FUELSNews 360 Q1 - 2014 by FUELSNews

M A R K E T

N E W S

I N F O R M A T I O N

JANUARY – MARCH Q1

1st QUARTER Q4

2 0 1 4

Q44

Q1 2014 Executive Summary The industry rang in the New Year with a positive outlook. The global economy showed signs of a slow, but steady, recovery — growing by 3 percent in 2013 and set to achieve 3.7 percent this year, according to the International Monetary Fund (IMF). U.S. fundamental economic indicators were nearing pre-recession levels, and both domestic crude and natural gas production reached new highs. Shortly after the start of the year, domestic production and distribution networks were stretched to their breaking points as a seemingly endless string of polar vortexes descended upon the Midwest and Northeast regions causing record low temperatures responsible for disrupting production at several key refineries, quickly draining existing inventories, curtailing natural gas usage, and driving diesel and natural gas prices to the highest in the nation. Remaining refineries, unprepared for the rapid drop in temperature, struggled to meet demand for coldresistant distillate products. In addition to the cold, heavy snowfall and icy conditions caused delays in transportation as carriers were urged by local and state officials to stay off the roads. Average heating degree days rose as much as 19 percent over last year and were 10 percent above the 10-year average, costing propane users in the Midwest roughly 34 percent more than previously forecasted to heat their homes. As winter weather raged on in the northern states, China’s economic situation seemed to worsen with each passing month — year-over-year exports suffered their greatest decline in five years and crude imports dropped significantly when compared to previous years. China’s economic decline raised concerns of the effect on other countries if the second-largest economy and largest net importer of crude oil enters a recession. Chinese officials worked quickly to stem talk of a Chinese recession, but have yet to offer noteworthy measures. At the start of March, Russia surprised the global community with their “liberation” of Ukraine’s southern territory of Crimea following the sudden ousting of Ukrainian President Viktor Yanukovych. With Russia being Europe’s top supplier of natural gas and the third largest producer of crude worldwide, the market reacted violently to initial reports, but calmed after investors realized it wasn’t a full-scale invasion as they’d been led to believe. Since Crimea’s annexation, European leaders have threatened energy sanctions, but have yet to act for fear of crippling themselves with no real punitive effect on Russia. Finally, non-commercial traders increased their net long position during the first quarter to the highest on record based on speculation of rising WTI crude values. Now, we’re waiting with baited breath for the ensuing avalanche of selling trades as they exit these positions. It may be fast and painful for some when the music stops. Despite the negative events shrouding the year’s first quarter, investors and consumers can rely on the strength of industry fundamentals to keep prices elevated as the IMF still believes global crude demand should increase in 2014 by an estimated 1.5 percent — revised upward mid-March to a record-setting 92.7 million barrels a day in spite of the troubles listed above. Our new Federal Reserve Chairwoman, Janet Yellen, has expressed confidence in the inflation rate, an improving job market, and the economy’s ability to stand on its own. Lastly, domestic production of oil and natural gas are still going strong and we can expect infrastructure to make great strides this quarter.

Index FUELSNews 360° Quarterly Report Q1 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

January through March 2014

PADD 1A, New England

First 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 7

Global Economic Outlook

U.S. Economic Outlook

Fundamentals 11

OPEC Production Forecast

Domestic Production, Consumption, and Exports

Domestic Infrastructure

FUELSNews 360° Commentaries 18

Commentaries; Andy, Sara and Dan

Commentaries; Evan and Jessica

Commentaries; Chris, Evan and Fernando

Alternative Fuels 36 39

Renewables Natural Gas

Urea (Diesel Exhaust Fluid)

Transportation & Logistics

45-46

FUELSNews 360˚ Supply Team

Overview January 2014 through March 2014 WTI’s bullish climb began in mid-January and continued strong through late February largely thanks to high distillate demand caused by ongoing winter storm conditions. Significant inventory drawdowns following the completion of TransCanada’s Keystone Gulf Coast Pipeline also contributed to the rise in index values. WTI started March by hitting the high of the quarter on news of Russia’s militaristic move into Crimea. Finally, support failed in mid-March when temperatures warmed and it became evident Russia wouldn’t commit to a full military incursion.

Russian soldiers guarding a Ukrainian naval base in Perevalne, Crimea, Ukraine. On February 28, 2014 Russian military forces invaded the Crimea peninsula.

First Quarter 2014 Russia Invades Crimea U.S. unemployment falls to lowest rate since Ocober 2008

101.58

Distillate supplies depleted on extreme weather

First SPR release since August 1990

WTI inventory stocks fall to lowest levels since March 2012

FN360

Source: Bloomberg Finance L.P. 4

Overview First Quarter Summary NYH ULSD futures hit a high at the end of January based on the winter usage and severe storms that plagued the Northeast. Meanwhile, crude and gas futures hit their highs much later in the quarter with demand picking up as we move into spring. Looking across the board, ULSD, RBOB and WTI contracts all had different reactions over the quarter with ULSD being the most violent in the quarter. Of course, despite all the noise, ULSD futures ended the quarter right where they started.

A 10â&#x20AC;? snow storm with sub-freezing temperatures, January 21, 2014 the Bronx, New York.

Summary, First Quarter 2014 Hi: 327.94 Hi: 302.03

293.20 291.10

Low: 289.08

Low: 259.51 Hi: 104.22

101.58 Low: 91.69

16457.66

Hi: 16530.94

FN360o

Low: 15372.80

Source: Bloomberg Finance L.P. 5

ÂŠ 2014 Mansfield Energy Corp.

“Most estimates show China leading the charge at roughly 7 percent GDP growth—still down from 7.5 percent in 2013— followed by the U.S. at roughly 3 percent and Europe bringing up the rear at 1.5 percent.”

Container port in Hong Kong, China

Global Economic Outlook

Gazprom powered thermal power plant facility in Alder, Russia

According to the International Monetary Fund (IMF), the global economy is still on track to expand at a rate of 3.7 percent this year. Most estimates show China leading the charge at roughly 7 percent GDP growth—still down from 7.5 percent in 2013—followed by the U.S. at roughly 3 percent and Europe bringing up the rear at 1.5 percent. Fears of deflation in both Europe and Japan have investors worried, thereby slowing their expected growth rates. China’s economy—second largest globally and a key factor in the petroleum industry—has been a roller coaster ride this quarter. First, its currency, the yuan, rose to a 20-year high, garnering 6.0406 yuan to the dollar. By mid-February, however, it faltered and lost more ground than in any previous quarter going back to 1994 when China’s unification of its dual exchange rates resulted in the yuan losing 33 percent of its value overnight. Furthermore, China’s exports and crude imports both slowed by as much as 18 percent in the first quarter—casting doubt on the Communist Party’s plans for 7.5 7

percent economic growth in 2014 and raising concerns as the International Energy Agency (IEA) attributes 11 percent of global crude oil demand to China. Following the Crimean incursion, Russia’s equity market has fallen roughly 18 percent and the ruble 9 percent on fears the global community could retaliate on Ukraine’s behalf. Growth estimates for Russia have already fallen to less than 2 percent and inﬂation is being offset by the Central Bank through increases to its interest rates. Russia’s slowing economy will likely be supported by the International Monetary Fund through Ukraine’s debt repayment bailout and the 80 percent increase to Ukraine’s natural gas bill —courtesy of state-owned Gazprom. Despite all the bluff and bluster, the market’s general sentiment seems to be that diplomacy will almost certainly prevail and Russia’s economy should bounce back quickly.

“ Rising from a 5-year low of 55.3 in November of 2008, consumers report higher conﬁdence in the state of our economy than in 83 percent of reports going back to 1960.”

U.S. Economic Outlook enough. The Fed’s target unemployment rate is 6.5 percent. We’re quickly approaching that quantitative measure, yet more than 7 million Americans are still underemployed or underpaid and nearly 700,000 have simply given up looking for work. Chairwoman Yellen stresses Price the importance of qualitative improvements to the Producer Index (PPI) Month-to-Month Change January March U.S. labor market as much asFebruary the quantitative measures. Current 0.2% -0.1% 0.5% rate of inﬂation is roughly 1 percent—half of the Fed’s 2 percent target—leaving room for the Fed to try stimulating job growth, which typically leads to inﬂation. This quarter, we witnessed the changing of the guard as Federal Reserve Chairman Ben Bernanke stepped down to make way for economist and professor emeritus Janet Yellen. At the peak of the Great Recession in late 2009, unemployment reached 10 percent. Since that time, we’ve posted 41 consecutive months of payroll growth, added 7.5 million jobs and the unemployment rate has fallen over 3 percent. For Chairwoman Yellen, this isn’t good

U.S. consumer sentiment fell in March, but the quarter still showed considerable improvement over the fourth quarter of 2013. Rising from a 5-year low of 55.3 in November of 2008, consumers report higher conﬁdence in the state of our economy than in 83 percent of reports going back to 1960.

In the second quarter, Americans may begin to see the effects of the Fed’s second priority: bringing an end to the ﬁve-year Quantitative Easing Program. While the program will likely continue into the third or fourth quarter, businesses are already adjusting for the inevitable PriceThis Index (CPI) Month-to-Month Change riseConsumer in interest rates. should discourage risky investments and January February March possibly corporate spending—which is counter to the Fed’s ﬁrst 0.1% 0.1% 0.2% goal discussed above.

Consumer Sentiment Index January 82.2

February 81.6

March 80.0

Consumer Sentiment Index

FN360o Source: University of Michigan 9

U.S. Economic Outlook CPI Consumer prices increased only marginally between

Consumer Price Index (CPI) Month-to-Month Change

January and March. Higher food costs were seen in all months as two-thirds of major grocery store food group indices increased. Meanwhile, energy costs spiked in January, but have since lost their early quarter gains.

January

February

0.1%

March

0.1%

0.2%

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

February

'"%#$

82.2

'"!#$

March

81.6

80.0

&"%#$ &"!#$

()*$

.)0$

<4=$

;46$

567$

89:$

34,$

./1$

+/2$

./0$

+,*$

()-$

!"!#$

()*$

!"%#$

FN360o Source: U.S. Bureau of Labor Statistics

PPI Producer prices showed little movement in the first quarter of 2014, which is not surprising as interest rates and inflation remain near zero. Lower retail margins on clothing and accessories are being blamed for declines in final demand for services this February. If the Fed attempts to stimulate job growth in the coming quarter, it’s likely we’ll see these numbers creep slightly higher along with inflation rates.

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

February

0.2%

-0.1%

March 0.5%

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

Consumer Price Index (CPI) Month-to-Month Change January 0.1%

February 0.1%

March 0.2%

Consumer Sentiment Index FN360

January Source: U.S. Bureau of Labor Statistics

82.2

February 81.6

March 80.0

Fundamentals Increased Western Production to Offset OPEC Shortfall in Coming Years

EIA projections indicate global petroleum supplies will increase by 1.3 million barrels a day over the course of 2014. The majority of this volume is expected to originate in the Americas with Brazil, Canada, and the United States being the primary contributors. OPEC nations, on the other hand, accounted for 2.3 million barrels of lost production each day in February and are expected to fall short of projections so long as Libyan, Nigerian, and Iraqi oil ﬁelds lay idle. At the moment, signiﬁcant energy sanctions against Russia seem unlikely. If the situation deteriorates, expect dramatic revisions. As mentioned above, non-OPEC nations are contributing more heavily towards global crude oil production. Therefore, some nations within OPEC choose to curtail their own production in lieu of contributing to a glut and subsequent drop in crude prices. This results in a surplus of production capacity. As seen below, idle capacity is expected to approach ten year highs in 2015 as Western oil production continues to develop.

OPEC Surplus Crude Oil Production Capacity (Million Barrels per Day)

FN360o Source: Energy Information Administration (EIA) 11

Fundamentals

Balancing Domestic Production with Consumption and Exports Distillate Inventories Showing Signs of Recovery Following Worst Winter in Decades Distillate Inventories We started the year with distillate inventories well below the 3-year historical range. This only compounded supply concerns when a series of winter storms disrupted production at several key reﬁneries in the eastern United States and increased residential demand for heating oil, natural gas, and propane at the same time plants were burning diesel to power generators. Prices surged as distillate inventories shrank to the lowest levels in six years and infrastructure failed to meet consumers’ needs.

(Million Barrels)

FN360o Source: Energy Information Administration (EIA)

Distillate Days of Supply

Since then, inventory levels have recovered and the average Days of Supply has returned to safer ranges. Additional volume should be added to these reserves as we move into the second quarter given the amount of crude building along the Gulf Coast and traditionally lower diesel demand going into the summer months.

FN360o Source: Energy Information Administration (EIA) 13

Fundamentals Cushing Glut Flows into Gulf Coast Storage At the end of January, crude oil inventories previously trapped in Cushing, Oklahoma poured into Texas following the completion of TransCanada’s 70,000-bpd Gulf Coast Pipeline Project. This lent early support to the rise in WTI crude futures—gaining nearly 10 percent over the course of a month—but has since had the opposite effect. Setting records with 200 million barrels in storage, Gulf Coast inventories continue to grow, applying downward pressure to WTI values. Until reﬁners gain some traction and put these inventories to use, look for prices to retreat to their previous levels of $90 to $95 a barrel in the absence of geopolitical strife.

Cushing, OK Crude Oil Inventories

(Million Barrels)

Source: Energy Information Administration (EIA)

Gulf Coast (PADD 3) Crude Oil Inventories

(Million Barrels)

Source: Energy Information Administration (EIA)

Fundamentals Just How “Refined” do Refined Products Need to Be? In accordance with the 1975 Energy Policy and Conservation Act, crude oil exports are heavily curtailed. In fact, only 2 percent of our domestically produced oil is exported with Canada and Mexico receiving the lion’s share. Export of refined products, on the other hand, is fair game. Therefore, traders seem to have two options: fight for legislation repealing an antiquated ban or refine the raw material into finished products. Some are choosing a third option and challenging the definition of “Refined Products.”

U.S. Exports Following Crude Oil Ban

(Million Barrels per Day)

FN360o Source: Energy Information Administration (EIA)

Scheduled for a July startup date, the first of many one-step refineries will process crude stocks just enough to circumvent the ban. Owned by Kinder Morgan Energy Partners LP, the refinery’s construction cost 90 percent less than full-scale facilities. The site was designed with plans to expand, which may soon be necessary as BP has already locked up 80 percent of the facility’s 100,000 bpd capacity for a 10-year period. Three similar operations have since been proposed. According to the Energy Information Administration (EIA), one 42-gallon barrel of crude generates 45 gallons of finished petroleum products—a 7.5 percent gain—over 80 percent of which will be highly-profitable gasoline, diesel/heating oil, kerosene, and propane. So, as exports of refined products rose in 2013 to an average of 2.75 million barrels a day, traders were actually sending 2.5 million barrels of crude overseas each day. If refineries such as these become common and crude slips across the border without being fully refined, U.S. refiners will miss out on growing crack spreads as well as volume gains produced through the refining process.

Fundamentals

Pipeline Expansions Lead to Greater Product Availabilities TransCanada Wins the Race to the Coast What do you get when you add 4,844 skilled American workers, 11 million hours of labor and $2.3 billion US dollars? A 36-inch pipeline stretching 485 miles from Cushing, Oklahoma to Nederland, Texas carrying up to 700,000 bbl/d of North American crude oil. TransCanada announced the completion of their Gulf Coast Pipeline Project January 22 after 18 months of construction. As part of this project, TransCanada also added 2.25 million barrels of crude storage in Cushing. As a result, Cushing inventories were finally able to drain into Gulf Coast refineries, and WTI crude futures held their place above $100 a barrel for the first time in 4 months. Source: TransCanada Pipelines Limited

TEPPCO to Resume Deliveries of Refined Products to East Coast Terminals In the last days of March, Enterprise TE Products reversed a nine-month-old decision to halt operations along their east coast TEPPCO pipeline and announced plans to resume interstate diesel shipments on May 1st. This will link refineries in Louisiana and Arkansas to cities throughout the Ohio Valley and the Northeast. Several states have experienced thin supplies and outages since the pipeline’s closure last summer. Consequently, local refineries assumed much of the supply responsibilities for the region. Unfortunately, the old adage “don’t put all your eggs in one basket” comes to mind. For instance, when Valero’s 195,000-bpd Memphis refinery suffered an FCC malfunction and went into premature turnaround at the end of February, supply became scarce and product was frequently long-hauled from out of state. This continued for several weeks. While the reopening of the TEPPCO pipeline may not lower prices on a consistent basis, it would certainly provide additional security of supply in situations such as these and protect consumers from product outages. 16

Fundamentals

“The market may experience a slight surge in WTI values, but most of the bang was spent when TransCanada completed their pipeline in January.”

400,000-BPD Crude Oil Pipeline Expansion to be Completed in May Enterprise Products Partners, LP surprised investors and analysts alike with a revised start-up date for their Cushing-to-Gulf-Coast Seaway pipeline expansion. Previously scheduled for the end of Q2, the additional 30-inch pipeline—available as early as late May—will run parallel to the existing 500-mile pipeline and roughly double Seaway’s capacity for crude to 850,000 barrels a day. The market may experience a slight surge in WTI values, but most of the bang was spent when TransCanada completed their pipeline in January. This comes after a lengthy court battle between Enterprise and pipeline builder Energy Transfer Partners (ETP) was resolved in early March. The jury found that Enterprise had violated the partnership, resulting in a $319.4 million award for damages to ETP. While ETP claims rival pipeline company Enbridge Inc. lured Enterprise away and was therefore also ﬁnancially liable for ETP loses, the courts did not agree. Enterprise still maintains there was never a legally binding partnership and is not responsible for any losses incurred by ETP. 17

Source: Seaway Crude Pipeline Company, LLC

FUELSNews 360˚ Commentaries Andy’s Answer

BULL BEAR

In the last FN360, I went into 2014 bullish on diesel prices and yet I certainly wouldn’t have predicted the roller-coaster that would ensue. Prompt ULSD futures (formerly HO futures) sky rocketed on tight NYH supply and one blistering snow storm after another. However, what goes up does come down eventually and diesel futures did exactly that by ending March pretty much where January started. Regarding WTI, the overall trend seemed to be bullish in the ﬁrst quarter, and I see no reason for that to fade going into the second quarter. The fact that the Non-Commercials are over 300% to the bullish side deﬁnitely helps my case. At least until the herd changes direction. In closing, last quarter I referenced the range that ULSD futures have stayed in since 2011 ($3.25/$2.80) and the trend should continue. Without a reason to bounce out of that band, I’m going to stick with it and ride that pony. Giddy up.

Sara’s Synopsis

BULL BEAR

Dan’s Dissertation

BULL BEAR

Petroleum futures are struggling to ﬁnd direction. In recent days, we have seen ups and downs during the day, as well as mixed closes across the board. Geopolitical tensions are offering support, but at the same time, oil supplies have expanded and are keeping prices in check when they start to gain momentum. However, crude pushed through the 200-day moving average at the end of the quarter, and this tends to be a sign that prices will continue to rise. In the short-term, I am bullish on the market for crude, but I believe reﬁned products will primarily see support from their spot market and regional fundamentals.

BULL BEAR

I am bearish both crude oil and products in the second quarter. As the first quarter comes to an end, crude reached a three-week high on the lingering tensions in Ukraine – but that will dissipate as diplomacy works its course over the next several months. Accordingly, the U.S. and the European Union will not move forward with intensified sanctions against Russia, the world’s largest energy exporter. Price premiums built in for conflict should thereby subside.

FUELSNews 360˚ Commentaries Evan’s Estimation

BULL BEAR

Looking back at the ﬁrst quarter of 2014, we saw the winter weather and Ukraine/Russia crisis as the main factors affecting the market. Even though the winter weather is over and markets have backed off considerably, I am predicting another spike in all prices (crude, diesel and gas) for the second quarter of 2014. The driving forces I see affecting the market are the disagreement between Russia and Ukraine and the increased demand of gas entering the driving season. The battle between Russia and Ukraine is still prevalent, and my prediction is this situation is going to continue to escalate and will draw in more involvement from the United States and the EU. Russia is a large exporter of crude and reﬁned products and, if this dispute continues, the exports could be affected, driving up fuel prices. On a more local level, as we enter spring and summer, gas demand will be on the rise. As the driving season is revving up, I am expecting gas demand for this season to be higher than previous years due to the winter that was just experienced. More long distance vacations will be taken since many residents were stuck indoors due to the excessive cold and snow.

Jessica’s Judgment

BULL BEAR

In recent weeks, ethanol production has suffered with distillers realizing they cannot continue to manufacture a product they cannot adequately ship in light of railcar concerns. Ethanol production averaged 949,000 barrels per day in December 2013, whereas current ethanol production has been roughly 870,000 barrels per day. Ethanol prices have steadily increased, and I do not expect to see a reprieve in coming months. The EIA is hopeful for a Q2 production increase. However, with annual plant maintenance and inspections — AKA “Spring Cleaning”— right around the corner, I predict ethanol prices won’t normalize until the third quarter. The Biodiesel industry produced a record high of 1.8 billion gallons in 2013. This total signiﬁcantly surpassed the 2013 RFS requirement. However, it is speculated that the 2014 RFS will hold production obligations to last year’s volume of 1.28 billion gallons in addition to reducing the Advanced Biofuel requirement. If the rumor mill is factually foretelling, biodiesel growth will be jeopardized. I expect biodiesel production will drastically decline, which will keep prices on the rise.

FUELSNews 360˚ Commentaries Chris’s Concept

BULL BEAR

Evan’s Expression

BULL BEAR

For the second quarter of 2014, I’m overall bullish on products. We will see the “spring rally” for RBOB as we enter the RVP transition. I expect wholesale and retail prices to continue their rise due to the current ethanol constraints. Also, the Commerce Department showed that both household spending and personal income rose 0.3 percent. Consumer conﬁdence rose to a six year high in late March. With this info and a rise in orders for goods, I expect the demand and prices for diesel to continue to rise for the second quarter of 2014.

The first quarter proved to be more bullish in price than I’d initially anticipated, but that’s my fault for studying physics in college in lieu of meteorology. Colder than average temperatures and geopolitical strife were unpredictable, but only served to amplify movement stemming from fundamental trends already in play—the Cushing drawdown kicked off, winter demand drained inventories, and the start of turnaround supported late quarter gasoline prices. In the second quarter, expect gasoline futures to climb while the industry prepares for summer demand, as always. Diesel futures will decline, but strong exports of refined products paired with growing global demand lead me to believe wholesale prices will stay in line with historical norms. Strong domestic fundamentals and the growing supply of crude in Houston tell me WTI will likely land between $90 and $95 a barrel. I personally feel refiners’ eyes were bigger than their stomachs when the MidCon glut began pumping into Houston storage and now they’ll be looking to liquidate.

Technical traders could prove to be the unexpected twist this quarter, however. We’re going in with record net long positions taken by non-commercial traders and I have to believe that position is going to turn and turn quickly. Besides, market sentiment and related news are both extremely bullish for the moment. Historically, that doesn’t bode well for the market. For these reasons—and to retain my role as resident naysayer—I believe we’ll see a bear market in the second quarter.

Fernando’s Forecast

BULL BEAR

Over the years, I have found the farmer’s almanac to be more accurate than our weather models. This year the almanac calls for a long and hot summer. When considering the short term technical indicators, current storage inventory levels, the fact that 50% of the new electric generation plants built last year are natural gas ﬁred, AND the almanac; I have to go long natural gas for this summer.

“Prices surged as distillate inventories shrank to the lowest levels in six years and infrastructure failed to meet consumers’ needs.”

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

PADD 4: Rocky Mountain

Did You Know? PADD 2: Midwest

PADD 3: Gulf Coast

PADD 1: East 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 1 East Coast PADD 1A New England Winter weather affected each PADD differently this quarter, but the Northeast certainly endured the greatest price swings and shortest supply out of the bunch. Now, residents of the Midwest and Ohio Valley may be thinking New Englanders just need to turn their thermostats down and they’ll stop running out of heating oil, because temperatures in these regions were deﬁnitely colder on average than those experienced throughout the Northeast. However, the Northeast had to contend with infrastructure issues which exacerbated the situation.

At the same time, consumption of natural gas rose, draining in-line inventories and taxing compressor capacity. This led to natural gas allocations and severe spikes in price throughout the Northeast and Central Atlantic states. Many power plants reverted to diesel-burning generators as a way of both saving a buck and relieving pressure on the natural gas network. Why should this matter? Some of these plants were consuming upwards of 250,000 gallons of diesel each day. That’s roughly 35 truckloads of previously non-existent demand on an already strained market.

Local refiners weathered the first couple of storms with little difficulty, but by the start of February, production simply couldn’t meet demand. Consequently, the region suffered sporadic outages of low-sulfur kerosene and winter grade diesel, causing paraffin wax to separate from the diesel—”or gel”— for many customers.

In addition to weeks of freezing temperatures and increased demand, the Northeast region faced heavy snowfall and icy roads—limiting carrier availability as many chose to either reduce operating hours or pull their ﬂeets off the road entirely. Similar conditions accompanied by high winds also led to the closing of New York Harbor—halting vessel trafﬁc and delaying deliveries of much needed diesel, heating oil, and propane.

PADD 1 East Coast

Short Supply Creates Disconnect Between Price and Inputs

PADD 1A New England

Basis (noun): the spread between futures contracts trading on the New York Mercantile Exchange (NYMEX) and a “cash” or “spot” value associated with the product’s physical region of origin. Traditionally, these regions resemble the PADD regions. Think of basis as a region’s hunger for product. Basis will rise if a market is short product and fall when a market is oversupplied.

During the ﬁrst quarter, ultra-low sulfur diesel prices in the New York Harbor region jumped to levels that haven’t been seen in over eight years as a result of extremely tight supply. This resulted in abnormally high basis values as NYMEX diesel contracts rose in value at a slower pace than gallons shipping within New York Harbor. At the peak of the Northeast’s winter worries, basis rose to nearly 46 cents a gallon, suggesting a gallon of diesel was more valuable in the Northeast than other regions and thereby creating an arbitrage situation. Notice a similar occurrence surrounding Hurricane Sandy towards the end of 2012.

New York Harbor Basis

“ During the ﬁrst quarter,

ultra-low sulfur diesel prices in the New York Harbor region jumped to levels that haven’t been seen in over eight years as a result of extremely tight supply.”

(dollars per gallon)

Winter Storm Season Hurricane Sandy

FN360

Source: Energy Information Administration (EIA)

Rack-to-Retail Diesel Spreads per PADD The following charts represent the average spreads between diesel retail prices and wholesale rack for the past 12 months. Note that retail prices react more slowly to changes in wholesale cost. PADDs 1A and 1B, for instance, show sharp increases in wholesale cost at the start of January, yet retail prices respond slowly and steadily. Conversely, as wholesale rack prices slip lower in the end of March, retail prices remain high in order to capture some of the margin lost in the sharp uptake.

PADD 1 East Coast PADD 1A New England

Rack-to-Retail Spreads Wholesale diesel prices increased rapidly this winter in response to short supply and faltering distribution. This provides a wonderful example of the relationship between rack and retail pricing. Wholesale racks follow the laws of supply and demand—hence the sharp rise in wholesale cost when supply was at its worst. Retail, on the other hand, lags considerably— resulting in compressed margins when wholesale costs are on the rise, but retailers are slow to give up that additional margin as the crisis subsides. See the graph below.

PADD 1A Wholesale vs. DOE Retail (34 cent avg.)

FN360o Source: Energy Information Administration (EIA)

Because retail customers most often make their purchasing decision purely on price, retail suppliers are slow to increase their price at the pump. Can’t get cars under the canopy if you’re the highest price on the strip, right? Of course, as cost spikes subside and the wholesale support falls off, retail prices “parachute,” allowing the retailer to recoup some of the loss experienced on the front end.

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

As cold weather continued, the spread between New York Harbor basis and Gulf Coast basis widened. The Colonial Pipeline delivers Gulf Coast product as far north as Linden, NJ with a transportation cost of roughly 4.5 cents per gallon. With Gulf Coast diesel products selling 25 to 40 cents a gallon lower than New York Harbor diesel between January and February, savvy shippers capitalized on the distillate shortage in the Northeast.

New York Harbor Basis vs. Gulf Coast Basis

“ With Gulf Coast diesel

(dollars per gallon)

0.5225

products selling 25 to 40 cents a gallon lower than New York Harbor diesel between January and February, savvy shippers capitalized on the distillate shortage in the Northeast.”

0.4992 0.4508

FN360

Source: Energy Information Administration (EIA)

As New York Harbor basis continued to rise, ﬂat prices rose as well in the New York Harbor barge-fed terminals across the east coast —Jacksonville, Charleston, Savannah, and Wilmington to name a few. This created additional strain and eventual allocations in Gulf Coast pipeline-fed terminals—such as Bainbridge, Albany, North Augusta, and Belton—as product was long-hauled to supply these coastal markets.

Pipeline terminals in much of the Southeast saw relief by mid-March as steady imports into the New York Harbor eased demand, temperatures rose, and natural gas prices normalized. Batch delays along the Colonial Pipeline still plagued a few markets. Knoxville, for instance, experienced 9 to 10-day cycle delays in late March, resulting in tight allocations in Knoxville and Chattanooga markets.

PADD 1 East Coast PADD 1B & 1C Central & Lower Atlantic “ Several markets

experienced terminal outages as the seasonal transition to lower Reid Vapor Pressure (RVP) products kicked off.”

Southeast Gas Much of the focus this quarter has been on Southeast distillate allocations. However, in mid-March, the focus shifted as gasoline allocations tightened. Several markets experienced terminal outages as the seasonal transition to lower Reid Vapor Pressure (RVP) products kicked off. This affected both branded and unbranded customers. During this time, Atlanta’s boutique fuel requirement created supply issues as few markets outside of the immediate area carry fuel meeting the particular speciﬁcations. Finally, ethanol supplies throughout the Eastern United States thinned as a result of insufﬁcient railcar availability departing from the Midwest region where the majority of ethanol originates. Gasoline allocations resulted from lack of blending stock to create E-10.

Possible RVP Change for Florida and North Carolina Several counties in Florida and North Carolina may soon see changes in their summer RVP requirements. The standard RVP for summer is a 9psi. However, there are several counties in both states that require a 7.8psi product between June 1st and September 15th. This results in terminals supplying both 7.8 and 9.0psi products to meet customer needs in and out of mandated areas. In the past, it has also resulted in product outages affecting 7.8psi counties while 9.0psi supplies are plentiful. On March 19th, the EPA proposed a single, statewide RVP requirement. The EPA’s proposal will become law after 60 days, assuming it passes the 30-day comment period uncontested. Florida markets stand to gain the most from this proposal as Jones Act vessels are in short supply, and a single RVP requirement would reduce product outages and logistical complications associated with shipping multiple waterborne products.

Memphis Refined Product Shortage In March, Memphis and its surrounding areas suffered supply allocations and terminal outages due to a breakdown in Valero’s gas unit. The refinery, scheduled to start its turnaround on April 1st, halted production when the Fluid Catalytic Cracker (FCC) went offline, causing the refinery to start repairs ahead of schedule. Valero’s 70,000-bpd gas unit was expected to be out of service for 50 days and the 35,000-bpd diesel unit was down for 21 days. During this outage, it was not uncommon to see unbranded outages for gas and diesel products. Long-hauls from Birmingham, Cape Girardeau, North Little Rock, and Collins were necessary to fulfill the demand in Memphis. Exxon also scheduled several barges up the Mississippi River to deliver product to their terminal. This relief was delivered late in March to help ease the allocation restrictions. Memphis wasn’t the only terminal city to feel the effects of the crippled Valero refinery. Valero supplies their Kentucky terminals with product from the Memphis refinery. As a result, allocation restrictions were placed on terminals in Louisville and Lexington. 26

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

Rack-to-Retail Spreads Similar to PADD 1A, the Central and Lower Atlantic regions illustrate a slow descent on retail pricing coming out of the winter storm season. This “parachuting” effect results in greater retail margins on the tail end of a crisis to make up for losses suffered at the onset.

PADD 1B Wholesale vs. DOE Retail (37cent avg.)

FN360o Source: Energy Information Administration (EIA)

PADD 1C Wholesale vs. DOE Retail (23 cent avg.)

FN360o Source: Energy Information Administration (EIA)

PADD 2 Midwest

Cold Weather Effect on Operations Just as people throughout the U.S. were adversely affected by the extreme cold weather over the first quarter, oil and gas operations were also disrupted. In the Midwest, this included interruptions at oil refineries and declarations of force majeure at petroleum terminals. On January 7th, as the temperature in eastern Michigan dropped to -12 degrees Fahrenheit, Marathon Petroleum’s 120,000-bpd Detroit refinery shut several production units. Just north of Detroit in Canada, Shell shut an unspecified unit at their 75,000-bpd Sarnia refinery for weather related repairs. On January 8th, temperatures around -10 degrees Fahrenheit caused flaring at ExxonMobil’s 238,000-bpd Joliet, IL refinery that feeds the Chicago area. While production wasn’t officially impacted, Citgo reported their 174,500-bpd Lemont, IL refinery was “working its way through minor issues caused by low ambient temperatures.”

Ho-Ho Pipeline Systems

Cold weather is a signiﬁcant challenge for a reﬁner as some production units operate at nearly 1,000 degrees Fahrenheit. Further, oil and other feedstocks in the plant’s pipelines are heated to 300 or 400 degrees, so large sudden drops in temperature can disrupt operations and cause liquids to freeze.

“ While heavy winter

precipitation may reduce fuel for driving needs, bitter temperatures can increase demand for heating. That, coupled with production issues, led to rising prices.”

Petroleum terminals were also impacted by the weather. Kinder Morgan reported a force majeure on January 6th due to “extremely frigid & snowy conditions” at their important Argo, IL terminal which serves as a hub for Chicago area biofuels and petroleum products. Instruments that control ﬂow can fail and products in terminal pipelines from the storage tanks to the rack can thicken and gel.

Cold Weather Effect on Prices While heavy winter precipitation may reduce fuel for driving needs, bitter temperatures can increase demand for heating. That, coupled with the aforementioned production issues, led to rising prices. On January 7th, gasoline for delivery to the Chicago market increased nearly 7 cents, or 2.7%, boosting the basis to February NYMEX gasoline futures over 4 cents on the day; similarly, Chicago diesel prices rose over 4.5 cents, or 1.6%, increasing the basis to February NYMEX diesel futures by more than 2.5 cents.

Propane Customers Held Hostage by High Propane Costs Roughly 10 percent of Indiana families heat their homes with propane. Businesses operate machinery, transportation ﬂeets power their vehicles, and farmers dry their crops all with propane. So, when the Midwest ran short of product in late January, residents and business owners were equally concerned. Prices—which were already up 60 percent in the region—nearly doubled in some areas as suppliers were forced to purchase blindly and allocations limited some customers to as little as 200 gallons per delivery. The situation forced the U.S. Department of Transportation to issue an emergency order waiving working hour limitations on transport drivers hauling propane and heating oil. Meanwhile, exports of propane continued at approximately 356 thousand barrels a day. 28

PADD 2 Midwest

Rack-to-Retail Spreads PADD 2 Wholesale vs. DOE Retail (26 cent avg.)

FN360o Source: Energy Information Administration (EIA)

PADD 3 Gulf Coast

Rack-to-Retail Spreads PADD 3 Wholesale vs. DOE Retail (29 cent avg.)

FN360o Source: Energy Information Administration (EIA)

The Houston Ship Channel, home to the nation’s largest petrochemical complex and export port, was shut down completely for three days. On March 22nd, a barge was struck spilling 4,000 barrels of bunker fuel into Galveston Bay. While the volume of fuel spilled was relatively small, the location of the accident—near a nature preserve and the entrance to the channel which allows tankers to sail to and from Texas City, Galveston, and Houston–made it a significant concern. For instance, ExxonMobil reduced production rates at its 560,600-bpd Baytown, TX refinery during the closure on fear of inadequate crude supply. While other refiners declined to comment on their operations in light of the spill, the combined refining capacity dependent on the ship channel is 2.1 million bpd. According to Bloomberg, Coast Guard data shows six collisions in the channel last year, with a total closure time of 26 hours. An average day on the channel in 2013 saw 38 tankers, 22 freighters, one cruise ship, 345 tows, 6 public vessels, 297 ferries, 25 other transits and 75 ships in port. 29

PADD 4 Rocky Mountain “A Group 3 barrel

averaged over 8 cents cheaper than the rest of the Denver market for Ultra Low Sulfur Diesel. It was just a matter of waiting in line.”

Production and Pricing Woes in the Rocky Mountains The Rockies were plagued by problems in the first quarter of 2014. Conoco’s Borger refinery was in turnaround in February. HollyFrontier’s Cheyenne refinery had a fire and subsequent issues restarting. Meanwhile, Suncor’s Denver facility took their #1 crude unit down for maintenance and then lost a second unit to unplanned maintenance. All of these issues led to strict allocations of both diesel and gasoline. As a result, most trucks headed to Magellan Pipeline’s Aurora terminal where they endured lines lasting 5 and 6 hours. Fortunately, barrels from the Midwest were available and continued to ship to the Rockies. In fact, the spread between a Midwest or Group 3 barrel not only brought product to the Rockies, but kept prices in check. A Group 3 barrel averaged over 8 cents cheaper than the rest of the Denver market for Ultra Low Sulfur Diesel. It was just a matter of waiting in line.

Ultra-Low Diesel Delivered to Denver

(dollars per gallon)

FN360

Source: Energy Information Administration (EIA)

Magellan Completes the Purchase of Rocky Mountain Pipeline Magellan, LP closed on their purchase of the Rocky Mountain Pipeline at the end of 2013. The purchase included terminals in Fountain, CO, Dupont, CO, Cheyenne, WY, and Rapid City, SD. Magellan began operating the new products system in the ﬁrst quarter of this year by announcing plans for improvement and expansion. At a recent meeting in Denver, Magellan discussed their plans for the system. It includes a plan to connect the Dupont, CO terminal to their Central Pipeline System and operating the pipeline and terminals as an open stock system. An open stock system could enable the reconsignment of reﬁned product between all terminals regardless of the barrel’s origin. 30

PADD 4 Rocky Mountain

Rack-to-Retail Spreads PADD 4 Wholesale vs. DOE Retail (18 cent avg.)

FN360o Source: Energy Information Administration (EIA)

PADD 5 West Coast, AK, HI

West Coast Gasoline Prices Lowest in 13 Months Strong gasoline production at West Coast reﬁneries, as well as healthy inventories at the beginning of the quarter, enabled the lowest CARBBOB prices in LA in the last 13 months. The steep drop in the LA area narrowed the pricing spread between the Bay Area and LA but left the Paciﬁc Northwest unaffected. By the end of March, however, the area saw a rebound into more normal ranges.

West Coast Gasoline Prices

(dollars per gallon)

FN360

Source: Energy Information Administration (EIA)

CorEnergy Acquires Willamette River Rail/Marine Terminal At the beginning of the quarter, CorEnergy Infrastructure announced an agreement to acquire a products terminal in Portland, OR and subsequently lease the terminal to Arc Logistics. The terminal is a rail/marine facility and handles storage, throughput, and transloading for the Paciﬁc Northwest Region. It is adjacent to the Willamette River in Portland and has a total storage capacity of 1.4 million barrels. CorEnergy is planning on making an additional $10 million in terminal related improvements at the facility.

Flint Hills to Shutter North Pole Refinery Flint Hills Resources Alaska LLC announced their plans to begin shutting down its North Pole refinery on May 1, 2014. The closure will end the refinery’s production of gasoline, jet fuel, and other products. There are plans to continue operating the terminal at the refinery site to meet Flint Hills’ contractual obligations to its customers. The refinery was rated to produce 220,000 barrels per day, but has been operating substantially below in the 75,000 barrel per day range. The North Pole Refinery’s higher cost Alaska North Slope crude compared to Mid-Continent crudes has put the refinery at a disadvantage compared to other refineries outside of Alaska. 32

PADD 5 West Coast, AK, HI

Tesoro Restores Competitive Balance to Boise Tesoro Corporation applied to the Federal Trade Commission and received approval to sell its terminal business and assets in Boise, ID to Sinclair Transportation Co. The divestiture of the asset was required to settle charges that Tesoro’s acquisition of Chevron’s Northwest Products Pipeline might lessen competition in the area. Without the requirement, Tesoro would own two of three petroleum terminals in Boise. The sale to Sinclair should restore competition lost when Tesoro completed its acquisition of the Chevron assets.

Changes Proposed for California’s Cap and Trade Program The state of California’s Cap and Trade Program continues to draw scrutiny. In February, the state’s Senate President announced proposed legislation that would dramatically change the program and its greenhouse gas emissions by eliminating its expansion to the reﬁning and fuels industries in 2015 by replacing it with a carbon tax. Under the proposal, it is estimated the carbon tax would cost 24 cents a gallon by the year 2020. The Senate President’s argument stated the carbon tax is stable, less vulnerable, as well as transparent. At the moment, regulations would take effect January 1, 2015 requiring California reﬁners and fuel distributors to produce carbon credits to offset emissions generated by the end user of their products—ultimately contributing to higher retail fuel prices. Cap and Trade would continue as planned for large industrial GHG emitters, however. Revenue raised from the tax would go to a state Earned Income Tax Credit for low to middle income Californians and mass transit infrastructure in the state.

Rack-to-Retail Spreads PADD 5 Wholesale vs. DOE Retail (24 cent avg.)

FN360o Source: Energy Information Administration (EIA) 33

Canada Demand forecasts for Canadian heavy crude oil grew in the first quarter as the National Energy Board approved Enbridge’s request to both reverse and expand Line 9B connecting Ontario and Quebec refineries. Built in 1976, Line 9B reversed its course in 1998 to transport once-cheaper West African imports to inland refineries. Given the country’s recent boom in Alberta’s oil sand production, Montreal refiners have been clamoring for yet another reversal, pushing up to 300,000 barrels a day of cheaper domestic crude to eastern refineries. Enbridge’s reversal, coupled with the developing Sturgeon Refinery project in Redwater, Alberta (September 2017), will likely soak up the heavy discounts that currently have American refiners salivating. TERREBONNE STATION

ONTARIO

CANADA

QUEBEC

MIRABEL/SAINT-JANVIER MONTREAL

OTTAWA

LANCASTER

MONTREAL TERMINAL

IROQUOIS

LINE 9B REVERSAL PROJECT (PROPOSED)

LINE 9

PRESCOTT

HILTON STATION BELLEVILLE

NORTH WESTOVER STATION

LINE 9A

SARNIA

LONDON

OSHAWA

CARDINAL STATION

GANANOQUE

PORT HOPE

TORONTO T

WESTOVER TERMINAL

HAMILTON CHIPPAWA

SARNIA TERMINAL

LINE 9 REVERSAL PHASE I PROJECT (APPROVED)

Line 9 Projects

UNITED STATES OF AMERICA

LINE 9B REVERSAL PROJECT (PROPOSED)

EXISTING LINE 9 PIPELINE

CITY/TOWN

ENBRIDGE FACILITIES WHERE PROJECT WORK WILL OCCUR FOR LINE 9B REVERSAL AND LINE 9 CAPACITY EXPANSION PROJECT ENBRIDGE FACILITIES WHERE PROJECT WORK WILL OCCUR FOR THE LINE 9 REVERSAL PHASE I PROJECT ENBRIDGE FACILITIES WHERE PROJECT WORK WILL OCCUR FOR BOTH THE LINE 9B REVERSAL AND LINE 9 CAPACITY EXPANSION PROJECT AND THE LINE 9 REVERSAL PHASE I PROJECT.

Royal Vopak Increases its Presence DECEMBER 2012

At the end of the ﬁrst quarter, Royal Vopak announced the acquisition of two reﬁned products distribution terminals in Montreal and Quebec City. The acquisition strengthens Vopak’s distribution presence in eastern Canada while increasing their storage capacity from 509,000 cubic meters (cbm) to 712,000 cbm (4.48 million barrels). Vopak already owns a terminal in Hamilton as well as Montreal. The two terminals belonged to Canterm Canadian Terminals Inc., which was previously owned and operated by TransMontaigne Inc. The terminals are located on the Saint Lawrence River which serves as the main shipping route to and from the Great Lakes. 34

Canada Keystone XL Project Update In March, TransCanada made a final push for building their Keystone XL pipeline as the last day of the official public comment period came to an end at the U.S. State Department. You may recall the project is a proposed pipeline that would stretch 1,179 miles beginning in Hardisty, Alberta and ending at the Gulf Coast. In that bid for approval, TransCanada stated the proposed pipeline project would serve the national interest of the U.S. The pipeline project has been controversial for the last several years. Numerous environmental groups expressed concerns about safety when it comes to the transportation of heavy oil sands from Canada to the U.S.— particularly as it crossed the now infamous Ogallala Aquifer. Since 2008, at least five environmental impact studies have concluded the Keystone XL Project would not have any significant environmental impact. Regardless, the project continues to undergo intensive public and government scrutiny. The project, if passed, could deliver more Canadian crude oil to the Gulf Coast region. The latest development came in late February as a Nebraska District Judge declared the state’s decision regarding eminent domain to be unconstitutional—claiming that responsibility should lie with a little-known board of five commissioners regulating everything from natural gas pipelines to grain warehouses, communications, and all-terrain vehicles. Source: The Guardian

Alberta Considers Greenhouse Gas Changes Alberta is proposing a series of changes for calculating greenhouse gas emissions from biofuels as part of its Renewable Fuel Standard (RFS). These adjustments would be the first change to the RFS methodology since 2007. Currently, Alberta mandates an average of 2 percent renewable diesel in diesel fuel and 5 percent ethanol in gasoline sold in the province. The biofuels used in blending are required to reduce greenhouse gas emissions by 25 percent over their life cycle. If the biofuels reduce greenhouse gas emissions by more than 25 percent, the producers can accumulate credits that are tradable and sellable. The proposed changes include updated emissions sources reflecting a full lifecycle analysis and energy-equivalent baseline, reduction of waste materials from landfills revision, and tightened record keeping requirements. Alberta created the first carbon trading system in North America. The model takes into consideration any greenhouse gas emissions related to growing, harvesting, processing, and transporting biofuels. 35

Alternative Fuels Renewables

2014 RFS Proposal The Environmental Protection Agency (EPA) held a public hearing on December 5, 2013 to collect interested parties’ commentary on the EPA’s proposal to amend the 2014 Renewable Fuel Standard (RFS) program regulations. Designed to reduce the nation’s dependence on foreign oil and greenhouse gas (GHG) emissions before 2022, the RFS encourages production of renewable fuels through tax credits and mandated volumes. However, EPA ofﬁcials are considering a 2.9 billion gallon reduction—currently 18.1 billion gallons annually—in their ethanol production requirements to address decreasing gasoline demand, increasing vehicle fuel economy, the 10 percent ethanol “blend wall” imposed on retail gasoline sales, and rising costs in oilseed and grain markets. 36

Critics of the proposal suggest the reduction would slow progress towards program goals and hinder growth of a burgeoning renewables industry. Subsequently, the Biotechnology Industry Organization (BIO) performed extensive research assessing the environmental consequences of such a change. BIO’s report states, “Based on EPA's proposed requirements for 2014, the U.S. would emit 6.6 million more metric tons of CO2equivalent greenhouse gases than it did in 2013.” If, however, the EPA kept the requirements at the originally instituted level, BIO believes GHG emissions would reduce by 21.6 million metric tons. To put this in perspective, the difference of the increase and attainable decrease is equal to an additional 5.9 million cars on American roads in 2015. Look for developments on this story throughout the second quarter, but don’t expect changes to be ﬁnalized before the start of the third quarter. © 2014 Mansfield Energy Corp.

Renewables Rail Issues Drive Ethanol Prices Higher

The ﬁrst quarter marked the beginning of a railcars shortage along the East Coast which took its toll on the ethanol market. A series of winter storms and competing demand for cars from crude oil shippers left railcar availability very sparse. Producers were happy to see rising delivered rail prices–if they have car availability to reach those markets–while E10 consumers saw the rising prices eliminate ethanol’s discount to gasoline, effectively making it more expensive to blend the biofuel.

Source: National Surface Transportation Policy and Revenue Study Commission 37

The pressure of the rail shortage was evident in OPIS postings for Chicago Ethanol and Chicago Rule 11 Ethanol. While the Chicago Ethanol posting is indicative of the cost for gallons delivered to Chicago—frequently by truck from local plants— the Rule 11 posting represents gallons delivered beyond Chicago, most often by rail. Chicago bridges the Midwest to the East Coast and is the only city in which all major railways converge. As illustrated at left, CSX and Norfolk Southern are the largest east coast railways and most often travel through Chicago to connect with BNSF and Union Paciﬁc in the Midwest, where most ethanol plants reside. The spread between Chicago Ethanol and Chicago Rule 11 Ethanol was a rare phenomenon, as the two typically trend very closely. The two began to separate as the bitter winter weather took its toll in January and the rail market didn’t show improvement until late March.

Renewables

? Did You Know?

California is geographically distinct in that many of its cities are actually located in valleys. So, air flows over them and not necessarily THROUGH them—allowing pollutants to settle, creating SMOG.

To combat the anxiety over air quality, the California Low Carbon Fuel Standard (LCFS) was established in 2009. The LCFS objective is to lower greenhouse gas (GHG) emissions from petroleum-based transportation fuels via a cap-and-trade system. In 2011, LCFS went into effect under the stewardship of the California Air Resources Board (CARB). To achieve the desired 10 percent reduction in carbon intensity by 2020, petroleum-based fuel producers must offset their greenhouse gas emissions by manufacturing low-carbon fuel products or buying LCFS credits from qualifying producers of low-carbon alternative fuels. In 2011, producers and importers were required to decrease their fuel carbon content by a quarter of a percent. Until the 10 percent reduction is attained, the requirements will continue to increase progressively. Researchers believe reductions made to date equate to taking half a million vehicles off California roads. As a result of the program, California biodiesel and renewable diesel usage is on the rise. Ethanol production is currently limited by the 10

percent blend wall, but the added value of LCFS credits encourage more producers to enter the market, resulting in more competitive pricing. Biodiesel, on the other hand, has no blending limitation and could hypothetically replace petroleum-based diesel entirely—which is not out of the question given the LCFS credit value only sweetens the discount from RIN credits, trading at roughly 70 cents per gallon in the ﬁrst quarter. California will continue to pave the way in carbon intensity reduction. However, British Columbia, Oregon, and Washington are all considering Low Carbon Fuel Standards and already support thriving biodiesel production facilities. Substantial amendments to the LCFS are expected later this year. Proposed changes include: (1) improvements to registration of new innovation/low-carbon fuels with the program and/or to receive carbon intensity scores, (2) changes to crop based fuels scores– accounting for planted crops versus emissions, and (3) implementation of a credit price ceiling and potential ﬂoor.

Average Carbon Intensity (CI) According to LCFS (Grams of CO2 equivalent per megajoule produced)

FN360o Source: California Air Resources Board (CARB)

Natural Gas

Production At the end of the first quarter, the number of drilling rigs operating in the United States rose above 1,800 for the first time since 2012 according to Baker Hughes Inc. While the number of natural gas rotary rigs actually decreased year-over-year, more than enough oil rigs sprung up in their place. Furthermore, rig efficiency has shown dramatic improvement in recent years, as evidenced by the graph below. Most notably, new rigs in the Marcellus shale formation are generating more than twice the volume of those operating at the start of 2012.

New-Well Gas Production Per Rig (Thousand Cubic Feet per Day)

FN360o Source: Energy Information Administration (EIA)

The EIA estimates marketed natural gas production—currently an estimated 72 billion cubic feet per day (Bcf/d)—will grow by 3 percent in 2014 and another 1.5 percent in 2015. Growth along the Marcellus shale formation has driven natural gas prices lower in the Northeast, which should encourage producers to head south, capitalizing on higher Gulf Coast prices. In recent history, producers have shown interest in the liquefaction of domestic natural gas for the purpose of export. Shipments into Europe and Asia currently earn a significant premium and recent tensions with Russia have EU leaders searching for alternative sources. Permits have been difficult to obtain—considering the export of natural gas is similar to that of crude in regards to national energy security—but Cheniere Energy’s Sabine Pass terminal in Cameron Parish, Louisiana is likely to be the first export facility in the lower 48 ready for the task. First stages of the Sabine Pass startup aren’t expected until the end of 2015. 39

Natural Gas Demand The 1Q14 “polar vortex” anomaly created historic demand in most regions of the country. While not fully compiled by the EIA for the ﬁrst quarter of this year, the January 2014 consumption increase is notable and expectations are that February compilations will bear out the same trend. As a result of the duration and extremity of winter temperatures, numerous gas utilities saw their compression and distribution networks pushed to their limits and beyond. The subsequent effect on pricing and product storage inventories was notable and is detailed in the inventory and price sections of this publication.

Natural Gas Demand by Sector (Million Cubic Feet)

FN360

Source: Energy Information Administration (EIA)

Inventory The quarter ended with natural gas inventories at their lowest in eleven years. As seen below, cold weather demand drained working gas inventories to 822 Bcf—less than half the normal level for this time of year. On the upside, analysts expect record stock increases throughout the injection season and suggest inventories should reach workable levels by the start of October.

Working Gas in Underground Storage (Billion Cubic Feet Bcf)

FN360o Source: Energy Information Administration (EIA) 40

Natural Gas Historical 5 Year Minimum and Maximum Natural Gas Storage Inventory Henry Hub natural gas spot prices were volatile over the past few months, increasing from $3.95 per million British thermal units (MMBtu) on January 10 to a high of $8.15/MMBtu on February 10, before falling back to $4.61/MMBtu on February 27, and then bouncing back up to $7.98/MMBtu on March 4.

Working Gas in Underground Storage (Billion Cubic Feet Bcf)

Price Forecast Based on storage fundamentals and seasonal demand forecasts, the expectation is that the Henry Hub natural gas spot price, which averaged $3.73/MMBtu in 2013, will average $4.44/MMBtu in 2014 and $4.11/MMBtu in 2015.

Forward Pricing

ÂŠ 2014 Mansfield Energy Corp.

UREA (Diesel Exhaust Fluid) DEF Near-term Outlook (2014) Global urea, the key component in DEF supply and pricing, appears to be following a similar cycle to 2013 with a run-up in urea prices from October 2013 through March 2014 of $125/short ton, translating into a NOLA-indexed price run-up of $0.19/gallon of DEF. The spring planting season and the annual spring demand for fertilizer placed upward pressure on urea pricing, as in 2013. However, urea prices began to stabilize in March and started dipping in April, following the spring planting season. (See chart below)

Bulk NOLA Urea Prices vs. DEF Prices

FN360o Source: GreenMarkets

The overall global trend for urea has weakened as we have moved through the spring planting season. The world market is soft even with the uncertainty surrounding Ukraine. Russia has raised natural gas prices, which could affect urea production longer term, but world supplies of urea are currently abundant. The application season is winding down in Asia (China in particular), which should make more product available for export to the world market. Wet weather in the Southeast U.S. and weak demand drove average Gulf Coast urea values lower in April, spanning a range of $380 - $414 per short ton FOB. The urea NOLA forward curve indicates a softening of urea prices through June from the current $382/ton level to $320/ton, and then a ďŹ rming of urea prices into July. Chinese prilled urea is subject to an export duty of 15%, which the Chinese government lifts after planting season for four months starting in July. So, we believe the July forward curve pricing may be overstated, given the lower-priced untaxed Chinese prill that will hit the market in July. Barring any worldwide ammonia plant and urea supply disruptions, we expect to see urea prices continue to soften as we move through the 2014 Q2 and Q3. (See table at right) 42

U.S. Gulf Coast NOLA Barge Urea

FN360o Source: GreenMarkets

ÂŠ 2014 Mansfield Energy Corp.

UREA (Diesel Exhaust Fluid) DEF Longer-term Outlook (2016+) Today, approximately 45% of the urea consumed in North America is imported, and we expect this domestic supply shortfall to remain until at least 2017 when new ammonia plants and plant expansions come on line from Koch, CF Industries, Agrium and others. Over the next three years, we would expect supply to remain tight as demand for DEF-grade urea continues to grow, while domestic supply remains essentially ﬂat. We expect the annual cyclical cost curve to 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. We expect North American DEF demand to continue growing by an average 26% annually through 2020 from 200 million gallons in 2013 to just shy of one billion gallons in 2020 (see chart below).

DEF Consumption Projected to Reach 1 Billion Gallons by 2019

Source: Integer Research Limited

Driving DEF demand in the near-term is the modernization of the heavy duty on-road commercial trucking ﬂeets and off-road equipment. However, in 2016 tighter commercial vehicle fuel economy regulations go into effect, which will likely result in a step change in DEF demand. The major truck and engine OEMs’ engine design and tuning strategies, to meet the increased fuel economy standards, all involve increased DEF dosing (in the range of 1.5X–2X current DEF dosing levels). Assuming these engine tuning strategies play out, which is becoming more evident as time passes, this could create a step function in DEF demand that is not reﬂected in current forecasts.

Transportation & Logistics The first quarter of 2014 has been an interesting but challenging 3 month period for the transportation industry. Truck tonnage dropped dramatically in January due to the severe weather in the Midwest and Northeast, but rebounded nicely in February and is expected to continue that trend through the rest of Q1 and into Q2 of 2014. The industry has seen some of the largest jumps in Class 8 truck sales in the past 7 years, growing almost 15 percent in the first quarter of 2014. Multiple surveys conducted by industry analysts expect the anticipated rate increases to move in tandem with the volume increase expectations. However, capacity continues to be consistently tight, which could potentially drive a significant price increase in 2014.

There are still concerns over an aging and depleted work force for the trucking industry. The average age of the truck driver has increased 2 ½ years to almost 50 years old. With a signiﬁcant number of drivers retiring from the industry, there isn’t the same replacement schedule with new drivers entering the industry. Many companies need to employ strategies to attract and retain drivers—such as utilizing sign on bonuses, over-market salaries, and increased beneﬁt packages.

Government Accountability Office to evaluate the two reports that the Federal Motor Carrier Safety Association (FMCSA) used to validate the amendments to the hours of service regulations for all commercial motor vehicle drivers. These changes include provisions which limit use of the 34-hour restart and require a rest break before driving after 8 hours on duty. FMCSA also published its longawaited proposal requiring all interstate truck drivers to use electronic logging devices two years after the rule becomes final. The rule provides current trucking companies an additional two years to obtain compliant logging devices. The FMCSA believes the proposal will not only enforce hours-of-service rules, but eliminate harassment issues, reduce paperwork burdens, and keep fatigued drivers from getting behind the wheel. In response to last year’s fatal train derailment in Lac-Mégantic, Quebec, the NTSB finalized details for examining safety issues associated with transportation of crude oil and ethanol via rail. With the increase in rail accidents over the past two years, the NTSB is inviting numerous experts in the fields of crude oil, ethanol, rail, emergency response, and research to meet and discuss the current state of the industry and issues plaguing transportation of these flammable liquids. The increase in accidents is also driving a significant backorder of rail cars meeting the current safety specifications. Many companies are placing orders for a significant number of cars to stay ahead of legislation that could outlaw older railcars currently in service. Right now, the estimated delivery of new DOT-111 rail car can be up to two years.

Along with the economic and workforce impact on the transportation industry, there have been many discussions and changes in legislation that will impact transportation and logistics companies. Hour of service rules continue to be scrutinized by the major trucking associations. The NTTC has asked the United States

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.

Sara Hordinksi VP of Western US Supply Sara’s extensive background in supply and trading, futures hedging and rack marketing, brings a unique perspective to Mansfield’s supply department. Although new to Mansfield’s supply department, Sara has more than twenty-five years’ experience in the oil & gas refined products industry. She has marketed refined products throughout much of the United States by pipeline, truck, and rail. In addition, she worked with numerous suppliers, refiners, jobbers, cstore owners, and distributors nationwide to develop competitive contract pricing and hedging programs individual to their needs.

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.

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.

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.

Fernando de Agüero Chief Operating Officer, Mansfield Power & Gas Fernando possesses a broad energy industry experience ranging from regulated utilities to deregulated merchant and retail business. He has launched five privately held energy ventures. Holding positions as CEO of a wholesale natural gas and electric supplier, Chairman, CEO and President of a deregulated retail natural gas marketer, Manager and CEO of a deregulated retail electric provider, Co-Founder, Chairman and CEO of a leading smart grid-enabled prepaid utility solutions and software development company and held various leadership roles spanning strategic planning, finance, business development, commercial operations and trading at AGL Resources, GenOn (formerly Mirant Corporation) and Southern Company. 46

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FUELSNews 360° M A RK ET N E WS & INFOR MATIO N

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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