Refining Trends and Outlook

2020 TXOGA Property Tax Conference

Karl Bartholomew, PE, ASA, MRICSManager, US Property TaxShell Oil Company

1February 2020

Agenda

▪ Matters impacting Refining & Petrochemicals

▪ Refining Deals & Opportunities

Any views and opinions expressed in this presentation are the sole views and opinions of the presenter and do

not any way represent the views or the opinions of Shell Oil Company or any of its affiliates.

2February 2020

The storyboard is as important as the numbers

Matters Impacting Refining

1February 2020 3

What do you think most impacted refining & chemicals in 2019?

▪ Price of oil

▪ Global economy (supply & demand)

▪ Renewable fuels standard

▪ Electric vehicles

▪ IMO (bunker fuel spec)

February 2020 4

Oil Price History

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160

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-01

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7

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-19

$/ba

rrel

Global, U.S. marker prices for oil

WTI

Brent

February 2020 5Source: EIA

◼ Global financial crisis

◼ The Rise of Shale

Major crude fields - 2010

February 2020 6

Source: 2011 ENI

World Oil & Gas

Urals

Maya

Major crude fields – 2018

February 2020 7

Source: 2018 ENI

World Oil & Gas

Urals

Maya

Major crude oil production changes by country2010-2017

February 2020 8

(2,000,000)

(1,000,000)

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

Barr

els

per

Cale

ndar

Day

Source: EIA International Energy Statistics

Major crude oil production changes by country2010-2018

February 2020 9

(2,000,000)

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

Barr

els

per

Cale

ndar

Day

Source: EIA International Energy Statistics

US Shale oil productionSource: EIA

10February 2020

0

1,000,000

2,000,000

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Barr

els

per

Cale

ndar

Day

Anadarko Appalachia Bakken Eagle Ford Haynesville Niobrara Permian

US Shale gas productionSource: EIA

0

10,000,000

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Thou

sand

Cub

ic F

eet p

er C

alen

dar

Day

Anadarko Appalachia Bakken Eagle Ford Haynesville Niobrara Permian

11February 2020

Global oil demandSource: BP Statistical Review of World Energy 2019

0

10,000,000

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40,000,000

50,000,000

60,000,000

70,000,000

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Barr

els

Per

Cale

ndar

Day

By Region

North America So. & Cent. America Europe & Eurasia Middle East Africa Asia Pacific

February 2020 12

What crude price do you think we’ll see next year?

February 2020 13

Jan Feb1Q 65.98 58.59 2Q 63.38 57.69 3Q 65.00 63.62 4Q 65.00 65.00

Average 64.83 61.25

AEO Long-Term Oil OutlookSource: EIA

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Wes

t Tex

as In

term

edia

te n

omin

al $

/bar

rel

AEO 2015 AEO 2020

February 2020 14

Operating RefineriesSource: EIA

February 2020 15

0

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1982

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Idled

Refineries

Operating

Refineries

18.7 MMBPD

132

3

15.7 MMBPD

254

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U.S. Refining CapacitySource: EIA

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2,000,000

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

% U

tiliz

atio

n O

pera

ble

Capa

city

Barr

els

Per

Cale

ndar

Day

US Operable Capacity US % Utilization TX GC % Utilization

February 2020 16

US net import/export balance crude & productSource: EIA

-2,000,000

0

2,000,000

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Barr

els

per

Cale

ndar

Day

17February 2020

November 2019

Propane 1.2 MMBPD

Gasoline 1.04 MMBPD

Diesel/Jet 1.14 MMBPD

Crude 3.02 MMBPD

US net import/export balance – looking out to 2030Source: EIA AEO 2020

-6,000,000

-4,000,000

-2,000,000

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000Ja

n-20

00

Jan-

2001

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Barr

els

per

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ndar

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18February 2020

Diesel & Resid exports double

Crude exports ~ 3MMBPD

Coronavirus

February 2020 19

Renewables (Ethanol RINs)Source: Valero investor website

0

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Cent

s pe

r G

allo

n

February 2020 20

What about Electric Vehicles (EV)?Source: Wall Street Journal

February 2020 21

AEO – Light Vehicle Sales by FuelSource: EIA AEO 2020

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Mill

ion

Vehi

cles

Sol

d

Gasoline Flex-fuel Diesel Battery EV Hybrid EV Other Plug in Hybrid EV

February 2020 22

Charging stations!!!!

February 2020 23

The real reason I have hope for EVs

February 2020 24

How about the IMO low sulfur fuel standard?

▪ IMO – International Maritime Organization

▪ Starting January 1, 2020, no more high sulfur fuel oil can be sold as bunker fuel

▪Compliance will be met by:

▪ Lighter crude slate

▪More resid destruction (cokers)

▪Marine diesel

▪Onboard ship scrubbers

▪Cheat

February 2020 25

Maya Crude Pricing Change

▪ Old formula was 40% (West Texas Sour + 3% HSFO) + 10% (LLS + Brent dated) + K factor

▪ New formula is 65% (Argus WTI Houston) + 35% (ICE Brent) + new K factor

▪ Why the change – IMO – move away from a large fuel oil component of the price formula

▪ If new formula had been in place in October 2019, Maya would have been price $5.63/barrel higher

▪ October K factor = 3.75

▪ January 2020 K factor = (8.00)

▪ This means market will have to adjust to a new metric for heavy oil economics

February 2020 26

Scrubbers have become more economic

February 2020 27

In case you thought the last option wasn’t real…

February 2020 28

Refining Economic IndicatorsSource: Company filings, SEC

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35.00

(2.00)

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12.0020

10 Q

1

2010

Q4

2011

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2

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Q1

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Q4

WTI

3-2

-1 M

argi

n $/

barr

el

Earn

ings

Indi

cato

r $/

barr

el

Earnings Indicator WTI 3-2-1

February 2020 29

What to say about refining in 2019?

February 2020 30

Steam cracker light feed advantage

(10)

(5)

0

5

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Cent

s pe

r po

und

mar

gin

(Ethane - Nap) Ethane Naphtha

February 2020 31

Steam cracker light feed advantage (continued)Source: ICIS Dashboard

(15.00)

(10.00)

(5.00)

-

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10.00

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35.00

8/2/2019 9/2/2019 10/2/2019 11/2/2019 12/2/2019 1/2/2020Feed

stoc

k Va

riabl

e M

argi

n ¢/

lb

Ethane LPG Naphtha

February 2020 32

Chemicals Economic IndicatorsSource: Company filings, SEC

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10 Q

1

2010

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2011

Q3

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Q2

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Q1

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7 Q

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Q1

2019

Q4

Ethy

lene

, ¢/l

b.

Earn

ings

Indi

cato

r ¢/

lb.

Earnings Indicator Spot Ethylene

February 2020 33

More capacity, more cost

February 2020 34

What to say about basic petrochemicals in 2019?

February 2020 35

Let’s build some more crackers!

Refining Deals and Opportunities

436February 2020

PBF - Martinez, CA

February 2020 37

Refinery Transactions

Year Location Buyer Est. FMV $MM2015 Chalmette PBF 3052016 Torrance PBF 1582016 Newcastle PAR Pacific 1142016 Dickinson Tesoro 662017 Superior Husky 4352018 Tacoma PAR Pacific ~150-1752019 Pasadena Chevron ~245-2502020 Martinez PBF 960

February 2020 38

U.S. refinery sales - % RCN

February 2020 39

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

% R

epla

cem

ent C

ost N

ew

Inland Coastal

PBF Martinez

Chevron - Pasadena

PAR Pacific - Tacoma

U.S. refinery sales - $/complexity barrel

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200

400

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800

1,000

1,200

1,400

1,600

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2,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

$ pe

r co

mpl

exity

bar

rel

Inland Coastal

February 2020 40

PBF - Martinez

Chevron - Pasadena

PAR Pacific - Tacoma

U.S. refinery sales – statistical analysis

0

200

400

600

800

1,000

1,200

2012 2013 2014 2015 2016 2017 2018 2019 2020

$ pe

r co

mpl

exity

bar

rel

Actual Correlation

February 2020 41

PBF - Martinez

Chevron - Pasadena

PAR Pacific - Tacoma

Husky - Superior

Tesoro - DicksonPAR Pacific - Newcastle

Marathon – Texas City

Northern Tier – St. Paul Park

Tesoro – Carson

PAR Pacific - Hawaii

PBF - Chalmette

PAR Pacific - Newcastle

How many refineries (allegedly) may be on the market?

▪ 2

▪ 4

▪ 6

▪ 8

▪ 10

▪ From published reports, many reasons why they are on the block: shareholder pressure; divest non-core assets;

regional refining economics; not disclosed

February 2020 42

◼ 1. PES Philadelphia (Hilco announced as winner, but may be in litigation)

◼ 2. Delta Trainer

◼ 3. CVR Coffeyville

◼ 4. CVR Wynnewood

◼ 5. ExxonMobil Billings

◼ 6. Marathon Salt Lake City

◼ 7. Marathon Kenai

◼ 8. Shell Puget Sound

To wrap it up

▪ Refining

▪ Expected market drivers didn’t move the market (IMO)

▪ So far 2020 isn’t trending any different

▪ Refineries on the block

▪ Coronavirus large short-term impact

▪ Chemicals

▪ Expected overbuild of basic petrochemicals (crackers, plastics) has occurred

▪ 2019 earnings reflect this

▪ More capacity expected 2021-2025

▪ Puts pressure on poor performing sites – do they rationalize or not?

February 2020 43

Questions and answers

44February 2020