FUELSNews 360 - Q2 2014 by FUELSNews

M A R K E T

N E W S

I N F O R M A T I O N

A P R I L M AY J U N E Q1

2nd QUARTER Q4

2 0 1 4

Q44

Q2 2014 Executive Summary We began the second quarter with one headline military conflict and concluded with three. Consequently, an otherwise bearish quarter rose to near record highs due to geopolitical strife and fears of production disruptions abroad. The ongoing situation in Ukraine deteriorated into violence, tensions in Libya quieted momentarily before erupting violently with the rebel seizure of Parliament, and — seemingly out of left field— Iraq’s tenuous hold on peace slipped, resulting in a Sunni insurrection fueled by the Islamist State of Iraq and the Levant (ISIL). These three events far outweighed promising indications from American oilfields which produced near 30-year highs, flooding the Gulf Coast with light, sweet oil. Crude inventories in Houston hit record highs in early May, topping 215.7 million barrels in storage and requiring a reduction in crude oil imports to relieve the glut. Crude production, averaging 7.4 million barrels a day in 2013, increased to an encouraging 8.4 million barrels a day in May — the highest level since March 1988. Crude oil exports drew significant attention this quarter as volumes maintained their highest sustained levels since 1985. While the export ban remains, the Obama administration granted more companies the right to ship domestically-produced crude overseas and — more commonly — across our borders. To complicate matters, the U.S. Department of Commerce issued its ruling in June allowing lightlyprocessed crude oil condensates to be exported as refined product — arguably undermining the controversial crude oil ban. Macroeconomic indicators were mixed during the second quarter as China’s Manufacturing PMI rebounded nicely from a disappointing first quarter while Europe’s Central Bank, in an attempt to drive euros out of savings and into the economy, implemented negative interest rates for the first time in modern history. At home, the Federal Reserve’s steady tapering of the Quantitative Easing (QE) program continues as unemployment rates move progressively lower and consumer spending rises. Finally, a series of high profile acquisitions early in the second quarter raised concerns for the “Mom & Pop” convenience store as well as regional fuel distributors. Marathon’s purchase of Hess assets in the retail sector, Energy Transfer Partners’ acquisition of Susser Holdings, and Lehigh’s tumultuous grab for Virginia-based Petroleum Marketers all consolidated extensive c-store networks into even larger holdings — improving cost advantages over independent, often single-store, owner/operators.

Index FUELSNews 360° Quarterly Report Q2 2014 FUELSNews 360°, published four times annually by Mansfield Energy Corp., analyzes and summarizes the prior quarter’s activity in the oil, natural gas and refined products industries. The purpose of this report is to provide industry market data, trends and reporting both domestically and globally as well as provide insight into upcoming challenges facing the energy supply chain. 4

Overview

Regional View

April through June, 2014

PADD 1A, Northeast

Second Quarter Summary

PADD 1B & 1C, Central & Lower Atlantic

PADD 2, Midwest

PADD 3, Gulf Coast

PADD 4, Rocky Mountain

PADD 5, West Coast, AK and HI

Canada

Economic Outlook 6

Global Economic Outlook

U.S. Economic Outlook

Fundamentals 11

OPEC

Domestic Production, Consumption, and Exports

Retail Market Acquisitions

FUELSNews 360° Commentaries 18

Commentaries; Andy, Dan and Evan S.

Commentaries; Jessica, Chris and Evan P.

Alternative Fuels 39 42

Renewables Natural Gas

Transportation & Logistics

Diesel Exhaust Fluid (DEF)

U.S. Fuel Taxes

49-50

FUELSNews 360˚ Supply Team

Overview April 2014 through June 2014 Maintaining the 2014 trend, WTI crude futures sought higher territory in the second quarter as geopolitical strife cropped up in familiar venues. In the previous quarter, Russia’s invasion of Crimea sparked crude’s rise above the $100 mark. As tensions in Ukraine lingered on, rebel militia in Libya stormed the country’s Parliament building, denouncing the governing body and disrupting oil production. Shortly after, a Sunni revolt in Iraq drove military forces back, seizing much of the nation’s northern territory along with its largest refinery.

WTI Crude Futures

(Dollars per Barrel)

Islamist Militants Seize Mosul, Iraq

Ukrainian Separatists Seize Gov't Buildings

China Demand Reportedly Slowing

U.S. Jobs Report Paints Positive Outlook WTI Crude Inventories Drop

FN360

Source: Oil Price Information Service (OPIS)

Baiji oil refinery, 200km north of Baghdad was seized by Sunni rebels in June. 4

Overview Second Quarter Summary New York Harbor (NYH) ULSD futures rose steadily at the start of the quarter due to escalating tensions in Ukraine. Prices then faltered when speculation of a slowing Chinese economy threatened global demand forecasts. After rising gradually for the month of May, values bottomed out in early June as production increases created a surplus domestically. However, futures recovered sharply through June on the news of armed militia seizing the second-largest city in Iraq, the No.2 oil producer among OPEC nations. RBOB gasoline followed the same direction and ultimately hit the highest prices of the quarter at the end of June.

Summary, Second Quarter 2014

3.0770 2.9708

105.37

16,826.60

FN360

Source: Bloomberg Finance L.P. 5

ÂŠ 2014 Mansfield Energy Corp.

Global Economic Outlook

Lowering its annual growth expectations for the global economy by 0.4 percent, the World Bank cites a slow ﬁrst quarter in the U.S. due to an abnormally cold winter, Ukraine’s civil unrest weighing on the European economy, and China’s economic rebalancing following several months of negative indicators. Despite their downward revision to a 2.8-percent growth rate for this year, World Bank analysts suggest growth rates should increase as high-income economies inject approximately $6.3 trillion to the global market over the next three years in contrast to the $3.9 trillion contributed over the three previous years. According to the Washington-based ﬁrm, high-income nations should anticipate growth in the neighborhood of 1.9 percent by the end of 2014, with targets of 2.4 percent next year and 6

2.5 percent in 2016. The Euro Zone, on track to grow by only 1.1 percent this year, continues to draw down averages. Developing nations, which are heavily impacted by the contributions of their larger neighbors, suffered similar disappointment in the second quarter. The World Bank’s reduced forecast for high-income nations trickled down to developing economies, leading to their third year of growth rates below 5 percent. While China is expected to lead the pack with a 7.6 percent growth rate, a lack of transparency in their ﬁnancial reporting and weak indicators throughout the ﬁrst quarter encourage skepticism despite a strong second quarter. In the worst case scenario, China’s rebalancing efforts fail and developing economies throughout the East suffer as a result.

“The World Bank’s reduced forecast for high-income nations trickled down to developing economies, leading to their third year of growth rates below 5 percent.”

U.S. Economic Outlook 2 percent rate, IMF Managing Director Christine Lagarde questioned the Federal Reserve’s choice to taper near-zero policy rates before the domestic job market enjoys a full recovery. Conversely, the Fund criticizes excessive public spending without sufficient revenues to back the Fed’s initiatives. A hot topic on both the domestic and international stages, President Obama’s promise to raise the nation’s minimum wage gained momentum in the second quarter. U.S. Secretary of Labor Thomas E. Perez announced a proposed ruling in the first half of June which would earn workers employed through federal service and construction contracts $10.10 an hour. Seattle mayor Ed Murray lent strength to the initiative, brokering a deal which raises the city’s minimum wage to an astounding $15 an hour over the course of 5 years. Finally, the IMF’s comparison of historical U.S. and international standards to the nation’s current minimum wage bolsters the President’s argument further — claiming a raise would provide a meaningful boost in after-tax earnings for millions of the nation’s poorest households, yet they provide no firm recommendation for a final value.

IMF Managing Director, Christine Lagarde

Previously anticipating the U.S. to grow at a rate of 2.8 percent, the International Monetary Fund (IMF) determined the nation simply could not overcome the frigid ﬁrst quarter, faltering housing market, and lack of international demand for U.S. goods to achieve initial goals. Reducing expectations by nearly a third to a ﬂat

Consumer sentiment in the U.S. looked to be returning to the higher levels seen in the second quarter of last year, jumping more than four points to 84.1 in April 2014. May proved to be less optimistic, realizing levels similar to the beginning of the year as June ﬁnishes at the same level experienced in January.

Consumer Sentiment Index April 84.1

May 81.9

June 81.2

Consumer Sentiment Index

FN360

Source: University of Michigan 8

U.S. Economic Outlook PPI Producer prices were somewhat sporadic in the second quarter of 2014, posting the highest gain in more than a year for the month of April and then unexpectedly retracing its steps in May. The May drop was heavily influenced by reduced energy prices for the month. Despite large gains throughout the first half of 2014, it seems that producer price inflation is still relatively well contained.

Producer Price Index (PPI) Month-to-Month Change April

May

1.05%

-0.20%

June*

-0.25%

*Projection

Headline vs. Core Producer Price Index (Year-over-year Percent Change, Seasonally Adjusted)

Consumer Price Index (CPI) Month-to-Month Change April May June* Producer Price Index (PPI) Month-to-Month Change 0.64% 0.33% 0.35% April May June* 1.05% -0.20% -0.25%

FN360 Consumer Sentiment Index o

Source: U.S. BureauApril of Labor Statistics 84.1

CPI Consumer prices, generally much less volatile than their producer counterparts, posted gains in the second quarter of 2014. Core CPI gains in May were the highest since 2011, lending weight to the idea that inflation is on the rise. Gains in consumer inflation rates could influence the Fed to alter its recovery policies.

May 81.9

June 81.2

Consumer Price Index (CPI) Month-to-Month Change April 0.64%

May 0.33%

June* 0.35%

*Projection

Headline vs. Core Consumer Price Index (Year-over-year Percent Change, Seasonally Adjusted) Consumer Sentiment Index April 84.1

May 81.9

FN360

Source: U.S. Bureau of Labor Statistics 9

June 81.2

“ The market's recent rise indicates traders expect the worst and have little conﬁdence in OPEC's assertions.”

Fundamentals OPEC Nations Vow to Cover Shortfall of Ailing Partners Violence in OPEC partner nations this quarter dominated the news. Concerns over possible crude oil supply disruptions led to WTI’s 8-percent gain over the quarter. While OPEC representatives claim the organization could easily cover any new demand for crude oil, sources suggest many of its members are already operating near or at capacity. Most are doing their best to assist with Libya’s one million barrel per day shortfall and would prove little help against Iraq’s approximately three million barrels a day. While no significant oil fields have been lost to Iraqi militants as of yet, the market’s recent rise indicates traders expect the worst and have little confidence in OPEC’s assertions. Even if global producers compensate for the loss of OPEC’s second-largest producer, the graph below illustrates the impact an increase of production from partner nations would have on WTI futures.

OPEC Spare Production Capacity and WTI Crude Oil Prices (Million Barrels per Day) Spare capacity (million barrels per day)

Price per barrel (real 2010 dollars)

Forecast

Spare capacity 2.5 million barrels per day

140

120

100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

OPEC spare capacity

WTI crude oil price Source: Energy Information Administration (EIA)

Fundamentals

Balancing Domestic Production with Consumption and Exports Crude Oil Exports Quadruple in Two Years, Reaching 15-Year High Despite a nearly 40-year-old ban on crude oil exports, tankers have been hauling away domestically-produced crude at near record rates this spring. Averaging 268,000 barrels a day, national exports have more than doubled in the last year. In 2012, exports averaged only 41,000 barrels a day —a sixth of the average volume for April of this year.

U.S. Exports of Crude Oil

(Thousand Barrels Per Day)

FN360o Source: Energy Information Administration (EIA)

Barrels to Canadian refineries account for the majority of our nation’s crude exports. Lobbyists in favor of lifting the ban argue our neighbors to the north don’t consume enough to soak up the nearly 60 percent increase flowing from U.S. oil fields, which approaches all-time highs at 8.5 million barrels a day. With light, sweet inventories along the coast at record highs, the Obama administration’s decision regarding the ban could dramatically impact the cost of WTI crude oil or hinder the nation’s growing drilling industry. Therefore, when the U.S. Department of Commerce announced their decision to allow the export of ultra-light condensates, industry participants took it as a sign the 12

White House supports lifting the ban or, at least, the controlled increase of crude oil and equivalent exports. The agency issued a private ruling —limiting the decision to select participants— allowing Pioneer Natural Resources and Enterprise Products Partners to export ultra-light condensates freely as “refined products.” Requiring minimal processing to achieve the stability needed for export, foreign refiners will have little trouble distilling these condensates into gasoline, diesel, and other valuable products. Analysts say condensates could be flowing at a rate totaling 700,000 barrels a day by the start of next year should more participants enter the arena.

â&#x20AC;&#x153;Despite a nearly 40-year-old ban on crude oil exports, tankers have been hauling away domestically-produced crude at near record rates this spring.â&#x20AC;?

Fundamentals

Bakken Turns a Billion

Spanning roughly 25,000 square miles beneath North Dakota, Montana, Saskatchewan, and Manitoba —two-thirds of which resides within North Dakota state lines— the Bakken shale formation produced its billionth barrel of oil during the second quarter of this year. While not significant on its own, it is indicative of the momentum generated by atypical drilling methods within the region. It took North Dakota 38 years to produce its first billion barrels (1989) and 22 to achieve its second (2011). Now, state officials believe they’ll eclipse three billion barrels this year or the next as the state produces approximately 1 million barrels a day. In less than a decade, North Dakota has gone from being the nation’s ninth-largest crude oil producer to its second — Texas being No.1. Experts have been aware of the estimated 7.4 billion barrel reserve —the largest continuous oil accumulation ever assessed by the U.S. Geological Survey— trapped beneath the region for 14

decades, but crude oil prices wouldn’t support costly horizontal drilling operations until recent years. Credited with producing 94 percent of North Dakota’s current crude output, drillers first tackled the Bakken formation through Montana in 2000 and spread to North Dakota over the next several years. Now, with crude oil demanding over $100 a barrel on most days, drillers and refiners are both eager to capitalize on the abundant reserves of light, sweet crude beneath North Dakota and Montana. Consumers, however, have yet to see savings from increased domestic production as retail fuel prices have risen roughly 65 percent in the last decade thanks to a dramatic increase in refined product exports. This illustrates the point that global economics affect domestic prices more than anyone would like to imagine.So long as there is money to be made by shipping propane to Central and South America, diesel to Europe, and gasoline to Africa, the price range will be determined on a global scale while immediate volatility is likely to be driven by domestic fundamentals.

Fundamentals

Distillate Inventories Slowly Rebound from First Quarter Losses Setting new 3-year lows nearly every week this year, distillate inventory levels finally peeked above the lows in the last weeks of June. Approaching the range’s 7.5-million barrel average, inventories show steady recovery as we began the year 22.7 million below average and reached a deficit of 33.0 million barrels in the last weeks of January. High refinery outputs should help to speed building inventories as we look ahead to increased demand beginning in late Q3.

Distillate Inventories

(Million Barrels)

FN360

Source: Energy Information Administration (EIA)

Distillate Days of Supply

(Million Barrels)

FN360

Source: Energy Information Administration (EIA)

Average days of distillate supply suffered in the second quarter, falling 6.8 days below the 3-year average of 34.4 days at its worst in early May. Growing reﬁnery outputs aided in the recovery to the range’s lower end in late June, but the industry averaged only 29 days of standing supply in the second quarter — four days below the 15-year average — leaving consumers more vulnerable to supply disruptions. 15

Fundamentals

Acquisitions Become the Name of the Game

ETP Acquires Susser for $1.8 Billion — Adding 630 New C-Stores to Sunoco Network In late April, Energy Transfer Partners (ETP) and Susser Holdings Corporation (SUSS) announced a definitive merger agreement valued at roughly $1.8 billion. The deal grants ETP general partner (GP) interest, incentive distribution rights (IDRs), a 50.2 percent stake in Susser Petroleum Partners LP (SUSP), and ownership of Susser’s convenience store locations. Sunoco, a well-known East Coast retailer and subsidiary of Energy Transfer Partners LP (ETP), will soon add Susser’s 630 Stripes locations to their roster as they acquire one of the largest non-refiner suppliers of motor fuel in Texas (1.3 billion gallons sold in 2013). Once combined with Sunoco’s existing network of more than 5,000 retail stores, synergy opportunities are expected to exceed $70 million annually from fuel, merchandising, and improved “buying power” reflecting economies of scale. Shareholders of Susser Holdings may either receive $80.25 in cash or 1.4506 ETP common shares in exchange for each share held in Susser Holdings. Susser Petroleum Partners LP (SUSP) continues operating out of their Houston, Texas office and still trades on the New York Stock Exchange as a master limited partnership. 16

Fundamentals Lehigh Gas Acquires Petroleum Marketers in $61-Million Deal The ﬁrst day in May, Lehigh Gas issued a press release announcing their $61-million acquisition of 64-year-old, employee-owned Petroleum Marketers Inc. (PMI) of Virginia and its network of convenience stores. PMI employees were shocked by the announcement as they’d been led to believe Texas tycoon Joseph “Trey” Smith of Pinehurst Petroleum would be taking the reins and to expect no change in location or operations. What Smith hadn’t disclosed were his intentions to divest the bulk of his newly-acquired investment in less than 24 hours to Lehigh Gas Partners while retaining PMI’s lubricants division. Over the years, PMI had grown to include transport services, bulk facility management, food distribution, and lubricants. They sold roughly 91 million gallons last year through a combination of branded dealers and their own convenience store network along the Route 81 interstate. Exxon and Shell both recognized PMI as one of their top branded distributors in the U.S. gross sales across all divisions amount to more than $1 billion each year. Lehigh intends to continue operating the PMI convenience stores with certain sites being transferred to third parties over time. However, the lubricants business was to be sold to an undetermined third party after the deal closed. This came less than a week after Energy Transfer Partners (ETP)’s purchase of Susser Holdings and illustrates a growing trend of investment ﬁrms and limited partnerships scooping up smaller operations. Lehigh Gas Chairman and CEO Joe Topper expressed his excitement over the acquisition saying it “adds materially to our presence in Virginia and complements our locations in Tennessee along the I-81 corridor.”

Marathon Doubles its Speedway Retail Store Count In late May, Marathon Petroleum Corporation announced the $2.87-billion acquisition of the East Coast’s largest company-operated convenience store chain — Hess Retail Holdings LLC. Taking ownership of Hess’ 1,300+ locations, Marathon’s retail subsidiary, Speedway LLC, will expand their footprint to an impressive 2,736 sites across 14 new states— bringing the total to 23 states. In addition to Hess’ retail chain, Marathon stands to gain transport operations and existing shipper history, including 40,000 barrels a day on Colonial Pipeline. Expected to close late in the third quarter of this year, this deal will mark the end of Hess’ 80-year history in the downstream market. In the fourth quarter of last year, Hess sold their network of twenty East Coast terminals to Buckeye Partners and their bunker fuels business to a company based in Greece.

Source: Michael Karas, Associated Press 17

FUELSNews 360˚ Commentaries Andy’s Answer

BULL BEAR

Right again! “Mr. Humility,” they call me. WTI started off the second quarter right at the $100 mark and here we are the end of June brushing the $107 level. Granted, without the latest developments in Iraq, we’d probably still be at the $100 level, but I’ll take my wins where I can get them! Regarding ULSD futures, we are still stuck in the same range we have been for virtually 3 years now. I’m going to stay in that range until at least the fourth quarter but we’ll see how demand goes as we get closer. Now, regarding RBOB, anyone that reads the daily FUELSNews hopefully caught my “Family Truckster” article and, therefore, knows I’m deﬁnitely not right all the time —explaining why I need to keep my day job. I still believe RBOB has room to move lower, but I think I’ve long outlasted my call on that one. So, for the third quarter of this year, I don’t see us getting above the $115 mark on crude —even with the continued violence in the Middle East— and most likely the events will calm down, relaxing the bullish sentiment in market. While I’m sticking with my bearish sentiment on RBOB, I see ULSD futures sitting in the same range they have for the past few years. So, the forever bull becomes the bear for the third quarter of this year.

Dan’s Dissertation

BULL BEAR

Concern that Iraqi oil production could be disrupted by militants led to a spike in crude oil prices to close the second quarter – a fear premium has been built into current values. However, the Baghdad government should be able to maintain control over the richest oil ﬁelds south of the nation’s capital; additionally, the Kurdistan Regional Government may soon strike a deal to take full control over oil exports in that region, so output may actually increase from the country by year’s end. The physical oil market is little changed from just a few weeks ago and is not as tight as recent price moves would suggest. While the fear premium may continue to persist as long as the unrest in Iraq, I expect concerns to subside by quarter’s end and prices to stabilize.

Evan’s Estimation

BULL BEAR

As we enter the third quarter of 2014, everyone’s eyes are on the situation unraveling in Iraq. As ISIS continues to push through Iraq, this could threaten oil exports and supply from OPEC’s second-largest crude producer. I don’t think this violence will escalate to the point that exports are affected to a large degree. Iran, and/or other countries, will assist with getting this situation under control and will halt the ISIS’ terror on Iraq. Since the oil market is already inﬂated from this ongoing attack, I expect to see the market drop off. Another factor leading me to believe this market will be bearish in the third quarter is supply and demand, domestically and internationally. U.S. domestic crude supply is currently at a 25-year high and continues to rise. Internationally, I believe OPEC countries will have a surge in supply after internal conﬂicts in those countries are lessened (could come as soon as this upcoming quarter). With this increase in supply and low demand, this will make the oil market slide in the third quarter. 18

FUELSNews 360˚ Commentaries Jessica’s Judgment

BULL BEAR

Who’s tired of talking about the 2014 Renewable Fuel Standards 2? The question is, “who isn’t?” At this rate, it will practically be 2015 before we know the EPA’s requirements for 2014; and what about the requirements for 2015?! It’s probably hard to tell by my opener, but I am bearish for third quarter renewables. It can only get better from here, right? I think so. Surely Congress and the Administration will find it more productive to finalize the rule than hold continual meetings on Capitol Hill to bide time and pacify the moment. Ethanol is already finding some pricing relief and I expect that to continue with increased production and plateaued demand. I think biodiesel will get there once the industry has some real expectations to get their arms around – maybe more like late Q3, but I anticipate prices will depress.

Chris’s Concept

BULL BEAR

For the third quarter of 2014, I expect the market to continue its rise. Obviously, the market is paying close attention to the ISIS insurgents in Iraq. If Iraq has any disruption to the 2.5 million barrels a day of export, it could send Brent prices into the $140’s, dragging WTI along for the ride. The U.S. economy is improving as well, with new job creation expected to total roughly 230,000 a month by year end. Non-supervisory workers —which account for 83 percent of the workforce— enjoyed an increase of 2.4 percent in pay over the past year. As the economy continues to show signs of improvement, I predict we will continue to see the market rise.

Evan’s Expression

BULL BEAR

The second quarter followed headlines —not fundamentals. That being said, I hate to jinx myself as I did last time and say “surely THREE military conflicts will be the worst that could happen!” I might be held liable if China attacks India, California sinks into the ocean, and four hurricanes converge on Galveston Bay at once! I believe the headlines will continue through the third quarter as Ukraine struggles to gain its footing, Iraq learns the definition of “representative government,” and Libya’s various factions duke it out again. Additionally, I don’t think we’ve heard the last from Syria and we are just entering hurricane season. Forecasts are calm, but I have a sneaking suspicion our recent luck will be tested. Beneath the headlines, I expect to see increased exports of both refined products and crude or crude equivalents —draining any excess product which might have contributed downward pressure to the market. I hope more of those barrels find their way to the East Coast in support of struggling refiners still cut off from cheaper shale oil stocks. Despite these seemingly bullish points, I still believe the market lacks support for crude at $110 a barrel. With traders —those not invested to service a physical demand— still long in the market, we’ll see a prolonged round of profit-taking in the third quarter before we go into the winter. So, being the stubborn individual my mother raised, I must retain my bearish sentiment and wait for the fall. 19

Regional View ? PADD 5: West Coast, AK, HI

PADD 4: Rocky Mountain

Did You Know? PADD 2: Midwest PADD 1: East Coast

PADD 3: Gulf Coast

PADD stands for Petroleum Administration for Defense Districts

During World War II, the United States was divided into five PADDs to organize the allocation of fuels derived from petroleum products, including gasoline and diesel. The purpose was to spread the nation’s oil supply among the regions, thereby eliminating the possibility of a single strike wiping out the country’s oil infrastructure and resources.

PADD 1A Wholesale vs. DOE Retail

PADD 1 East Coast PADD 1A Northeast

FN360

Source: Energy Information Administration (EIA)

Five New England States Implement Strict Heating Oil Mandate A mandate limiting ﬁve states— Massachusetts, Vermont, New Jersey, Rhode Island, and Connecticut— to a maximum of 500 ppm sulfur in all heating oil sold within state lines kicks in July 1st. Since 500-ppm is a new product for the Northeast markets, some suppliers plan on switching to ultra-low sulfur heat (15-ppm) and some are taking advantage of a possible blending margin, blending high-sulfur heat with ultra-low sulfur heat. Blending margins, logistical bottlenecks, and terminal tankage are just a few factors suppliers must consider when looking at the beneﬁt of blending a 500-ppm spec rather than moving to a simpler 15-ppm spec. 20

The spread between high-sulfur heating oil and ultra-low sulfur diesel has been narrow recently through the warmer spring and summer months, which reduces blending margins. If we see the spread widen this year as we did this past winter, expect many suppliers to take advantage by blending high-sulfur and ultra-low sulfur product to produce heating oil which meets the 500-ppm mandate. However, as temperatures fall and consumption of heating oil rises, drivers will feel the pinch more than ever as suppliers drain on-road diesel inventories to blend with high-sulfur products to meet demand.

PADD 1 Laurel Pipeline Allocations East Coast Impact Pennsylvania Consumers PADD 1A Northeast

In the second quarter, the main —and now only major— pipeline transporting reﬁned products from the Atlantic Coast through southern Pennsylvania to Pittsburgh experienced major delays. Having just pulled through the coldest winter in recent history and given that the Sunoco Logistics pipeline no longer carries reﬁned products to Pittsburgh, the region suffered severe supply disruptions.

Historically, gasoline shipments to the region overtake diesel in the second quarter as we enter the peak travel season. However, suppliers were still restocking diesel supplies which had been drained during the winter. The two conﬂicting interests increased demand for pipeline space, resulting in shipment delays of up to a week and product shortages in central and western Pennsylvania. The shortage of reﬁned products impacted many markets, but Altoona and Pittsburgh suffered the most. Multiple suppliers shut off unbranded wholesale racks for days at a time, reserving product for their contract and branded customers. Netbacks in the region for diesel and gasoline turned extremely positive— indicative of a market in which unbranded rack prices exceed the costs associated with shipping product along the pipeline. The Laurel Pipeline has since returned to normalcy and product shortages in Central and Western Pennsylvania have been resolved.

DOE Creates a One Million Barrel Northeast Regional Gasoline Reserve Consequently, Secretary of Energy Ernest Moniz announced in May the Department of Energy will establish the Northeast region’s first federal gasoline reserve. Spurred on by severe supply disruptions in the wake of Super Storm Sandy, the reserve will complement the one million barrel Northeast Home Heating Oil Reserve (NHHOR) which proved vital in fueling first responder vehicles and emergency generators when traditional delivery systems failed for lack of power. Following Hurricane Sandy in October of 2012, the Northeast suffered bone-chilling temperatures and persistent power outages. Many home owners were dependent upon gasoline-powered generators for their heat and light sources as they waited patiently for utilities to jump into action. Unfortunately, without power, refiners were forced to do the same and gasoline quickly fell into short supply. 22

Expected to start by the end of the summer, the reserve will be split across two locations with one in the New York Harbor area and the other in New England.

PADD 1 East Coast PADD 1B & 1C Central & Lower Atlantic “ Providing relief for several barge-fed

markets along the East Coast, which have struggled with supply since December of 2012, consumers may enjoy cost reductions, as foreignﬂagged vessels often present discounts of several cents a gallon over higher- demand Jones Act vessels.” (Pg. 25)

PADD 1B Wholesale vs. DOE Retail

FN360o Source: Energy Information Administration (EIA)

PADD 1C Wholesale vs. DOE Retail

FN360o Source: Energy Information Administration (EIA) 23

PADD 1 East Coast PADD 1B & 1C Central & Lower Atlantic

Florida and North Carolina Consumers Get a Break from Low-RVP Gasoline Finally putting an end to the suspense surrounding low-RVP gasoline sales in several southern markets, the federal EPA announced in May that Florida and North Carolina customers would not be required to fill up on 7.8psi RVP gasoline this summer. All of Florida, along with the Greensboro “Triad” and Durham “Triangle” in North Carolina, now have a single 9.0psi RVP requirement year-round. Charlotte, NC remains a 7.8psi-mandated region, however. Effective May 30th, the ruling greatly simplifies gasoline supplies for all three regions, resulting in more reliable fuel supplies and potentially lower prices at the pump for consumers. A Kentucky lawyer cited the EPA’s failure to consider air quality in surrounding metropolitan areas. His adverse statements during the open comment period triggered delays in publishing the agency’s final decision. However, EPA regulators determined the regions were compliant with ozone standards and should not be held to the higher standard.

U.S. Summer Gasoline Requirements

“ Effective May 30th, the

ruling greatly simpliﬁes gasoline supplies for all three regions, resulting in more reliable fuel supplies and potentially lower prices at the pump for consumers.”

RFG RVP 7 RVP7.8 RVP 9

Memphis Refinery Outage Leads to EPA Waiver Residents of Shelby County, TN —home to Valero’s crippled 195,000-bpd refinery— received much needed relief from the EPA’s low-RVP requirement at the start of June. The agency issued a waiver, which remained in effect through June 26th, freeing consumers to use the cheaper and more readily available 9.0 lb. product while Valero performed repairs. At fault for Memphis’ supply woes since the first quarter, Valero’s refinery offers the only source of low (7.8-lb) RVP gasoline for the metro area and suppliers were ill-prepared to meet the EPA’s requirement. Without the waiver, consumers would have experienced frequent product outages and price spikes. 24

PADD 1 East Coast PADD 1B & 1C Central & Lower Atlantic

U.S. Customs Breathes Life Back into Buckeye’s BORCO Assets Buckeye Partners announced in May it would begin blending gasoline components at their BORCO facility on Grand Bahama Island. A U.S. Customs and Border Protection (UBP) ruling this spring cleared the way for the transportation of unﬁnished fuel components to the Bahamas for blending prior to re-exporting as a ﬁnished product into the U.S. without requiring a Jones Act vessel. Consequently, imports of gasoline rose to their highest levels since the start of 2012 in the middle of May.

Providing relief for several barge-fed markets along the East Coast, which have struggled with supply since December of 2012, consumers may enjoy cost reductions, as foreign-ﬂagged vessels often present discounts of several cents a gallon over higher-demand Jones Act vessels. Located only 80 miles off the Florida coastline and ranking as one of the world’s largest storage terminals with capacity of 21.6 million barrels, the Customs ruling affords Buckeye an opportunity to fully capitalize on their recent acquisition. It is still too early to know how this will impact East Coast terminals, but will provide reliable alternatives to Houston barrels while offering suppliers opportunities to capitalize during tough market conditions.

Wilmington Charleston Jacksonville Houston

BORCO Ft. Lauderdale

PADD 2 Midwest

PADD 2 Wholesale vs. DOE Retail

FN360

Source: Energy Information Administration (EIA)

Chicago Area Gasoline Prices Reach Highest in the Country As warmer weather ﬁnally arrived in the Midwest, so did the changeover to summer gasoline standards in many metropolitan areas. Beginning each year on May 1st at the terminal level, this seasonal change sometimes leaves gasoline suppliers scrambling to switch their supply networks to the lower emission summer spec. Federal guidelines require retailers in certain metropolitan areas to reduce VOC (volatile organic compound) emissions by at least

“ Beginning each year on

21.4 percent —assuming a 10 percent ethanol blend—between June 1st and September 15th. The result can be skyrocketing prices in regional gasoline cash markets. Chicago seemed hardest hit. Over the course of the month of May, gasoline prices in the area increased nearly 25 cents per gallon while NYMEX RBOB gained only about 6 cents per gallon on the month.

Chicago Gasoline vs. NYMEX RBOB Futures (Dollars per Gallon)

May 1st at the terminal level, this seasonal change sometimes leaves gasoline suppliers scrambling to switch their supply networks to the lower emission summer spec.”

FN360

Source: Platts and NYMEX

The seasonal changeover doesn’t just affect blenders and retailers, but often reﬁners as well. For instance, on the news of multiple reﬁners bidding for summer spec gasoline, Chicago area RBOB experienced its biggest one-day jump on May 28th increasing more than 10 cents per gallon over NYMEX RBOB’s gain on the day. Unfortunately for gasoline consumers, this is not an uncommon occurrence in the Chicago market. In 2013, RBOB values exceeded NYMEX futures by as much as 80 cents per gallon during this same period.

PADD 2 Midwest

Midwest ULSD Prices Unseasonably Weak Midwest diesel prices moved lower in relation to futures as the second quarter came to a close. This is an unusual seasonal move, as typically spring planting season bolsters demand through this time of year. However, diesel supplies felt abundant as distillate production reached historic highs for this time of year.

Midwest ULSD vs. NYMEX HO Futures (Dollars per Gallon)

FN360

Source: Platts and NYMEX

Benefiting from price-advantaged mid-continent and Canadian crude oil inputs, many Midwest refiners exceeded standard production levels in the second quarter. Additionally, expansion projects at several large refineries in the region have been completed in recent months, resulting in higher output.

PADD 2 Net Production of Distillate Fuel Oil (Thousand Barrels per Day)

FN360o Source: Energy Information Administration (EIA) 27

PADD 3 Gulf Coast

PADD 3 Wholesale vs. DOE Retail

FN360o Source: Energy Information Administration (EIA)

2014 Hurricane Season — Lion or Lamb? Hurricane Season, Atlantic Basin 2013 ACCUWEATHER 2014 FORECAST NUMBERS

NOAA NORMAL

TROPICAL STORMS

HURRICANES

MAJOR HURRICANES

Source: AccuWeather.com

Generating the fewest hurricanes since the early 80’s and producing no major storms, last year’s hurricane season was a welcome reprieve from the devastating 2012 season, which produced two pre-season named storms, tied for third in most named storms produced in a single season, and culminated in the late-season destruction of Super Storm Sandy—the second-costliest hurricane ($68b) in U.S. history behind 2005’s Hurricane Katrina. So, what will 2014 bring? Will we suffer through another 2012 or enjoy the relative ease of 2013? The 2014 hurricane season opened quietly, earning an uncommon distinction as the ﬁrst season in a decade to produce no named storms in the months of May and June. In 2004, a similar El Niño pattern disrupted storm winds early in the season only to give way to several of the Gulf’s most destructive and deadly storms. AccuWeather.com’s recent long-range forecast suggests another below-average year, but not as quiet as last year — indicating approximately 10 tropical storms, ﬁve hurricanes, and two major hurricanes in the Atlantic Basin. Only two of these 17 events are expected to make landfall somewhere along the U.S. coastline. 28

“The 2014 hurricane season opened quietly, earning an uncommon distinction as the ﬁrst season in a decade to produce no named storms in the months of May and June.”

PADD 3 Gulf Coast

Brent-WTI Crude Oil Spread

(Dollars per Barrel)

Sept 23, 2011 Peak

$29.59 Current

$4.96 FN360o Source: Energy Information Administration (EIA)

Cushing Glut Relocates to Gulf Coast Storage Prior to the industry’s exploration of shale formations in the West, the spread between West Texas Intermediate (WTI) crude oil prices and European Brent barrels stayed low and often indicated U.S. barrels suffered a slight disadvantage to foreign crude — hence why so many refineries along the East Coast preferred crude stocks from Africa and Europe. However, once shale oil began pouring into Cushing, OK, domestic barrels lost much of their value and the spread widened — granting U.S. refiners a significant advantage over their foreign counterparts. After all, whether it started as $100/barrel WTI or $110/barrel Brent, the diesel produced still sells for $4/gallon.

PADD 3 Gulf Coast

Gulf Coast (PADD 3) Crude Oil Inventories (Million Barrels)

Following the completion of TransCanada’s 700,000-bpd crude oil pipeline in the ﬁrst quarter, WTI values rose sharply, narrowing the spread and making foreign barrels more appealing than in recent history.

FN360

Source: Energy Information Administration (EIA)

Cushing, OK Crude Oil Inventories (Million Barrels)

Cushing barrels continued to flow southward in the second quarter, stripping away any remaining discount on WTI crude. Meanwhile, tanks along the Gulf Coast filled rapidly, reaching record highs of 215 million barrels in storage. That’s roughly equivalent to one-third of the nation’s entire Strategic Petroleum Reserve. With more than half of the nation’s refining capacity positioned along the Gulf Coast, however, it seems the logical home for such vast reserves.

FN360

Source: Energy Information Administration (EIA)

As a result of over-stocked tanks, imports of crude into the region slipped to 17-year lows in the first half of May. Not lasting long however, increased refinery inputs in the following weeks sparked a 20-percent rise in crude imports for the week of May 23rd —the largest weekly percentage gain since 2008. So long as crude inventories remain at unprecedented levels with little excess capacity, expect imports to suffer higher volatility depending more than ever on refinery operations.

PADD 4 Rocky Mountain

PADD 4 Wholesale vs. DOE Retail

FN360o Source: Energy Information Administration (EIA)

“According to the Association

of American Railroads, U.S. crude oil shipments by rail topped a record 110,000 carloads in the ﬁrst quarter.”

Carriers Fight Montana Officials Over Release of Railcar Statistics Earlier this month, Montana state officials agreed to release statistics showing the number of trains carrying crude oil through the state. Railroad carriers oppose the decision given recent, high-profile rail accidents and citing security concerns which could result from the dissemination of such information. Many states —including California, Minnesota, Colorado, among others— elected to keep this information confidential. According to the Association of American Railroads, U.S. crude oil shipments by rail topped a record 110,000 carloads in the first quarter.

ÂŠ 2014 Mansfield Energy Corp.

PADD 5 West Coast, AK, HI

PADD 5 Wholesale vs. DOE Retail

FN360o Source: Energy Information Administration (EIA)

“Californians already pay close to 53

Cap & Trade Tax Increase

cents in state taxes for every gallon of gasoline and 49.5 cents for diesel. This move has already sparked ﬁerce opposition within the industry and affected communities.” Federal Taxes State Taxes Cap & Trade Distribution Refining Oil

costs estimated *atCapup&toTrade 40 cents per gallon

4.5 5 5 5 5

0.24

4 3.5

3.5 3.5 3.5 3.5 3 3 3 3 2.5 2.5 2.5 2.5

3 2.5

2 2 2 2

1.5 1.5 1.5 1.5

1.5

1 1 1 1

0.24 0.24 0.24 0.50 0.50 0.50 0.21 0.21 0.21 0.45 0.45 0.45

2.60 2.60 2.60

0.24 0.24 0.24 0.50 0.50 0.50

0.50 0.21 0.45

0.40 0.21 0.45

0.40 0.40 0.40 0.21 0.21 0.21 0.45 0.45 0.45

2.60 2.60 2.60

2.60

0.5 0.5 0.5 0.5 0 0 0 0

0.50

0.24

4.5 4.5 4.5 4.5 4 4 4 4

(Dollars per Gallon)

0.5

Current Current $4.00 Current $4.00 $4.00

Predicted Predicted $4.40* Predicted $4.40* $4.40*

Current $4.00

Predicted $4.40*

California Cap-and-Trade Program Expected to Tax Motorists California’s Cap-and-Trade start date is fast approaching. Consumers won’t see the tax listed on their receipts, but it’ll be there —an estimated 10–40 cents on each gallon of fuel sold. Californians already pay close to 53 cents in state taxes for every gallon of gasoline and 49.5 cents for diesel. This move has already sparked fierce opposition within the industry and affected communities. Scheduled to begin on January 1st, 2015, opponents to the California Air Resource Board (CARB)’s new program hope to educate the public on this hidden tax through radio and social media with the intention of repealing the state’s fee. If they are unsuccessful, executives and bureau officials warn low-income families and agricultural communities will be the hardest hit. Meanwhile, several fuel distributors expressed intentions of vacating their positions in the market to avoid the administrative burden associated with the plan. Program revenues, estimated at upwards of $2 billion in its first year, are expected to go towards green initiatives and programs designed to reduce greenhouse gas emissions. However, some State representatives have already suggested allocating the funds towards high-speed rail lines and housing projects rather than environmental programs. 34

PADD 5 West Coast, California Legislation to Crack AK, HI Down on Crude-by-Rail Shippers Expected to supply the state of California revenues totaling $6.6 million in its first year and $12.3 million when fully implemented, the Office of Spill Prevention and Response (OSPR) hopes to collect 6.5 cents for every barrel of crude delivered to refineries within the state. Revenues will go towards expanding the department’s effective range and coverage of inland rail terminals. Both the State Assembly and Senate approved the plan, but Governor Jerry Brown must still sign the bill before the tax goes into effect. This comes in response to concerns over the state’s growing crudeby-rail industry. Valero, for instance, intends to replace waterborne deliveries of crude to their Benicia refinery north of San Francisco with two 50-tanker trains a day. While harmful emissions from locomotives would normally be a concern, the state’s report suggests the reduction in barge emissions would more than offset any negative effects. The OSPR, however, is better prepared to handle spills in the Bay than on the ground —lending support to the 6.5-cent tax.

Flint Hills’ North Pole Refinery Cracks its Last Barrel Marking the end of a 37-year run, the 85,000-bpd North Pole Reﬁnery, owned and operated by Flint Hills Resources, stopped receiving crude oil shipments at the end of May as workers ramped up the painstaking decommissioning process. Two crude processing units were already shut down in 2010 and 2012 due to shifting economics following the 2008 crisis, but production of gasoline and asphalt had continued in spite of rising “quality bank” penalties. 35

Workers proceeded to disconnect the facility’s storage tanks in preparation for its next life as a receiving/shipping terminal. Currently employing 126 workers, the facility’s head count is expected to total roughly 35 once the transition is completed. The Petro Star Reﬁnery —roughly 1/10 the size of Flint Hills’— will continue to produce jet fuel and heating fuel, but will now be the region’s leading supplier of naphtha, used to power three Golden Valley Electric Association generators.

Canada Pivotal Keystone XL Bill Receives Committee Approval The Senate Energy and Natural Resources Committee approved (12-10) a controversial bill on June 18th to bypass President Obama and approve the proposed Keystone XL crude oil pipeline. Transporting more than 800,000 barrels per day from Alberta, Canada to refineries on the Gulf Coast, the pipeline would require presidential approval because it crosses an international boundary. However, the vote by the Senate Energy and Natural Resources Committee would remove the presidential approval provision. Even though the Senate passed a key hurdle, it remains uncertain whether Senate Majority leader Harry Reid would allow the bill to reach the Senate floor. Furthermore, if the bill was taken to the floor and passed, President Obama could still veto it. At the end of the day, the measure’s prospects are pretty slim, meaning a decision on the long-delayed Keystone XL pipeline doesn’t appear to be on the immediate horizon.

Source: TransCanada

Suncor finished planned maintenance at Edmonton and Montreal refineries Suncor Energy completed planned maintenance at its refineries in Edmonton, AB and Montreal, QC in late May. The planned maintenance activities for Suncor’s 142,000-bpd Edmonton refinery began on April 7th and lasted approximately 8 weeks. Meanwhile, maintenance at the 137,000-bpd Montreal plant concluded on May 30th after being shut down for roughly 4 weeks. Suncor operates three refineries in Canada and one in the U.S. with refining capacity totaling 462,000 barrels per day. The company did not disclose specific details regarding the work undertaken at either refinery, but both plants are expected to go down again in the third quarter for further planned maintenance lasting 4 weeks and 9 weeks, respectively. 36

Canada

Proposed Northern Gateway Pipeline

Source: Enbridge via The Canadian Press

Enbridge Receives Government Approval for its Northern Gateway Pipeline Some industry analysts say the growth of oil shipments by rail and other export opportunities for oil producers could make it difficult for Enbridge to shore up commitments from commercial players. Considering one of the NEB’s conditions for project approval required Enbridge to obtain firm transportation contracts covering at least 60 percent of the pipeline’s 525,000-bpd capacity before construction commences, competition for barrels may delay construction well into the next decade or even prove fatal to the proposed pipeline. The Canadian government accepted the National Energy Board (NEB)’s recommendation to approve Enbridge’s Northern Gateway Pipeline on June 17th. Transporting up to 525,000 barrels of crude each day from Alberta’s oil sands to a proposed tanker port in Kitimat, B.C., the Northern Gateway Pipeline would allow Canadian oil producers to tap energy demand in California and Asia. Enbridge submitted its application for the pipeline to the NEB in 2010 and the application was later approved by a panel in 2013. However, the proposal’s approval came with 209 conditions. Enbridge’s CEO Al Monaco said the company would take the next year to work through these conditions, but shied away from making a definitive commitment to the $6.5-billion oil pipeline’s construction. If Enbridge pursues the project —and assuming they address the more than 100 conditions requiring attention before shovels hit the ground— the pipeline could be up and running by late 2018. 37

Oil sands production hit 1.93 million barrels per day last year. Estimates show production rising to 3.2 million barrels by 2020 and reaching levels of roughly 4 million barrels each day by 2025. With these estimates in mind, it would be years before oil sands production supported the Northern Gateway pipeline’s construction if the Keystone XL and Energy East projects obtain approval first. The Energy East Pipeline, a 1.1-million barrel per day pipeline shipping oil to Quebec and New Brunswick as early as 2018, already locked up 900,000 bpd in firm commitments. Kinder Morgan Canada’s Trans Mountain Pacific pipeline reportedly secured firm commitments totaling 708,000 barrels per day. In the near-term, there’s not a lot of crude left to satisfy all the pipeline projects being discussed. The order in which projects receive approval could dramatically impact those left on the table and possibly spelling disaster for Keystone XL supporters.

Canada Canadian Imports of U.S. Crude Nearly Double in 12 Months According to Statistics Canada, the nation nearly doubled its imports of crude oil from the United States in April when compared to the same period a year ago. As discussed earlier in this issue, crude exports are restricted under federal law, but commercial players often receive licenses to sell crude oil to foreign nations.

Canada imported approximately 8.1 million barrels in April from the United States, marking a 95-percent increase over last year’s volume. Imports increased only 4 percent compared to March 2014, when Canada brought in 7.8 million barrels from the U.S. In total, Canadian refiners imported 17.5 million barrels, or 583,000 bpd, of crude oil in April. The U.S. was the biggest import partner followed by Iraq, who exported roughly 75,000 bpd to the easternmost province of Newfoundland and Labrador. While Canada produces 4.3 million barrels of crude each day, the country relies heavily on U.S. imports due to pipeline constraints preventing the western oil-producing region from shipping its oil to Canada’s eastern refineries. Oddly enough, Texas was the biggest exporter by state in the U.S. for the fifth consecutive month, shipping 4.4 million barrels of the 8.1 million monthly total, with the Irving Oil St. John Refinery taking most of the Texas crude coming from the Eagle Ford shale boom. 38

Alternative Fuels Renewables

Ethanol on the Up and Up? In mid-June, domestic ethanol production topped 972,000 barrels a day, its highest level since the Energy Information Administration (EIA) started keeping records in June 2010. The weeks of May 19th through June 13th showed average ethanol production at 945,000 barrels per day, up 7.9% from June 2013. If producers maintained these levels of production for an entire year, it would equate to roughly 14.5 billion gallons of ethanol.

NYH Spot Ethanol vs. Gasoline Futures

(Dollars per Gallon)

FN360

Source: Oil Price Information Services (OPIS)

Increased production led to record length in domestic ethanol inventories by mid-June, increasing 15.2 percent from last year to reach a 15-month high at 18.42 million barrels. Stockpiles have since dropped slightly in light of slow imports, greater exports, and rising gasoline demand. Blender inputs —a measure of demand— reﬂected a 2.8 percent increase from last year during the same 4-week period in June. Historically, gasoline consumption spikes during the weeks surrounding the July 4th holiday, so it is expected for gasoline demand —and consequently ethanol— to climb. So what is not up? Ethanol prices. In most cases, gains in the corn market would help maintain or boost ethanol futures, but with the release of the EIA’s ethanol production ﬁgures, corn fundamentals are unable to offer support at the moment. If production continues at the present pace and demand levels out after Independence Day, U.S. ethanol inventories have the potential to grow rapidly, keeping prices on the decline. 39

Renewables

Soy Biodiesel vs. NYMEX Diesel Futures

“ Many blame the U.S.

government for declining production as erratic policy changes, delayed information, and poor communication increased uncertainty for all industry participants.”

(Dollars per Gallon)

FN360o Source: Oil Price Information Services (OPIS)

Biodiesel Producers’ Crisis The National Biodiesel Board conducted a recent survey ﬁnding that more than half of U.S. biodiesel producers idled at least one plant this year, 78 percent reduced production in comparison to 2013 rates, and 85 percent postponed or cancelled expansion initiatives. Nearly two-thirds expect to lay off employees as a result of suffering production levels. Many blame the U.S. government for declining production as erratic policy changes, delayed information, and poor communication increased uncertainty for all industry participants. Biodiesel advocates continue lobbying lawmakers to reinstate last year’s $1 tax incentive and expand the biodiesel volumes required in the highly anticipated 2014 Renewable Fuel Standard (RFS2). Adding to the producers’ crisis, biodiesel blending economics have been suffering. In many non-mandated markets without state tax incentives, suppliers suspended bio-blended offerings as costs surpassed prompt heating oil values. Biodiesel traders are creating rules of engagement as they go, which creates a highlycompetitive and opportunistic trading environment. Many producers are hedging current product losses with the possible return of blender’s credits —some even going so far as to split potential credit revenues with purchasers to encourage trading.

RIN Price Review The Environmental Protection Agency (EPA) issues Renewable Identification Numbers (RINs) to track renewable fuel usage within the supply chain, holding refiners to a blend quota. RIN prices lost traction after March’s high due to continuing delays in publication of the 2014 RFS2. D4 biodiesel RINs fell from an annual high of 70 cents per gallon blended while D6 ethanol RINS hovered around 50 cents per RIN. After suffering a 23-percent (15-cent) decline in April, biodiesel RINs rebounded —adding roughly 10 cents per RIN— while ethanol RINs regained nearly all of April’s losses by mid-May. RINs finished Q2 strong, as in late June, biodiesel RINs traded 7 cents higher and ethanol RINs traded 5 cents higher than the prior day, which is the largest single-day jump in quite some time. 40

Renewables (continued) Consumers of diesel and gasoline should watch RIN values as blending renewable products with traditional petroleum-based fuels offers an opportunity to signiﬁcantly reduce their per gallon fuel costs, depending on RIN values. Under current legislation, RINs represent discounts on renewable fuels; often creating cost advantages for biodiesel and ethanol, despite their higher base costs. Therefore, consumers of bio-blended products often purchase fuel at discounts of up to several cents per gallon.

Biofuel RIN Values

(Dollars per Gallon)

FN360o Source: Oil Price Information Services (OPIS)

Globally Green The Paris-based International Energy Agency (IEA) projects global biofuels output to increase 2.7 percent each year, reaching approximately 2.3 million barrels per day in 2019—slower than suggested in the IEA’s 2013 Medium-Term Oil Market Report. The agency claims diminishing government support for biofuel policies hinders the production and consumption of renewable transportation fuels; criticizing both U.S. and European leaders for policy ﬂaws and ambiguous future growth initiatives. In 2013, biofuels accounted for 3.5 percent of the world’s road transportation fuel consumption —falling well short of the IEA’s minimum threshold for reaching the 2050 goal of 27 percent. Ethanol, the world’s most widely accepted and utilized renewable transportation fuel, struggles to gain its footing as demand stalled in both the U.S. and Brazil —the world’s top two producers and consumers of ethanol. At home, the 10 percent blend wall limits domestic consumption while Brazil’s woes result from declining sugarcane crops and federal governance of gasoline prices. 41

Natural Gas Production Expected to grow at a rate of 1.6 percent each year through 2040 —twice the forecasted consumption growth rate— increasing domestic natural gas production should earn the U.S. the title of “net exporter” by the end of 2017. At that time, the industry will have replaced 1.5 trillion cubic feet (Tcf) of imported natural gas with cheaper, domestically-produced fuel. Consequently, volumes traveling abroad by LNG tankers and natural gas pipelines are expected to reach 5.8 Tcf a year by 2040 —88 percent of which should be realized before 2030. History

2012

While the EIA projects Asian markets to receive roughly two-thirds of all American LNG exports by 2030 and represent 55 percent of the projected net natural gas export increase during the same period, China’s 30-year deal with Russia for natural gas deliveries into northern provinces may slow exports to the nation. Canada, as well, plans to develop pipeline infrastructure for both crude and natural gas products in an effort to improve global exports.

Projections

Net exports, 2040 (18%) Total production

30 Net imports, 2012 (6%)

Total consumption

Net imports

-10

Net exports 1990

2000

2010

2020

2030

2040

Source: Energy Information Administration (EIA)

Conversely, the EU’s recent conﬂict with Russia prompted a search for more reliable channels to satiate the region’s nearly 19 Tcf demand for Russian imports each year. Covering 30 percent of Europe’s natural gas consumption in 2013, Russian producers may contend with American traders of LNG should China’s demand falter, despite logistical and cost disadvantages.

Courtesy of TransCanada 42

Natural Gas

History

Demand

2012

Projections Industrial

Domestic consumption of natural gas is expected to rise approximately 6 Tcf before 2040 when Americans will burn 31.6 Tcf a year. As illustrated at right, consumption for electrical generation will rise as more coal-ﬁred plants retire, making way for natural gas generation in parts of the nation less amenable to wind, solar, and geothermal sources, among others. The EIA forecasts the decline of natural gas consumption for residential heating, however, citing the population’s migration to warmer climates and improved efﬁciency of appliances and heating units. Representing the smallest —yet fastest growing— portion of the nation’s natural gas consumption, commercial vehicles, trains, and ships will contribute 850 billion cubic feet (Bcf) of demand by the end of 2040 —up from 40 Bcf in 2012.

Electric power

8 6

Residential 4 Commercial

2 0

Transportation 1990

2000

2010

2020

2030

2040

Source: Energy Information Administration (EIA)

Despite EIA forecasts, the transportation sector will continue to represent only a fraction of the nation’s overall demand during the next 25 years. Growing from roughly 400 million dieselequivalent gallons to 8 billion in 2040, the transportation sector will make up only 4 percent of nation’s expected 37.5 trillion cubic feet (Tcf) of production each year.

“ The EIA forecasts the decline of natural gas consumption for residential heating, however, citing the population’s migration to warmer climates and improved efﬁciency of appliances and heating units.”

Natural Gas Demand by Sector

(Trillion Cubic Feet Per Year)

FN360

Source: Energy Information Administration (EIA) 43

“Legislators allude to economic opportunities in Asian markets as well as the geopolitical impact of shipping domestically produced gas into areas of Europe threatened by Russia’s conﬂict with Ukraine.”

Natural Gas Domestic Inventories Rebounding from their lowest levels in over a decade, natural gas inventories have more than doubled to 1,829 Bcf towards the end of June. At this rate, inventories are expected to reach normal levels by mid-October, just in time for winter demand to begin. U.S. Energy Secretary Ernest Moniz toured the Northeast this spring, calling on legislators and utility providers to expand the region’s energy infrastructure. Suffering the brunt of natural gas shortages this winter, Northeastern consumers are constrained by an aging network of pipelines and a growing demand in the electric generation sector, which now relies on natural gas for more than half its output compared to 30 percent in 2001.

Working Gas in Underground Storage (Billion Cubic Feet Bcf)

FN360

Source: Energy Information Administration (EIA)

Exports The Energy Department announced revisions to their LNG export application review process this quarter. The current review process has been called a “deli counter” approach —granting priority based on application file date. This encourages companies to “take a number” even before obtaining Federal Energy Regulatory Commission (FERC) approval —a pre-requisite for final administrative consent —and allowing unprepared applicants to delay those waiting in line. If implemented, the Department will only review those projects which have cleared initial regulatory hurdles, “prioritizing resources on the more commercially advanced projects.” Should the proposed changes be adopted, companies such as Cheniere Energy and Exxon Mobil would possess a distinct advantage over groups just now preparing to break ground, as both companies already gained conditional export approval. At the end of the quarter, the House passed a bill aimed at expediting administrative approval of LNG export facilities. If approved, the bill would hold U.S. Department of Energy administrators to a 30-day deadline following a site’s environmental review. Legislators allude to economic opportunities in Asian markets as well as the geopolitical impact of shipping domestically-produced gas into areas of Europe threatened by Russia’s conflict with Ukraine. Without their chokehold on natural gas supplies, Russia would lose much of its bargaining power, likely forcing a compromise. 45

Transportation & Logistics Total freight hauled in April climbed for the third straight month —adding 0.4 percent— as the nation continued its rebound from an unseasonably cold winter. The April index fell two-tenths of a point short of all-time highs, illustrating the industry’s steady recovery following the recession. Activity was up 4.8 percent since April of last year, 24.1 percent since April of 2009, but only 6.4 percent in the last 10 years, accentuating how far the industry had fallen following the ﬁnancial crisis. Much of the 10-year gains were made in the past 12 months, however, boding well for the momentum of the transportation industry. The Federal Motor Carrier Safety Administration, with help from Virginia Tech’s Transportation Institute, published a study correlating the use of electronic hours-of-service recorders (EHSRs) to crashes and hours-of-service (HOS) violations. Analyzing data gathered over 15.6 billion miles from 11 small, medium, and large carriers, researchers determined those with EHSRs enjoyed an 11.7-percent reduction in their overall crash rates, including a 5.1-percent reduction in preventable crashes. Furthermore, those using EHSRs were 51 percent less likely to receive citations for HOS violations. HOS regulations recently made headlines after actor/comedian Tracy Morgan was critically injured on the New Jersey Turnpike when a fatigued 46

tractor driver struck the actor’s limo bus at a high speed. As state representatives debate the merits of extending drivers’ eligible work hours, two New Jersey democrats urged senators to halt increases as further studies are conducted. Their proposed amendment to the existing HOS regulations failed to advance to the Senate floor; however, after Senate majority and minority leaders disagreed on the vote threshold. Now, imagine 51,000 truck drivers idling for an entire working year. According to the American Transportation Research Institute (ATRI)’s April report, that was the reality last year. Congestion along the nation’s roughly 50,000 miles of interstate highway cheated carriers out of over 141 million hours and more than $9.2 billion in operational expenses last year. Nearly 20 percent of that total was lost on California roadways. Gleaned from proprietary financial statements and anonymous GPS tracking data, the Institute determined congestion cost carriers an average of $0.0340 for each mile driven last year. Finally, in response to concerns surrounding the growing number of rail cars crisscrossing the nation with highly-volatile Bakken crude oil, the federal Department of Transportation announced in early May an emergency order requiring carriers to provide the State Emergency Response Commissions (SERC) of each state they pass through advance written notification of the trains’ volume, frequency, and county-by-county movements. Effective in early June, the order only impacts carriers hauling a million gallons or more —roughly 35 cars. Affected carriers responded with confidentiality agreements which would limit the audience to emergency response team members involved in planning.

Diesel Exhaust Fluid (DEF)

U.S. Gulf Coast NOLA Urea (Avg Dollars per Short Ton Granular Urea, FOB New Orleans)

Near-term Outlook North American urea followed a similar year-over-year supply/demand and pricing pattern through the ﬁrst half of calendar year 2014. The cost per short ton of prilled urea FOB New Orleans (referenced as “NOLA” herein) ran up $125 from a bottom of $285 in October ‘13, to a peak of $410 in March ‘14. NOLA has since retreated $70 and stabilized through the spring planting season.

FN360

As illustrated at right, urea prices ﬁrmed-up in June as strong demand drove granular urea prices higher, erasing price declines in May. In the short-term, barges loaded and ready to ship earned as high as $395/ST in late June. However, forward curve indicates a softening in Q3 and further softening into Q4 with the NOLA Q4 forward curve dipping to $300/ST. China’s export window opens July 1, freeing Chinese producers of the 15% export tariff. The ﬂood of Chinese and other foreign prilled urea expected to hit the domestic North American market between August and September supports a softening forward curve and should temper prices. Barring any worldwide ammonia plant and urea supply disruptions, we expect to see Q3/Q4 urea price declines as Chinese prill hits the market and agricultural demand softens off its usual spring planting highs.

Source: GreenMarkets

U.S. Gulf Coast NOLA Barge Urea

(Dolars per Short Ton)

since the start of Q2

FN360

Source: GreenMarkets

DEF Longer-term Outlook (2016+) Over the next three years, we expect supply to remain tight as demand for DEF-grade urea continues to grow, while domestic supply remains essentially flat. After that, expect the longer-term domestic supply shortfall to alleviate beginning in 2017 when new ammonia plants and plant expansions come on line from Koch, CF Industries, Agrium, Yara/BASF, and others. The annual cyclical cost curve will continue with some gradual increase in year-over-year urea and DEF supply cost, barring any major disruptions or anomalies in the world ammonia and urea markets. A significant demand-led wild card will be the engine-tuning strategies of heavy-duty engine manufacturers attempting to meet 2016+ CAFÉ fuel efficiency requirements. There is a tradeoff between fuel efficiency and NOX emissions, namely that fuel efficiency gains can be achieved at the expense of increased NOX emissions. However, this trade off can be solved with increased DEF dosing, which could create a potentially substantive future step-up demand for urea and DEF. 47

Fuel Taxes The sum of city, state, and federal taxes in cents per gallon Diesel Taxes – Effective July 1st, 2014

56.40¢ / Gallon 47.40¢ / Gallon 47.40¢ - 56.40¢

56.40¢ / Gallon 47.40¢ / Gallon

Gasoline Taxes – Effective July 1st, 2014

47.40¢ - 56.40¢

51.35¢ / Gallon 40.40¢ / Gallon

40.40¢ - 51.35¢ 51.35¢ / Gallon 40.40¢ / Gallon

40.40¢ - 51.35¢

Mansﬁeld’s National Supply Team Mansfield’s supply team brings unique experience and industry expertise to the table. From contract pricing and hedging to trading of fuel, renewables and alternatives such as CNG and LNG, the Mansfield supply team covers the gamut of knowledge that is required to manage today’s complex national fuel supply chain. Although they work as a national team, each member’s regional focus enables Mansfield to deliver geographic based supply solutions by more efficiently managing market specific refining, shipping and terminal/assets.

Andy Milton VP of Supply & Distribution Andy heads the supply group for Mansfield and during his tenure the company has grown from 1.3 billion gallons to over 2.5 billion gallons per year. Andy’s industry experience spans all aspects of the fuel supply business from truck dispatch, analytics, and index pricing to hedging and bulk purchasing. Prior to Mansfield, Andy worked at RaceTrac Petroleum. Andy’s expertise in purchasing via pipeline, vessel, and the coordination via futures and options for hedging purchases enables him to successfully lead a team of experienced and motivated supply personnel at Mansfield. Andy’s team handles a wide geographic area of all 50 states and Canada, including all gasoline products, ULSD, kerosene, Heating Oil, biodiesel, Ethanol, and Natural Gas. Andy’s education began at Young Harris College and later at Georgia Southern University where he received a BS in Sports Management.

Dan Luther Manager of Supply & Distribution Dan is responsible for purchasing, hedging, and the distribution of natural gas and renewable fuels. Before joining Mansﬁeld, Dan was Director of Operations at Aska Energy and also worked at RaceTrac Petroleum, where he helped manage all barge, rail, and truck fuel deliveries before assuming ethanol trading responsibilities, including purchasing product to fulﬁll RaceTrac’s demand while trading product across other U.S. markets. Dan holds a BSBA in Supply Chain Management and Marketing from Ohio State University and is currently working towards his MBA at Georgia Tech.

Evan Smiles Northeast Supply Supervisor Evan began his career with Mansﬁeld as an intern in the supply department back in the winter of 2011, assisting in the Southeast region. Evan quickly advanced into the role of Northeast Supply Optimization Analyst and currently holds the position of Northeast Supply Supervisor, handling various tasks including supply bids, day deal purchasing, long haul analysis, contract negotiations/fulﬁllment and supply optimization. Evan earned a BS in Sports Management and BBA in Finance from the University of Georgia.

Jessica Phillips Renewable Supply & Distribution Supervisor Jessica is based out of Houston, TX and is responsible for nationwide purchasing, hedging, and the distribution of renewable fuels. Joining the Mansﬁeld team in 2009, she has held multiple titles over the years: Contracts Coordinator, Regional Supply Analyst, Senior Strategic Supply Analyst, and as of late, Renewables Supply Supervisor. Jessica has a strong background in reﬁned products scheduling, contracts, optimization and market analysis and is driven to continue to expand her knowledge in renewable and alternative fuels. 49

Chris Carter Southeast Supply Manager Chris serves as the Southeast Supply Manager responsible for reﬁned product purchases including contracts, day deals and rack purchases. The Southeast region covers Florida, Georgia, Mississippi, Alabama, Tennessee, South Carolina, North Carolina, Virginia and Maryland. His responsibilities also include supply contracts and current bids. Chris manages pipeline shipments of gas and diesel on the Colonial, Plantation and Central Florida Pipelines. Chris joined Mansﬁeld in 2009 as a Supply Optimization Analyst and earned his BA in Business Management from North Georgia College and State University.

Nate Kovacevich Senior Supply Manager Before joining the company, Nate worked for Yocum Oil Company as a Senior Trader where his responsibilities included managing the company's reﬁned product and renewable fuels procurement, handling all hedging related activities, and providing risk management tools and strategies to help customers mitigate volatility and price risk. Nate previously worked for FCStone, where he performed commodity research and analysis for customers with agricultural and petroleum related risk, devised and implemented risk management programs and strategies, and executed futures and option orders on all the major exchanges as well as any OTC related transactions. Nate earned his BA in Entrepreneurship and Economics from the University of St. Thomas

Evan Poole Supply Support Manager Evan started his career with Mansﬁeld analyzing purchasing strategies and index behavior throughout the US and Canada. He’s the resident expert in Canadian reﬁned products and serves in an advisory capacity to the Canadian Supply team. Evan holds an MBA concentrated in Managerial Leadership from Piedmont College.

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FUELSNews 360° M A RKET NEWS & INFORMATION

Mansfield Energy Corp. www.mansfieldoil.com www.fuelsnews.com 678.450.2000 1025 Airport Pkwy SW Gainesville, GA 30501 United States of America

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* Some of the information provided is owned and licensed by OPIS. In no event shall any user copy, modify, publish, retransmit or otherwise reproduce information from OPIS. Copyright 2014. All rights reserved. Disclaimer: The information contained herein is derived from sources believed to be reliable; however, this information is not guaranteed as to its accuracy or completeness. Furthermore, no responsibility is assumed for use of this material and no express or implied warranties or guarantees are made. This material and any view or comment expressed herein are provided for informational purposes only and should not be construed in any way as an inducement or recommendation to buy or sell products, commodity futures or options contract.

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