could retaliate on Ukraine’s behalf. Growth estimatesfor Russia have already fallen to less than 2 percent and inflationis being offset by the Central Bank through increases to its interestrates. Russia’s slowing economy will likely be supported by theInternational Monetary Fund through Ukraine’s debt repaymentbailout and the 80 percent increase to Ukraine’s natural gas bill—courtesy of state-owned Gazprom. Despite all the bluff andbluster, the market’s general sentiment seems to be thatdiplomacy will almost certainly prevail and Russia’s economyshould bounce back quickly.

Global Economic Outlook

Gazprom powered thermal power plant facility in Alder, Russia

“ Rising from a 5-year low of 55.3 in November of 2008, consumers report higher confidence in the state of our economy than in 83 percent of reports going back to 1960.”


This quarter, we witnessed the changing of the guard as FederalReserve Chairman Ben Bernanke stepped down to make way foreconomist and professor emeritus Janet Yellen. At the peak of theGreat Recession in late 2009, unemployment reached 10 percent.Since that time, we’ve posted 41 consecutive months of payrollgrowth, added 7.5 million jobs and the unemployment rate hasfallen over 3 percent. For Chairwoman Yellen, this isn’t good

enough. The Fed’s target unemployment rate is 6.5 percent. We’requickly approaching that quantitative measure, yet more than 7million Americans are still underemployed or underpaid and nearly700,000 have simply given up looking for work. ChairwomanYellen stresses the importance of qualitative improvements to theU.S. labor market as much as the quantitative measures. Currentrate of inflation is roughly 1 percent—half of the Fed’s 2 percenttarget—leaving room for the Fed to try stimulating job growth,which typically leads to inflation.

In the second quarter, Americans may begin to see the effects of theFed’s second priority: bringing an end to the five-year QuantitativeEasing Program. While the program will likely continue into the thirdor fourth quarter, businesses are already adjusting for the inevitablerise in interest rates. This should discourage risky investments andpossibly corporate spending—which is counter to the Fed’s firstgoal discussed above.

U.S. Economic Outlook

Consumer Sentiment Index

Source: University of Michigan

FN360o

Producer Price Index (PPI) Month-to-Month ChangeJanuary February March

0.2% -0.1% 0.5%

Consumer Price Index (CPI) Month-to-Month ChangeJanuary February March

0.1% 0.1% 0.2%

Consumer Sentiment IndexJanuary February March

82.2 81.6 80.0

U.S. consumer sentiment fell in March, but the quarter still showedconsiderable improvement over the fourth quarter of 2013. Risingfrom a 5-year low of 55.3 in November of 2008, consumersreport higher confidence in the state of our economy than in 83percent of reports going back to 1960.


U.S. Economic Outlook


0.2% -0.1% 0.5%


0.1% 0.1% 0.2%


82.2 81.6 80.0

CPI Consumer prices increased only marginally betweenJanuary and March. Higher food costs were seen in all months astwo-thirds of major grocery store food group indices increased.Meanwhile, energy costs spiked in January, but have since losttheir early quarter gains.

Headline vs. Core Consumer Price Index(Year-over-year Percent Change, Seasonally Adjusted)

Source: U.S. Bureau of Labor Statistics

FN360o

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PPI Producer prices showed little movement in the first quarterof 2014, which is not surprising as interest rates and inflationremain near zero. Lower retail margins on clothing and accessoriesare being blamed for declines in final demand for services thisFebruary. If the Fed attempts to stimulate job growth in the comingquarter, it’s likely we’ll see these numbers creep slightly higheralong with inflation rates.


0.2% -0.1% 0.5%


0.1% 0.1% 0.2%


82.2 81.6 80.0

Headline vs. Core Producer Price Index(Year-over-year Percent Change, Seasonally Adjusted)

Source: U.S. Bureau of Labor Statistics

FN360o


Fundamentals

EIA projections indicate global petroleum supplies will increase by 1.3 million barrels a day over the course of 2014. The majority of this volume is expected to originate in the Americas with Brazil, Canada, and the United States being the primary contributors. OPEC nations, on the other hand, accounted for 2.3 million barrels of lost production each day in February and are expected to fall short of projections so long as Libyan, Nigerian, and Iraqi oil fields lay idle. At the moment, significant energy sanctions against Russia seem unlikely. If the situationdeteriorates, expect dramatic revisions.

As mentioned above, non-OPEC nations are contributing more heavily towards global crude oil production. Therefore, some nations within OPECchoose to curtail their own production in lieu of contributing to a glut and subsequent drop in crude prices. This results in a surplus of productioncapacity. As seen below, idle capacity is expected to approach ten year highs in 2015 as Western oil production continues to develop.

Source: Energy Information Administration (EIA)

OPEC Surplus Crude Oil Production Capacity (Million Barrels per Day)

FN360o

Increased Western Production to Offset OPEC Shortfall in Coming Years

Since then, inventory levels have recoveredand the average Days of Supply hasreturned to safer ranges. Additional volumeshould be added to these reserves as wemove into the second quarter given theamount of crude building along the GulfCoast and traditionally lower diesel demandgoing into the summer months.

We started the year with distillate inventorieswell below the 3-year historical range. Thisonly compounded supply concerns when aseries of winter storms disrupted productionat several key refineries in the eastern UnitedStates and increased residential demand forheating oil, natural gas, and propane at thesame time plants were burning diesel topower generators. Prices surged as distillateinventories shrank to the lowest levels in sixyears and infrastructure failed to meetconsumers’ needs.

Fundamentals



Balancing Domestic Production with Consumption and Exports

Distillate Inventories (Million Barrels)

Distillate Days of Supply

FN360o

Distillate InventoriesShowing Signs of Recovery FollowingWorst Winter in Decades


FN360o

Fundamentals


Cushing Glut Flows into Gulf Coast StorageAt the end of January, crude oil inventories previously trapped in Cushing, Oklahoma pouredinto Texas following the completion of TransCanada’s 70,000-bpd Gulf Coast Pipeline Project.This lent early support to the rise in WTI crude futures—gaining nearly 10 percent over thecourse of a month—but has since had the opposite effect. Setting records with 200 millionbarrels in storage, Gulf Coast inventories continue to grow, applying downward pressure toWTI values. Until refiners gain some traction and put these inventories to use, look for pricesto retreat to their previous levels of $90 to $95 a barrel in the absence of geopolitical strife.

Cushing, OK Crude Oil Inventories (Million Barrels)

Gulf Coast (PADD 3) Crude Oil Inventories (Million Barrels)



Just How “Refined” do Refined Products Need to Be?In accordance with the 1975 Energy Policy and Conservation Act, crude oil exports are heavily curtailed. In fact, only 2 percent of ourdomestically produced oil is exported with Canada and Mexico receiving the lion’s share. Export of refined products, on the other hand, is fairgame. Therefore, traders seem to have two options: fight for legislation repealing an antiquated ban or refine the raw material into finishedproducts. Some are choosing a third option and challenging the definition of “Refined Products.”

Fundamentals

U.S. Exports Following Crude Oil Ban (Million Barrels per Day)

Scheduled for a July startup date, the first of many one-step refineries will process crude stocks just enough to circumvent theban. Owned by Kinder Morgan Energy Partners LP, the refinery’s construction cost 90 percent less than full-scale facilities. The sitewas designed with plans to expand, which may soon be necessary as BP has already locked up 80 percent of the facility’s100,000 bpd capacity for a 10-year period. Three similar operations have since been proposed.


FN360o

According to the Energy Information Administration (EIA), one 42-gallon barrel of crude generates 45 gallons of finishedpetroleum products—a 7.5 percent gain—over 80 percent ofwhich will be highly-profitable gasoline, diesel/heating oil,kerosene, and propane. So, as exports of refined products rose in2013 to an average of 2.75 million barrels a day, traders wereactually sending 2.5 million barrels of crude overseas each day. If refineries such as these become common and crude slips acrossthe border without being fully refined, U.S. refiners will miss outon growing crack spreads as well as volume gains producedthrough the refining process.

Fundamentals

TransCanada Wins the Race to the CoastWhat do you get when you add 4,844 skilled American workers,11 million hours of labor and $2.3 billion US dollars? A 36-inchpipeline stretching 485 miles from Cushing, Oklahoma toNederland, Texas carrying up to 700,000 bbl/d of NorthAmerican crude oil. TransCanada announced the completion oftheir Gulf Coast Pipeline Project January 22 after 18 months ofconstruction. As part of this project, TransCanada also added2.25 million barrels of crude storage in Cushing.

As a result, Cushing inventories were finally able to drain into GulfCoast refineries, and WTI crude futures held their place above$100 a barrel for the first time in 4 months.

Pipeline Expansions Lead to Greater Product Availabilities

TEPPCO to Resume Deliveries of Refined Products to EastCoast TerminalsIn the last days of March, Enterprise TE Products reversed anine-month-old decision to halt operations along their eastcoast TEPPCO pipeline and announced plans to resumeinterstate diesel shipments on May 1st. This will link refineriesin Louisiana and Arkansas to cities throughout the Ohio Valleyand the Northeast. Several states have experienced thinsupplies and outages since the pipeline’s closure last summer.

Consequently, local refineries assumed much of the supply responsibilities for the region. Unfortunately, the old adage “don’t put all youreggs in one basket” comes to mind. For instance, when Valero’s 195,000-bpd Memphis refinery suffered an FCC malfunction and went intopremature turnaround at the end of February, supply became scarce and product was frequently long-hauled from out of state. This continuedfor several weeks.

While the reopening of the TEPPCO pipeline may not lower prices on a consistent basis, it would certainly provide additional security ofsupply in situations such as these and protect consumers from product outages.


Source: TransCanada Pipelines Limited

Fundamentals


Enterprise Products Partners, LP surprised investors and analysts alike with a revisedstart-up date for their Cushing-to-Gulf-Coast Seaway pipeline expansion. Previouslyscheduled for the end of Q2, the additional 30-inch pipeline—available as early aslate May—will run parallel to the existing 500-mile pipeline and roughly doubleSeaway’s capacity for crude to 850,000 barrels a day. The market may experiencea slight surge in WTI values, but most of the bang was spent when TransCanadacompleted their pipeline in January.

This comes after a lengthy court battle between Enterprise and pipeline builderEnergy Transfer Partners (ETP) was resolved in early March. The jury found thatEnterprise had violated the partnership, resulting in a $319.4 million award fordamages to ETP. While ETP claims rival pipeline company Enbridge Inc. luredEnterprise away and was therefore also financially liable for ETP loses, the courts didnot agree. Enterprise still maintains there was never a legally binding partnershipand is not responsible for any losses incurred by ETP.

400,000-BPD Crude Oil Pipeline Expansion to be Completed in May

Source: Seaway CrudePipeline Company, LLC

“The market may experience a slight surge in WTI values, but most of the bang was spent when TransCanada completed their pipeline in January. ”

In the last FN360, I went into 2014 bullish on diesel prices and yet I certainly wouldn’t havepredicted the roller-coaster that would ensue. Prompt ULSD futures (formerly HO futures) skyrocketed on tight NYH supply and one blistering snow storm after another. However, whatgoes up does come down eventually and diesel futures did exactly that by ending Marchpretty much where January started.

Regarding WTI, the overall trend seemed to be bullish in the first quarter, and I see no reasonfor that to fade going into the second quarter. The fact that the Non-Commercials are over300% to the bullish side definitely helps my case. At least until the herd changes direction.

In closing, last quarter I referenced the range that ULSD futures have stayed in since 2011($3.25/$2.80) and the trend should continue. Without a reason to bounce out of that band,I’m going to stick with it and ride that pony. Giddy up.

Andy’s Answer

FUELSNews 360˚ Commentaries


Petroleum futures are struggling to find direction. In recent days, we have seen ups anddowns during the day, as well as mixed closes across the board. Geopolitical tensions areoffering support, but at the same time, oil supplies have expanded and are keeping pricesin check when they start to gain momentum. However, crude pushed through the 200-daymoving average at the end of the quarter, and this tends to be a sign that prices willcontinue to rise. In the short-term, I am bullish on the market for crude, but I believerefined products will primarily see support from their spot market and regionalfundamentals.

Sara’s Synopsis

BEAR BEARBULL BULL

I am bearish both crude oil and products in the second quarter. As the first quarter comesto an end, crude reached a three-week high on the lingering tensions in Ukraine – butthat will dissipate as diplomacy works its course over the next several months.Accordingly, the U.S. and the European Union will not move forward with intensifiedsanctions against Russia, the world’s largest energy exporter. Price premiums built in forconflict should thereby subside.

Dan’s Dissertation

BEAR BEARBULL BULL

BEAR BEARBULL BULL

FUELSNews 360̊ Commentaries

In recent weeks, ethanol production has suffered with distillers realizing they cannotcontinue to manufacture a product they cannot adequately ship in light of railcarconcerns. Ethanol production averaged 949,000 barrels per day in December 2013,whereas current ethanol production has been roughly 870,000 barrels per day.Ethanol prices have steadily increased, and I do not expect to see a reprieve incoming months. The EIA is hopeful for a Q2 production increase. However, withannual plant maintenance and inspections — AKA “Spring Cleaning”— rightaround the corner, I predict ethanol prices won’t normalize until the third quarter.

The Biodiesel industry produced a record high of 1.8 billion gallons in 2013. Thistotal significantly surpassed the 2013 RFS requirement. However, it is speculatedthat the 2014 RFS will hold production obligations to last year’s volume of 1.28billion gallons in addition to reducing the Advanced Biofuel requirement. If the rumormill is factually foretelling, biodiesel growth will be jeopardized. I expect biodieselproduction will drastically decline, which will keep prices on the rise.


Jessica’s JudgmentBEAR BEARBULL BULL

Looking back at the first quarter of 2014, we saw the winter weather and Ukraine/Russiacrisis as the main factors affecting the market. Even though the winter weather is over andmarkets have backed off considerably, I am predicting another spike in all prices (crude,diesel and gas) for the second quarter of 2014.

The driving forces I see affecting the market are the disagreement between Russia andUkraine and the increased demand of gas entering the driving season. The battle betweenRussia and Ukraine is still prevalent, and my prediction is this situation is going to continueto escalate and will draw in more involvement from the United States and the EU. Russia isa large exporter of crude and refined products and, if this dispute continues, the exportscould be affected, driving up fuel prices. On a more local level, as we enter spring andsummer, gas demand will be on the rise. As the driving season is revving up, I amexpecting gas demand for this season to be higher than previous years due to the winterthat was just experienced. More long distance vacations will be taken since many residentswere stuck indoors due to the excessive cold and snow.

Evan’s EstimationBEAR BEARBULL BULL


Chris’s Concept

Fernando’s ForecastBEAR BEARBULL BULL

For the second quarter of 2014, I’m overall bullish on products. We will see the “springrally” for RBOB as we enter the RVP transition. I expect wholesale and retail prices tocontinue their rise due to the current ethanol constraints. Also, the Commerce Departmentshowed that both household spending and personal income rose 0.3 percent. Consumerconfidence rose to a six year high in late March. With this info and a rise in orders forgoods, I expect the demand and prices for diesel to continue to rise for the secondquarter of 2014.

Evan’s Expression The first quarter proved to be more bullish in price than I’d initially anticipated, but that’s myfault for studying physics in college in lieu of meteorology. Colder than average temperaturesand geopolitical strife were unpredictable, but only served to amplify movement stemmingfrom fundamental trends already in play—the Cushing drawdown kicked off, winter demanddrained inventories, and the start of turnaround supported late quarter gasoline prices.

In the second quarter, expect gasoline futures to climb while the industry prepares for summerdemand, as always. Diesel futures will decline, but strong exports of refined products pairedwith growing global demand lead me to believe wholesale prices will stay in line with historicalnorms. Strong domestic fundamentals and the growing supply of crude in Houston tell me WTIwill likely land between $90 and $95 a barrel. I personally feel refiners’ eyes were biggerthan their stomachs when the MidCon glut began pumping into Houston storage and nowthey’ll be looking to liquidate.

BEAR BEARBULL BULL

Technical traders could prove to be the unexpected twist this quarter, however. We’re going in with record net long positions taken by non-commercial traders and Ihave to believe that position is going to turn and turn quickly. Besides, market sentiment and related news are both extremely bullish for the moment. Historically,that doesn’t bode well for the market. For these reasons—and to retain my role as resident naysayer—I believe we’ll see a bear market in the second quarter.

BEAR BEARBULL BULL

FUELSNews 360˚ Commentaries

Over the years, I have found the farmer’s almanac to be more accurate than our weathermodels. This year the almanac calls for a long and hot summer. When considering theshort term technical indicators, current storage inventory levels, the fact that 50% of thenew electric generation plants built last year are natural gas fired, AND the almanac; Ihave to go long natural gas for this summer.

“Prices surged as distillate inventories shrank to the lowest levels in six years and infrastructure failed to meet consumers’ needs.”

Winter weather affected each PADD differently this quarter, butthe Northeast certainly endured the greatest price swings andshortest supply out of the bunch. Now, residents of the Midwestand Ohio Valley may be thinking New Englanders just need toturn their thermostats down and they’ll stop running out ofheating oil, because temperatures in these regions weredefinitely colder on average than those experienced throughoutthe Northeast. However, the Northeast had to contend withinfrastructure issues which exacerbated the situation.

Local refiners weathered the first couple of storms with littledifficulty, but by the start of February, production simplycouldn’t meet demand. Consequently, the region sufferedsporadic outages of low-sulfur kerosene and winter grade diesel,causing paraffin wax to separate from the diesel—”or gel”—for many customers.

PADD 1 East CoastPADD 1A New England


PADD stands forPetroleum Administration for Defense Districts

During World War II, the United States was divided into five PADDs to organize theallocation of fuels derived from petroleum products, including gasoline and diesel.The purpose was to spread the nation’s oil supply among the regions, therebyeliminating the possibility of a single strike wiping out the country’s oilinfrastructure and resources.

PADD 5:West Coast,

AK, HI

PADD 4:Rocky

Mountain

PADD 3: Gulf Coast

PADD 2: Midwest

PADD 1:East Coast

Regional View?

Did You Know?

At the same time, consumption of natural gas rose, draining in-lineinventories and taxing compressor capacity. This led to natural gasallocations and severe spikes in price throughout the Northeast andCentral Atlantic states. Many power plants reverted to diesel-burninggenerators as a way of both saving a buck and relieving pressure on thenatural gas network. Why should this matter? Some of these plantswere consuming upwards of 250,000 gallons of diesel each day. That’sroughly 35 truckloads of previously non-existent demand on an alreadystrained market.

In addition to weeks of freezing temperatures and increased demand,the Northeast region faced heavy snowfall and icy roads—limitingcarrier availability as many chose to either reduce operating hours or pulltheir fleets off the road entirely. Similar conditions accompanied by highwinds also led to the closing of New York Harbor—halting vessel trafficand delaying deliveries of much needed diesel, heating oil, and propane.


Short Supply Creates Disconnect Between Price and InputsBasis (noun): the spread between futures contracts trading on the New York Mercantile Exchange(NYMEX) and a “cash” or “spot” value associated with the product’s physical region of origin.Traditionally, these regions resemble the PADD regions. Think of basis as a region’s hunger for product.Basis will rise if a market is short product and fall when a market is oversupplied.

Hurricane SandyWinter Storm Season

New York Harbor Basis (dollars per gallon)

Source: Energy Information Administration (EIA)FN360o

During the first quarter, ultra-low sulfur diesel prices in the New York Harbor region jumped to levels that haven’t been seen in over eightyears as a result of extremely tight supply. This resulted in abnormally high basis values as NYMEX diesel contracts rose in value at a slowerpace than gallons shipping within New York Harbor. At the peak of the Northeast’s winter worries, basis rose to nearly 46 cents a gallon,suggesting a gallon of diesel was more valuable in the Northeast than other regions and thereby creating an arbitrage situation. Notice asimilar occurrence surrounding Hurricane Sandy towards the end of 2012.

“During the first quarter, ultra-low sulfur diesel prices in the New York Harbor region jumped to levels that haven’t been seen in over eight years as a result of extremely tight supply.”




The following charts represent the average spreadsbetween diesel retail prices and wholesale rack for thepast 12 months. Note that retail prices react more slowlyto changes in wholesale cost. PADDs 1A and 1B, forinstance, show sharp increases in wholesale cost at thestart of January, yet retail prices respond slowly andsteadily. Conversely, as wholesale rack prices slip lower inthe end of March, retail prices remain high in order tocapture some of the margin lost in the sharp uptake.

PADD 1A Wholesale vs. DOE Retail (34 cent avg.)

Rack-to-Retail SpreadsWholesale diesel prices increased rapidly this winter in response to short supply and falteringdistribution. This provides a wonderful example of the relationship between rack and retailpricing. Wholesale racks follow the laws of supply and demand—hence the sharp rise inwholesale cost when supply was at its worst. Retail, on the other hand, lags considerably—resulting in compressed margins when wholesale costs are on the rise, but retailers are slowto give up that additional margin as the crisis subsides. See the graph below.


Because retail customers most often make their purchasing decision purely on price, retailsuppliers are slow to increase their price at the pump. Can’t get cars under the canopy ifyou’re the highest price on the strip, right? Of course, as cost spikes subside and thewholesale support falls off, retail prices “parachute,” allowing the retailer to recoup some ofthe loss experienced on the front end.

Rack-to-Retail Diesel Spreads per PADD

PADD 1 East CoastPADD 1B & 1C Central & Lower Atlantic


“With Gulf Coast diesel products selling 25 to 40 cents a gallon lower than New York Harbor diesel between January and February, savvy shippers capitalized on the distillate shortage in the Northeast.”

As cold weather continued, the spread between New York Harbor basis and Gulf Coast basis widened.The Colonial Pipeline delivers Gulf Coast product as far north as Linden, NJ with a transportation costof roughly 4.5 cents per gallon. With Gulf Coast diesel products selling 25 to 40 cents a gallon lowerthan New York Harbor diesel between January and February, savvy shippers capitalized on thedistillate shortage in the Northeast.

0.5225

0.4508

0.4992

New York Harbor Basis vs. Gulf Coast Basis (dollars per gallon)

As New York Harbor basis continued to rise, flat prices rose as wellin the New York Harbor barge-fed terminals across the east coast—Jacksonville, Charleston, Savannah, and Wilmington to name afew. This created additional strain and eventual allocations in GulfCoast pipeline-fed terminals—such as Bainbridge, Albany, NorthAugusta, and Belton—as product was long-hauled to supply thesecoastal markets.

Pipeline terminals in much of the Southeast saw relief bymid-March as steady imports into the New York Harbor easeddemand, temperatures rose, and natural gas prices normalized.Batch delays along the Colonial Pipeline still plagued a fewmarkets. Knoxville, for instance, experienced 9 to 10-day cycledelays in late March, resulting in tight allocations in Knoxville andChattanooga markets.


FN360o



Southeast GasMuch of the focus this quarter has been on Southeast distillate allocations. However, in mid-March, thefocus shifted as gasoline allocations tightened. Several markets experienced terminal outages as theseasonal transition to lower Reid Vapor Pressure (RVP) products kicked off. This affected both brandedand unbranded customers.

During this time, Atlanta’s boutique fuel requirement created supply issues as few markets outside of theimmediate area carry fuel meeting the particular specifications.

Finally, ethanol supplies throughout the Eastern United States thinned as a result of insufficient railcaravailability departing from the Midwest region where the majority of ethanol originates. Gasoline allocations resulted from lack of blending stock to create E-10.

Possible RVP Change for Florida and North Carolina Several counties in Florida and North Carolina may soon see changes in their summer RVP requirements.The standard RVP for summer is a 9psi. However, there are several counties in both states that require a7.8psi product between June 1st and September 15th. This results in terminals supplying both 7.8 and9.0psi products to meet customer needs in and out of mandated areas. In the past, it has also resulted inproduct outages affecting 7.8psi counties while 9.0psi supplies are plentiful.

On March 19th, the EPA proposed a single, statewide RVP requirement. The EPA’s proposal will become lawafter 60 days, assuming it passes the 30-day comment period uncontested. Florida markets stand to gainthe most from this proposal as Jones Act vessels are in short supply, and a single RVP requirement wouldreduce product outages and logistical complications associated with shipping multiple waterborne products.

Memphis Refined Product ShortageIn March, Memphis and its surrounding areas suffered supply allocations and terminal outages due to abreakdown in Valero’s gas unit. The refinery, scheduled to start its turnaround on April 1st, halted productionwhen the Fluid Catalytic Cracker (FCC) went offline, causing the refinery to start repairs ahead of schedule.Valero’s 70,000-bpd gas unit was expected to be out of service for 50 days and the 35,000-bpd diesel unitwas down for 21 days.

During this outage, it was not uncommon to see unbranded outages for gas and diesel products. Long-haulsfrom Birmingham, Cape Girardeau, North Little Rock, and Collins were necessary to fulfill the demand inMemphis. Exxon also scheduled several barges up the Mississippi River to deliver product to their terminal.This relief was delivered late in March to help ease the allocation restrictions.

Memphis wasn’t the only terminal city to feel the effects of the crippled Valero refinery. Valero supplies theirKentucky terminals with product from the Memphis refinery. As a result, allocation restrictions were placedon terminals in Louisville and Lexington.

“Several markets experienced terminal outages as the seasonal transition to lower Reid Vapor Pressure (RVP) products kicked off.”


Rack-to-Retail SpreadsSimilar to PADD 1A, the Central and Lower Atlantic regions illustrate a slow descent on retailpricing coming out of the winter storm season. This “parachuting” effect results in greater retailmargins on the tail end of a crisis to make up for losses suffered at the onset.


PADD 1B Wholesale vs. DOE Retail (37cent avg.)


PADD 1C Wholesale vs. DOE Retail (23 cent avg.)


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Ho-Ho Pipeline Systems

PADD 2 Midwest

Cold Weather Effect on OperationsJust as people throughout the U.S. were adversely affected by the extreme cold weather over the firstquarter, oil and gas operations were also disrupted. In the Midwest, this included interruptions at oilrefineries and declarations of force majeure at petroleum terminals. On January 7th, as the temperature ineastern Michigan dropped to -12 degrees Fahrenheit, Marathon Petroleum’s 120,000-bpd Detroit refineryshut several production units. Just north of Detroit in Canada, Shell shut an unspecified unit at their 75,000-bpd Sarnia refinery for weather related repairs. On January 8th, temperatures around -10 degreesFahrenheit caused flaring at ExxonMobil’s 238,000-bpd Joliet, IL refinery that feeds the Chicago area.While production wasn’t officially impacted, Citgo reported their 174,500-bpd Lemont, IL refinery was“working its way through minor issues caused by low ambient temperatures.”

Cold weather is a significant challenge for a refiner as some production units operate at nearly 1,000degrees Fahrenheit. Further, oil and other feedstocks in the plant’s pipelines are heated to 300 or 400degrees, so large sudden drops in temperature can disrupt operations and cause liquids to freeze.

Petroleum terminals were also impacted by the weather. Kinder Morgan reported a force majeure onJanuary 6th due to “extremely frigid & snowy conditions” at their important Argo, IL terminal which servesas a hub for Chicago area biofuels and petroleum products. Instruments that control flow can fail andproducts in terminal pipelines from the storage tanks to the rack can thicken and gel.

Cold Weather Effect on PricesWhile heavy winter precipitation may reduce fuel for driving needs, bitter temperatures can increasedemand for heating. That, coupled with the aforementioned production issues, led to rising prices. On January 7th, gasoline for delivery to the Chicago market increased nearly 7 cents, or 2.7%, boosting thebasis to February NYMEX gasoline futures over 4 cents on the day; similarly, Chicago diesel prices rose over4.5 cents, or 1.6%, increasing the basis to February NYMEX diesel futures by more than 2.5 cents.

Propane Customers Held Hostage by High Propane CostsRoughly 10 percent of Indiana families heat their homes with propane. Businesses operate machinery,transportation fleets power their vehicles, and farmers dry their crops all with propane. So, when theMidwest ran short of product in late January, residents and business owners were equally concerned.

Prices—which were already up 60 percent in the region—nearly doubled in some areas as suppliers wereforced to purchase blindly and allocations limited some customers to as little as 200 gallons per delivery.The situation forced the U.S. Department of Transportation to issue an emergency order waiving workinghour limitations on transport drivers hauling propane and heating oil. Meanwhile, exports of propanecontinued at approximately 356 thousand barrels a day.

“While heavy winter precipitation may reduce fuel for driving needs, bitter temperatures can increase demand for heating. That, coupled with production issues, led to rising prices.”

The Houston Ship Channel, home to the nation’s largest petrochemical complex andexport port, was shut down completely for three days. On March 22nd, a barge wasstruck spilling 4,000 barrels of bunker fuel into Galveston Bay. While the volume of fuelspilled was relatively small, the location of the accident—near a nature preserve and theentrance to the channel which allows tankers to sail to and from Texas City, Galveston,and Houston–made it a significant concern. For instance, ExxonMobil reduced productionrates at its 560,600-bpd Baytown, TX refinery during the closure on fear of inadequatecrude supply. While other refiners declined to comment on their operations in light of thespill, the combined refining capacity dependent on the ship channel is 2.1 million bpd.

According to Bloomberg, Coast Guard data shows six collisions in the channel last year,with a total closure time of 26 hours. An average day on the channel in 2013 saw 38tankers, 22 freighters, one cruise ship, 345 tows, 6 public vessels, 297 ferries, 25 other transits and 75 ships in port.


PADD 2 Midwest

PADD 3 Gulf Coast

Rack-to-Retail Spreads

PADD 2 Wholesale vs. DOE Retail (26 cent avg.)

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The Rockies were plagued by problems in the first quarter of 2014. Conoco’s Borger refinery was inturnaround in February. HollyFrontier’s Cheyenne refinery had a fire and subsequent issuesrestarting. Meanwhile, Suncor’s Denver facility took their #1 crude unit down for maintenance andthen lost a second unit to unplanned maintenance. All of these issues led to strict allocations of bothdiesel and gasoline. As a result, most trucks headed to Magellan Pipeline’s Aurora terminal wherethey endured lines lasting 5 and 6 hours.

Fortunately, barrels from the Midwest were available and continued to ship to the Rockies. In fact,the spread between a Midwest or Group 3 barrel not only brought product to the Rockies, but keptprices in check. A Group 3 barrel averaged over 8 cents cheaper than the rest of the Denver marketfor Ultra Low Sulfur Diesel. It was just a matter of waiting in line.

PADD 4 RockyMountain

“A Group 3 barrel averaged over 8 cents cheaper than the rest of the Denver market for Ultra Low Sulfur Diesel. It was just a matter of waiting in line.”

Ultra-Low Diesel Delivered to Denver (dollars per gallon)


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Magellan Completes the Purchase of Rocky Mountain PipelineMagellan, LP closed on their purchase of the Rocky Mountain Pipeline at the end of 2013. The purchase included terminals in Fountain, CO, Dupont, CO, Cheyenne, WY, and Rapid City,SD. Magellan began operating the new products system in the first quarter of this year byannouncing plans for improvement and expansion. At a recent meeting in Denver, Magellandiscussed their plans for the system. It includes a plan to connect the Dupont, CO terminal totheir Central Pipeline System and operating the pipeline and terminals as an open stocksystem. An open stock system could enable the reconsignment of refined product between allterminals regardless of the barrel’s origin.

Production and Pricing Woesin the Rocky Mountains

PADD 4 RockyMountain




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CorEnergy Acquires WillametteRiver Rail/Marine TerminalAt the beginning of the quarter, CorEnergy Infrastructure announced anagreement to acquire a products terminal in Portland, OR and subsequentlylease the terminal to Arc Logistics. The terminal is a rail/marine facility andhandles storage, throughput, and transloading for the Pacific NorthwestRegion. It is adjacent to the Willamette River in Portland and has a totalstorage capacity of 1.4 million barrels. CorEnergy is planning on making anadditional $10 million in terminal related improvements at the facility.

PADD 5 West Coast,AK, HI

Flint Hills to Shutter North Pole RefineryFlint Hills Resources Alaska LLC announced their plans to begin shutting down its North Polerefinery on May 1, 2014. The closure will end the refinery’s production of gasoline, jet fuel, andother products. There are plans to continue operating the terminal at the refinery site to meet FlintHills’ contractual obligations to its customers. The refinery was rated to produce 220,000 barrelsper day, but has been operating substantially below in the 75,000 barrel per day range. TheNorth Pole Refinery’s higher cost Alaska North Slope crude compared to Mid-Continent crudes hasput the refinery at a disadvantage compared to other refineries outside of Alaska.

West Coast Gasoline Prices Lowest in 13 MonthsStrong gasoline production at West Coast refineries, as well as healthy inventories at the beginning ofthe quarter, enabled the lowest CARBBOB prices in LA in the last 13 months. The steep drop in the LAarea narrowed the pricing spread between the Bay Area and LA but left the Pacific Northwestunaffected. By the end of March, however, the area saw a rebound into more normal ranges.

West Coast Gasoline Prices (dollars per gallon)


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Tesoro Restores Competitive Balance to BoiseTesoro Corporation applied to the Federal Trade Commission and received approval to sell its terminalbusiness and assets in Boise, ID to Sinclair Transportation Co. The divestiture of the asset wasrequired to settle charges that Tesoro’s acquisition of Chevron’s Northwest Products Pipeline mightlessen competition in the area. Without the requirement, Tesoro would own two of three petroleumterminals in Boise. The sale to Sinclair should restore competition lost when Tesoro completed itsacquisition of the Chevron assets.

Changes Proposed for California’s Cap and Trade Program

PADD 5 West Coast,AK, HI



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The state of California’s Cap and Trade Program continues to drawscrutiny. In February, the state’s Senate President announcedproposed legislation that would dramatically change the program andits greenhouse gas emissions by eliminating its expansion to therefining and fuels industries in 2015 by replacing it with a carbontax. Under the proposal, it is estimated the carbon tax would cost 24cents a gallon by the year 2020. The Senate President’s argumentstated the carbon tax is stable, less vulnerable, as well astransparent. At the moment, regulations would take effect January1, 2015 requiring California refiners and fuel distributors to producecarbon credits to offset emissions generated by the end user of theirproducts—ultimately contributing to higher retail fuel prices. Capand Trade would continue as planned for large industrial GHGemitters, however. Revenue raised from the tax would go to a stateEarned Income Tax Credit for low to middle income Californians andmass transit infrastructure in the state.

Canada


Demand forecasts for Canadian heavy crude oil grew in the first quarter as the National Energy Board approved Enbridge’s request to bothreverse and expand Line 9B connecting Ontario and Quebec refineries. Built in 1976, Line 9B reversed its course in 1998 to transport once-cheaper West African imports to inland refineries. Given the country’s recent boom in Alberta’s oil sand production, Montreal refinershave been clamoring for yet another reversal, pushing up to 300,000 barrels a day of cheaper domestic crude to eastern refineries.

Enbridge’s reversal, coupled with the developing Sturgeon Refinery project in Redwater, Alberta (September 2017), will likely soak up the heavy discounts that currently have American refiners salivating.

LONDON

IROQUOIS

MONTREALTERMINAL

TORONTO

MONTREAL

SARNIA TERMINAL

T

CANADA

UNITED STATES OF AMERICA

QUEBECONTARIO

SARNIA HAMILTON

CHIPPAWA

LINE 9B REVERSAL PROJECT (PROPOSED) EXISTING LINE 9 PIPELINELINE 9 REVERSAL PHASE I PROJECT (APPROVED)

DECEMBER 2012

ENBRIDGE FACILITIES WHERE PROJECT WORK WILL OCCUR FOR LINE 9B REVERSAL AND LINE 9 CAPACITY EXPANSION PROJECT

CITY/TOWN

HILTON STATION

ENBRIDGE FACILITIES WHERE PROJECT WORK WILL OCCUR FOR THE LINE 9 REVERSAL PHASE I PROJECT

ENBRIDGE FACILITIES WHERE PROJECT WORK WILL OCCUR FOR BOTH THE LINE 9B REVERSAL AND LINE 9 CAPACITY EXPANSION PROJECT AND THE LINE 9 REVERSAL PHASE I PROJECT.

CARDINAL STATION

TERREBONNE STATION

LINE 9A

OSHAWA PORT HOPE

BELLEVILLEGANANOQUE

LANCASTER

MIRABEL/SAINT-JANVIER

PRESCOTT

OTTAWA

NORTH WESTOVER STATION

LINE 9B REVERSALPROJECT (PROPOSED)

LINE 9

WESTOVER TERMINAL

Line 9 Projects

Royal Vopak Increases its PresenceAt the end of the first quarter, Royal Vopak announced the acquisition of tworefined products distribution terminals in Montreal and Quebec City. Theacquisition strengthens Vopak’s distribution presence in eastern Canada whileincreasing their storage capacity from 509,000 cubic meters (cbm) to712,000 cbm (4.48 million barrels). Vopak already owns a terminal inHamilton as well as Montreal. The two terminals belonged to CantermCanadian Terminals Inc., which was previously owned and operated byTransMontaigne Inc. The terminals are located on the Saint Lawrence Riverwhich serves as the main shipping route to and from the Great Lakes.

Alberta Considers Greenhouse Gas ChangesAlberta is proposing a series of changes for calculating greenhouse gas emissions from biofuels aspart of its Renewable Fuel Standard (RFS). These adjustments would be the first change to theRFS methodology since 2007. Currently, Alberta mandates an average of 2 percent renewablediesel in diesel fuel and 5 percent ethanol in gasoline sold in the province. The biofuels used inblending are required to reduce greenhouse gas emissions by 25 percent over their life cycle. Ifthe biofuels reduce greenhouse gas emissions by more than 25 percent, the producers canaccumulate credits that are tradable and sellable. The proposed changes include updatedemissions sources reflecting a full lifecycle analysis and energy-equivalent baseline, reduction ofwaste materials from landfills revision, and tightened record keeping requirements. Albertacreated the first carbon trading system in North America. The model takes into consideration anygreenhouse gas emissions related to growing, harvesting, processing, and transporting biofuels.


CanadaKeystone XL Project UpdateIn March, TransCanada made a final push for building their Keystone XLpipeline as the last day of the official public comment period came to an end at the U.S. State Department. You may recall the project is a proposedpipeline that would stretch 1,179 miles beginning in Hardisty, Alberta andending at the Gulf Coast. In that bid for approval, TransCanada stated theproposed pipeline project would serve the national interest of the U.S.

The pipeline project has been controversial for the last several years.Numerous environmental groups expressed concerns about safety when itcomes to the transportation of heavy oil sands from Canada to the U.S.—particularly as it crossed the now infamous Ogallala Aquifer. Since 2008, at least five environmental impact studies have concluded the Keystone XLProject would not have any significant environmental impact. Regardless,the project continues to undergo intensive public and government scrutiny.The project, if passed, could deliver more Canadian crude oil to the GulfCoast region.

The latest development came in late February as a Nebraska District Judgedeclared the state’s decision regarding eminent domain to beunconstitutional—claiming that responsibility should lie with a little-knownboard of five commissioners regulating everything from natural gas pipelinesto grain warehouses, communications, and all-terrain vehicles.

Source: The Guardian

Alternative Fuels

Renewables

The Environmental Protection Agency (EPA) held a publichearing on December 5, 2013 to collect interested parties’commentary on the EPA’s proposal to amend the 2014Renewable Fuel Standard (RFS) program regulations.

Designed to reduce the nation’s dependence on foreign oil and greenhouse gas (GHG) emissions before 2022, the RFSencourages production of renewable fuels through tax creditsand mandated volumes. However, EPA officials are consideringa 2.9 billion gallon reduction—currently 18.1 billion gallonsannually—in their ethanol production requirements to addressdecreasing gasoline demand, increasing vehicle fuel economy,the 10 percent ethanol “blend wall” imposed on retail gasolinesales, and rising costs in oilseed and grain markets.

2014 RFS ProposalCritics of the proposal suggest the reduction would slow progress towardsprogram goals and hinder growth of a burgeoning renewables industry.Subsequently, the Biotechnology Industry Organization (BIO) performedextensive research assessing the environmental consequences of such achange. BIO’s report states, “Based on EPA's proposed requirements for2014, the U.S. would emit 6.6 million more metric tons of CO2-equivalent greenhouse gases than it did in 2013.” If, however, the EPAkept the requirements at the originally instituted level, BIO believes GHGemissions would reduce by 21.6 million metric tons. To put this inperspective, the difference of the increase and attainable decrease isequal to an additional 5.9 million cars on American roads in 2015.

Look for developments on this story throughout the second quarter, butdon’t expect changes to be finalized before the start of the third quarter.



Rail Issues Drive Ethanol Prices HigherRenewables

The first quarter marked the beginning of a railcars shortage along the East Coastwhich took its toll on the ethanol market. A series of winter storms and competingdemand for cars from crude oil shippers left railcar availability very sparse. Producerswere happy to see rising delivered rail prices–if they have car availability to reachthose markets–while E10 consumers saw the rising prices eliminate ethanol’sdiscount to gasoline, effectively making it more expensive to blend the biofuel.

The pressure of the rail shortage was evident inOPIS postings for Chicago Ethanol and Chicago Rule11 Ethanol. While the Chicago Ethanol posting isindicative of the cost for gallons delivered toChicago—frequently by truck from local plants—the Rule 11 posting represents gallons deliveredbeyond Chicago, most often by rail. Chicago bridgesthe Midwest to the East Coast and is the only cityin which all major railways converge. As illustratedat left, CSX and Norfolk Southern are the largesteast coast railways and most often travel throughChicago to connect with BNSF and Union Pacific inthe Midwest, where most ethanol plants reside.

The spread between Chicago Ethanol and ChicagoRule 11 Ethanol was a rare phenomenon, as thetwo typically trend very closely. The two began toseparate as the bitter winter weather took its toll inJanuary and the rail market didn’t showimprovement until late March. Source: National Surface Transportation Policy and Revenue Study Commission


Renewables

To combat the anxiety over air quality, the California Low Carbon Fuel Standard (LCFS) was established in 2009. The LCFS objective is to lower greenhouse gas (GHG) emissions from petroleum-basedtransportation fuels via a cap-and-trade system. In 2011, LCFS wentinto effect under the stewardship of the California Air ResourcesBoard (CARB).

To achieve the desired 10 percent reduction in carbon intensity by2020, petroleum-based fuel producers must offset their greenhousegas emissions by manufacturing low-carbon fuel products or buyingLCFS credits from qualifying producers of low-carbon alternative fuels. In 2011, producers and importers were required to decreasetheir fuel carbon content by a quarter of a percent. Until the 10percent reduction is attained, the requirements will continue toincrease progressively. Researchers believe reductions made to dateequate to taking half a million vehicles off California roads.

As a result of the program, California biodiesel and renewable dieselusage is on the rise. Ethanol production is currently limited by the 10

percent blend wall, but the added value of LCFS credits encouragemore producers to enter the market, resulting in more competitivepricing. Biodiesel, on the other hand, has no blending limitation andcould hypothetically replace petroleum-based diesel entirely—which isnot out of the question given the LCFS credit value only sweetens thediscount from RIN credits, trading at roughly 70 cents per gallon in thefirst quarter.

California will continue to pave the way in carbon intensity reduction.However, British Columbia, Oregon, and Washington are allconsidering Low Carbon Fuel Standards and already support thrivingbiodiesel production facilities.

Substantial amendments to the LCFS are expected later this year.Proposed changes include: (1) improvements to registration of newinnovation/low-carbon fuels with the program and/or to receivecarbon intensity scores, (2) changes to crop based fuels scores–accounting for planted crops versus emissions, and (3)implementation of a credit price ceiling and potential floor.

Source: California Air Resources Board (CARB)

Average Carbon Intensity (CI) According to LCFS(Grams of CO2 equivalent per megajoule produced)

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California is geographically distinct in that many of its cities areactually located in valleys. So, air flows over them and not necessarilyTHROUGH them—allowing pollutants to settle, creating SMOG.

?Did You Know?


Natural Gas ProductionAt the end of the first quarter, the number of drilling rigs operating in theUnited States rose above 1,800 for the first time since 2012 according toBaker Hughes Inc. While the number of natural gas rotary rigs actuallydecreased year-over-year, more than enough oil rigs sprung up in theirplace. Furthermore, rig efficiency has shown dramatic improvement inrecent years, as evidenced by the graph below. Most notably, new rigs inthe Marcellus shale formation are generating more than twice the volumeof those operating at the start of 2012.

The EIA estimates marketed natural gas production—currently anestimated 72 billion cubic feet per day (Bcf/d)—will grow by 3 percentin 2014 and another 1.5 percent in 2015. Growth along the Marcellusshale formation has driven natural gas prices lower in the Northeast,which should encourage producers to head south, capitalizing on higherGulf Coast prices.

In recent history, producers have shown interest in the liquefaction ofdomestic natural gas for the purpose of export. Shipments into Europeand Asia currently earn a significant premium and recent tensions withRussia have EU leaders searching for alternative sources. Permits havebeen difficult to obtain—considering the export of natural gas is similarto that of crude in regards to national energy security—but CheniereEnergy’s Sabine Pass terminal in Cameron Parish, Louisiana is likely to bethe first export facility in the lower 48 ready for the task. First stages ofthe Sabine Pass startup aren’t expected until the end of 2015.

New-Well Gas Production Per Rig(Thousand Cubic Feet per Day)


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Natural GasDemandThe 1Q14 “polar vortex” anomaly created historic demand in most regions of the country. While not fully compiled by the EIA for thefirst quarter of this year, the January 2014 consumption increase is notable and expectations are that February compilations will bearout the same trend. As a result of the duration and extremity of winter temperatures, numerous gas utilities saw their compression anddistribution networks pushed to their limits and beyond. The subsequent effect on pricing and product storage inventories was notableand is detailed in the inventory and price sections of this publication.

Natural Gas Demand by Sector (Million Cubic Feet)


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InventoryThe quarter ended with natural gas inventories at their lowest in eleven years. As seen below, cold weather demand drainedworking gas inventories to 822 Bcf—less than half the normal level for this time of year. On the upside, analysts expect recordstock increases throughout the injection season and suggest inventories should reach workable levels by the start of October.

Working Gas in Underground Storage (Billion Cubic Feet Bcf)


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Natural Gas

Henry Hub natural gas spot prices were volatile over the past few months, increasing from$3.95 per million British thermal units (MMBtu) on January 10 to a high of $8.15/MMBtuon February 10, before falling back to $4.61/MMBtu on February 27, and then bouncingback up to $7.98/MMBtu on March 4.

Historical 5 Year Minimum and Maximum Natural Gas Storage Inventory

Price ForecastBased on storage fundamentals and seasonal demand forecasts, the expectation is that the HenryHub natural gas spot price, which averaged $3.73/MMBtu in 2013, will average $4.44/MMBtuin 2014 and $4.11/MMBtu in 2015.

Working Gas in Underground Storage (Billion Cubic Feet Bcf)

Forward Pricing


The overall global trend for urea has weakened as we have moved through the spring planting season. The world market is soft even with theuncertainty surrounding Ukraine. Russia has raised natural gas prices, which could affect urea production longer term, but world supplies of ureaare currently abundant. The application season is winding down in Asia (China in particular), which should make more product available forexport to the world market. Wet weather in the Southeast U.S. and weak demand drove average Gulf Coast urea values lower in April, spanninga range of $380 - $414 per short ton FOB.

UREA (Diesel Exhaust Fluid)DEF Near-term Outlook (2014)Global urea, the key component in DEF supply and pricing, appears to be following a similar cycle to 2013 with a run-up in urea prices fromOctober 2013 through March 2014 of $125/short ton, translating into a NOLA-indexed price run-up of $0.19/gallon of DEF. The springplanting season and the annual spring demand for fertilizer placed upward pressure on urea pricing, as in 2013. However, urea prices beganto stabilize in March and started dipping in April, following the spring planting season. (See chart below)

Source: GreenMarkets

Bulk NOLA Urea Prices vs. DEF Prices

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Source: GreenMarkets

U.S. Gulf Coast NOLA Barge Urea

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The urea NOLA forward curve indicates a softening of ureaprices through June from the current $382/ton level to$320/ton, and then a firming of urea prices into July.Chinese prilled urea is subject to an export duty of 15%,which the Chinese government lifts after planting season forfour months starting in July. So, we believe the July forwardcurve pricing may be overstated, given the lower-priceduntaxed Chinese prill that will hit the market in July. Barringany worldwide ammonia plant and urea supply disruptions,we expect to see urea prices continue to soften as we movethrough the 2014 Q2 and Q3. (See table at right)


UREA (Diesel Exhaust Fluid)DEF Longer-term Outlook (2016+)Today, approximately 45% of the urea consumed in North America is imported, and we expect this domestic supply shortfall to remain untilat least 2017 when new ammonia plants and plant expansions come on line from Koch, CF Industries, Agrium and others. Over the nextthree years, we would expect supply to remain tight as demand for DEF-grade urea continues to grow, while domestic supply remainsessentially flat. We expect the annual cyclical cost curve to continue with some gradual increase in year-over-year urea and DEF supply cost,barring any major disruptions or anomalies in the world ammonia and urea markets.

We expect North American DEF demand to continue growing by an average 26% annually through 2020 from 200 million gallons in 2013to just shy of one billion gallons in 2020 (see chart below).

Source: Integer Research Limited

DEF Consumption Projected to Reach 1 Billion Gallons by 2019

Driving DEF demand in the near-term is the modernization of the heavyduty on-road commercial trucking fleets and off-road equipment.However, in 2016 tighter commercial vehicle fuel economy regulationsgo into effect, which will likely result in a step change in DEF demand.The major truck and engine OEMs’ engine design and tuning strategies,to meet the increased fuel economy standards, all involve increased DEFdosing (in the range of 1.5X–2X current DEF dosing levels). Assumingthese engine tuning strategies play out, which is becoming more evidentas time passes, this could create a step function in DEF demand that isnot reflected in current forecasts.


Transportation & LogisticsThe first quarter of 2014 has been an interesting but challenging3 month period for the transportation industry. Truck tonnagedropped dramatically in January due to the severe weather in theMidwest and Northeast, but rebounded nicely in February and isexpected to continue that trend through the rest of Q1 and intoQ2 of 2014. The industry has seen some of the largest jumps inClass 8 truck sales in the past 7 years, growing almost 15 percentin the first quarter of 2014. Multiple surveys conducted byindustry analysts expect the anticipated rate increases to move intandem with the volume increase expectations. However, capacitycontinues to be consistently tight, which could potentially drive asignificant price increase in 2014.

There are still concerns over an aging and depleted work force forthe trucking industry. The average age of the truck driver hasincreased 2 ½ years to almost 50 years old. With a significantnumber of drivers retiring from the industry, there isn’t the samereplacement schedule with new drivers entering the industry.Many companies need to employ strategies to attract and retaindrivers—such as utilizing sign on bonuses, over-market salaries,and increased benefit packages.

Along with the economic and workforce impact on thetransportation industry, there have been many discussions andchanges in legislation that will impact transportation and logisticscompanies. Hour of service rules continue to be scrutinized by themajor trucking associations. The NTTC has asked the United States

Government Accountability Office to evaluate the two reports thatthe Federal Motor Carrier Safety Association (FMCSA) used tovalidate the amendments to the hours of service regulations for allcommercial motor vehicle drivers. These changes include provisionswhich limit use of the 34-hour restart and require a rest breakbefore driving after 8 hours on duty. FMCSA also published its long-awaited proposal requiring all interstate truck drivers to useelectronic logging devices two years after the rule becomes final.The rule provides current trucking companies an additional twoyears to obtain compliant logging devices. The FMCSA believes theproposal will not only enforce hours-of-service rules, but eliminateharassment issues, reduce paperwork burdens, and keep fatigueddrivers from getting behind the wheel.

In response to last year’s fatal train derailment in Lac-Mégantic,Quebec, the NTSB finalized details for examining safety issuesassociated with transportation of crude oil and ethanol via rail.With the increase in rail accidents over the past two years, theNTSB is inviting numerous experts in the fields of crude oil,ethanol, rail, emergency response, and research to meet anddiscuss the current state of the industry and issues plaguingtransportation of these flammable liquids. The increase in accidentsis also driving a significant backorder of rail cars meeting thecurrent safety specifications. Many companies are placing orders fora significant number of cars to stay ahead of legislation that couldoutlaw older railcars currently in service. Right now, the estimateddelivery of new DOT-111 rail car can be up to two years.


Mansfield’s National Supply Team

Andy Milton VP of Supply & DistributionAndy heads the supply group for Mansfield and during his tenure the company has grown from 1.3 billion gallons toover 2.5 billion gallons per year. Andy’s industry experience spans all aspects of the fuel supply business from truckdispatch, analytics, and index pricing to hedging and bulk purchasing. Prior to Mansfield, Andy worked at RaceTracPetroleum. Andy’s expertise in purchasing via pipeline, vessel, and the coordination via futures and options forhedging purchases enables him to successfully lead a team of experienced and motivated supply personnel atMansfield. Andy’s team handles a wide geographic area of all 50 states and Canada, including all gasoline products,ULSD, kerosene, Heating Oil, biodiesel, Ethanol, and Natural Gas. Andy’s education began at Young Harris Collegeand later at Georgia Southern University where he received a BS in Sports Management.

Sara Hordinksi VP of Western US SupplySara’s extensive background in supply and trading, futures hedging and rack marketing, brings a unique perspectiveto Mansfield’s supply department. Although new to Mansfield’s supply department, Sara has more than twenty-fiveyears’ experience in the oil & gas refined products industry. She has marketed refined products throughout much ofthe United States by pipeline, truck, and rail. In addition, she worked with numerous suppliers, refiners, jobbers, c-store owners, and distributors nationwide to develop competitive contract pricing and hedging programs individual totheir needs.

Mansfield’s supply team brings unique experience and industry expertise to the table. From contract pricing and hedging to trading of fuel,renewables and alternatives such as CNG and LNG, the Mansfield supply team covers the gamut of knowledge that is required to managetoday’s complex national fuel supply chain. Although they work as a national team, each member’s regional focus enables Mansfield todeliver geographic based supply solutions by more efficiently managing market specific refining, shipping and terminal/assets.

Dan Luther Manager of Supply & DistributionDan is responsible for purchasing, hedging, and the distribution of natural gas and renewable fuels. Before joiningMansfield, Dan was Director of Operations at Aska Energy and also worked at RaceTrac Petroleum, where he helpedmanage all barge, rail, and truck fuel deliveries before assuming ethanol trading responsibilities, includingpurchasing product to fulfill RaceTrac’s demand while trading product across other U.S. markets. Dan holds a BSBAin Supply Chain Management and Marketing from Ohio State University and is currently working towards his MBAat Georgia Tech.

Evan Smiles Northeast Supply SupervisorEvan began his career with Mansfield as an intern in the supply department back in the winter of 2011,assisting in the Southeast region. Evan quickly advanced into the role of Northeast Supply OptimizationAnalyst and currently holds the position of Northeast Supply Supervisor, handling various tasks includingsupply bids, day deal purchasing, long haul analysis, contract negotiations/fulfillment and supplyoptimization. Evan earned a BS in Sports Management and BBA in Finance from the University of Georgia.

Jessica Phillips Renewable Supply & Distribution SupervisorJessica is based out of Houston, TX and is responsible for nationwide purchasing, hedging, and thedistribution of renewable fuels. Joining the Mansfield team in 2009, she has held multiple titles over theyears: Contracts Coordinator, Regional Supply Analyst, Senior Strategic Supply Analyst, and as of late,Renewables Supply Supervisor. Jessica has a strong background in refined products scheduling, contracts,optimization and market analysis and is driven to continue to expand her knowledge in renewable andalternative fuels.

Chris Carter Southeast Supply ManagerChris serves as the Southeast Supply Manager responsible for refined product purchases including contracts,day deals and rack purchases. The Southeast region covers Florida, Georgia, Mississippi, Alabama,Tennessee, South Carolina, North Carolina, Virginia and Maryland. His responsibilities also include supplycontracts and current bids. Chris manages pipeline shipments of gas and diesel on the Colonial, Plantationand Central Florida Pipelines. Chris joined Mansfield in 2009 as a Supply Optimization Analyst and earnedhis BA in Business Management from North Georgia College and State University.


Evan Poole Supply Support ManagerEvan started his career with Mansfield analyzing purchasing strategies and index behavior throughoutthe US and Canada. He’s the resident expert in Canadian refined products and serves in an advisorycapacity to the Canadian Supply team. Evan holds an MBA concentrated in Managerial Leadership fromPiedmont College.

Mansfield’s National Supply TeamMansfield’s supply team brings unique experience and industry expertise to the table. From contract pricing and hedging to trading of fuel,renewables and alternatives such as CNG and LNG, the Mansfield supply team covers the gamut of knowledge that is required to managetoday’s complex national fuel supply chain. Although they work as a national team, each member’s regional focus enables Mansfield todeliver geographic based supply solutions by more efficiently managing market specific refining, shipping and terminal/assets.

Fernando de Agüero Chief Operating Officer, Mansfield Power & GasFernando possesses a broad energy industry experience ranging from regulated utilities to deregulatedmerchant and retail business. He has launched five privately held energy ventures. Holding positions asCEO of a wholesale natural gas and electric supplier, Chairman, CEO and President of a deregulated retailnatural gas marketer, Manager and CEO of a deregulated retail electric provider, Co-Founder, Chairmanand CEO of a leading smart grid-enabled prepaid utility solutions and software development companyand held various leadership roles spanning strategic planning, finance, business development, commercialoperations and trading at AGL Resources, GenOn (formerly Mirant Corporation) and Southern Company.


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Mansfield Energy Corp.

www.mansfieldoil.com

www.fuelsnews.com

678.450.2000

1025 Airport Pkwy SW

Gainesville, GA 30501

United States of America

Disclaimer: The information contained herein is derived from sources believed to be reliable; however, this information is not guaranteed as to its accuracy or completeness. Furthermore,no responsibility is assumed for use of this material and no express or implied warranties or guarantees are made. This material and any view or comment expressed herein areprovided for informational purposes only and should not be construed in any way as an inducement or recommendation to buy or sell products, commodity futures or options contract.

©2014 Mansfield Energy Corp.

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