Crude Oil: Should export policy be liberalized?

Presented at:Conference of Western Attorneys GeneralEnergy Exports Summit

Jamie Webster

May 2015

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1st Tipping Point: return of Libyan production brought fundamentals back into focus

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Contango (upward sloping forward curve) indicates loose market

Backwardation (downward sloping forward curve) indicates tight market

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2nd Tipping Point: Saudi Arabia stepped back from being the market balancer to guard market share

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OPEC’s roll-over of production reflects a willingness to incur short-term pain to let market find the weak producers.

© 2015, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent. 4

US Crude Production Outlook

• Great Revival creating a surge of production reversing decades of decline• Most growth is Light Tight Oil (LTO, a light sweet crude quality).• Base case peak of 11.2 million B/D and Potential case peak of 14.3 million B/D

• Up from 9.2 million B/D currently and 5.0 million B/D in 2008

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1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Light Sour / Medium Sour Heavy Sour Condensate Light Sweet Potential Production / Free Trade Case

FIGURE 2.7US Crude Production by Crude Type

Source: IHS Energy, EIA © 2014 IHS

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Forecast Assumes Free Trade

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Trade Impacts

• Export of crude oil would significantly improve petroleum trade.• Average reduction of $67B and $93B for Base and Potential cases, respectively

• Enhanced energy security• Export trade destinations

• Europe (displacing Africa and Russia) • Asia (reduce Middle East production)

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Base Production Potential Production

FIGURE 1.2Reduction in US Net Petroleum Import Bill from Free Trade

IHS Energy © 2014 IHS

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Refining Constraint for LTO

Tier 1 – Displace light sweet crude imports

($2 – 4/Barrel)

($1 – 2/Barrel)

($0.5 – 1.0/Barrel)

($8 – 18+/Barrel)

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The system is stretching to accommodate

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What is the crude oil supply chain?

• A vast and interconnected network of labor, commodities, technologies, and information services

• Symbiotic relationship – supply chain has aided in technology and productivity gains

• Creates high multiplier affect

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Job gains are present in nearly every congressional district due in large part to supply chain

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Gasoline Price Response to Additional Production

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Gasoline Price

• US gasoline prices most directly influenced by global price.• Lower gasoline price as result of free trade (8-12 cents per gallon).• Diesel provides similar results.• Consumer fuel savings of $265-$418 billion over 2016-2030.

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Chicago - Rotterdam Chicago - Houston Chicago - NYH Chicago - LA Crude (WTI - Brent)

FIGURE 4.24Inland US Gasoline Price Differentials (12 Month Moving Average)

Source: Platts, IHS Energy © 2014 IHS

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Note: NYH = New York Harbor, LA = Los Angeles, WTI = West Texas Intermediate

© 2015, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Saudi production management

Saudi production management

Potential for a historic shift in oil market to a real free marketUS unconventional has features to allow this to occur

High oil prices

Low oil prices

Broad OPEC cutBroad OPEC cut

IEA stock release

IEA stock release

Demand increases/conventional production slowdown

Demand increases/conventional production slowdown

Demand decreases (OECD)

Demand decreases (OECD)

Global slowdownGlobal slowdown

Saudi production management

Saudi production management

IEA stock release

IEA stock release

Demand increases/conventional production slowdown

Demand increases/conventional production slowdown

Demand decreases (OECD?)

Demand decreases (OECD?)

Global slowdownGlobal slowdown

Broad OPEC cut

Broad OPEC cut

Shale oil production

change

Shale oil production

change

Shale oil more responsive to price than historic production

Shale oil more responsive to price than historic production

Current/historic oil market balancers

Future oil market balancers

Abandoned for nowAbandoned for now

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© 2015, IHS Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent. 13