USA’s future as a naphtha exporter.

1. USA’s future as a naphtha exporter. George Gale Naphtha Information Services Austin, November 2011 NIS

2. US refiners already make too much virgin naphtha. • Reformers run lightly loaded. • Hydrogen, more than octane, now drives many reformers. • Cokers and hydrocrackers supply good reformer feedstock. • The more refiners water their motor fuel with ethanol, the less pure gasoline they make. • They still want to run cat crackers. • So they have less room for LVN and isomerate in the pool. • Where they have the option, many refiners sell naphtha. • Not long ago refineries ran for maximum gasoline. • Now, Gulf coast refiners export naphthenic naphtha and sell paraffinic to ethylene producers. • Inland, refiners can’t sell much naphtha. • Some of them would like to run naphtha-poor crude oil. • In the mid-continent, Southern Lights lets them recycle the naphtha arriving in Canadian crude. • And we haven’t mentioned the increased C5+ from gas plants.

3. Meanwhile, light stuff takes aim at USA’s Gulf coast. • Western Canada crude: cut to pipeline viscosity with naphtha. • A Midwest reality today. • A Gulf coast problem tomorrow? • Upper Midwest shale oil: rich in naphtha, bound for refineries now running WTI. • On the rails today. • In pipelines tomorrow? • Cushing pipelines: escape routes for light inland crude. • To inland refineries today. • To Gulf coast refining centers tomorrow. • Texas shale-gas natural gasoline: • Not big like ethane. • Not eagerly awaited. • Texas shale condensate: • Component of light crude blends bound for Corpus, Houston, and Port Arthur. • Reaching Texas steam crackers. • Texas shale oil: • Abundant, before long. • Practically on the coast. • High in naphtha content. • Coming soon from a pipeline near you.

4. Shale crude and condensate change the refining slate.

5. USA has become a refined products exporting nation.

6. Trends in US refining favor naphtha sales. *Jan–Sep

7. Mogas make slides faster than demand.

8. USG gasoline can’t reach domestic sales opportunities. • US refining consolidation raises call on USG mogas less than you’d think. • Pipeline capacity limits access to the northeast. • Emphasizing M-grade through Colonial would benefit European, not USG, naphtha. • Canadian and US inland crude helps PADD 2 refinery margins. • Diluent in Canadian crude, and northern-tier shale plays give the Midwest its own urge to maximize mogas production. 2H ‘12 assumes Marcus Hook, Philadelphia, and Trainer don’t run.

9. USA’s ethylene industry prefers light feedstocks. • Steam cracking promises very little additional naphtha demand. • Ethane cracking makes the most money. • Even in a year when propylene and butadiene got tight, heavy feed cracking declined. • Naphtha cracking probably won’t decline much more. • But nothing realistic favors a big increase in heavy feed cracking, or naphtha cracking, any time soon.

10. Local refinery naphtha wins USG cracker-feed sales. • Refineries support local naphtha cracking as: • Diluent claims domestic and imported C5+. • Foreign cargo supply comes and goes. • The small number of heavy crackers do maintenance. • Cracking companies can get good volume locally. • They’ve bought a cargo’s worth of barge naphtha in one day. • Companies relax specs to take advantage of local barge supply.

11. Other places’ prices gain strength against US Gulf’s.

12. US Gulf naphtha slips toward export-point pricing.

13. So, where could excess US Gulf naphtha go? • It can’t easily go to other parts of USA. • The mid-continent has a more than enough naphtha of its own. • How could Gulf coast naphtha reach the Atlantic coast? • It already goes to neighboring countries in North America. • Canada takes US diluent and will take more, at the right price. • Mexico takes heavy in BTX feed blends. • In the short run, South America could take some cargoes. • Occasionally, shipments go to Brazil. • Colombia imports from Mexico. Why not from Texas, too? • Realistically, the South America opportunity can’t last. • Growing US supply will block imports. Displaced South American exports will take South American outlets. • New refineries will reduce Brazil’s imports by mid-decade. • US cargoes will inevitably go to Asia.

14. Diluent emerges as an important naphtha use. • Canada began importing naphtha to dilute western oil sands crude a decade ago. The first foreign supply travelled by railcar from USA. In ‘06, a terminal opened in British Columbia to receive shipments by tanker. In ‘10, Southern Lights pipeline started carrying diluent north from USA’s Midwest. • Colombia started importing significant amounts of naphtha for diluting heavy crude in ‘08. In ‘09, the requirement increased when Ecopetrol completed a pipeline linking inland oil fields to the coast. When ‘11 began, Colombia imported about three cargoes per month. By this past Summer, the requirement reached four to five per month. By early ’12, it should reach five to six. • Even Venezuela imports naphtha to dilute heavy crude. Just recently, PDV tendered to buy HVN, supposedly to replenish a pool of naphtha constantly used as diluent and recycled. But suspicion has arisen that equipment in the heavy crude treatment or recycling systems has failed. If a break-down has occurred, imports might continue.

15. Canadian imports will grow, and might help USG. • Canadian diluent imports depend on: • Oil sands crude production. • Expanding Canadian crude transportation facilities. • Local light oil production. • The opportunity for US Gulf naphtha depends on: • US mid-continent exports (fresh and recycle). • Competing with seaborne naphtha. • Alberta producers should complete several oil sands projects: • 148 kb/d in ‘11 (Diluent requirement* at maturity: 49 kb/d) • 190 kb/d in ‘12 (Diluent requirement* at maturity: 63 kb/d) • 125 kb/d in ‘13 (Diluent requirement* at maturity: 42 kb/d) *at CAPP’s standard annual average 1:3 dilution ratio. • No new upgraders – which means no new synthetic diluent. • But how quickly can Canada develop evacuation routes for 615 kb/d of diluted heavy crude?

16. Brazil has a motor fuel problem. Ethanol as mogas-equivalent

17. Brazil imports naphtha to solve its mogas problem. • Brazil would have a naphtha deficit even if its refineries and sugar cane mills could meet motor fuel demand. • But Petrobras should finish building 300 kb/d of new refining capacity in ‘13 (Sao Luis) and another 165 kb/d in ’14 (Rio).

18. South America goes short. • Until ‘10, South America exported more naphtha than it imported. • Restarting Curaçao barely kept Venezuela exports from shrinking. • Pacific-side South America reduces exports. • The Caribbean Islands don’t offer much any longer. • Brazil’s imports surged and remain well above the pre-’10 level. • Colombia’s diluent imports rise steadily as heavy crude production increases.

19. Signs of changing times appear on the Gulf coast. • Mexico now sends more naphtha to South America than to USA and Canada. • Mexico has supplied more of Colombia’s diluent requirement than any other country in recent months. • Mexico has captured some of Brazil’s business, too. • The US Gulf coast exports occasionally. • Cargoes have gone to Asia from time to time. • Gulf coast naphtha has gone to South America and USVI. • Lack of facilities for assembling cargo-lots has prevented exports to Europe on a number of occasions in ‘11. • Over the next year, Gulf coast refiners will want to sell more and more naphtha. As their availabilities surpass local demand, they’ll look for opportunities to send supply overseas. • Growing availabilities already influence demand for imports. When Gulf coast suppliers can’t get rid of their excess production by fending off imports, they’ll export in earnest.