panama canal expansion - makai marine...sources: eia, ca energy commission, company reports, makai...

Makai Marine Advisors LLC

Panama Canal ExpansionShipping Domestic Crude from the US Gulf to the USWC

04 February 2015

Crude-by-Water North America Conference

Houston, Texas

2Makai Marine Advisors LLC February 2015

Topics for discussion

• Motive -- Why move it?

• Means -- What would move it?

• Opportunity -- Will there be a chance to move it?


USWC Refiners &

Motivation for USG Crude


© 2015 Makai Marine Advisors, All Rights Reserved

After two years of stability, renewed declines in Alaskan crude

production leads PADD5 output lower

Sources: EIA, Makai Marine Advisors

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2003 2007 2011 2015F 2019F 2023F

mb

pd

Alaska

CA Offshore

CA Onshore

Other

2014-19 Change

-183 kbpd

-3.5% CAGR

PADD5 Crude Production

California

-64 kbpd

Alaska

-118 kbpd



Stable crude runs and declining regional production would boost

PADD5 crude import requirements

Sources: EIA, Makai

PADD5 Crude Runs by Source

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2003 2006 2009 2012 2015F 2018F 2021F

mb

pd

Non-Canadian Canada Alaska Calif Bakken



PADD5 refineries have the heaviest crude slate in the US, given

the quality of Californian crude production…

US Crude Intake Gravities by PADD PADD5 Average Gravities by Source

Sources: EIA, Makai Sources: EIA, Makai

22

24

26

28

30

32

34

36

2000 2003 2006 2009 2012 2015F 2018F 2021F

De

gre

es

AP

I

PADD1

PADD2

PADD3

PADD5

23

24

25

26

27

28

29

30

31

32

33

2000 2003 2006 2009 2012 2015F 2018F 2021FD

eg

ree

s A

PI

Imported Domestic Total Inputs

Bakken

Loss of

ANS



…but have the refinery configuration to deal with it, with highest

concentration of cokers in US, relative to distillation capacity

Coking Capacity as Pct of Atm Distillation Crude Assay Yields for Various Crudes

Sources: EIA, Makai Sources: Various, Makai

0% 5% 10% 15% 20% 25% 30% 35%

TX Gulf Coking

LA Gulf Coking

CA Coking

PADD4 Avg

PADD3 Avg

PADD2 Avg

PADD1 Avg

US Avg

WA

CA

PADD5 Avg

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ANS Kern R MWSS Syncrude Bakken EF CondT

BP

Yie

ld, V

olu

me

Pe

rce

nt

Resid HVGO Gasoil Kero Naphtha LPG



With lower coking capacity, Washington refineries feature a

lighter crude import slate than California

California Crude Imports by Grade Washington Crude Imports by Grade

Sources: EIA, Makai Sources: EIA, Makai

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1q02 1q04 1q06 1q08 1q10 1q12 1q14

mb

pd

Super Lt/Cond Light Sweet Light Sour Medium Heavy

0

50

100

150

200

250

300

350

1q02 1q04 1q06 1q08 1q10 1q12 1q14kb

pd

Super Lt/Cond Light Sweet Light Sour Medium Heavy



Expanded imports of AG and Latin American grades most likely

replacements for declining ANS and CA heavy production

Sources: EIA, Makai

PADD5 Crude Imports by Source

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2003 2006 2009 2012 2015F 2018F 2021F

mb

pd

FSU/Europe Africa

AG Latin Amer

Canada



Verdict: West Coast refiners seeking new crudes, but have limited

interest in surplus USG light crudes and condensates

• USWC refining system faces rising import requirements from declining production of ANS and California heavy crudes

• Eagle Ford condensate not a good match for California refining system, with heavy crude configuration and negligible naphtha demand

• Washington refineries run a lighter crude slate, but Bakken-by-rail a better match for refiners and regional demand

• California refineries can replace local heavy grades with Latin American, but need medium/sour replacement for ANS besides AG grades

• Possible interest in blending lighter USG grades with heavier crudes to mimic ANS

• Condensate processing might be favourable if surplus naphtha provides triangulation trade with Asian jet/diesel imports, once CA economy recovers and product deficits return


Panama Canal Expansion


New Panama Canal lock dimensions would allow all Aframaxes

and most Suezmaxes to transit physically

Source: ACP

12.04-metre draft has been a

constraint

15.2-metre draft remains a constraint for larger Afras

Current Beam32.3 metres

New Beam49.0 metres



Draft restrictions for new locks would imply deadfreight for all

Suezmaxes, but unlikely for normal Aframax/LR2 cargo sizes

Tanker Beam vs Deadweight Tanker Draft vs Deadweight

Sources: Clarksons, SeaWeb Sources: Clarksons, SeaWeb

25

30

35

40

45

50

55

60 80 100 120 140 160 180

Be

am

, me

tre

s

Vessel Size, kdwt

Existing

Newbuildings

Current Locks Restriction

New Locks Restriction

10

11

12

13

14

15

16

17

18

60 80 100 120 140 160 180

Dra

ft,

me

tre

sVessel Size, kdwt

Existing

Newbuildings

New Locks Restriction

Current Locks Restriction



Proposed Panama Canal tolls to charge tankers usual capacity

charge, plus a cargo carried charge, for new locks

Sources: ACP, Makai

Proposed Panama Canal Tolls by Vessel Size

0

50

100

150

200

250

300

350

50 70 90 110 130 150

Co

st, U

S$

00

0s

kdwt

Laden - Px Locks

Laden - NeoPx Locks

Ballast - Both

For vessels above 105kdwt, cargo size

reflects arrival draft below 15.2 metres

Panama Canal Universal Measurement System (PC/UMS)

based roughly on total vessel volume



New Panama Canal locks offer economies of scale for vessels up

to average Aframax size, then deadfreight limits gains

Sources: ACP, Makai

Proposed Panama Canal Tolls by Vessel Size, US$/tonne

1.00

1.50

2.00

2.50

3.00

3.50

4.00

50 70 90 110 130 150

Co

st, U

S$

/to

nn

e o

f C

arg

o

kdwt

Laden - Px Locks

Laden - NeoPx Locks



Deadfreight limits economies of scale

Deadfrieght for larger Panas hits unit costs


Jones Act Suspects



Deliv Deliv Age LOA Beam Draft

Vessel Name dwt Year Mo Yrs Shipyard m m m Owner Trade

ALASKAN EXPLORER 193,049 2005 3 9.9 NASSCO 287.25 50.00 18.75 Alaska Tanker (OSG/Keystone/BP) AK/USWC

ALASKAN FRONTIER 193,049 2004 8 10.5 NASSCO 287.25 50.00 18.75 Alaska Tanker (OSG/Keystone/BP) AK/USWC

ALASKAN LEGEND 193,048 2006 8 8.5 NASSCO 287.25 50.00 18.75 Alaska Tanker (OSG/Keystone/BP) AK/USWC

ALASKAN NAVIGATOR 193,048 2005 11 9.2 NASSCO 287.25 50.00 18.75 Alaska Tanker (OSG/Keystone/BP) AK/USWC

POLAR ADVENTURE 141,740 2004 9 10.4 Avondale 272.70 46.20 17.52 Polar (ConocoPhillips) AK/USWC

POLAR DISCOVERY 141,740 2003 9 11.4 Avondale 272.69 46.20 17.52 Polar (ConocoPhillips) AK/USWC

POLAR ENDEAVOUR 141,740 2001 4 13.8 Avondale 272.69 46.20 17.52 Polar (ConocoPhillips) AK/USWC

POLAR ENTERPRISE 141,740 2006 1 9.0 Avondale 272.70 46.20 17.52 Polar (ConocoPhillips) AK/USWC

POLAR RESOLUTION 141,740 2002 5 12.7 Avondale 272.69 46.15 17.52 Polar (ConocoPhillips) AK/USWC

EAGLE FORD (ex-KODIAK) 124,644 1978 5 36.7 Sun Shipbuilding 264.88 41.46 16.77 Seacor/Access (ex-XOM) USG

SIERRA 125,133 1979 1 36.0 Sun Shipbuilding 264.88 41.46 16.76 Keystone (ex-XOM) AK/USWC →USG

LIBERTY BAY 115,000 2014 6 0.6 Aker Philadelphia 251.10 43.80 15.00 ExxonMobil AK/USWC

EAGLE BAY 115,000 2015 1 0.0 Aker Philadelphia 251.10 43.80 15.00 ExxonMobil AK/USWC

Nine of the large Jones Act vessels could transit the new Panama

Canal locks, but seven would face significant deadfreight

Sources: SeaWeb, Alaska Tanker, ConocoPhillips



Higher vessel volume for larger Jones Act vessels would boost

canal costs versus typical fleet dimensions

Sources: ACP, Makai

Proposed Panama Canal Tolls by Vessel Size

0

50

100

150

200

250

300

350

400

50 70 90 110 130 150

Co

st, U

S$

00

0s

kdwt

Laden - Px Locks

Laden - NeoPx Locks

Ballast - Both



Polar

Tankers

Sierra,

Kodiak

XOM Liberty

Class



1.00

1.50

2.00

2.50

3.00

3.50

4.00

50 70 90 110 130 150

Co

st, U

S$

/to

nn

e o

f C

arg

o

kdwt

Laden - Px Locks

Laden - NeoPx Locks

Combined with higher canal capacity charges, deadfreight

producing substantial unit costs for Jones Act vessels

Sources: ACP, Makai

Proposed Panama Canal Tolls by Vessel Size, US$/tonne

Polar

Tankers

Sierra,

Kodiak

XOM Liberty

Class




Opportunity:

Potential for USG crude

movement to USWC



Declining ANS production and distribution to USWC refineries to

provide 33% drop in tonne-mile demand for Alaska fleet by 2019

Sources: EIA, CA Energy Commission, Company Reports, Makai

ANS Tonne-mile Demand, by Destination

0

10

20

30

40

50

60

70

2003 2006 2009 2012 2015F 2018F 2021F

To

nn

e-m

ile

s b

illion

s

Calif

Wash

Hawaii

2014-19 Change

-7.6% CAGR

Bakken to WA

pushes ANS to CA



Sliding ANS tonne-mile demand would allow release of 300 kdwt

from the Alaska fleet by 2021, under constant utilisation

Sources: EIA, CA Energy Commission, Company Reports, Makai

ANS Tonne-mile Supply & Demand

Supply under

constant

utilisation

0

2

4

6

8

10

12

14

16

1q12 1q14 1q16F 1q18F 1q20F

To

nn

e-m

ile

s b

illion

s

Hawaii Wash

Calif Capacity



Surplus tonnage on Alaska/USWC trade could potentially move

40-50 kbpd of USG crude to West Coast refiners

Sources: Makai

Potential USG/USWC Movements, kbpd

0

10

20

30

40

50

60

70

80

90

1q15F 1q17F 1q19F 1q21F

kb

pd

Quarterly

4-qtr Mov Avg



Polar Sierra XOM Aker

Age, years 11.5 30.5 0.5

FOC Vessel Value, US$ millions 38.0 N/A 57.0

Vessel Value, $US millions 133.0 33.3 200.0

Scrap Age, years 35 40 35

ROIC 9.00% 9.00% 9.00%

Current Opex, US$/day 32,200 40,300 28,500

Breakeven TCE, US$/day 76,000 72,000 90,800

Jones Act tonnage could deliver USG crude and condensate to

USWC refiners for $5/bbl

Valuation & Cost Assumptions Indicative Freight Costs, US$/bbl

Source: Makai Source: Makai

0

1

2

3

4

5

6

7

8

USG/WA USG/SF USG/LA

US

$/b

bl

Polar 141 kdwt Sierra 125 kdwt Aker 115kdwt FOC Afra



Jones Act freight costs for USG/USWC crude trade would exceed

typical spreads between ANS and USG light marker grades

Sources: Bloomberg, Platts, Argus, Makai

ANS Premium/(Discount) to LLS St. James, Weekly

-20

-15

-10

-5

0

5

10

Dec-08 Dec-10 Dec-12 Dec-14

US

$/b

bl

ANS-LLS Weekly

13-week Mov Avg

Future Freight Costs using

Jones Act Vessels


Kinder Morgan resurrecting Freedom Pipeline, with new focus on

delivering ANS-like crude mix preferred by USWC refiners

Source: Kinder Makai

• First attempt cancelled in May13 on lack of shipper interest -- Bakken-by-rail preference and

limited appeal for light Permian Basin grades

• Delays in crude-by-rail permitting sparking increased shipper interest in 250 kbpd line

• Includes plans for 150 kbpd topping unit to remove lights ends

• 200 kbpd blended crude mimicking ANS• 100 kbpd condensate for export

Topping

Unit

Potential Tariff

$5/bbl



Conclusions

• USWC refiners need replacements for declining ANS and California heavy crude

• USG light crude and condensates not their first choice

• Panama Canal expansion will allow Suezmaxes to transit with deadfreight, but Aframax becomes optimal size for new locks

• Nine of larger Jones Act vessels could transit the new Panama Canal locks, but most would face significant deadfreight

- ExxonMobil’s new Aframaxes would be optimal, but unclear if any surplus capacity- High vessel volumes relative to typical dimensions, boosts Panama Canal costs for

larger Jones Act candidates

• Demand for Alaska/USWC fleet would drop 33% by 2019, potentially releasing 300 kdwt, that could move 40-50 kbpd from USG to USWC

• Jones Act cost structure and higher Panama Canal costs would make it difficult for USG/USWC movements to overcome ANS/LLS differentials



Disclaimer

This memorandum is for informational purposes and is not intended as an offer or solicitation with

respect to the purchase or sale of any security. This report and the information contained herein may

not be reproduced or redistributed, in whole or in part, without the written permission of Makai Marine

Advisors LLC (Makai). Although the statements of fact have been obtained from and are based upon

sources Makai believes reliable, we do not guarantee their accuracy, and any such information may be

incomplete. All opinions and estimates included in this report are subject to change without notice.

Makai, its affiliates and their respective officers, directors, members and employees, including persons

involved in the preparation of this memorandum, may from time to time maintain may act in the

capacity as advisor(s) of companies mentioned in this memorandum. Neither Makai nor any officer or

employee of Makai, or any affiliate thereof, accepts any liability whatsoever for any direct, indirect or

consequential damages or losses arising from any use of this memorandum or its contents.



Contact Information

Makai Marine Advisors LLC

5200 Martel Avenue

Dallas, Texas 75206

US Mobile +1 914 218 7579

UK Mobile +44 7976 738 794

[email protected]

www.makaimarine.com

Twitter: @MakaiMarine
http://www.makaimarine.com/

panama canal expansion - makai marine...sources: eia, ca energy commission, company reports, makai...

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