Overview of Midstream and Downstream:
Highlighting Current Events and Their
Impact on the Back Office
Patrick Long and Steve Roberts
May 2014
Did You Know…
…the 42 gallon barrel originated with John D. Rockefeller?
Some oil was spilled during one of his early shipments. The
result was 50 gallons a barrel now being 42…
Agenda






Introduction to Opportune Process & Technology
Downstream Overview
Crude Origin
Logistics
Refining
Final Thoughts
Introduction to Opportune
Opportune
at a glance
Opportune is a leading energy consulting firm, serving clients
throughout North America and Europe from offices in Houston, Denver,
and London.
We are unique in that we have the deep energy expertise of a large firm,
but the nimbleness of a smaller firm.
We bring heavily experienced teams to deliver value to our clients in
addressing complex strategic, transaction, process and technology
issues.
Practice Areas
Energy Segments
•
•
•
•
•
•
•
•
•
•
•
Process and Technology
Corporate finance
Complex financial reporting
Strategy and organization
Restructuring & Bankruptcy
Strategic Tax
Energy trading and risk management
Upstream oil & gas
Refining & marketing
Power generation
Transport/distribution and storage
How Downstream Fits Into Oil Production
UPSTREAM
MIDSTREAM
DOWNSTREAM
Downstream’s Role Within the Industry
Representative Companies
Upstream
Midstream
Integrated Oils
Downstream
Energy is in the News
Senate Asks EIA to Study Crude Oil Export
7
North American Unconventional Basins
Crude Origin


Crude at the Wellhead

Almost no value without the ability to get it to market

First Purchaser usually makes initial logistical move towards liquid market

Small pipeline gathering system or limited well-site storage and truck transport to pipeline or
storage
Complexities

Geographically dispersed supply

Divisions of interest

Economics of transportation

Leased Crude
Crude Origin
The increase in drilling technology has outpaced the industry’s ability to absorb the
change efficiently.
Complexities / Challenges
•
•
•
Leased Crude
Limited infrastructure to support boom
Health and safety uncertainty around
methods of drilling (e.g., fracking debate)
•
•
•
•
Inventory tracking and reconciliation
New Suppliers with Limited Credit History
New Logistical Processes (Transloading)
New crude types
Current Events
•
•
Shale boom has generated production in new regions
Fracking technologies have generated increased production in existing regions
Crude Origin – Accounting Impacts
New crude sources have created opportunities for many new companies to emerge
almost overnight in this space.
Accounting Impacts
•
•
•
•
Boom has created new companies to support the value chain, many of which are focused on operations
and have limited accounting capabilities
Secondary costs are often “invisible” to commercial deal teams, and only reveal themselves during
actual transactional flow
Significant transactional volume for royalty, tax, and other associated payments
Increased regulatory reporting requirements (permitting, first purchaser reports)
Crude Logistics
Two primary modes of logistics from initial gathering to market:
Bulk
Non-Bulk
Complexities / Challenges
•
•
Pipelines have limited and fixed operating
locations and throughput
Vessels / barges are limited by access
•
•
Trucks have flexible operating locations, but
high costs and limited per truck volume
Rail has wide operating range, similar
capacity to barge
Current Events
•
•
New oil production onshore has outpaced
the available pipeline capacity in the region
Cyclical swings in marine utilization has
current costs very high
•
•
Wellhead gathering demand has driven up
truck costs
High profile rail incidents have increased
scrutiny on operations
Crude Logistics – Accounting Impacts
Two primary modes of logistics from initial gathering to market:
Bulk
Non-Bulk
Accounting Impacts
•
•
Most pipelines very automated and provide
volumetric and invoice integration, but work on a
monthly cycle
Marine movements have numerous line item costs,
events to manage, and mode of transport is
highly paper based
•
•
Limited tank car capacity leads to high number
of transactions for equivalent volume of crude
(vs bulk)
Crude by rail is relatively new in industry, and
organizations are slow to evolve processes to
support the transactions
Rail is in the News
Oregon oil train shipments increased 250% in 2013
14
Rail Specific Complexities…in Accounting
Crude rail creates many complexities not typically seen with other modes of
bulk transportation…they all have accounting implications!
• Destination Offloading Costs
• Cleaning
• Track Repair
• Yard Fees
• Hydrocarbon Pricing, Costs,
Commercial Terms
• Transloading Costs
• Inspections
• Railcar Leases and Riders
• Car Location Messages (CLM): Locations,
Sight Codes, Dates / Times, Destinations,
Railroads, ETA’s
• Freight Costs
• Fuel Surcharge
• Customs Charges
• Equipment Surcharge
Crude Types Around the World
Different regions of the world have different crude types...
Light
High 40
Bakken
Libyan
USA WTI
35
Ural
Arab Light
North Sea Brent
Dubai
Arab Medium
30
25
20
API
Gravity
(API)
Arab Heavy
Nigerian Forecados
Alaskan
Venezuelan BCF-17
North
Slope
Mexican Maya
Venezuelan Pilon
15
Indonesian Duri
10
5
Heavy
Low
0
0
0.5
1
1.5
2
2.5
3
3.5
High
Sweet
Sulfur (%)
Sour
Crude Properties
Light or heavy designation depends on the average molecular
weight of the crude oil.


Heavy oils are high in either tar (asphaltic) compounds, polyaromatics, or
both.
Light oils are high in low molecular weight compounds, like small alkanes. Light
crude is easier to process which brings a higher price.
Sweet or sour depends on the sulfur content.

Sweet crudes have a low sulfur content.

Sour crudes have a high sulfur content.

Sweet crude is easier to process which brings a higher price.
Converting Crude to Refined Product
Refineries convert crude oil into finished (refined) products
Oil Refinery
Processes
• Separation
• Conversion
• Blending
• Treatment
With Assistance of
• Heat
• Pressure
• Catalysts
• Additives
What Goes Into the Cost of Gasoline?
Refinery Types and Crude Optionality
Every refinery is different in terms of what
units it has and how big each unit is.
Major groups: margin vs investment

Topping plant

Cracking plants

Coking plants
Determined by crudes to be run and products
to be produced

Far East: run light crude to produce distillates

West Coast: run heavy crude to make gasoline

Rocky Mountain: limited crude access

East Coast: must produce home heating oil
Crude Conversion Happens in Different Ways
Hydrocraking

Breaks up the next heavies components using hydrogen /
catalysts
Fluidized Catalytic Cracking (FCC)

Breaks up diesel quality components using catalysts
Alkylation

Combines light ends from crude tower with by products
from FCC
Refining Current Events


North American domestic oil production has increased, adding to
the crude optionality for refineries
In US, Jones Act restricts export of domestically produced crude


Anything that is processed can be exported, leading to new construction of
splitters that run crude through a single process then export the refined
products
Global political instability has a constant impact on crude and
refined product markets
Accounting Impacts


Numerous sources of crude coming into refinery must be tracked
and measured
Changing economic landscape is bringing new counterparties with
which to transact

Inventory Reconciliation

Yield Accounting

Production or increased supply from new areas brings new
locations

Master Reference Data impact

Potential new tax implications

New points at which to hold inventory
Final Thoughts

Transaction Processing and Scaling Organization and Processes to
Support

Focus on larger trends and analysis

Health Checks to catch issues early

(Over) Communicate with the Business
Appendix
PADD: Petroleum Administration for Defense Districts
Source: eia.gov
Key Numbers and Stats to Remember
Gallons of Oil per Barrel
Barrels of Oil per Metric Ton (U.S.)
U.S. Petroleum Consumption
Dependence on Net Petroleum Imports
42
7.33
18.5 million barrels/day
45.6%
Motor Gasoline Retail Prices U.S. City Average
$3.41/gallon
Regular Grade Motor Gasoline Retail Prices U.S. City Average (2011)
$3.32/gallon
Premium Motor Gasoline Retail Prices U.S. City Average
$3.68/gallon
Federal Motor Gasoline Tax
U.S. Motor Gasoline Consumption
Share of US Oil Consumption for Transportation
U.S. Average Home Heating Oil Price
Number of U.S. Operable Petroleum Refineries
Largest U.S. Refinery by Capacity – Port Arthur, TX (Motiva)
Top U.S. Petroleum Refining States - Texas
18.3 cents/gallon
9,120,000 barrels/day (383
million gallons/day)
69%
$4.23/gallon (excluding taxes)
148
600,000 barrels/day
4,717,199 barrels/day
Did You Know…
…U.S. oil demand in 2013 was 18.5 million barrels per day?
…every day the US consumes enough oil to cover a football
field with a column of oil 2500 feet tall? That's 121 million
cubic feet.
… the current U.S. refining capacity is 16.1 Million BPD
What to Know About Gas Prices
As this year’s driving season begins, gas prices this week reached a
nationwide average of $3.17 per gallon, four cents per gallon higher than
the previous record set last year.
The media stories are increasing, and as friends and family start to ask
about gas prices, it’s important to understand the facts about what goes
into the price at the pump:

Crude price drives the price of gasoline

Gasoline is a global product

Taxes take a toll

Consumers are in control
What Are the Most Common Refined Products?
Refined Product
Application
Specifications
Gasoline
Transportation
Octane, Vapor Pressure, Oxygen
& Sulfur
Jet Fuel
Power Generation &
Transportation
Freeze, Flash & Smoke Points
Diesel Fuel
Power Generation &
Transportation
Sulfur, Cetane Index, Viscosity &
Pour Point
Home Heating Oil
Heating
Sulfur, Viscosity & Pour Point
Residual Fuel Oil
Industrial Uses, Power Generation
Sulfur, Viscosity & Pour Point
& Transportation
Others – LPG,
Lubricants,
Heating, Industrial Uses,
Naphtahs, Greases,
Transportation & Petrochemicals
Asphalt, Coke &
Waxes
Measuring Crude Oil Using Density and Gravity
The lighter the crude, the more desirable the components it naturally
contains are.

Measured in degrees API

Light crude > 30 API / Heavy crude < 30 API

EX: Roofing Tar = 8 API; Motor Oil = 40 API
Quality and Price of Various Marker Crudes
Gravity
Sulfur
Price
WTI
39.6
0.24%
$100.32
Brent
38.3
0.37%
$111.30
ANS
30.0
1.09%
$110.46
Maya
21.8
3.33%
$107.05
Classifying Refineries by Major Processes
When looking at an oil refinery from a technical perspective items are the
most relevant.


Complexity - an oil refinery’s ability to process feedstocks, such as heavier
and higher sulfur content crude oils, into value-added products. Generally, the
higher the complexity and more flexible the feedstock slate, the better
positioned the refinery is to take advantage of the more cost effective crude
oils. The result is incremental gross margin opportunities for the refinery.
Capacity – is a measurement of how much crude oil can be processed on a
daily basis. The measurement is determined based on the standard crude
slate that is run through the refinery. By adjusting the crude slates, there is
the ability to slightly adjust the maximum amount that a refinery can run on a
daily basis.
Distillation: A Boiling Process
Crude oil boils at a number of temperatures…
Crude oil boils at
150
1000
450
750
900
Crude Oil Distillation Curve and Its Fractions
900
RESIDUE
150o…
450o…
750o…
900o...
Each type of crude has a
unique distillation curve
that characterizes the
kinds of chemical
compounds in that crude
BOILING TEMPERATURE of
800
GAS-OIL
CAT PLANT
FEED
700
600
500
KEROSENE
400
HEAVY
NAPHTHA
300
200
LIGHT
NAPHTHA
100
0
BUTANES &
LIGHTER
10
20
30
40
50
60
CUMULATIVE PERCENT VOLUME
Petroleum Refining: Leffler
70
80
90
100
Major Components of Distillation: Crude Tower






Vaporizes crude oil
Separates components
Sends lighter gas to top
Settles heavier liquid to bottom
Directs components to other
processes
Keeps chemical nature the same
Major Components of Distillation: Vacuum Tower






Receives heavier crude from the
crude tower
Heats crude again
Distills under a vacuum to prevent
decomposition
Distills lighter vapor into gas oil
Sends heavier crude to coker unit
Produces Fuel Oil
Major Components of Distillation: Summary

The outputs of these two units are
sent throughout the refinery, either as
finished products or components that
need more refining

Going from lightest to heaviest
distilled component, natural gas (or
methane) comes first

Methane is used as fuel in the
refinery
Major Components of Conversion: Delayed Coker





Receives heavy crude from the
vacuum tower
Breaks up the heaviest
components with high temperature
and pressure
Makes heavy components lighter
Sends some components for
further processing
Produces solid industrial fuel
called coke
Improving Octane Through Conversion
Low Octane – Molecules in straight line
Higher Octane – Molecules in shape or branch
Two processes for reshaping molecules
Reforming
Isomerization
Forms a ring of molecules
Rearranges molecules geometrically
De-sulfurization: Getting It Out
Removes sulfur using catalysts and
pressurized hydrogen

Low pressure – 600 to 800 psi (reduces sulfur
to 500 ppm)

Medium pressure – 800 to 1,200 psi (reduces
sulfur to 50 ppm)

High pressure – 1,200 to 1,800 psi (reduces
sulfur to 5 ppm)
Gasoline Blending: Getting the Right Mix
Mixes components from:




Crude / vacuum tower
Hydrocracker
FCC
Alkylation
And creates products with specifics, desired characteristics



Regular
Premium
Aviation gasoline
Top 10 List: Largest Global Refineries
Rank Company
Location
Crude Capacity (b/cd)
1
Paraguana Refining
Center
Cardon/Judibana, Falcon,
Venezuela
940,000
2
SK Corp.
Ulsan, South Korea
817,000
3
GS Caltex Corp.
Yeosu, South Korea
750,000
4
Reliance Petroleum Ltd.
Jamnagar, India
660,000
5
ExxonMobil Refining &
Supply Co.
Jurong/Pulau Ayer Chawan,
Singapore
605,000
6
Reliance Industries Ltd.
Jamnagar, India
580,000
7
S-Oil Corp.
Onsan, South Korea
565,000
8
ExxonMobil Refining &
Supply Co.
Baytown, Texas, USA
560,500
9
Saudi Arabian Oil Co.
(Saudi Aramco)
Ras Tanura, Saudi Arabia
550,000
10
Formosa Petrochemical
Co.
Mailiao, Taiwan
540,000
Top 10 List: Largest US Refineries
Rank
Corporation
State
Site
Barrels per Calendar Day
1
Motiva
Texas
Port Arthur
600,000
2
ExxonMobile
Texas
Baytown
584,000
3
Marathon
Louisiana
Garyville
522,000
4
ExxonMobile
Louisiana
Baton Rouge
503,000
5
Marathon
Texas
Texas City
451,000
6
PDV AMERICA INC
Louisiana
Lake Charles
427,800
7
BP PLC
Indiana
Whiting
405,000
8
Chevron Corp
Mississippi
Pascagoula
370,000
9
ExxonMobile
Texas
Beaumont
348,500
10
Sunoco / ETP
Pennsylvania
Philadelphia
335,000
Top 10 List: Petroleum Refining States
Rank
State
Operating Crude Oil Distillation
Capacity (1000/day)
# of Operating
Refineries
1
Texas
4,241
24
2
Louisiana
2,534
16
3
California
2,005
20
4
Illinois
904
4
5
Pennsylvania
770
5
6
New Jersey
655
6
7
Washington
624
5
8
Ohio
511
4
9
Oklahoma
487
5
10
Indiana
433
2
Did You Know…
…U.S. oil demand in 2013 was 18.5 million barrels per day?
…every day the US consumes enough oil to cover a football
field with a column of oil 2500 feet tall? That's 121 million
cubic feet.
… the current U.S. refining capacity is 16.1 Million BPD
The Largest U.S. Refiners Are…
Company Name (2013 Fortune 500)
Rank
Revenues ($b) Profits ($mm)
Exxon Mobil
2
449.9
44,880
Chevron
3
233.9
26,179
Phillips 66
4
169.6
4,124
Valero Energy
9
138.3
2,083
Marathon Petroleum
33
76.8
3,389
Hess
75
38.4
2,025
Tesoro
95
32.5
743
Murphy Oil
104
28.8
971
PBF Energy
142
20.1
2
HollyFrontier
143
20.1
1,727
Western Refining
283
9.5
399
What to Know About Gas Prices
As this year’s driving season begins, gas prices this week reached a
nationwide average of $3.17 per gallon, four cents per gallon higher than
the previous record set last year.
The media stories are increasing, and as friends and family start to ask
about gas prices, it’s important to understand the facts about what goes
into the price at the pump:

Crude price drives the price of gasoline

Gasoline is a global product

Taxes take a toll

Consumers are in control
Refining Take Aways – Remember these…

Refined products are designed with specific properties
based on engine requirements.

Refineries convert crude oil into finished products.

Distillation separates hydrocarbons into fractions using
different boiling temperatures.

Quality improvement operations increase gasoline octane
and remove sulfur impurities.

Conversion operations break larger hydrocarbons (fuel oil)
into smaller ones (gasoline).

Refineries are built using combinations of different
processing units.