1

Refinery Investment
Prospects for the US Gulf Coast

Nathaniel Horner
Erin Mayfield

25 October 2015

Photo: U.S. government work / public domain

 2

Recent and developing market conditions

Recent market trends suggest glut of 7
Global Refined Product Demand (EIA 2015)

(billion bbl)
discounted domestic crude supply and 120
6

increasing demand for refined products 100

million barrles/day
5
80
North American light tight production

Annual Production
460 2010
North American heavy shale production 3
40 2020
Domestic refined products demand 20 2030
2
Global refined product demand 0
US net exporter of refined products

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1970 1980 1990 2000 2010 2020 2030 2040
WTI-Brent spread differential

Eu

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Ca

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A

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id
in

As
&

M
Historic

t
La
US
2014 AEO High Economic Growth Projection
2014 AEO HighRegion
Oil Price Projection

Uncertainty in developing market conditions

2014 AEO High Oil and Gas Resource Projection
2014 AEO Low Economic Growth Projection
2014 AEO Low Oil Price Projection

and impacts on domestic crude supply

? Oil export ban
? Keystone XL

Recent market conditions indicate potential refining capacity investment

opportunities, although future market conditions are uncertain
 3

Possible alternatives to new capacity

Displace crude Increase utilization of Lift export
imports existing capacity restrictions
[EIA 2015]
US refin
i ng c apacity and u liza on
20000

Refining input and capacity

15000

(Thousand bpd)
10000

5000

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Gross input Operable capacity

LSC imports fell from 1.6M bpd to
0.3M bpd 2011-2015; imports to
USGC almost fully eliminated.
[EIA]
Economic disincentive to process
light oil in heavy refineries
Gross inputs at record levels (>17M Shift US refining slate to
bpd) in July; avg U.S. utilization >95%. more heavy crude
Additional opportunities to increase Gasoline prices lower or
utilization limited. unchanged, depending on
analyst
 4

Refinery technology options

Distillation Process Units Products End-
Column Increasing
use complexity /
higher CAPEX,
OPEX

Cracking
Less
Coking
expensive
feedstocks
Adapted from: Canadian Fuels Association (2013). The Economics of Petroleum Refining, Fig 3.

Refinery Nelson CAPEX Annual fixed OPEX Construction

Type Complexity ($Billions) ($Millions) Period (years)
Cracking 7 $5.3 $147 3

Coking 10 $8.6 $303 5

 5

New capacity: strategic questions

What are the financial prospects

of a new 500K bpd refinery on
the U.S. Gulf Coast?

What refinery technology

(cracking vs. coking) offers
the best financial outlook?
 6

Analytical approach
COST DISCOUNTED CASH RESULTS
ASSUMPTIONS FLOW MODEL
NPV
FORWARD PRICE Revenue comparison
SCENARIOS OPEX Breakeven
Separate module
Financing margins
EIA AEO 11
10-yr bonds Sensitivities
@ 5%
Aspen 3 Interpretation
CAPEX
Separate module
ICF 4 Context with
Taxes
Federal, state, other lines of
depreciation evidence
 7

Forward scenario literature

LIFTING THE CRUDE OIL EXPORT BAN:

THE IMPACT ON U.S. MANUFACTURING
By Thomas J. Duesterberg, Donald A. Norman and Jeffrey F. Werling

October 2014

Technical Options for Processing

Effects of Removing Restrictions Additional Light Tight Oil Volumes
on U.S. Crude Oil Exports within the United States

September 2015 April 2015

Independent Statistics & Analysis U.S. Department of Energy Independent Statistics & Analysis U.S. Department of Energy
www.eia.gov Washington, DC 20585 www.eia.gov Washington, DC 20585
 8

Financial model
Liquid products value (global)
Refining
WTI value (Cushing) Gross margin (crack spread)
Margin
Crude transport Netback shipping Variable OPEX Net Margin

Financing CF Bond Issue Interest Principal repayment

Annual Net Margin

Operating CF Operating Cash Flow Fixed OPEX

Interest Depreciation Taxable Income tax rate = Income Taxes

Taxes
Tax Credits Net Tax

Annual CF = Operating CF + Financing CF CAPEX Taxes Discounted Sum NPV

 9
Refinery economics $35.00

driven heavily by
$30.00

Margin (2014 $/barrel)

$25.00

refining margin $20.00

$15.00

$10.00

Historic cracking and coking $5.00

margins (top) and margin $-

differentials (bottom) show 1995 2000

WTI crack spread

2005

Brent crack spread

2010

Coking spread
2015

the light crude cost $20.00

Spread differen al (2014 $/barrel)

advantage enjoyed by US $15.00

refiners since 2010 . . . $10.00

and the advantage of refining $5.00

heavy oils from 1999-2010. $-

$(5.00)
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
WTI-Brent crack spread differen al Coking-Cracking spread differen al
 10

WTI crack spread projections

$35

$30

$25
Cracking Spread [$/bbl]

$20

$15

$10

$5

$0
2015 2017 2019 2021 2023 2025 2027 2029
AEO Reference Case AEO High Economic Growth
AEO Low Economic Growth AEO High Oil Price
AEO Low Oil Price AEO High Oil and Gas Resource
AEO Low Oil Price and High Oil and Gas Resource AEO Reference Case without Restrictions
AEO Low Oil Price without Restrictions AEO High Oil and Gas Resource without Restrictions
AEO Low Oil Price and High Oil and Gas Resource without Restrictions
 11

Coke-crack spread differential projections

$15
Refine
heavy
$10
crude
Coking-Cracking Spread Differentials

$5
[$/bbl]

$0

($5)
Refine
light
crude
($10)
2015 2017 2019 2021 2023 2025 2027 2029
AEO Reference Case AEO High Economic Growth
AEO Low Economic Growth AEO High Oil Price
AEO Low Oil Price AEO High Oil and Gas Resource
AEO Low Oil Price and High Oil and Gas Resource AEO Reference Case without Restrictions
AEO Low Oil Price without Restrictions AEO High Oil and Gas Resource without Restrictions
AEO Low Oil Price and High Oil and Gas Resource without Restrictions
 12
Refineries have positive NPV across all scenarios;
cracker is almost always more profitable than coker;
lifting export restrictions reduces NPV in some cases
10
Coking refinery more appealing as oil
prices increase
Breakeven refining margin: 8

Refinery NPV ($billions)

$7.20-$13.50 / bbl (our model)
$6.78-$10.10 / bbl (EIA) 6

Aspen & ICF scenarios lead to

qualitatively similar conclusions 4

MARR to 30%, NPVs by

approximately two-thirds, making the 2
coker-cracker decision a toss-up
State tax credit improves NPV 2% 17%
(avg. 7%), depending on scenario 0
AEO AEO High AEO Low AEO High Oil AEO Low Oil AEO High Oil AEO HOGR AEO HOGR / AEO HOGR /
Reference Economic Economic Price Price (LP) and Gas Unrestricted LP LP
Growth Growth Resource Unrestricted
(HOGR)
Cracking Coking
Anticipated U.S. crude production can likely 13

support the Port Arthur refinery

Additional 500K bpd capacity vs. projected increased domestic production
of 1M-5M bpd, most of which is LSC. [EIA]
KXL would increase supply and further improve outlook
Some risk in low oil price case
 14

Findings and recommendations

Adaptive approach: build the cracker now; add the coking unit later if
needed.
Odds of lifting export restrictions are hard to determine, but perhaps
somewhere in the 40%-50% range. However, easing of restrictions is
unlikely to make the refinery unprofitable.
If very risk-averse, investigate lower-complexity options (e.g.,
hydroskimmer) if they fit with company strategy.
Expanding capacity beyond 500K bpd is not recommended, due to
longer construction delay and size of crude oversupply.
Robust product demand growth in Asia. Domestic demand flat to
declining.
 15

to the 2015 USAEE

Thanks! Case Competition sponsor and the judges

Contact Nathaniel Horner nch@cmu.edu

Erin Mayfield enmayfie@andrew.cmu.edu

CE
Center for Climate and Energy Decision Making

This presentation is submitted as a solution to a student case competition. Its

conclusions rely on a fictional scenario and should not be construed as research findings.
 16

Want to see more?

Supplemental
Information
From the refiners perspective, we care about17
feedstock supply and refined product demand
Feedstock price drivers for USGC: (effect on price)
Export restrictions: captive domestic LTO supply ()
Domestic production: unconventional LTO supply ()
Keystone XL: LTO supply, transitioning to Canadian heavy ()
Refined liquids price drivers:
Domestic product demand: flat to slow decline ()
International product demand: growth ()
Export ban: marginal price support ()
Brent-WTI spread is $6-$10/bbl in most scenarios 18

odds of ban lifting = ~40%

Decreased refining margin only in HOGR
and HOGR/LP cases (50% of
unrestricted cases) our model shows
NPV decrease by 50%.

US refining slate shifts towards heavier

crude

Coking refinery slightly more

competitive with crackers but
crackers still have higher NPV

Both refinery types still have positive

NPV in our model

There is a nontrivial risk of the restrictions being lifted, but this

change is unlikely to make refinery investment a poor decision.
 19

KXL assessment
KXL would bring heavy crude from
Western Canadian Sedimentary
Basin oil sands and light crude from
Bakken shale

Construction supports case to build

refining capacity, but not LSC
capacity

KXL construction is linked to oil

export ban

Odds that KXL will be built is high

Source: NRDC 2015

 20

EIA AEO Scenarios

Scenario
Reference
High Economic Growth
Low Economic Growth
High Oil Price
Low Oil Price (LP)
High Oil and Gas Resource (HOGR)
HOGR / LP
Reference with Unrestricted Exports
HOGR with Unrestricted Exports
LP with Unrestricted Exports
HOGR / LP with Unrestricted Exports Same as HOGR / LP, but assuming export ban lifted.
Scenario Description
Business-as-usual case, given known technology and technological and demographic trends.
Reflects different expectations for growth in population, labor force, capital stock, and
productivity. Assumes high growth and low inflation.
Reflects different expectations for growth in population, labor force, capital stock, and
productivity. Assumes low growth and high inflation.
Assumes strong economic growth in the emerging non-OECD nations increases growth of their
demand and drives oil prices higher.
Assumes lower levels of world economic growth and liquid fuels demand, as well as more
abundant and less costly non-OPEC liquid fuels supply.
Assumes higher estimates for recoverable crude oil and natural gas resources in tight wells and
shale formations and for offshore resources.
Assumes higher estimates for recoverable crude oil and natural gas resources in tight wells and
shale formations and for offshore resources. Assumes lower levels of world economic growth
and liquid fuels demand, as well as more abundant and less costly non-OPEC liquid fuels supply.
Same as reference, but assuming export ban lifted.
Same as HOGR, but assuming export ban lifted.
Same as LP, but assuming export ban lifted.
 21

Aspen Institute Scenarios

Scenario Scenario Description
Reference Business-as-usual case, given known technology and
technological and demographic trends. Based on AEO
reference case.
Low Exports Relative to reference, assumes higher crude oil exports and
production, higher WTI oil prices, lower global crude prices,
and lower refined product prices.
High Exports Relative to low exports cases, assumes higher crude oil
exports and production, higher WTI oil prices, lower global
crude prices, and lower refined product prices.
 22

ICF International Scenarios

Scenario Scenario Description

Low Differential Assumes a low WTI-Brent price differential resulting from a relatively rapid
with Exports accommodation of light sweet crude through the buildout of rail, marine, and
refinery capacity. No export ban.
Low Differential Assumes a low WTI-Brent price differential resulting from a relatively rapid
without Exports accommodation of light sweet crude through the buildout of rail, marine, and
refinery capacity. Assumes export ban.
High Differential Assumes a high WTI-Brent price differential for several years, resulting from
with Exports delays in adaptation to increased crude due to market and policy uncertainty and
risk aversion. No export ban.
High Differential without Exports Assumes a high WTI-Brent price differential for several years, resulting from
delays in adaptation to increased crude due to market and policy uncertainty and
risk aversion. Assumes export ban.
 23

CF model example
FINANCIAL CASH FLOW MODEL
CRACKER
Financing Capitalization Operating cash flow Taxes NPV

values in $millions bbl/y State Federal

OPEX Fed. taxable
Financing CF Interest CAPEX Production Revenue Operating CF State taxable CF Tax Credits Taxes Taxes NET CASH FLOW
Depreciation (fixed) CF
$4,226
$ 1,773 $ - $ 1,773 $ - $ - - - - $ - $ 167 $ (167) $ 167 $ 58 $ 108
$ 1,684 $ 89 $ 1,773 $ - $ - - - - $ (89) $ 167 $ (168) $ 79 $ 28 $ 51
$ 1,596 $ 177 $ 1,773 $ - $ - - - - $ (177) $ 167 $ (168) $ (9) $ (3) $ (6)
$ (266) $ 266 $ - $ 532 $ 147 164,250,000 2,067 1,919 $ 1,121 $ - $ 11 $ 1,110 $ 389 $ 1,254
$ (266) $ 266 $ - $ 957 $ 147 164,250,000 1,963 1,815 $ 592 $ - $ 6 $ 586 $ 205 $ 1,338
$ (266) $ 266 $ - $ 766 $ 147 164,250,000 1,927 1,780 $ 748 $ - $ 7 $ 740 $ 259 $ 1,247
$ (266) $ 266 $ - $ 613 $ 147 164,250,000 1,945 1,798 $ 919 $ - $ 9 $ 910 $ 319 $ 1,204
$ (266) $ 266 $ - $ 490 $ 147 164,250,000 1,847 1,699 $ 943 $ - $ 9 $ 933 $ 327 $ 1,097
$ (266) $ 266 $ - $ 392 $ 147 164,250,000 1,758 1,610 $ 952 $ - $ 10 $ 943 $ 330 $ 1,005
$ (266) $ 266 $ - $ 348 $ 147 164,250,000 1,731 1,584 $ 969 $ - $ 10 $ 960 $ 336 $ 972
$ (2,039) $ 266 $ - $ 348 $ 147 164,250,000 1,629 1,481 $ 867 $ - $ 9 $ 858 $ 300 $ (867)
$ (1,950) $ 177 $ - $ 349 $ 147 164,250,000 1,571 1,423 $ 897 $ - $ 9 $ 888 $ 311 $ (847)
$ (1,862) $ 89 $ - $ 348 $ 147 164,250,000 1,494 1,347 $ 910 $ - $ 9 $ 901 $ 315 $ (839)
$ - $ - $ - $ 174 $ 147 164,250,000 1,451 1,303 $ 1,129 $ - $ 11 $ 1,118 $ 391 $ 901
$ - $ - $ - $ - $ 147 164,250,000 1,373 1,225 $ 1,225 $ - $ 12 $ 1,213 $ 425 $ 788
$ - $ - $ - $ - $ 147 164,250,000 1,279 1,132 $ 1,132 $ - $ 11 $ 1,120 $ 392 $ 728

MISC ASSUMPTIONS
Crude transport Cushing Port Arthur $6/bbl
Hurdle rate 10% - 30%
Bond term (years) 10
 24

CF model assumptions refinery costs

REFINERY COSTS
ASSUMPTIONS OPEX (FIXED ANNUAL) ESTIMATE
Costed capacity (bbl/day) 200,000 Equation coefficients
Target capacity (bbl/day) 500,000 Intercept 2.18
Capacity scale 2.5 Heavy sour crude 0.51
Cracker Coker PADD-III -0.17
Complexity index 7 10 PADD V 0.28
Complexity-barrel 3,500,000* 5,000,000* LN Refinery capacity 0.64
LN Complexity index 0.59
CAPEX ESTIMATE
Cracker Coker Equation variables Cracker Coker-heavy
CAPEX (costed) $ 2,127,400,000 $ 3,433,900,000
Intercept 1 1
CAPEX (target) ($millions) $ 5,319 $ 8,585
Heavy sour crude 0 1
Coker premium 61% $ 3,266
PADD-III 1 1
PADD-V 0 0
OPEX (VARIABLE) ln(capacity) 13.12236338 13.12236338
Min Base Max ln(complexity) 1.945910149 2.302585093
$/bbl $2.20 3.3 5.59
ln(costs) 11.55639955 12.27683777
Cracker Coker
Costs (1996 $1000s) $ 104,443 $ 214,666
Parameter: 3 3.5
Costs (1996 $) $ 104,443,293 $ 214,665,819

Costs (2014 $millions) $ 147 $ 303

Coker premium 106%
 25

Variable OPEX source data

IEA Refinery Margins (https://www.iea.org/media/omrreports/Refining_Margin_Supplement_OMRAUG_12SEP2012.pdf)
 26

CF model assumptions - misc

CRUDE SHIPPING RATES REFINERY ASSUMPTIONS
Crude transport Cushing Port Arthur $6/bbl
Refinery capacity (bbl/day) 500,000
Construction period (years) 3 (cracker) - 5 (coker)
Refinery capacity factor 90%
NETBACK SHIPPING RATES
tonnes barrels
Ship capacity 37,000 271,210
Shipping cost ($/day) 15,000

From: Galveston, TX
Destination Sailing days Cost Cost/barrel
Rotterdam, Netherlands 15 $ 225,000 $ 0.83
Singapore 35 $ 525,000 $ 1.94
Shanghai, China 30 $ 450,000 $ 1.66
Rio de Janeiro, Brazil 16 $ 240,000 $ 0.88
 27

CF model assumptions financing

FINANCING ASSUMPTIONS
Borrowing rate 5.0%
Hurdle rate 10% - 30% (Shell)
Bond term (years) 10

FINANCING CASH FLOWS

COKER Bond 1 Bond 2 Bond 3 Bond 4 Bond 5 Total
Face value: 1773 1773 1773 1633 1633
Coupon pmt: 88.65 88.65 88.65 81.65 81.65
Year y_i B1 CF int y_i B2 CF int y_i B3 CF int y_i B4 CF int y_i B4 CF int CF Interest
2015 0 1773 0 1773 0
2016 1 -88.65 88.65 0 1773 0 1684.35 88.65
2017 2 -88.65 88.65 1 -88.65 88.65 0 1773 0 1595.7 177.3
2018 3 -88.65 88.65 2 -88.65 88.65 1 -88.65 88.65 0 1633 0 1367.05 265.95
2019 4 -88.65 88.65 3 -88.65 88.65 2 -88.65 88.65 1 -81.65 81.65 0 1633 0 1285.4 347.6
2020 5 -88.65 88.65 4 -88.65 88.65 3 -88.65 88.65 2 -81.65 81.65 1 -81.65 81.65 -429.25 429.25
2021 6 -88.65 88.65 5 -88.65 88.65 4 -88.65 88.65 3 -81.65 81.65 2 -81.65 81.65 -429.25 429.25
2022 7 -88.65 88.65 6 -88.65 88.65 5 -88.65 88.65 4 -81.65 81.65 3 -81.65 81.65 -429.25 429.25
2023 8 -88.65 88.65 7 -88.65 88.65 6 -88.65 88.65 5 -81.65 81.65 4 -81.65 81.65 -429.25 429.25
2024 9 -88.65 88.65 8 -88.65 88.65 7 -88.65 88.65 6 -81.65 81.65 5 -81.65 81.65 -429.25 429.25
2025 10 -1861.65 88.65 9 -88.65 88.65 8 -88.65 88.65 7 -81.65 81.65 6 -81.65 81.65 -2202.25 429.25
2026 11 0 0 10 -1861.65 88.65 9 -88.65 88.65 8 -81.65 81.65 7 -81.65 81.65 -2113.6 340.6
2027 12 0 0 11 0 0 10 -1861.65 88.65 9 -81.65 81.65 8 -81.65 81.65 -2024.95 251.95
2028 13 0 0 12 0 0 11 0 0 10 -1714.65 81.65 9 -81.65 81.65 -1796.3 163.3
2029 14 0 0 13 0 0 12 0 0 11 0 0 10 -1714.65 81.65 -1714.65 81.65
 28

CF model assumptions tax parameters

TAX ASSUMPTIONS
Tax rate -- federal corporate 35% Assume tax benefits offset reduce taxable income elsewhere in the company.
Tax rate -- Texas corporate 1%
Tax credit (state) $500,000,000 (Over 3 years of construction)
Depreciation period (years) 10

DEPRECIATION SCHEDULE
Year 200% DB
1 10%
2 18%
3 14.40%
4 11.52%
5 9.22%
6 7.37%
7 6.55%
8 6.55%
9 6.56%
10 6.55%
11 3.28%
 29

Crack Spread
$70

$60
Coking-Cracking Spread Differentials

$50

$40
[$/bbl]

$30

$20

$10

$0
2015 2017 2019 2021 2023 2025 2027 2029
AEO Reference Case AEO High Economic Growth
AEO Low Economic Growth AEO High Oil Price
AEO Low Oil Price AEO High Oil and Gas Resource
AEO Low Oil Price and High Oil and Gas Resource Aspen Institute Reference
Aspen Institute Low Exports Aspen Institute High Exports
ICF Low Differential with Exports ICF Low Differential without Exports
ICF High Differential without Exports ICF High Differential with Exports
AEO Reference Case without Restrictions AEO Low Oil Price without Restrictions
AEO High Oil and Gas Resource without Restrictions AEO Low Oil Price and High Oil and Gas Resource without Restrictions
 30

Coke-crack spread differential

$15
AEO Reference Case

AEO Reference Case without Restrictions

$10 AEO High Economic Growth

AEO Low Economic Growth

AEO High Oil Price

Coking-Cracking Spread Differentials

$5 AEO Low Oil Price

AEO High Oil and Gas Resource

AEO High Oil and Gas Resource without Restrictions

[$/bbl]

$0 Aspen Institute Reference

Aspen Institute Low Exports

Aspen Institute High Exports

ICF Low Differential with Exports

($5)
ICF Low Differential without Exports

ICF High Differential without Exports

ICF High Differential with Exports

($10)
AEO Low Oil Price and High Oil and Gas Resource without Restrictions

AEO Low Oil Price with No Restrictions

AEO Low Oil Price and High Oil and Gas Resource
($15)
2015 2017 2019 2021 2023 2025 2027 2029
 31

WTI-Brent spread
WTI-Brent Price Differential
[$/bbl]
16
14
12
10
8
6
4
2
0
2015 2017 2019 2021 2023 2025 2027 2029
Scenario 1: AEO Reference Case Scenario 2: AEO High Economic Growth Case

Scenario 3: AEO Low Economic Growth Case Scenario 4: AEO High Oil Price Case

Scenario 5: AEO Low Oil Price Case Scenario 6: AEO High Oil and Gas Resource Case

Scenario 10: ICF Low Differential with Exports Case Scenario 11: ICF Low Differential without Exports Case

Scenario 12: ICF High Differential without Exports Case Scenario 13: ICF High Differential with Exports Case
Displacing heavy crude in existing refineries 32

requires additional LTO discounting

 33

Recent and planned refinery investments