Market Development for Western Canadian Crude Oil...Market Development for Western Canadian Crude Oil Prepared for: COQG / CCQTA Joint Meeting Calgary, AlbertaCalgary, Alberta June

Market Development for pWestern Canadian Crude Oil

Prepared for:COQG / CCQTA Joint Meeting

Calgary, AlbertaCalgary, AlbertaJune 2008

Steve Fekete

1

Steve FeketeSenior PrincipalCalgary

Purvin & Gertz and Oil Sands

International Energy ConsultancyPrivate and Independent

Firm established in 1947Headquartered in HoustonMaintained office in Calgary since 1973

30 years in oil sands (Canada and Venezuela)y ( )Maintain short-term and long-term forecasts

Supply / DemandPricingPricing

Refining and upgrading Technologies, Costs / Economics

Independent Engineer for banks/investorsIndependent Engineer for banks/investorsInitial project reviews and project reportsProject monitoring and certification of progress

2

Topics

Oils Sands Supply OutlookBiBitumenSCO

Markets for Oil Sands ProductsMarkets for Oil Sands ProductsCanadaPADD II (US Midwest / Mid ti t)Midcontinent)PADD III (USGC)PADD I (US East Coast)PADD I (US East Coast)

Netback Outlook

3

Potential Markets for Incremental Supplies of Western Canadian Crude Oil

Current Markets

Developing/Potential Markets

Current markets include Canada/U.S. Midwest, Rocky Mountains and PNW

4

PNWDeveloping and potential markets for incremental exports include Midcontinent, USGC, Pacific Rim, US East Coast

Despite Challenges, Oil Sands Production Growth to 2015 will Offset Conventional Decline

4,500

5,000Thousand Barrels per Day

3,500

4,000

4,500East CoastSCOBitumenConventional Heavy

Total Western Canada

2,500

3,000

yConventional Light & C5s

1 000

1,500

2,000

0

500

1,000

5

1990

1995

2000

2005

2010

2015

Gross Bitumen Production

2500Thousand Barrel per Day

2000 Athabasca/WabascaCold Lake/PrimroseOther

1000

1500OtherAnnounced Capacity

500

1000

0

995

000

005

006

007

008

009

010

015

6

199

200

200

200

200

200

200

201

201

Gross bitumen (not diluted)Does not include mining projects with an integrated upgrader

Bitumen Processing Options…

BitumenSynthetic Crude

(no Resid)

Upgrading Refining

Refined Products Bitumen (no Resid)

Naphtha &Lighter Gasoline18%

Distillate &Lighter 20%

Resid

Distillate

Gas Oil

Diesel / Jet FuelRFO A h lt

50%

32% Gas Oil45%

35%+

57%

35%

8 API4.8 % Sulfur

33 API0.2% Sulfur

>50 API<0.003% Sulfur

light products only

RFO, Asphalt35%+8%

Coking Refinery

7

Significant conversion and refining needed to reduce C:H ratio

Market Development For Bitumen Blends

100%

Coking RefineriesCrude Capacity, % of Total

25%

30%Coking/Asphalt as % of Crude

Upper MW

60%

80%PADD II

PADD V

PADD III

15%

20%

25% pp

PADD IVSouth MW

PNW PADD III

California

20%

40%

Ontario

PADD IVW.Canada

5%

10%

15%Midcont

W.Canada/Ont

0%0 2 4 6 8

Crude Capacity (Million B/D)

0%

5%

0 2 4 6 8 10Total Crude (Million B/D) Crude Capacity (Million B/D)Total Crude (Million B/D)

USGC is a very large market with high complexity. Need pipeline.Midwest (PADD II) has large coking. Main market for Canadian heavy crude.

8

For West Coast (PADD V or Asia) need new or expanded pipeline and marine terminal

Many Announced Refinery Projects Focus on Bitumen

Projects Targeting BitumenPetro-Canada, EdmontonPetro-Canada, Montreal

BP - Whiting, INBP/Husky – Toledo, OH

ConocoPhillips/EnCana – Wood River, ILConocoPhillips/EnCana – Borger, TX

Flint Hills - Pine Bend, MN

H k Li OHHusky – Lima, OH

Marathon - Detroit, MIMarathon – Catlettsburg, KYMarathon – Robinson, ILMarathon Robinson, IL

Coffeyville Refining – Coffeyville, KS

Frontier – El Dorado, KS

Si l i T l OK

9

Sinclair – Tulsa, OK

Western Canadian Heavy Crude Oil Disposition

Thousand Barrels per Day

2 500

3,000 At present, most heavy crude blends go to the

2,000

2,500 OtherPADD IICanada

gUS Midwest (PADD II)

Continued growth expected in supply and PADD II use

1,000

1,500in supply and PADD II use

Runs in Canada will increase

0

500

5 0 5 0 5

Large increase in heavy crude demand in PADD II could consume most

1995

2000

2005

2010

2015 II could consume most of incremental supply

10

Most SCO production growth to come from integrated oil sands projects

3000Thousand Barrel per Day

2000

2500 Midstream UpgradingIntegrated ProductionA d C it

1500

2000 Announced Capacity

500

1000

0

995

000

005

006

007

008

009

010

015

11

199

200

200

200

200

200

200

201

201

Distillation Comparison – Light Sweet Crude

80%90%

100%Volume Percent

50%60%70%80%

10%20%30%40%

0%10%

densa

te

SCO

MSW

LLS WTI

ny Light

Cond

Bonny

Resid Vac Gas Oil Distillate Naphtha

Bottomless

12

p

Note: Missing fraction is light ends

Non-Coking Refineries with High VGO Conversion Ideal for SCO Processing

80%

100%Non-Coking Refinery Capacity, % of Total

PADD I

PADD IIIW.Canada/Ont

South MW25%

30%

40%

45%Hydrocracking% of Crude

FCCU,% of Crude

60%

80%OntarioPADD IVW.Canada

PADD ICalifornia

Midcont

PNW

PADD IVCaliforniaUpper MW

15%

20%

25%

30%

35%

20%

40%PADD II

PADD V

PADD IIIPADD III

W.Canada/OntPNW

South MW

PADD IV Upper MW5%

10%

10%

15%

20%

0%0 1 2 3

Crude Capacity (Million B/D)

PADD IMidcont

PADD IV Upper MW

0%

0 2 4 6 8 10Total Crude (Million B/D)

0%

5%

Western Canada:Western Canada: Small and saturatedMidwest (PADD II):Midwest (PADD II): Large market but needs hydrocrackingUSGC (PADD III):USGC (PADD III): Has hydrocracking capacity; mostly coking refineries

p y ( )( )

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USGC (PADD III):USGC (PADD III): Has hydrocracking capacity; mostly coking refineriesWest Coast (PADD V):West Coast (PADD V): Large market (hydrocracking, mostly with coking)East Coast (PADD I): High concentration of cracking (FCCU) capacity

Downstream VGO Conversion Capacity Required

VGO conversion capacity additions required in

1,600PADD II VGO SupplyCapacity w/ 2.0% Creep

Thousand Barrels per Day

qtraditional markets to process incremental SCOEstimated capacity

1,400

Capacity w/ 1.0% Creep

Estimated capacity requirements in excess of creep additions

Requirements exceed 1%1,200

Requirements exceed 1% annually

Access to USGC may provide some relief

1,000some relief

Large VGO market, active trade

800

14

2005 2010 2015 2020

Conversion Capacity Focus on SCO Projects is Limited to Date…

Projects Targeting SCOSun – Toledo, OH

Projects Targeting BitumenPetro-Canada, EdmontonPetro Canada Montreal ,

Suncor – Denver, COSuncor – Sarnia, ON

Petro-Canada, Montreal

BP - Whiting, INBP/Husky – Toledo, OH

ConocoPhillips/EnCana – Wood River ILFlint Hills - Pine Bend, MN (combined

with bitumen)

ConocoPhillips/EnCana – Wood River, ILConocoPhillips/EnCana – Borger, TX

Flint Hills - Pine Bend, MN

Husky – Lima, OHHusky Lima, OH

Marathon - Detroit, MIMarathon – Catlettsburg, KYMarathon – Robinson, IL

Coffeyville Refining – Coffeyville, KS

Frontier – El Dorado, KS

Sinclair – Tulsa, OK

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Sinclair Tulsa, OK

SCO Growth Dependent on Traditional and New Markets

2,000Most SCO has

Thousand Barrels per Day

1,500OtherPADD IICanada

historically been processed in CanadaMost future SCO growth

500

1,000 Most future SCO growth will go to the US Midwest / Mid-continent

0

5 0 5 0 5

New markets required to absorb incremental SCO

1995

2000

2005

2010

2015

16

Sour, Heavy SCO Expected to Increase…

2,000Sour / Heavy SCO

Lower capital requirements for the

d

Thousand Barrels per Day

1,500

Sour / Heavy SCOSweet SCO

upgraderRefiner assumes the “load” of hydrotreating product to meet specs

1,000product to meet specs

Potentially unique processing / transport i

0

500issuesOlefins, nitrogen, sulfur, gravity

0

2000

2005

2010

2015

2020

Issues with traditional processingPipeline limitations

17

Considerations in screening potential markets for oil sands crudes

15Complexity

Initial screening based on capacity, complexity

California

Texas GC12

p y, p y

Other considerations:Future heavy crude supply

UMW/Chi

PADD IPADD IV

South MW

Japan

Midcont

WC/Ont

9

to large, complex USGC marketStrong growth in Asia suggests current and new-Japan

Chi

South Korea

PNWWC/Ont

6

suggests current and newbuild opportunitiesCalifornia will need more heavy importsI t f l tChina

30 2 4 6

Impact of regulatory constraints on market development

18

0 2 4 6Total Crude Capacity (Million B/D)

Canadian Markets for Western Crude

Refinery Capacity(Thousand B/D)

West is fully suppliedOntario receives crude

West 627Ontario 468Montreal 255

225 MB/D from west150 MB/D from east*

Montreal receives all crude from east*Montreal 255

Total 1,350 *Newfoundland and imports

Uncertain ProjectsUncertain ProjectsReversal of Enbridge Line 9 from Sarnia to Montreal

- could increase western crude delivery by 250 MB/D- or more if one of Portland pipelines also reversed from Montreal to Maine- displaced crudes are mostly light

Petro-Canada coker at Montreal to use heavy crudeShell grassroots refinery at Sarnia for oil sands crudes

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- would add more than 80 MB/D to Ontario

PADD II Markets for Canadian Crude Oil

%Lt S t

CRUDE TYPES REFINERY CONFIGURATION

44%

25%Lt Swt

Lt Sour

Hvy Sour

2%

31%Coking

Cracking

31%

y

High Tan67%

HydroSkim

3.6 million Barrel per Day (design)

13%Domestic

SOURCE

53%34%

13%Domestic

Foreign

C di 11%

71% Lt Swt

Lt Sour

Hvy Sour

20

53%Canadian 11%18%

y

PADD II Refinery Crude Runs – By Source

5,000Canadian ImportsOther ImportsDomestic Receipts From Other PADDsIndigeno s Prod ction

Thousand Barrels per Day

B Pi li

3,000

4,000 Indigenous Production Forecast By Pipeline

2,000

from North

1,000 from South

01990 1995 2000 2005 2010 2015

internal

PADD II is the largest market for Canadian crude.

21

Canadian crude runs forecast to rise strongly.

More pipeline capacity needed.

PADD III Markets for Canadian Crude Oil

32%Lt Swt

CRUDE TYPES REFINERY CONFIGURATION

34%

32%Lt Sour

Hvy Sour 79%20%

Coking

Cracking

2%32%High Tan 1%

HydroSkim

8.4 million Barrel per Day (design)

Domestic86% Lt Swt

SOURCE

32%

1%42%OtherForeign

Canada9%

86% Lt Swt

Lt Sour

Hvy Sour

22

25%Mexico /Veneuzela

9% 5%

Heavy Crude Production From Venezuela

3.0 Most production from Venezuela is heavy sour

Million Barrels per Day

2.0

2.5 Extra Heavy Heavy Four Orinoco upgraders upgrade extra heavy Orinoco production to produce about 700 KBPD synthetic crudes, which vary from 16 to 30+ °API

1 0

1.5which vary from 16 to 30+ APICrude production is declining in current political environment and the inflection point is uncertain

0.5

1.0 pNew fiscal and operating terms delaying development of new Orinoco projects, despite a new group of

ti i t0.0

1990 1995 2000 2005 2010 2015 2020

participantsResource base is huge

V l d ti ddi hi h d f

23

Venezuela production adding a high degree of uncertainty to heavy crude balances

Heavy Crude Production From Mexico

3.0Maya produced from Cantarell

Million Barrels per Day

2.0

2.5

Maya produced from Cantarell offshore field has peaked

Other heavy production from Ku-

1.5

Maloob-Zaap is increasing

New production may come from exploration and production

0.5

1.0exploration and production further offshore and in deeper water - eventually

0.01990 1995 2000 2005 2010 2015 2020

M i d ti ld th i t

24

Mexico production could resume growth or go into long-term decline adding further uncertainty

PADD I refiners process significant volumes of imported sweet crude, and should continue

1 6001,800Thousand Barrels per Day

1 6001,800

Thousand Barrels per Day

1 0001,2001,4001,600

1,2001,4001,600

600800

1,000

600800

1,000

0200400

0200400

2000 2005 2010 2015 Heavy Sour Crude Runs Light Sour Crude Runs Sweet Crude Runs

2000 2005 2010 2015Other Imported CrudeCanadian CrudeDomestic Crude

25

Oil sands crudes have similar distillation characteristics to selected PADD I imports

100%Volume Percent

60%

80%

40%

60%

0%

20%

0%SCO Bonny

LightSynBit Arab Hvy

26

Resid VGO Distillate Naphtha Light Ends

PADD I imported crude sources are varied(Barrels per Day, 2007)

Europe 51North Africa

127

CIS 43 Middle East 167

127

Canada 256

Latin

West Africa

Latin America 192

Average Quality: 31 2 API 1 05 wt% Sulfur

West Africa 652

27

Average Quality: 31.2 API, 1.05 wt% Sulfur

PADD I Market Development and Access

Potential target refineries in Philadelphia region (capacity in MB/D):

Sunoco Marcus Hook 175Sunoco Philadelphia 335Sunoco Eagle Point 150ConocoPhillips Trainer 185Valero Paulsboro 160

Several proposals:I l d i liInland pipeline Line 9/Portland/marine

No cost information available

28

Impact of Market Clearing Location

4

5SCO – MSW, Edmonton (2008 $/BBL)

2

3Sarnia

Chi

Parity Location

0

1Chicago

Wood RiverCushing

-2

-1

USGCSCO Price ForecastSCO Price Forecast

-32007 2008 2009 2010 2011 2012 2013 2014 2015

PADD I it lik l t bli h d b B Li ht t Phil d l hi

29

PADD I parity likely established by Bonny Light at PhiladelphiaEdmonton netback will depend on pipeline tolls

Light/heavy differentials will drop as resid destruction capacity comes on-stream

45 30USGC Light Products minus Fuel OilForecast in Constant 2008 Dollars per Barrel

Crude Differential

30

35

40

20

25Lt Products - HSFOWTI - MayaMSW - CLB

20

25

30

15

20MSW - CLB

10

15

20

10

0

5

0

5

30

1995 2000 2005 2010

Note: Light Products = ½ (Gasoline + Distillate)

Light / Heavy Differential & Coking Project Return

50 00 100%Forecast in Constant 2007 Dollars per Barrel

Moderation is forecast as conversion capacity is added . . .

%

40.00

50.00

80%

100%Light/Heavy Product Differential

Coking Return, %

30.00 60%

10 00

20.00

20%

40%

0.00

10.00

0%

20%

31 3131

1995 2000 2005 2010

Summary

Rapid expansion of Western Canadian Oil Sands will require new markets

Markets required for SCO, especially with diluent alternatives becoming reality

D t i it i dDownstream conversion capacity requiredPADD II cooker capacity announcements appears sufficient to consume bitumenVGO conversion capacity required for incremental SCO

Disposition of SCO in more distant markets will likely reduce netbacksreduce netbacks

SCO discounts may create the economic incentive for investment

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About this Presentation

Production and marketability of Oil Sands bitumen blends and synthetic crude oil, crude price differentials, economics of upgrading and diluent issues are analyzed in Purvin & Gertz’ multi-client service,Crude Oil & Oil Sands Market Outlook.

This presentation has been prepared for the sole benefit of attendees of the COQG / CCQTA June 2008 Joint Meeting. Neither the presentation nor any part of the presentation shall be provided to2008 Joint Meeting. Neither the presentation nor any part of the presentation shall be provided to third parties without the written consent of Purvin & Gertz. Any third party in possession of the presentation may not rely upon its conclusions without the written consent of Purvin & Gertz. Possession of the presentation does not carry with it the right of publication.

Purvin & Gertz prepared this presentation utilizing reasonable care and skill in applying methods of l i i t t ith l i d t ti All lt b d i f ti il bl t thanalysis 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 APPLYSHALL APPLY.

Some of the information on which this presentation 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.

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