FUELSNews 360 - Q3 2013 by FUELSNews

M A R K E T

N E W S

I N F O R M A T I O N

JULY–SEPTEMBER Q1

3rd QUARTER Q4

2 0 1 3

Q3 2013 Executive Summary The third quarter of 2013 reflected a slowly improving global economy, with the U.S. and China making sluggish progress while Europe’s economic struggles continued. Despite projections for a quicker economic recovery, the global economy remains hampered by high unemployment and relatively weak demand, which affected overall consumer spending and economic confidence. The U.S. unemployment rate reached 7.3% in August, while the Eurozone’s unemployment rate remained at 12.1%, with Italy, France and Spain’s unemployment rates above 10% this quarter (Spain’s hit 26.2% in August). Despite numerous attempts to fix their ongoing economic struggles, Europe remains the biggest point of concern as the global economy struggles to turn the corner. From a geopolitical standpoint, Middle East issues returned to center stage and made their mark on oil prices. Conflict in Libya represented almost 1 million barrels per day in disruptions, while Syria’s violence caused a surge in oil prices not seen since May of 2011. As in previous quarters, the market reacted by adding a risk premium to oil prices, especially after some Western countries announced the possibility of military involvement. Diplomats in Syria and the West reached an agreement after many days of worldwide tension. Domestically, the U.S. markets continued to speculate about a possible tapering of the Fed’s Quantitative Easing (QE) program due to the improving economic conditions seen over the last few months, with the housing sector, the labor sector, and the manufacturing sector all showing progress. However, the Fed surprisingly left the QE program untouched, with bond purchases remaining at $40 billion in mortgage-backed securities monthly and $45 billion in long-term treasuries, and with policy rates at 0 to 0.25%. Under the QE programs, the Fed prints a total of $85 billion per month to ensure liquidity in long term bond markets which keeps interest rates “artificially” low. The Fed restated that the monetary policy will remain active until unemployment falls under 6.5% or inflation falls under 2%. Overall, the third quarter reflected a volatile and reactive market once again, with oil prices feeling external influence from the U.S. dollar, U.S. equities, geopolitics, and supply disruptions. For Q4, experts are forecasting economic improvements in the U.S. and China, while forecasts for Europe remain fairly mixed.

Index FUELSNews 360° Quarterly Report Q3 2013 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

FUELSNews 360° Commentaries

July through September, 2013

Commentaries; Andy, Sara and Dan

Third Quarter Summary

Commentaries; Hannah and Jorge

Commentaries; Scott, Chris and Evan

Economic Outlook 7

Global Economic Outlook

U.S. Economic Outlook, PPI, CPI

Macroeconomic Headlines

Fundamentals 12

OPEC

Non-OPEC Supply

U.S. Crude Production

Domestic Crude Oil Inventories & Days of Supply

Refinery Inputs

Crack Spread by Crude Slate

Domestic Production vs. Imports

U.S. Fuels Dependance & Consumption

U.S. Exports & Retail Diesel

U.S. Retail Gasoline Prices & Diesel Forecast

Diesel Spreads per PADD

Regional View 34

PADD 1, 1A, New England

PADD 1B & 1C, Central & Lower Atlantic

PADD 2, Midwest

PADD 3, Gulf Coast

PADD 4, Rocky Mountains

PADD 5, West Coast, AK and HI

Canada

Alternative Products 47 50

Natural Gas Renewable Fuels

FUELSNews 360˚ Supply Team

Overview July 2013 through September 2013

As seen in the first semester of 2013, oil prices remained volatile during the third quarter. Prices for WTI crude oil ranged from a low of $97.99 in early July to a high of $110.53 in early September before settling at $102.33. The main price drivers behind these moves were geopolitical concerns, economic reports, and external pressure from the U.S. dollar and equities.

Third Quarter 2013 U.S. unemployment falls to 7.3% WTI trades higher than Brent, first time in 3 years

U.S. says it will hold Syria accountable 102.83

Concern on Fed Stimulus reduction WTI stocks decline 9.4 million barrels

FN360o Source: Bloomberg Finance L.P. 4

ÂŠ 2013 Mansfield Energy Corp.

Overview Third Quarter Summary

Oil prices finished the third quarter of 2013 higher, while RBOB gasoline dropped and heating oil finished in positive territory. Crude oil futures (green) increased and settled at $102.33, while RBOB gasoline (yellow) dropped to $2.6347, and heating oil (white) increased to $2.9710. The Dow Jones, the main indicator for stock market price movement, rose in comparison to Q2 and settled at 15,129.67.

Summary, Third Quarter 2013 Hi: 320.83

Hi: 313.43

298.89 Low: 262.30

266.85

Hi: 110.53

102.83 Low: 97.99 Hi: 15676.94

15258.24 Low: 14776.13

FN360o Source: Bloomberg Finance L.P.

ÂŠ 2013 Mansfield Energy Corp.

â&#x20AC;&#x153;Simply put, the global economic recovery has underperformed so far in the year 2013. Despite the fact that some countries have introduced stimulus packages and lowered interest rates, the economic crisis persists.â&#x20AC;?

Global Economic Outlook “Manufacturing and industrial output struggled this quarter, with July’s industrial production levels dropping 1.5%, the steepest decline since September 2012.”

The global economy performed marginally better in the third quarter of 2013 compared to Q2, as the latest macroeconomic reports reflect economic improvements in several countries around the world, including the U.S., China, and Europe. With 10.4% growth in August, Chinese industrial production has grown at the fastest rate in over 18 months, averaging 0.7% month-to-month growth during Q3. Despite a disappointing first half of the year, the Chinese economy remains hopeful for improvements in GDP growth during Q3 and Q4, hoping to get back on track in order to meet the forecasted 7.5% yearly growth target. The European economy remains the primary point of concern for the global economy. High unemployment and timid industrial production suggests there are still many unresolved issues the countries must address in order for the European economy to begin making forward progress. As of the end of August, the E.U.’s unemployment remained at 12.1%, with Spain’s unemployment at 7

26.3%, Portugal’s at 16.5%, Italy’s at 12%, and France’s at 11%. Manufacturing and industrial output struggled this quarter, with July’s industrial production levels dropping 1.5%, the steepest decline since September 2012. On a yearly comparison, E.U. industrial production is down 2.1%. Simply put, the global economic recovery has underperformed so far in the year 2013. Despite the fact that some countries have introduced stimulus packages and lowered interest rates, the economic crisis persists. Some of the biggest factors that continue to affect global economic growth include geopolitical instability, as well as timid consumer spending and extremely high unemployment in some regions. However, the improvements in Q3 have translated into mild optimism in some regions (particularly in the U.S.), as consumers are beginning to see improvements in the labor and housing sectors, while econometrics for the remainder of 2013 and 2014 reflect projected growth.

“With the U.S. economy making some progress in its main economic sectors, many believed it was only a matter of time until the Fed’s QE program would begin to see a reduction. ”

U.S. Economic Outlook

The U.S. economic recovery seems to have picked up a bit during the third quarter of 2013. Though some remain skeptical about the economic data (some could argue that the jobless claims improvements do not factor in the discouraged workers, for example), the latest economic reports suggest the U.S. labor, manufacturing, and housing sectors have all shown improvements during Q3. Furthermore, the latest revision for Q2 GDP reflected a real GDP growth of 2.5% (previously 1.7%), exceeding expectations of a possible 2.2% increase. The upward revision to GDP growth was mainly due to a strong upward revision to net exports, as well as improvements to inventories and nonresidential structures investments. With the U.S. economy making some progress in its main economic sectors, many believed it was only a matter of time until the Fedâ&#x20AC;&#x2122;s QE program would begin to see a reduction. Some experts went as far as saying the Fed would begin to taper their massive printing program by $10 billion per month. Producer Price Index (PPI) Month-to-Month Change July 0.0%

August 0.3%

September 0.2%

Consumer Price Index (CPI) Month-to-Month Change July 0.2%

August 0.1%

September 0.2%

PPI Following a flat month of July, producer prices accelerated CPI Similar to producer prices, consumer prices increased 0.2% in August, mainly due to higher food and energy prices. The August producer price index rose 0.3%, while the core rate, which excludes both food and energy, was flat after a 0.1% increase in July. For the month of September, experts were anticipating a 0.2% increase in prices ahead of the October 11th official report. C 9

and 0.1% in July and August, respectively. The core CPI, which excludes food and energy prices, edged up 0.2% in July and 0.1% in August. For the month of September, experts were expecting a 0.2% increase in prices ahead of the October 16th official report.

ÂŠ 2013 Mansfield Energy Corp.

Macroeconomic Headlines

Brazilian Imports Continue Despite the Weakening of the Brazilian Real “Despite the weakening currency, Petrobras has continued U.S. product imports (mainly diesel) even though the substantially higher product price will not pass down to consumers (due to the fact Brazilian domestic fuel prices are regulated by the government). ”

Brazilian imports of gasoline and diesel fuel continued during the third quarter of 2013 despite the weakening of the Brazilian Real in comparison to the U.S. Dollar. Since the end of Q1, the Brazilian Real has weakened nearly 26%. However, Brazilian imports of diesel fuel and gasoline have remained steady as the country’s refinery infrastructure has not been able to keep up with demand. To put things in perspective, Brazilian state-owned company Petrobras imports approximately 8 diesel cargoes (approximately 32.8 million barrels) per month from the U.S., as well as gasoline from the E.U. and U.S. when the economics are favorable (depending on ethanol prices and demand). Despite the weakening currency, Petrobras has continued U.S. product imports (mainly diesel) even though the substantially higher product price will not pass down to consumers (due to the fact Brazilian domestic fuel prices are regulated by the government). Despite having to pay hefty prices, Petrobras expects to continue importing the amount of fuel it needs, as domestic demand has outstripped Brazilian refinery outputs. According to OPIS, Brazil's reported gasoline imports in July totaled 569,914 barrels, which represents a drop of 8.3% from the 621,319 barrels imported in June. Furthermore, Brazil's diesel imports totaled 4.842 million barrels in July, showing an increase of 79.7% from the 2.695 million barrels imported in June. 10

Middle East Chaos Threatens Production

Volatility in the Middle East played a key role in oil prices during the third quarter of 2013, with Egypt, Syria and Libya taking the spotlight. According to Reuters, Libya's crude oil production is expected to slowly recover to pre-war levels following production issues throughout the quarter. Output had collapsed to below 150,000 bbl/d following protests between the government and armed rebel groups. By midSeptember, Libyan production reached 620,000 bbl/d (still substantially lower than its pre-war capacity of 1.6 million bbl/d) as major western fields ramped up output after protesters agreed to reopen them. By September 19th, 5 out of the 9 Libyan export terminals were operating.

Egypt and Syria’s situation also caused some turmoil in the market, as the Egyptian president was overthrown and locked down by the military, while Syria’s use of chemical weapons prompted a reaction from the international community that almost resulted in military action. The latest of these events caused spirited debates within European and American communities, with most polls opposing the military involvement in the Middle Eastern country. After several weeks of negotiations, Syria agreed to turn over their chemical weapons arsenal in an attempt to pursue a diplomatic agreement with Western countries.

Fundamentals

OPEC Supply to Decrease in 2013 and 2014 Total OPEC liquid fuels production is expected to decline by 0.8 million barrels per day (bbl/d) in 2013, and 0.2 million bbl/d in 2014. According to the EIA, these declines reflect unplanned outages of crude oil production among some OPEC producers, as well as decreases in Saudi Arabia's production in response to the increase in non-OPEC supply. The chart below reflects estimated unplanned OPEC production outages per country between January, 2011 and July, 2013. Note the disruptions in Iran and Libya, which have been a hot topic over the last two years, as they caused disruptions to global supply which translated into higher oil prices.

“Total OPEC liquid fuels production is expected to decline by 0.8 million barrels per day (bbl/d) in 2013, and 0.2 million bbl/d in 2014. ”

Estimated Unplanned OPEC Crude Oil Production Outages (Thousand Barrels per Day)

FN360o Source: EIA 12

Fundamentals Furthermore, total OPEC surplus crude oil production capacity in the second quarter of 2013 averaged 2.2 million bbl/d, which is approximately 0.2 million bbl/d above last year’s level, but nearly 1.0 million bbl/d lower than the historical three-year average. Looking ahead, the EIA projects OPEC surplus capacity to increase by 2.5 million bbl/d in the fourth quarter of 2013, and by 4.6 million bbl/d in the fourth quarter of 2014. Note that these estimates do not include additional capacity that may be available in Iran, but is currently offline due to the sanctions from the U.S. and E.U.

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

FN360o Source: EIA

OPEC Basket Price Due to disruptions in Libya and Iran’s sanctions discussed above, the OPEC basket price has seen incrementally higher prices during the third quarter of 2013. As seen on the chart below, the OPEC Basket Price, which is a weighted average of oil prices collected from various oil producing countries, has traded between the $104 – $109 range during Q3 after trading relatively flat, between $100 and $102 during Q2.

OPEC Basket Price

(dollars per barrel)

OPEC Basket Price

FN360o Source: OPEC 13

A weighted average of oil prices collected from various oil producing countries. This average is determined according to the production and exports of each country and is used as a reference point by OPEC to monitor worldwide oil market conditions.

Fundamentals Non-OPEC Supply to Increase Through 2014 Non-OPEC crude oil and liquid fuels production is expected to increase by 1.6 million barrels per day (bbl/d) in 2013 and by 1.4 million bbl/d in 2014. As seen on the chart below, the main contributing area to non-OPEC production growth is North America, where production is forecasted to increase by 1.4 million bbl/d and 1.1 million bbl/d in 2013 and 2014, respectively. According to the EIA, North American production has surged over the last few years, mainly due to continued production growth in U.S., onshore tight oil formations and Canadian oil sands.

Non-OPEC Production Growth (Million Barrels per Day)

FN360o Source: EIA

Fundamentals The chart below reflects Non-OPEC projected production levels for 2014. The EIA expects production growth from a number of other areas, including Central America, South America, Asia, and Oceania. In Central and South America, liquid fuels supply is expected to increase by 0.2 million bbl/d in 2014, mainly due to increases in Brazil's offshore, pre-salt output. Furthermore, the EIA expects total liquid fuels supply in Asia and Oceania to increase by 0.2 million bbl/d in 2014. The increase in supply in 2014 in this region comes mostly from production growth in China, Malaysia, and Australia. As for the U.S. and Canada, the EIA expects production levels to reach 13.20 million bbl/d and 4.38 million bbl/d in 2014, respectively, which would account for annual production growth of 1.01 million bbl/d in the U.S., and 123,000 bbl/d production growth in Canada.

Non-OPEC Projected Production - 2014

(Million Barrels per Day)

FN360o Source: Short-Term Energy Outlook, September 2013

Fundamentals U.S. Crude Oil Production per State Most of the growth in U.S. crude oil production has come (and is expected to continue for the next few years) from the drilling in tight oil plays in the onshore Williston, Western Gulf, and Permian Basins. In fact, offshore production from the Gulf of Mexico is expected to average 1.3 million bbl/d in 2013 and 1.4 million bbl/d in 2014. Furthermore, on a state contribution analysis, the biggest contributions in 2013 came from Texas followed by Alaska, North Dakota, California and Oklahoma. As seen on the graph below, Texas contributed with 2,525 thousand bbl/d (35%), followed by Alaska’s 1,213 thousand bbl/d (14%), North Dakota’s 810 thousand bbl/d (11%), California’s 531 thousand bbl/d (7%) and Oklahoma’s 321 thousand bbl/d (4%). Behind the top five listed above, states like New Mexico, Louisiana, Wyoming, Colorado and Utah stand out, as they continued to bolster production and contributed with an average of 2.5% per state to the national production level. The remaining states contributed a combined 6% to the national production level.

Top U.S. Crude Oil Producing States (Thousand Barrels per Day) 3,000 2,525

2,500 2,000

1,213

1,500

1,030

810

1,000

531

500 0

North Dakota

Texas

Federal Gulf of Mexico

Alaska

California

321

Oklahoma

FN360o Source: EIA

Oil Price Volatility

The market saw higher oil price volatility during the third quarter of 2013, mainly due to unrest in the Middle East as the market added a risk premium to oil prices, fearing possible production or supply disruptions. As fears dwindled, the market returned to more comfortable levels within a few days. As seen on the graph below, the rapid swings in prices were a common trend during Q3. From a price standpoint, the difference to Q1 and Q2 is evident, as crude oil prices went from trading between $80 and $100 during the first six months of the year to trading between $100 and $111 in Q3.

FN360o Source: DTN ProphetX

Fundamentals Rail, Truck, and Barge Domestic Refinery Receipts of Crude Oil on the Rise “Over the last few years, U.S. refineries have received product from a wider array of transportation systems, including rail, trucks, barges and pipelines.”

The increase in U.S. domestic production has translated into an increase in refinery receipts. Over the last few years, U.S. refineries have received product from a wider array of transportation systems, including rail, trucks, barges and pipelines. According to the EIA, the Gulf Coast (PADD 3) region accounts for most U.S. refinery receipts by rail, truck, and barge (receipts almost doubled in 2012) as the region has grown increasingly dependent on rail and truck to move crude production out of the Eagle Ford and Permian basins to refineries in the area. In the Rocky Mountain region (PADD 4), domestic truck and pipeline imports of Canadian oil continue to increase as domestic pipeline receipts have stayed flat, while the East Coast (PADD 1) receipts decreased in 2011 (mainly due to refinery closures) and increased by 18% in 2012 after several refiners added rail facilities to receive discounted crude from the Bakken and other tight oil formations. 17

Over the last few years, truck and rail transportation have established themselves as a reliable alternative transportation method when pipelines are operating at limited capacity or when a production area lacks pipeline infrastructure. Both of these transportation methods have offered greater operational flexibility than pipelines, as they make use of existing road and rail infrastructure near producing basins to transport crude oil to refineries that may not be accessible by pipelines. Furthermore, the increase in barge receipts is mainly due to an increase in crude oil transfers from rail cars to barges for the final leg of some journeys to refineries (particularly on the East Coast and along the Mississippi River). Over time, crude oil is expected to continue moving by rail and truck (even as additional pipeline infrastructure is built) as economics demonstrate these transportations methods could be more economic, flexible, and effective in some instances.

“Crude oil inventories remained historically high in Q3, mainly due to higher domestic production. Crude oil inventories were lower in Q3 than during the same time last year. ”

Fundamentals Domestic Crude Oil Inventories Crude oil inventories remained historically high in Q3, mainly due to higher domestic production. As seen on the graph below, crude oil inventories were lower in Q3 than during the same time last year. However, despite domestic refineries operating above 90%, crude oil inventories were also affected by infrastructure limitations (such as limited pipeline capacities), which kept inventories land locked and on the higher side of the 5-year range.

U.S. Commercial Crude Oil Stocks (Excluding SPR)

FN360o Source: EIA

Days of Supply The Days of Supply (DOS) average dropped below the 5-year average during Q3, averaging 22.74 days. The DOS average consists of the number of days it would take for crude oil inventories to satisfy demand. As of mid-September, the DOS was .43 days below the 5-year average of 22.93 and 2.15 days below 2012â&#x20AC;&#x2122;s average of 24.65. The main reasons for the decrease of DOS in Q3 include decreasing domestic crude oil inventories as well as higher domestic demand.

U.S. Days of Supply of Crude Oil

(Excluding SPR)

Days of Supply (DOS) The number of days that crude inventories would satisfy demand.

FN360o Source: EIA 19

ÂŠ 2013 Mansfield Energy Corp.

Fundamentals Refinery Inputs Refiner net inputs increased during the third quarter of 2013, mainly due to a combination of higher demand and an increase in exports. After averaging 14.8 million barrels (mb) during the first half of 2013, refiner inputs averaged 15.9 mb during Q3. As seen on the graph below, the Gulf Coast accounted for 52% of refiner inputs, with an average 8.3 mb during Q3, followed by the Midwest’s 3.52 mb (22%), the West Coast’s 2.47 mb (16%), the East Coast’s 1.08 mb (7%), and the Rocky Mountain’s 0.56 mb (4%). During the week of July 12th, refiner net inputs reached 16.2 mb which was the highest input since July of 2007.

U.S. Crude Refiner Net Input by PADD (Demand) (Excluding SPR)

FN360

Source: EIA

Fundamentals Crack Spread by Crude Slate While declining overall in comparison to Q2, oil refineries continue to see strong profits by producing refined products. The crack spread is the profit margin for oil refineries when they compare the cost of the crude oil (inputs) to refined products’ wholesale prices (outputs). The 3:2:1 crack spread illustrates the product margin at a typical U.S. refinery: for every three barrels of crude oil the refinery processes, it makes two barrels of gasoline and one barrel of distillate fuel. As seen on the graph below, Western Canadian Select crude oil remains the best alternative in terms of product margin, averaging $48 per gallon so far in 2013, followed by WTI’s $26 per gallon and Brent’s $16 per gallon.

Crack Spreads by Crude Slate (May 2012 – September 2013)

Crack Spread 3:2:1 Spread

A crack spread measures the difference between the purchase price of crude oil and the selling price of finished products, such as gasoline and distillate fuel, that a refinery produces from the crude oil.

FN360o Source: DTN ProphetX

Fundamentals

Domestic Production vs. Imports U.S. crude oil production exceeded imports for the first time in 16 years during May of this year, when domestic output exceeded imports by 32,000 bbl/d. As seen on the graph below, imports have dropped significantly, while domestic production continues its steady rise in states like Texas, North Dakota and Oklahoma. According to the EIA, June’s Bakken production (which makes approximately 90% of North Dakota’s production) was approximately 23.6% higher than in 2012, while the number of oil wells in production rose from 5,891 to 6,097 (in comparison to the 4,300 in June of 2012).

U.S. Domestic Production vs. Imports

(Million Barrels per Day)

“U.S. crude oil production exceeded imports for the first time in 16 years during May of this year, when domestic output exceeded imports by 32,000 bbl/d.” FN360

Source: EIA 22

Fundamentals

U.S. Dependence on Foreign Petroleum Declines According to the EIA, U.S. dependence on foreign petroleum has declined since peaking in 2005. As seen on the graph below, the United States relied on net imports (imports minus exports) for about 40% of the petroleum (crude oil and petroleum products) consumed in 2012. The United States consumed a total 18.6 million barrels per day (bbl/d) of petroleum products during 2012, making it the world's largest petroleum consumer. Furthermore, at 6.5 million bbl/d, the United States was third in crude oil production. With that said, crude oil alone did not account for all of U.S. petroleum supplies, as significant gains occurred due to the expansion of crude oil in the refining process, the capturing of liquid fuels in the processing of natural gas and other sources of liquid fuels (including biofuels). These additional supplies totaled 4.8 million bbl/d in 2012.

U.S. Production and Net Imports of U.S. Petroleum and Other Liquids Demand, 2012 n U.S. Production

60%

40%

n Net Imports

FN360o

Source: EIA

The United States imported 11.0 million bbl/d of crude oil and refined petroleum products in 2012 and exported 3.2 million bbl/d of crude oil and petroleum products, leaving net imports at 7.4 million bbl/d in 2012. Furthermore, the U.S. imported 2.1 million bbl/d of petroleum products (such as gasoline, diesel fuel and heating oil) and exported 3.1 million bbl/d of products, making the U.S. a net exporter of petroleum products. As seen on the graph below, just over half of these imports came from the Western Hemisphere. (continued)

Sources of Net Petroleum Imports, 2012

16%

Top Sources: Canada (28%) Saudi Arabia (13%)

n Other n Western Hemisphere n Persian Gulf n Africa

28%

53%

MĂŠxico (10%) Venezuela (9%) Russia (5%)

FN360o

Source: EIA 23

ÂŠ 2013 Mansfield Energy Corp.

Fundamentals

(continued)

U.S. Dependence on Foreign Petroleum Declines Though most consumers believe the U.S. relies on the Middle East for oil, the reality is over 50% of U.S. crude oil and petroleum products actually came from the Western Hemisphere in 2012 (North, South, and Central America, and the Caribbean), while 29% of the imports came from Persian Gulf countries (Iraq, Saudi Arabia, United Arab Emirates, etc.). In 2012, the largest sources of net crude oil and petroleum product imports were Canada and Saudi Arabia. So far in 2013, Persian imports account for 25%, while Canadian imports increased to 33%, and Mexican imports rose to 11%. U.S. dependence on imported oil has declined since peaking in 2005. There are several reasons attributed to the decrease in foreign oil dependency, including a decline in consumption and changes in supply patterns. The “Great Recession” (the financial crisis of 2008), improvements in efficiency, changes in consumer behavior, and patterns of economic growth have played an important role and contributed to the decline in petroleum consumption. At the same time, increased use of domestic biofuels (ethanol and biodiesel) and strong gains in domestic production of crude oil and natural gas plant liquids have allowed the U.S. to expand domestic supplies and reduce the need for imports.

U.S. Liquid Fuels Consumption (Demand) Total liquid fuels consumption increased by 70,000 barrels per day (bbl/d) during the first half of 2013. According to the EIA, the increase was mainly due to increases in liquefied petroleum gas and distillate consumption. Total liquid fuels consumption reached 149.78 million bbl/d in the first half of 2013, which is a 0.4% increase from last year during the same time period. Furthermore, the EIA projects total liquids consumption during the second half of 2013 to increase by 180,000 bbl/d from the same period last year, with all of the finished products contributing to that growth. On a side note, the EIA projects gasoline consumption to decrease in 2014 as improving fuel economy of new vehicles continues to outstrip growth in highway travel. For 2014, total consumption of liquid fuels is expected to increase by 30,000 bbl/d (approximately 0.2%) with further declines in motor gasoline expected to be offset by higher distillate fuel consumption.

U.S. Liquid Fuels Consumption (Million Barrels per Day)

FN360o Source: EIA 24

Fundamentals U.S. Exports of Finished Petroleum Products Exports of petroleum products increased during the third quarter of 2013 following a decrease in the first six months of the year. Total finished petroleum products exports averaged 2.90 million bbl/d in the first semester of 2013, a difference of 40,000 bbl/d compared to the 2.86 million bbl/d in the first half 2012. During Q3, total petroleum products exports averaged 3.02 million bbl/d, an increase of 173,000 bbl/d in comparison to last year’s 2.84 million bbl/d Q3 average. With the increase, total petroleum product exports are averaging 2.93 million bbl/d in 2013, a difference of 90,000 barrels in comparison to the 2.84 million bbl/d averaged in 2012. Diesel exports increased to an average 1.1 million bbl/d in Q3 and exceeded 2012 exports by 269,000 bbl/d, while gasoline exports averaged 3.1 million bbl/d, which is a decrease of 900,000 bbl/d in comparison to Q2’s 4.0 million bbl/d.

U.S. Finished Petroleum Products Exports

(Million Barrels per Day)

FN360o Source: EIA

U.S. Retail On-Road Diesel

On-road diesel prices finished the third quarter of 2013 higher than Q2 but below 2012’s Q3 price level. As seen on the graph below, retail diesel prices have averaged $3.90 per gallon in Q3, a difference of 5 cents to Q2’s $3.95, and 53 points higher than last year’s Q3 average of $3.91. Furthermore, at a yearly average of $3.94, 2013 retail diesel prices remain on the higher side of the 5-year range and almost 42 cents higher than the 5-year average of $3.52.

Weekly U.S. No. 2 Diesel Retail Prices (Dollars per Gallon)

FN360o Source: EIA 25

Fundamentals U.S. Retail Gasoline Prices Retail gasoline prices decreased during the third quarter of 2013, falling below the 2012 price level for the same time period. As seen on the chart below, gasoline retail prices averaged $3.58 during Q3, which is 6 cents less than 2012â&#x20AC;&#x2122;s Q3 average of 3.64, as well as 25 cents higher than the 5-year average of $3.33 for the same time period. On a yearly analysis, at $3.58, retail gasoline prices are 7 cents below 2012â&#x20AC;&#x2122;s $ 3.65 average, but 35 cents above the 5-year average of $3.23. Despite the drop, retail gasoline prices remain on the upper side of the 5-year range.

Weekly U.S. Regular Conventional Gasoline Retail Prices (Dollars per Gallon)

FN360o Source: EIA

ÂŠ 2013 Mansfield Energy Corp.

FNQ3 High Res_Layout 1 10/18/13 1:30 PM Page 27

Fundamentals

Diesel Price Forecasts As we approach the beginning of Q4, when most companies go through their fiscal year budgeting process, there are multiple factors to consider. From market mechanics, to supply availability, to product seasonality, to weather, the reality is that all of these factors could impact fuel prices. Based on the trends seen in the last three years, we have made different assumptions in order to back into the following prices. With that said, before getting into regional pricing, it is important to first understand the pricing pyramid.

RETAIL +taxes TERMINAL /RACK

The Pricing Pyramid

The tables to the right reflect PADD specific diesel fuel price forecasts for the remainder of 2013 and for 2014. The first table illustrates diesel fuel at the terminal (rack) level, while the second one illustrates diesel fuel prices at the retail level. The price forecasts take into consideration the market mechanics discussed previously, as well as current taxes and product supply.

Source: EIA

Diesel Fuel Rack Prices per PADD

Projected Diesel Fuel Prices per PADD

Diesel Fuel Retail Prices per PADD

The illustration to the right shows what we call “The Pricing Pyramid.” The pyramid is composed of 5 different levels, each of which represents an accrued level of cost until the fuel reaches CASH (ORIGIN) the retail stations (or a bulk tank). Starting with the NYMEX futures contract price and BASIS adding the unique specification of each regional product (basis), we reach the cash (origin) spot price. From there we add the bulk transportation costs for pipeline or NYMEX vessel fees (rack). Of course, every step adds different costs and margins that ultimately affect prices. Taxes are tacked on to the price at the terminal level or at the retail level (2013 average diesel road taxes are 53 cents - including federal, state, and local taxes), while retail margins are incorporated in the final price at the street level (retail).

Fundamentals Rack to Retail Diesel Spreads per PADD The following charts represent the average price spreads between prices at the rack level and prices at the retail level (rack to retail spreads) thus far in 2013. Notice how the rack to retail spreads change based on each market’s mechanics over time.

Northeast (PADD 1A) – 35 Cents

FN360o

Central Atlantic (PADD 1B) – 36 Cents

Source: EIA

FN360o

Lower Atlantic (PADD 1C) – 25 Cents

Source: EIA

FN360o Source: EIA 28

Midwest (PADD 2) – 26 Cents

Fundamentals

FN360

Gulf Coast (PADD 3) – 30 Cents

Source: EIA

FN360o

Rocky Mountain (PADD 4) – 20 Cents

Source: EIA

FN360o

West Coast (PADD 5) – 25 Cents

Source: EIA

FN360o Source: EIA 29

FUELSNews 360˚ Commentaries Andy’s Answer

BEAR

The forever bull was beat into submission in the second quarter and then along came Syria. WTI took off breaking into new yearly highs not seen since May of 2011. Heating Oil (NYH futures) broke the $3.20 mark in late August but they have declined ever since. RBOB has followed the Heating Oil trend (lower lately) and with both products declining, while Crude has stayed relatively high, the nice crack spreads enjoyed by the refining community have been vaporized. The question now is will crack spreads stay this low and ultimately start affecting production, which has been relatively high lately helping to build product stocks and eat into crude inventories. My assumption is cracks will continue to stay in the sub $18 mark for the rest of the year. I know, I can hear you saying “wow, way to go out on a limb there Andy” but let’s put that comment in perspective. We haven’t seen sub $18 cracks since the first few days of January 2012 (until September 2013). Which means that I’m suggesting Crude will continue to stay relatively high (above $90) but products will continue to linger relatively flat and potentially drift slightly lower going into fourth quarter 2013. Don’t fret; I’ll be bullish again next edition once we have depleted inventories a bit on less production.

Sara’s Synopsis

Dan’s Dissertation

BEAR

I ended the 2nd quarter firmly a “Bear” and watched the crude oil market reach highs not seen since the spring of 2011 - so much for my track record. Since I rarely back away from an opinion, I still remain a Bear. With Syria no longer influencing prices in the same manner and speculators trimming their net length positions in crude oil, I believe we may see crude oil back in the $90s once more. As for refined products, their performance has been lackluster in relation to crude and little presents itself in the form of demand or serious refinery issues to change this. Crude oil’s backwardation generally reflects the market thinking that higher prices are temporary. We see this same backwardation for ULSD or Heating Oil long-term and for Gasoline or RBOB until the spring. I struggle to find a reason to anticipate higher prices.

BULL

The Fed’s decision not to taper their asset purchase program is a nearby bullish sign for crude oil. While it’s true the essence of the government’s program is to assist a struggling economy, which of course is negative for oil, there is other upside to be considered. First, continued QE should help emerging market demand as their economies have greater access to cheaper money. Second, a weaker dollar means emerging market currencies should appreciate, lowering the record oil costs some experienced this summer. Furthermore, on the supply side, OECD oil inventories have been below seasonal averages, which may also lend support to prices.

FUELSNews 360˚ Commentaries Hannah’s Hypothesis

Jorge’s Judgment

BULL

BEAR

Despite the fact that crude will continue to set the floor for gas and diesel flat prices, I am relatively bullish crude and bearish products for Q4’13. While WTI crude prices continue to take cues from geopolitical events, such as the threat of ongoing conflict in the Mideast and currency fluctuations, products stay grounded in US fundamentals. I also don’t believe we’ve seen the bottom for the 3-2-1 crack spread quite yet, as US refineries continue upgrades to process heavier crudes with prompt discounts as low as $30 to WTI (such as WCS and Bakken crude) – meaning that the traditional 3-2-1 crack spread no longer accurately reflects US refinery runs and that a “new normal” will be set for WTI versus NYMEX HO and RB.

After hitting 28-month highs in early September, I believe oil prices will drop during Q4, though not as much as some have suggested. On one side, the fact that the U.S. opted for the diplomatic approach with Syria should help oil prices return to more comfortable levels. However, that doesn’t mean the unrest in the Middle East is over ... it is far from it. So far, we have seen the Middle East make headlines in every quarter this year, so my gut instinct suggests things won’t be too different in Q4. On the other side, the Fed continues to pump money into the U.S. economy, meaning energy commodity prices will remain artificially inflated as the Fed continues their aggressive money printing program. Also, keep in mind energy returns have been substantially higher than non-energy returns during Q2 (last time I checked the difference was 8% vs. 1.5%), meaning energy investments are an even more popular type of investment these days. By mid-August, the CFTC Non-Commercial Traders Report for 2013 WTI crude oil was 35% bullish. That personally scares me, as it makes me wonder if it is just a matter of time until prices plummet. With all this said, I am setting my floor at $95 for Q4, while my ceiling will remain at $111. For products I am bearish gasoline and bullish diesel for Q4. Gasoline demand should remain flat or decrease following the summer driving season, while diesel fuel demand should increase as we approach the winter months due to cold temperatures. I expect diesel demand to continue to increase as crude oil and product transports continue to increase, as the U.S. has been incrementally producing more crude oil year over year, putting our current infrastructure under pressure. As refineries continue to operate at high rates and products continues to flow, I expect demand from the transportation sector to continue its uptrend, which may have an impact on diesel fuel prices. With that said, keep in mind that the U.S. is a net exporter of diesel, so if needed, we could meet our own demand (as long as the economics make sense).

FUELSNews 360˚ Commentaries Scott’s Sixth Sense

BULL

I remain confident in my predictions of the last quarter, based on where Canada is in the third quarter of 2013. The challenge continues to be that Canada, like many of our friends economies around the world, has taken longer to reach a position of “natural growth” or a level of economic stability where government intervention and global banking policy is no longer steering the ship. We are seeing the right indicators to reach natural growth. There continues to be a tremendous requirement for capital investment to develop Canada’s energy resources. The interest of foreign investors remains strong and this will continue to drive major projects, acquisitions and joint venture activity through 2013 and 2014. Growing global demand for resources and hydrocarbons combined with Canada’s political and economic stability, technological advances, and highly skilled workforce are attracting these investment opportunities. This coupled with Canada’s moderate inflation level, consistent employment position, a healthy housing market, and improving U.S. export markets, all point to solid growth. Expect to see a continued strengthening Canadian economy in the last quarter of the year. Canadian crude prices have been very healthy throughout the year, whereby Western Canadian heavy oil followed higher world prices in late Q2 and into Q3. I predict with higher prices being supported by increased rail exports to US markets, and improving economies, crude prices will edge up in Q4.

Chris’s Concept

BEAR

For the fourth quarter of 2013, I’m leaning towards a bearish market. US crude oil production increased to an average of 7.6 million barrels per day in August. This marks the highest monthly production of crude since 1989. The forecast for the remainder of 2013 is 7.5 million barrels per day and projected to increase in 2014 to 8.4 million barrels per day. Along with overall demand still declining, major oil companies still struggling to meet RFS standards and Libya’s oil production coming back on line, I project the market will continue trending downward. Of course this projection doesn’t include a storm during the remaining two months of hurricane season.

Evan’s Estimation

BULL

I was bearish for the third quarter of this year but will flip to a bullish prediction through the fourth quarter of 2013. This market continues to remain inflated due to the ongoing conflicts in the Middle East. We saw the market drop off in mid-September after some positive news was released regarding the Syria crisis; however, I believe we are far from over with all of the Middle East instability. This uncertainty will add an upward push to this market. In addition, while there have been recent signs of slow economic repair in the United States, many believe the US economy is still not stable enough to survive without the Fed’s stimulus program. With the QE program continuing (at least for now), this could increase financial demand and oil prices in the fourth quarter. For these two reasons – Mid East violence and the Fed’s stimulus program continuing – I am predicting a bullish market for the fourth quarter of 2013. 32

â&#x20AC;&#x153;Though most consumers believe the U.S. relies on the Middle East for oil, the reality is over 50% of U.S. crude oil and petroleum products actually came from the Western Hemisphere in 2012. â&#x20AC;?

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 1A New England

PADD 1: East Coast

PADD stands for Petroleum Administration for Defense Districts

During World War II, the United States was divided into five different PADDs in order to help organize the allocation of fuels derived from petroleum products, including gasoline and diesel fuel. This virtually meant that if the U.S. was attacked, the country’s oil supply would be strategically spread out among five different regions, making it more difficult to destroy the country’s oil infrastructure and resources.

Project Mariner East – Sunoco Logistics Sunoco Logistics (SXL) has plans drawn up to reverse their East to West pipeline in a project known as Project Mariner East. This pipeline is currently transporting refined products from the Philadelphia area out to the Pittsburgh area, but will soon deliver propane and ethane from the Marcellus and Utica Shale region in Western Pennsylvania back to their facility in Marcus Hook. The undertaking of this project is going to cause some challenges on the refined products side, shutting down terminals and potentially creating some product shortages.

The Buckeye Laurel Pipeline and the Sunoco Logistics Pipeline are the two main pipelines that travel through southern Pennsylvania carrying refined products from the refinery rich east side to the western edge of the state. All of the terminals throughout Pennsylvania are fed by one or both of these pipelines. With the reversal of a large portion of the Sunoco Logistics Pipeline, this may put a strain on refined products in multiple cities. The Sunoco Mechanicsburg terminal is the first terminal to experience the effects of this project and is currently idle. This terminal had to shut down well before the project began due to the largest shipper pulling out of that market in preparation of the reversal. In Mechanicsburg, the terminals that remain open are the PPC and Gulf terminals (both supplied by the Buckeye Laurel pipeline). The other terminals that are expected to be affected are the Sunoco Blawnox and Sunoco Pittsburgh terminals. These terminals are expected to go idle in the upcoming months and remain idle until July 2014. The Sunoco Delmont and Sunoco Altoona terminals are expected to remain operational since they are also fed by the Buckeye Laurel pipeline. Along with those terminal closures come the unknown of how the Buckeye Laurel pipeline will fare during this time. The demand to ship on this pipeline will be increased dramatically to make up for the Sunoco Logistics pipeline no longer being a viable option to ship refined products. Pittsburgh currently receives some product from the Chicago market on a West to East pipeline and these barrels will help support the supply in the second largest city in Pennsylvania. Altoona, PA and Harrisburg, PA are the two markets with the most supply uncertainty; they will only be fed by one pipeline (Buckeye Laurel pipeline) instead of two. 34

PADD 1 East Coast

The supply situation throughout Pennsylvania will be interesting to watch over the next few months with this project kicking off. Already, many of the suppliers who had a throughput at Sun-Mechanicsburg have moved on to throughput at other Mechanicsburg terminals. Will supply be largely impacted throughout the state? Will supply be impacted in only select cities? Will we see no impact in supply due to this pipeline reversal? Those are the important supply questions we will face in the upcoming months.

PADD 1A New England

Shale Marcus Hook Terminal Refinery Markwest Fractionator Refined Products Pipeline Proposed Pipeline Mariner East Pipeline

“ Sunoco Logistics (SXL) has plans drawn up to reverse their East to West pipeline in a project known as Project Mariner East.”

Sources: Sunoco Logistics

Northeast Refinery Issues Plague Third Quarter of 2013 The third quarter of 2013 proved to be a tough one for most of the refineries in the Northeast region. The first refinery issue that arose involved the Irving St. John refinery, in which their smaller fluid catalytic cracker (FCC) was shut down. Just days after the first FCC was taken out of service, the larger FCC was shut down due to operational issues. In addition to the FCC units being taken down, Irving additionally shut down their crude distillation unit (CDU) and a desulfurization unit. All units were repaired and restarted in just under a month after being shut down; however, the larger FCC unit had to be taken out of service again two weeks after the restart. Irving has pushed their turnaround back (which was planned for the fall of 2013) until the first quarter of 2014. Philadelphia Energy Solutions (PES) also had to take down some units unexpectedly at their Philadelphia refinery. PES was forced to shut down an alkylate unit and hydrotreater right around the same time that Irving was having issues with their refinery in St. John. The shutdown of these units lasted approximately 2 ½ weeks, they finally restarted on July 30th. 35

PADD 1 East Coast

Phillips 66 performed planned maintenance on their Bayway, NJ refinery during the time when the PES and Irving refineries were shutting down units for unplanned maintenance. The maintenance at this refinery involved a reformer that produced xylene, toluene, benzene and reformate. Even though this maintenance was planned, the impact was still felt in the NYH RBOB gasoline futures market.

PADD 1A New England

The Come-By-Chance refinery in Newfoundland also completed unplanned repairs. North Atlantic Refining, who currently owns this refinery, shut down a sulfur recovery unit and isomax unit for repairs when the PES, Irving and Phillips 66 refineries were already running at reduced rates. These units remained out of service for close to two weeks. The last refinery that saw issues during the third quarter of 2013 was Monroe Energyâ&#x20AC;&#x2122;s Trainer refinery. Monroe Energy, a subsidiary of Delta, was forced to shut down its only FCC unit back in late August. This shutdown came after Phillips 66 and North Atlantic Refining restarted their units; however, the larger FCC at the Irving refinery still remained down. These events caused a reduction of gasoline production in the Northeast and, in turn, created upward pressure on the RBOB futures due to a surge in spot gasoline purchases by these companies.

Refinery Outages

Source: OPIS

Top 5 Northeast Refineries

FN360o Source: EIA 36

ÂŠ 2013 Mansfield Energy Corp.

PADD 1 East Coast PADD 1A New England

“ In September, New York City

Expansion of Bio in the Northeast Rhode Island has signed a bill that will require all heating oil within the state to contain biodiesel starting July 2014. Currently, New York City is the only area that mandates all heating oil to contain a certain percentage of biodiesel. The bill states that all heating oil within the state of Rhode Island is required to contain 2% biodiesel by July 2014, 3% biodiesel by July 2015, 4% biodiesel by July 2016 and 5% biodiesel by July 2017. The governor does have the ability, however, to suspend this mandate if biodiesel is not available at reasonable prices. This enactment of a bio-heat requirement does not come as a surprise as the Northeast consumes over 75% of the country’s heating oil and continuously strives to clean up the pollution caused by the burning of fuel.

Mayor Michael Bloomberg signed a bill requiring all city vehicles to contain biodiesel by 2014.”

New York City has also enacted a new bio mandate. There is currently a requirement that all heating oil consumed within the city limits of New York City must contain at least 2% biodiesel. In September, New York City Mayor Michael Bloomberg signed a bill requiring all city vehicles to contain biodiesel by 2014. This bill requires all city vehicles to use 5% biodiesel by 2014 and 20% biodiesel by 2016 between April and November (bio gels more easily in cold weather than diesel).

PADD 1 East Coast

Marathon East Coast Expansion

PADD 1B & 1C Central & Lower Atlantic Memphis

Marathon is working on increasing its export capacity and continuing to access untapped product markets on the east coast. Marathon plans on utilizing their Catlettsburg refinery in Kentucky that produces 233,000 barrels per day. In conjunction with Catlettsburg, it could also deliver products from their refinery in Robinson, Illinois. Marathon is currently building additional storage tanks in their Garyville refinery that produces 490,000 barrels per day in Louisiana. Adding this additional tankage will allow products to be exported out of Galveston Bay. Marathon has scheduled maintenance for the Catlettsburg refinery through October 30th. A crude unit, vacuum unit, CCR unit and vacuum gas oil unit are all scheduled to have maintenance during this time. This pause in production will add additional stress to the Kentucky and Tennessee markets that are already experiencing tightness of supply.

Memphis suffered product outages at the end of September for ULSD and tight allocations for gasoline following a power blip at Valero’s refinery that caused damage to the sulfur recovery unit. The repairs took over a week to complete. Up until this time, Memphis had been handling the additional demand that normally sourced out of North Little Rock, AR; however, with Teppco pipeline making changes the arbitrage opportunity opened between the two terminal cities. Valero and Exxon had to schedule additional barges up the Mississippi River to help support their terminals during the refinery’s down time. Lion Oil also experienced product outages during this time. With Memphis contract and rack allocations cut to below 50%, long hauls had to be arranged from multiple terminal cities including markets in Mississippi, Alabama, Kentucky, Missouri, Arkansas and additional terminals in Tennessee. Nashville terminals felt the impact immediately with scarce ULSD and gasoline. In addition to issues in Memphis, terminals in the southeast were transitioning out of low RVP season. Several terminal cities were already experiencing tightness of product during this time for gasoline and were unable to provide the support needed in the Memphis market. 37

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

Southeast Gasoline Several terminal markets in the Southeast began feeling the impact of increasing RIN values and their values being passed down at the rack posted price level. 2013 ethanol RINS traded as high as 1.455; as a result, rack suppliers began calculating a portion or all of the RIN values into their prices. Several markets saw over 100% of the RIN values being passed along at the rack. Customers who had contracts based upon shipping cost quickly watched their contracts slip higher compared to rack prices. Since then, suppliers and customers have worked together as a portion of the RIN values are being passed along in contracts. During the third quarter of 2013, shipping gas products from the Gulf Coast into New York Harbor was very profitable for shippers on the Colonial Pipeline. During the first 45 days the spread was .08-.09 cpg for both CBOB and RBOB. By the end of August, the spread continued to increase to over .20 cpg. The impact was felt the most in RFG markets during the transition to High RVP gas, with markets such as Baltimore, Fairfax, Richmond and Norfolk experiencing tight allocations during September. Even with the arbitrage opportunity available on the pipeline, Philadelphia rack prices during the end of September were discounted to what was available in Baltimore for RFG gasoline.

Colonial Pipeline Open Season On September 12th, Colonial Pipeline announced an opportunity for current shippers and new shippers to enter a transportation services agreement. The agreement included rate discounts depending on the shipperâ&#x20AC;&#x2122;s commitment on Lines 1 and 2 and developments to the allocation calculation. The length of this agreement is up to 10 years and is expected to begin 2014.

ÂŠ 2013 Mansfield Energy Corp.

PADD 2 Midwest

Husky Lima Refinery Contemplates Upgrade The Husky Lima refinery in Ohio is considering a $300 million upgrade that would allow them to refine heavy, sour crudes along with the current slate of light crude oils. If approved, the upgrade would be completed in 2017, allowing the refinery to run as much as 25% of the 160,000 barrels-per-day as heavy crude. The driver for investing in heavier crude processing arises from the extreme discounts in price. West Canadian Select crude, for example, has run at a discount of almost $24 year-to-date versus West Texas Intermediate crude oil, or almost $0.60 per gallon. Assuming runs of 40,000 barrels-per-day of the discounted crude, this makes a payback period of less than a year for the refinery while allowing them more flexibility in sourcing.

PADD 3 Gulf Coast

Coffeyville Ponca City

Oklahoma City Wynnewood Duncan

Magellan Solicits Shipper Interest in Potential New Pipeline into Little Rock

Tulsa

Allen

Ft Smith Little Rock

Ardmore From Houston

Following the halting of interstate diesel shipments on Enterprise pipeline as of July 1, 2013, Little Rock, AR has experienced continued shortness of supply for ULSD as the market relies solely on the El Dorado refinery for product. Diesel deliveries to the Little Rock area now lean heavily on hauling diesel in from surrounding markets, such as Memphis and Fort Smith which leads to additional logistics challenges as well as up to 10 cents in freight. In response to the above issues, Magellan Midstream Partners has announced a plan to potentially tie the Magellan North pipeline system into Little Rock, which would allow diesel shipments from a multitude of major pipelines and refineries. Magellan is currently assessing shipper interest by conducting an open-season that will end mid-October of this year. If enough shippers commit to shipping on the proposed pipeline, Magellan will begin construction this year for diesel shipments to start sometime next year, hopefully easing the supply concerns that plague the region now. 39

ÂŠ 2013 Mansfield Energy Corp.

PADD 3 Gulf Coast

Construction of Gas-to-Liquids Facilities Boom in Louisiana

Over the past few months, more and more players have announced plans to construct gas-to-liquids (GTL) facilities in the southern half of Louisiana. Gas-to-liquids refers to technology that utilizes natural gas, a commodity that is currently in abundant supply in the US, to make petroleum products such as gasoline and diesel. The projects have a wide range of operators and outputs with niche operators to global GTL giants offering a variety of products. One of the companies, G2X Energy, announced plans for a Lake Charles facility earlier this year that will produce approximately 12,000 barrels-per-day of 87 octane gasoline once operational. Construction is currently slated to begin in 2014 for operations to start 2017. This is G2Xâ&#x20AC;&#x2122;s second recent project in PADD III, as they broke ground on construction earlier this year for a methanol facility in Pampa, TX.

Source: OPIS 34

ÂŠ 2013 Mansfield Energy Corp.

PADD 4 Rocky Mountain The Rockies saw little news of note during most of the third quarter. At the close of the quarter, however, things began to change. Salt Lake City felt a supply squeeze, with Tesoro’s Salt Lake City refinery experiencing issues which caused a noticeable impact to supply as well as prices in the region. This impact led to an arbitrage or price advantage between PADD 5’s Las Vegas and PADD 4’s Salt Lake City. Las Vegas’ price advantage of $.40 cents per gallon compared to Salt Lake made long hauls advantageous depending on the fuel drop site.

Las Vegas vs. Salt Lake City ULSD Prices

“ Colorado remained uneventful until a 100 year flood wreaked havoc on terminal assets in the Denver market place.”

FN360o Source: EIA

Source: The Denver Post

In addition, the former Chevron Pipeline now owned by Tesoro went down for testing between Salt Lake City and Boise. Ten days of testing strained the overall supply of gasoline in both market places. Colorado remained uneventful until a 100 year flood wreaked havoc on terminal assets in the Denver market place. Rocky Mountain Pipeline’s Dupont terminal, Suncor’s East and West Denver terminals and Magellan’s Aurora terminal all experienced shutdowns due to rising flood waters. Rising waters and obstructed highways made fuel deliveries impossible. The Denver Channel 7 News reported that 17 counties were impacted by the flood, with 30 state bridges destroyed and 20 damaged and 200 miles of road damaged. In addition, approximately 1,200 oil and gas wells were shut down by energy companies and the Colorado Oil and Gas Conservation Commission reported “notable” releases. © 2013 Mansfield Energy Corp.

“During the third quarter, Los Angeles and San Francisco CARBOB basis traded at a five-year record low. This happened as total gasoline inventories along PADD 5 remained nearly 3 million barrels higher than the same week last year.”

PADD 5 West Coast, AK, HI During the third quarter, Los Angeles and San Francisco CARBOB basis traded at a five-year record low. This happened as total gasoline inventories along PADD 5 remained nearly 3 million barrels higher than the same week last year. However, the outlook changed as the West Coast experienced a slew of refinery issues. Shell Martinez, Valero Benecia, Tesoro Golden Eagle, Phillips 66 Wilmington, and Exxon Torrance all experienced refinery outages and traders were concerned about their impact on the supply chain and, of course, wholesalers began to experience the rise of wholesale prices at numerous rack locations. However, the health of refineries on the west coast proved not to be an issue for long, as gasoline inventories were building and refinery rates were strong. By mid-September spot prices began to move downwards once more. After it’s shutdown in April, Tesoro announced the sale of its 94,000 barrel per day refinery in Hawaii to Par Petroleum in the third quarter of 2013. Once the sale is closed and the refinery restarted, Par Petroleum will begin marketing gasoline and diesel supply to local retail stations on Oahu, Maui, and the island Los Angeles vs. San Francisco CARBOB Basis of Hawaii. They are also expected to supply the Hawaii Electric Company as well as the Honolulu International Airport and military installations. Since the refinery’s shutdown, Tesoro has been delivering product to the Hawaiian market by tanker from the U.S. West Coast. Par Petroleum estimated the restart of the refinery would cost an estimated $27 million in their company o FN360 filing to the Securities and Exchange Source: OPIS Commission.

A West Coast Refinery Overview The Los Angeles area produces approx. 1 million barrels of refined products daily.

The San Francisco area produces approx. 850,000 barrels of refined products daily.

The Seattle area produces approx. 650,000 barrels of refined products daily.

Valero Benicia 132,000 b/d Chevron El Segundo 260,000 b/d Exxon Mobil Torrance 155,000 b/d BP (west) Carson 266,000 b/d

Conoco Phillips

Golden Eagle 166,000 b/d

Rodeo 128,000 b/d

BP West Shell

Martinez 158,000 b/d Chevron

Conoco Phillips

Ferdale 107,000 b/d

Tesoro

Richmond 257,000 b/d

Tesoro

Wilmington Wilmington 139,000 b/d Valero (Ultramar) 97,000 b/d Wilmington 78,000 b/d

Cherry Point 230,000 b/d Tesoro Shell

Puget Sound 145,000 b/d

Anacortes 120,000 b/d

Source: Energy Supply Logistics 43

Canada

Consumer Price Index The Canadian price index rose 0.1 % from June to July 2013, following a twelve month 1.2% increase in June. This improving trend in the CPI, from the first half of 2013, was seen across six of the eight sectors measured monthly. Canada is expected to continue in a relatively moderate inflationary environment throughout the remainder of 2013.

Gross Domestic Product Economy The Bank of Canada declared in September that the Canadian economy is showing encouraging signs of recovery. While the economy has not yet returned to normal levels, it is showing shows signs of returning to a state that wouldnâ&#x20AC;&#x2122;t require extraordinarily low interest rates and other stimulus measures. Although encouraged, the Bank of Canada is forecasting growth of 1.8% this year and 2.8% in 2014, downgraded slightly from their original forecast of 1.9%, and 2.9%, respectively. The Bank cited improving demand for Canadian exports, higher long-term interest rates, and rising business sentiment as evidence the economy is getting back on track. The expectation is Canadian interest rates will remain at the trendsetting rate of 1% until the end of 2014. 44

Canadaâ&#x20AC;&#x2122;s Gross Domestic Product was down 0.5% in June, which was close to expectation, given the loss of momentum the economy suffered in the second quarter. This decline was not all due to the devastating floods in Alberta and the general construction strike in the Province of Quebec. Retail sales dropped across the country and will likely continue a flatter trend for consumption into the fourth quarter of 2013. For the remainder of the year, analysts predict that improvement in the U.S. housing market, rising motor vehicle sales, and increasing U.S. business investment in Canadian products continues the growth trend of rising demand for exports. Into 2014, as the economy continues to move forward, the Canadian dollar is likely to rebound against the American dollar.

ÂŠ 2013 Mansfield Energy Corp.

Canada

Canadian Crude Oil Markets Today, Canadian refineries have a total refining capacity of almost 2.0 million b/d of crude oil. In 2012, Canadian refineries processed just over 1.7 million b/d. Of that total, only about 60% of all the crude oil refined is being sourced from domestic supply. The on-going restriction for Eastern Canadian refineries to obtain domestic supply is the limited access of crude through a pipeline system that supplies the eight refineries in the west. Currently Eastern Canadian refineries have no choice but to make up the remainder of their production capacity by importing 722,000 b/d of foreign crude supply. The encouraging news is that through to 2020, Western crude oil will continue to supply 100% of the Western Canada refining demand which will increase by over 80,000 b/d. This future increase in demand is driven from a number of capacity increasing projects including the Moose Jaw Asphalt Refinery and the Coop Refinery, both located in the Province of Saskatchewan, as well as the start-up of the Sturgeon (North West Partnership) Refinery located at Red Water, Alberta, near the City of Edmonton. As Canada and the United States are natural trading partners given the geography, Canada continues to be the number one supplier of crude oil into the U.S. Although Canada has longer term plans to develop alternative foreign markets for their crude supply, the U.S. is almost Canada’s only market. A growing U.S. domestic production in lighter crude from shale and more recently Texas and North Dakota opportunities has displaced foreign 45

imports. Even with the newer U.S. supply Canadian exports of crude oil into the U.S. grew by 200,000 b/d or a 9% increase in 2012 over 2011.

Alberta Floods The devastating floods of 2013 across Alberta have led to a spending spree following storms that caused $5 billion dollars in damage. It is reported the post flood spending will more than compensate for the drop in economic activity related to the natural disaster as the province is revising it’s GDP growth rate to 3.2 % in 2013, up from 3.0% previously projected due to the anticipated economic boost.

Quebec General Construction Industry Strike For two weeks, starting in late June, Quebec’s construction industry came to a complete halt, as unions representing 175,000 residential, industrial and commercial construction workers called a province wide strike in a dispute over wages. All construction projects were idle, until the Quebec government passed legislation ordering striking workers to return to the job site. The strike did slow the provincial economy and affected Canadian materials imports into Quebec, as the construction industry is over a $50 million dollar a day business for the province.

Alternative Products Natural Gas U.S. natural gas inventory was monitored closely during the third quarter’s “refill” season after a colder than normal winter depleted historically high stockpile levels. Early in July, injections lagged the five-year average as warmer weather fueled demand for electricity generation. On July 18th, the EIA reported natural gas inventory increased only 58 Bcf the week prior, roughly 10% below analysts’ expectations of a 65 Bcf increase and less than the five-year weekly average of 70 Bcf. Given the surprise, NYMEX natural gas for August delivery surged 5% on the day, a $.183 increase, to settle at $3.8120 per MMBtu.

Refill Season Natural Gas Inventory Injections (Billion Cubic Feet)

FN360o Source: EIA

A series of strong inventory gains through late July and early August culminated in a stockpile increase of 96 Bcf as reported in an EIA release on August 8th. Natural gas for September delivery slipped 2 percent the next day to settle at a five-month low of $3.23 per MMBtu. Injections vacillated through the remainder of the quarter as discretionary demand and weather dictated inputs. Natural gas for November delivery settled the quarter at $3.56 per MMBtu. 47

Natural Gas Fracking The University of Texas released a comprehensive study on September 16th that found smaller amounts of methane are leaked through hydraulic fracturing than previously estimated by the EPA and industry critics. This is an important contention, because while methane burns cleaner relative to other fuels such as coal and oil, pure methane is an extremely potent greenhouse gas which traps heat at a much higher rate than carbon dioxide; critics of fracking have claimed that methane lost during natural gas drilling eliminates any potential climate benefits of burning the fuel. The report, sponsored by the Environmental Defense Fund and nine petroleum companies, analyzed over 500 wells and was the first to study operations at actual drilling sites. In particular, the researchers found that new containment measures during well completion, a process that prepares the well for production, captured 99 percent of methane leaks. The EPA recently instituted a requirement that will go into effect January 2015 that obligates drillers to control leaks during completions, though many

companies have already begun to comply. However, some skeptics believe the wells chosen for the report are not representative of fracking nationwide, since the petroleum companies knew ahead of time they would be closely monitored; the implication being that many unmonitored drillers do not make the effort to reduce emissions. Nonetheless, the study does show that with the proper controls in place, methane leaks on the drilling pad can be controlled, maintaining the overall climate benefits of natural gas relative to other fossil fuels at that step in the supply chain. The report is released after several years of increased hydraulic fracturing of shale gas. Fracking involves the injection of water, sand, and chemicals into wells, a process that releases more gas than conventional drilling. Shale production, now roughly 30 percent of all U.S. natural gas, is expected to reach 50 percent by 2040. The below graph highlights the explosion of production across various U.S. shale plays:

Monthly Dry Shale Gas Production (Billion Cubic Feet per Day)

FN360o Source: EIA 48

ÂŠ 2013 Mansfield Energy Corp.

“In particular, the researchers found that new containment measures during well completion, a process that prepares the well for production, captured 99 percent of methane leaks.”

Renewable Fuels

As is typical for this time of the year, Midwestern weather dictated grain prices during the quarter. After closing at a quarterly high of $5.27 per bushel in mid-July on warm weather concerns, CBOT corn for December delivery – the benchmark contract for the new crop – generally fell through the remainder of the month and into early August on more moderate temperatures and sufficient rain. December corn settled at a low of $4.4725 per bushel on August 13th, the lowest futures value since 2010. The day before, the USDA had forecasted U.S. farmers would harvest 13.763 billion bushels of corn, 28 percent more than last year’s output, boosting world reserves to the largest since 2002. Toward the end of August, extremely hot and dry weather threatened most of the Midwestern crop, as temperatures averaged as much as 14 degrees above normal. July and August were also the driest since 1936 in Iowa, Illinois, and Indiana. As a result, corn jumped the most in over a year, 6.5% on August 26th, to settle at $5.005 per bushel. Soybeans also followed suit climbing 4.6% on the day to settle at $13.895 a bushel after three prior weeks of increases. Nonetheless, prices eased toward the end of the quarter as the harvest is still expected to be a record crop. In fact, both Goldman Sachs and Deutsche Bank claim the USDA is underestimating the overall harvest: Goldman claims output will be 14.14 billion bushels while Deutsche Bank predicts 14.25 billion bushels, this compared to the 13.843 projected by the USDA.

Q3 CBOT Soybean (right) and Corn Prices (left) (Dollars per Bushel)

FN360o Source: CME 50

Renewable Fuels

2013 RIN Values (Dollars per RIN)

RINs In an early August release finalizing the renewable fuel 2013 standards, the EPA unexpectedly addressed upcoming 2014 concerns regarding the E10 blend wall. The EPA stated “it will propose to use flexibilities in the RFS statute to reduce both the advanced biofuel and total renewable volumes in the forthcoming 2014 RFS volume requirement proposal.” The ethanol blend wall refers to the difficulty incorporating ethanol into the fuel supply at volumes over the standard E10 blend, despite a rising RFS requirement to blend more of the biofuel. Based on concerns over a shortage of ethanol RINs, prices rose to a high of $1.455/RIN in mid-July up over 1,700% on the year. The EPA is expected to offer more details on how it will revise the 2014 mandate in early fall when it is due to propose next year’s percentage standards.

FN360o Source: OPIS

Wholesale Gulf Coast CBOB vs. E10 Blend

FN360o Source: OPIS

Wholesale Gulf Cost ULSD vs. Biodiesel Blends

Given the EPA announcement, a September statement by the Commodity Futures Trading Commission that they may begin tracking banks’ RIN trading, and a reassessment of blending economics by market participants, RIN prices fell steadily toward the end of the quarter. 2013 Ethanol RINs settled the quarter at $0.4375 per RIN while 2013 Biodiesel RINs closed at $0.625.

FN360

Source: OPIS

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 Milton 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 Hordinski’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, c-store owners, and distributors nationwide to develop competitive contract pricing and hedging programs individual to their needs.

Dan Luther Manager of Supply & Distribution Dan Luther 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.

Hannah Hauman Manager of Supply & Distribution Hannah Hauman serves as the Midcontinent Manager of Supply & Distribution and is based in Houston, TX. Hannah manages Midcontinent refined products trading and scheduling, contracts, procurement optimization, and fixed price shorts. Prior to joining Mansfield, Hannah worked for Marathon Petroleum Company and Atlas Oil Company in a variety of functions within marketing, supply, and trading. Hannah holds a BS from The University of Findlay and an MBA with a focus on Energy Risk Management from the University of Houston.

Jorge Pradilla Supply Risk Supervisor Jorge Pradilla started at Mansfield as an intern where he assisted with tracking supplier postings and market analytics. Jorge progressed to become a Supply Risk Supervisor focusing on Mansfield’s futures and clearport activities including reconciliation, broker dealings and trade executions. Jorge oversees the company’s hedging portfolio as well as tracks liabilities, fixed price contracts and analyzes market trends. Jorge also authors the FUELSNews Daily. Born in Colombia, Jorge holds a BS in Marketing from Piedmont College and an MBA in Managerial Leadership.

Chris Carter Southeast Supply Manager Chris Carter 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 Smiles Northeast Supply Supervisor Evan Smiles 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.

Scott Van Berkel Director of Canadian Operations Scott recently joined Mansfield after a 32 year career with Shell Canada Ltd. Scott’s broad expertise spans a variety of areas including marketing, sales, logistics and customer service. Scott held numerous management positions with both Shell Canada and their parent company, Royal Dutch Shell. Scott’s extensive knowledge of the Canadian market, coupled with his experience working in the Commercial, Industrial and Retail businesses, makes him an invaluable asset to the supply team. Scott holds a BS in Agricultural Economics from the University of Manitoba. 53

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

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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 2013. 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.