FN360 Q4 2015 by FUELSNews

M A R K E T

N E W S

I N F O R M A T I O N

OCTOBER–DECEMBER Q1

4th QUARTER Q4

2 0 1 5

Q11

Q4 2015 Executive Summary Despite bullish legislation, increasing oilfield bankruptcies and rising consumer fuel demand, the year ended with a whimper, logging crude oil prices below $34 a barrel for the first time since February 2009 and facing even greater supply challenges in coming months. Global crude oil producers struggle to make the most of slim profit margins while oversupplying the market by roughly 1.5 to 2.0 million barrels each day and, analysts across the globe seemingly agree, conditions will only worsen in the first half of 2016. Poor global economics discourage new oil assets development, resulting in massive oilfield service cuts and promising a painful correction as production capacity inevitably slips near the start of 2017. China, the world’s second-largest economy and top energy importer, watched its financial bubble collapse midway through the year and the government’s attempt to stem the tide through stimulus and legal actions only drove wary investors from the nation. Analysts now expect little in the way of demand from the country which nearly single-handedly fueled global economic growth for the last twenty years, extending global supply concerns even further. With global crude oil demand stagnating, bullish traders look to producing nations for solace, but find little comfort as OPEC held onto recordhigh production quotas in December. The International Energy Agency (IEA) already attributes declining non-OPEC supply to the Saudi-led pricing war, however, and annual growth shrank below 300,000 barrels a day in November from roughly 2.2 million barrels a day at the start of 2015. Most established oil-producing nations survived the last year of slim margins at great expense to their nation’s financial reserves, but Russian reserves will not last another year and even the Saudi war chest showed cracks by the end of 2015. Meanwhile, less-developed, oildependent nations, whose cash reserves already evaporated under unrelenting pricing pressure, will need to scrape by on debt, good will and outright charity in 2016 if they hope to fight another day. Adding to existing production concerns, market watchers expect to see an old, familiar face this spring as the world’s advanced economies remove long-standing sanctions against Iran. While hardline opposition calls for the cancellation of Iran’s sanction relief following several brazen missile tests in the fourth quarter, Iran’s return to the global crude oil market seems almost certain, unnecessarily adding another half a million barrels of daily crude exports to the global balance sheet and delaying any significant recovery. Saudi Arabia and its OPEC followers failed to make room at the table for Iran during their December meeting, but Iranian oil minister Bijan Zanganeh warned his nation would stop at nothing to regain their lost market share. Now, with domestic oil producers apparently undeterred by Saudi Arabia’s aggressive pricing strategy, Chinese demand on the fritz and global storage nearing capacity, experts with Goldman Sachs warn prices could fall as low as $20 a barrel before jumpstarting the market. As a result, consumers should notice continued savings in 2016 as heating oil (diesel) futures already fell to their lowest rates in over a decade this December and cheaper crude only encourages refiners to produce more finished products. Enjoy savings while they last, however, as all good things must come to an end.

Index FUELSNews 360° Quarterly Report Q4 2015 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

October through December, 2015

Fourth Quarter Summary

Economic Outlook 6

Global Economic Outlook

U.S. Economic Outlook

Regional View 16

PADD 1A, Northeast Commentary–Evan Smiles

PADD 1B & 1C, Central & Lower Atlantic Commentary–Chris Carter

PADD 2, Midwest Commentary–Dan Luther

PADD 3, Gulf Coast Commentary–Lynn Argianas

PADD 4, Rocky Mountain Commentary–Nate Kovacevich

PADD 5, West Coast, AK and HI Commentary–Matt Elder

Canada

Fundamentals 10

Crude Market Volatility

Justifying Crude Oil Exports

Bearish Energy Predictions 32

Renewable Fuels Commentary–Jessica Phillips

Natural Gas

Electrical Power

Transportation Logistics

FUELSNews 360˚ Supply Team

Overview October 2015 through December 2015 dollars per barrel

WTI Crude Futures

Dollar Weakens Versus Foreign Currencies Russia Carries Out First Airstrikesin Syria, Raising Middle East Tensions

Federal reserve Ends 7-Year-Old, Zero Percent Interest Rate Policy

Global Production Disruptions Press Crude Oil Futures Higher EIA Reports Largest Crude Oil Inventory Decline Since June 5

Source: New York Mercantile Exchange (NYMEX)

he fourth quarter began with the U.S. dollar still stuck in the summer season doldrums after hitting 10-year highs in the spring. A weaker dollar supported higher petroleum product prices along with rising tensions across the Middle East as Russian bombers targeted U.S.-backed forces in Syria and tested the Turkish border. However, nearly every bullish sign was then ignored while Chinaâ&#x20AC;&#x2122;s economy struggled and domestic crude oil producers grew commercial inventories by 31.5 million barrels in the first two months of the quarter. While inventory growth slowed in December, legislators and policymakers stayed busy ahead of year end, driving petroleum futures lower with the repeal of the nationâ&#x20AC;&#x2122;s 40-year-old crude export ban, while also ending its 7-year-old, zero-percent interest rate policy. Coupled with strong support from within the Obama administration for an end to Iranian economic sanctions. By the end of December, bulls had little hope of mustering a rally, and we headed into 2016 with nearly every financial institution calling for $20 crude.

Overview Fourth Quarter Summary Summary, 4rd Quarter 2015 $1.1007 $1.2671

$37.04

17425.03

Source: New York Mercantile Exchange (NYMEX) and St. Louis Federal Reserve

Refined products played Follow-the-Leader throughout much of the fourth with heating oil (diesel) futures almost perfectly mirroring crude oilâ&#x20AC;&#x2122;s movements while RBOB (gasoline) futures found strength in above-average consumer demand and refinery disruptions. Typically, their roles would be reversed with gasoline ending the year on defense and distillates surging, but record-high seasonal temperatures across much of the Northeast and Ohio Valley encouraged more travel and less home heating heading into the winter season.

Domestic distillate inventories soared well beyond their seasonal averages as refiners aggressively pursued cost-advantaged barrels for their lucrative gasoline outputs and the usual distillate dumping grounds in Europe rapidly filled to capacity. As a result, northern markets traditionally plagued by product shortages and elevated prices instead watched home heating oil prices tumble to their lowest rates in a decade. Gasoline inventories, on the other hand, remained roughly in line with multi-year seasonal averages as an improving job market translated to more commuters on the road and warmer temperatures extended the driving season well beyond the norm. While crude and heating oil futures both lost as much as 30 percent of their value in the fourth quarter alone, RBOB futures slid little more than 14 percent and ended the quarter only 10cpg lower than where they began. 5

ÂŠ 2016 Mansfield Energy Corp.

IIIII II

Global Economic Outlook

IIII II I

Since the early ‘90s, China has risen through the global ranks, posting impressive economic growth rates each year to surpass the U.S. in overall purchasing power and represent a significant factor in all financial forecasts. After posting growth rates nearly twice that of the U.S. and European nations for more than two decades, bolstering financial growth targets worldwide, experts worry a slowdown in today’s second-largest economy could stall economic recovery efforts in developed nations along with crude oil’s anticipated rebound. After watching China’s real estate bubble burst and, more recently, its equity bubble, institutions are taking a long look at how China fuels its economic growth and do not like what they are finding. Since the turn of the century, China more than doubled its debt-to-GDP ratio to record rates of roughly 276 percent, grossly surpassing the average for other developing nations while even exceeding most advanced economies. In the post-recession economy, China accounted for more than a third of global debt growth, adding nearly $21 trillion in new debt since 2007.

China’s Economic Growth Fueled by Debt

Chinese citizen making a stock trade at a Beijing open-to-the-public municipal access market trading exchange room during a stock market index decline in China. Source: Getty Images

At the same time, analysts point out a disturbing trend in China’s manufacturing operations — traditionally, the nation’s bread and butter. For the last year, the country’s Purchasing Managers’ Index (PMI) hovered just below the all-important breakeven mark (50), supporting speculation of an economic slowdown, but rates then fell to 48.2 in December, signaling China’s tenth month of contracting activity and worrying investors of a larger economic restructuring. Furthermore, China’s slowly rising manufacturing wages have driven low-end production work to other developing nations. With reduced manufacturing operations and a struggling ﬁnancial sector, activity in China’s service sector — now the nation’s largest contributor to GDP — slowed to a 17-month low in December. Source: The World Bank

As a result of China’s slowing economic machine, worldwide commodity prices have fallen to multi-year lows and commodity-exporting nations suffer the consequences. Middle Eastern oil producers currently wage a bitter price war to capture more of the dwindling Chinese market share while demand for iron ore, largely sourced out of Brazil, fell to a 15-year low just as widespread corruption charges threaten Brazil’s political system and economic future. Similarly, Chinese demand for steel and cement, major indicators of real estate development, declined by the largest margins in roughly 20 years — particularly concerning as real estate accounts for most of China’s non-ﬁnancial corporate and household debts.

Several factors contribute to the global market’s current state. However, they almost all circled back to China and its declining appetite for raw materials during the fourth quarter. Market watchers hope to see further monetary policy reform in 2016 as ofﬁcials combat rising debt ratios, but long-standing reliance upon government-funded borrowing, state-owned monopolies and shady lending practices could prove problematic, ending their twenty year rise and weighing on commodity prices for the next several years. •

Mining operation, Brazil

Middle Eastern oil producers currently wage a bitter price war to capture more of the dwindling Chinese market share while demand for iron ore, largely sourced out of Brazil, fell to a 15-year low just as widespread corruption charges threaten Brazil’s political system and economic future.

IIIII II

U.S. Economic Outlook

IIII II I

Rising U.S. Dollar Drives Crude Oil Lower

Talk of a stronger dollar and the Federal Reserve’s interest rate plan dominated fourth quarter economic news. Finally following through on summer speculation, Federal Reserve members voted in December to raise interest rates a quarter-percent, ending the Fed’s seven-year, zero-percent policy and prompting the dollar’s greatest singleday gain this year. Federal Reserve Chair Janet Yellen promised a slow-but-steady path forward, claiming “the economic recovery has clearly come a long way, although it is not yet complete.” Two weeks earlier, European Central Bank (ECB) members lowered their own interest rates further into negative territory, widening the gap between the U.S. dollar and euro. Given the dollar’s inverse correlation to crude oil futures, barrel prices fell sharply as the currency gained strength versus foreign currencies. Until the ECB’s aggressive stimulus program has run its course, jumpstarting demand and eliminating the euro’s disadvantage to the dollar, consumers should continue enjoying the dollar’s incredibly bearish inﬂuence on petroleum prices.

Source: DTN ProphetX

Chief economist Richard Curtin with the University of Michigan credited lower inflation and increased demand for household durables with December’s last-minute bump in consumer confidence, earning 2015 the highest annual average (92.9) in more than a decade. With interest rates on the rise once more, however, optimism may flag as wages trail rising consumer prices. Of course, rising domestic interest rates coupled with weak European deposit rates improves the nation’s purchasing power overseas, lowering the cost of imports and possibly balancing the influence rising rates alone may carry.

Consumer Sentiment Index Q4 2015

October 90.0

November 91.3

December

Consumer Sentiment Index

Source: University of Michigan

92.6

That being said, lower domestic energy prices throughout 2015 improved consumers’ purchasing power at home, as well, but did little to benefit lower- and middle-income households as they spent more on food/meals out, rent and healthcare. While personal consumption expenditures (PCE) remained relatively flat during the fourth, according to the Federal Reserve Bank of Dallas, long-term wage growth will be needed to offset energy’s inevitable rebound. The Federal Reserve argues labor markets appear significantly improved and wages will surely follow, but those driven from the workforce in years past may consider a return if wages become too appealing, slowing predicted wage growth. •

Headline Personal Consumption Expenditures (PCE) MoM Change

October 1.35

November 1.62

December *1.65

*Projection

Trimmed Personal Consumption Expenditures (PCE)

Source: Federal Reserve Bank of Dallas

Fundamentals “Help Me Accept the Things I Cannot Change.” Finding Serenity through Volatility According to former chief economist and author Herbert Stein, “if something cannot go on forever, it will stop.” A simple statement with complex implications which perfectly explains crude oil’s most recent 4-year cycle and its forward trajectory. Following the 2008/09 global economic crisis, rising crude oil prices and cheap capital drew countless fortune-seekers to unproven oil ﬁelds across the nation. Domestic production began a 5-year climb which would eventually double output to 45-year highs and contribute heavily to the global supply imbalance

Global Supply Imbalance Set to Ease in Q1

Source: Energy Information Administration (EIA)

Fracking in Texas

Looking back through the lens of Stein’s Law, the market’s inevitable decline seems obvious, but overwhelmingly bullish market sentiment clouded signs from both the industry and central banks at the time. Ultimately, overzealous drillers set their records, overtaking global demand in the process. At the same time, the European Central Bank (ECB) broke ties with the U.S. Federal Reserve, discouraging European depositors through negative interest rates and driving investors to the U.S. dollar. As a result, crude oil futures plummeted under both fundamental and macroeconomic pressures. Now, the market’s rife with analysts proclaiming a new sub-$60/bbl norm. While historical averages would seem to support their assertions, social spending in nearly every oil-producing nation now demands barrel prices well above $60, failing the test of Stein’s Law and suggesting production will eventually fall further before prices rise to sustainable levels. So, what price constitutes a “sustainable level?”

OPEC Nations Run at Steep Daily Deficits with $51 Crude

Source: Organization of Petroleum Exporting Countries (OPEC) and the International Monetary Fund (IMF)

According to the International Monetary Fund (IMF), three-quarters of OPEC nations require barrel prices above $80 to balance their budgets and even the group’s cornerstone, Saudi Arabia, can’t dismiss floundering prices for long, suggesting its coffers would empty in a little over five years at current rates. Shale oil breakeven prices, meanwhile, range from $30 to $70 a barrel, according to Citigroup commodities strategist Eric Lee, but high transportation costs for many of the cheapest shale formations often put profits just outside of reach. Therefore, companies across the globe are deferring new well projects at current prices while maintaining only the best of existing operations, eventually proving Stein’s Law once more as the supply imbalance swings the opposite direction, raising prices and perpetuating the cycle. As an end user of petroleum products with no direct influence over global crude oil production rates or barrel prices, market volatility falls squarely in the realm of things you cannot change. Furthermore, the petroleum market has shown itself to be a complex, unpredictable relationship between fundamentals, macroeconomics and human psychology, ensuring an ever-changing landscape and proving Stein’s Law on a daily basis. Therefore, consumers can either bemoan their lack of cost control or adopt a more sophisticated energy procurement strategy which mitigates price volatility and locks budgets through financial tools such as futures, swaps or options. • Oil sands Operation, Canada

Fundamentals

Justifying Crude Oil Exports as a Net Importing Nation

In mid-December, House and Senate representatives passed a $1.1-trillion spending bill which also ended the nation’s 40-year-old crude oil export ban. Hotly debated since advanced drilling technology and a decade of $40+/bbl prices spurred domestic oil output higher, the export ban encouraged greater domestic reﬁning operations, lowered consumer fuel expenses and reduced reﬁned product imports by 4.4 million barrels a day.

Of course, with domestic oil production constrained by American refining and storage capacity, oilers soon outpaced domestic demand, leading to often steep discounts versus foreign alternatives and steadily pushing commercial inventories to 80-year highs. As eastbound, crude-by-rail shipments became more frequent in 2012, East Coast refiners — consuming almost exclusively light-sweet foreign crude — slashed their dependence upon crude oil imports by nearly half. Meanwhile, Gulf Coast states — home to more than half the nation’s refining capacity — slowed their foreign crude oil intake from roughly 80 percent of total refinery inputs in 2005 to a mere 37 percent through the first nine months of 2015.

Net U.S. Imports of Crude and Other Petroleum Products to 30-Year Low

Source: Energy Information Administration (EIA)

Fundamentals Rising Domestic Production Reduced Import Dependency

Source: Energy Information Administration (EIA)

So, considering the export ban’s many positive effects, why would legislators want to undermine advances made over the last decade? Also, why would President Obama approve such a measure less than two weeks after pushing for reduced carbon emissions and fossil fuel dependence at the global climate change summit in Paris? First, not all refiners prefer domestic barrels. Even a decade ago, significant portions of domestically consumed barrels originated from Central/South America, Canada and the Gulf of Mexico, which possess heavier API gravities. Many mid-continent refiners, therefore, tailored their facilities to maximize returns on heavy, most often sour, varieties. Now, they’re presented with an overabundance of lighter domestic barrels, which would create suboptimal refinery run rates, and they’re choosing to stick with imports, extending the nation’s supply imbalance. 13

Also working against domestic producers, OPEC recently opted to continue its pricing war against high-cost producers, namely, in the United States. Without additional buyers, American producers will either pump the brakes on output, leading to widespread bankruptcies and reversing the industry’s decade of progress, or ﬁnd themselves capped by storage capacity, driving domestic barrel prices even lower against the foreign market while also leading to widespread bankruptcies. So, legislators did not work in opposition to the President’s clean energy goals, but instead, supported American producers against OPEC’s war on oil, saving countless energy-related jobs and tax revenues. After all, the best defense is a good offense and U.S. oil producers fought this price war with one hand tied behind their backs for the past year. •

Fundamentals

Energy Experts Extend Bearish Predictions Past 2016 When fuel futures ﬁrst tumbled during 2014’s second half, experts predicted a swift recovery. EIA and industry analysts anticipated falling domestic production to bolster prices as they drifted below $60 a barrel, generating a late-2015 rally. Seasoned oilers even relieved hedges, guaranteeing short-term gains while they waited for prices to stabilize in the $85 to $90/bbl range.

Mapping Crude Oil’s Collapse

Source: Oil Price Information Service (OPIS)

Of course, prices did not halt their decline as predicted and, instead, settled closer to $40 a barrel. OPEC’s secretary general, Abdulla al-Badri, even called the bottom ten dollars earlier around $50/bbl, certain dwindling investments in production capacity would spark the market’s eminent rebound and eventually demand barrel prices closer to $200, but oil futures still struggle. The ever-growing glut prevents buyers from organizing and many analysts blame limited crude storage capacity for their $10/bbl predictions. 14

Fundamentals Domestic Storage Nears Capacity

Source: Energy Information Administration (EIA)

According to the Energy Information Administration’s (EIA) latest poling, commercial inventories once again approached 80-year highs, ﬁlling roughly 90 percent of the nation’s working storage capacity and supporting traders’ trepidation. As PADD 4 readings illustrate, however, working storage capacity doesn’t actually tell the whole truth. In fact, EIA reports include a generous contingency — approximately 120 million barrels nationwide —to account for barrels trapped in the nation’s distribution network.

Tank Capacity Schematic Unavailable Space Contingency Space

Maximum Operating Inventory Level

Net Avaialable Shell Capacity Working Storage Capacity

Suction Line Tank Bottoms

So, that means the industry has nothing to worry about and domestic prices should rebound as soon as traders realize their mistake, right? Not quite. The EIA can only estimate volumes in ﬂoating storage, tank bottoms, rail cars and barges. In late November, the Financial Times 15

reported more than 100 million barrels of crude and heavy fuels trapped at sea while Reuters counted 41 commercial oil tankers anchored outside Houston ports, a nearly 60percent jump. As a result, at least twice as much oil remains marooned at sea today than reported earlier this year. Furthermore, Cushing storage tanks — delivery point for WTI crude futures purchased on the New York Mercantile Exchange — topped 63 million barrels at the end of December, leaving room for fewer than 30 million barrels before tanks reach their total shell capacity. If that were to happen, domestic crude oil futures would likely plummet. Of course, with the export ban now a thing of the past, international buyers would quickly capitalize on discounts, possibly alleviating pricing pressure. All of this to say, the market still holds signiﬁcant downward potential, but it would take a combination of strong domestic production and even weaker global demand to drop prices below $30 a barrel, as some predict. •

Regional Views PADD 1 East Coast PADD 1A Northeast

BULL

Evan’s Estimation I

Evan Smiles, Supply Supervisor See his bio, page 45

Fourth quarter 2015 proves the market’s bearish capacity, breaking resistance levels and dropping to record lows. Like many others, I couldn’t imagine WTI crude remaining under $40/bbl for such an extended period of time and anxiously anticipated the market’s rebound with each new quarter. Now, Northeast distillate markets begin the year on the defensive with warmer-than-average temperatures and abundant inventories, thanks to generous refinery output this summer and low European demand. Still, warm December temperatures are sure to give way to a cooler first quarter, supplying distillates some upward pressure and supporting my bullish outlook. Gasoline, on the other hand, should continue to decline through the first quarter due to weak demand and minimal refinery disruptions from falling temperatures. The added risk of driving in winter conditions tends to limit travel and gasoline inventories, like distillates, exceed multi-year seasonal averages. I expect a bearish first quarter as prices either remain flat or slip even further, testing the $1/gallon mark. •

PADD 1A Wholesale vs. DOE Retail (dollars per gallon)

“ The added risk of

driving in winter conditions tends to limit travel and gasoline inventories, like distillates, exceed multi-year seasonal averages.

” Source: Energy Information Administration (EIA)

PADD 1 East Coast PADD 1A Northeast

Rising New England Distillate Inventories Demand Off-Shore Assistance Like many other regions, strong refinery output last summer lifted New England distillate inventories steadily higher after hitting winter lows in March. Above-average inventories not only weighed on rack prices, but created significant demand for storage space. Suppliers will store excess barrels because the NYMEX heating oil index —benchmark for Northeast distillate pricing — currently exhibits a strong contango pattern in which barrels sold today earn a lower sale price than those sold in future months. Typical of the last year, contango patterns indicate a well-supplied or oversupplied market and result in steadily higher petroleum product inventories. However, New England storage facilities most often work on a just-in-time supply system, maintaining one of the smallest storage networks in the nation, and spare storage space is proving slim. With traditionally disruptive — aka “lucrative” — winter weather just around the corner and discounts of more than two cents a gallon for those willing to hold product an extra month, fuel traders are betting current discounts and future premiums from winter demand will offset the cost of offshore storage. At least one supplier already enlisted a refined product transport to serve as floating storage and more will surely follow, holding excess barrels offshore until inventories take their seasonal dive, despite the significantly higher cost in comparison to onshore options.

New England Distillate Inventories Soar Past Multi-Year Averages

Source: Energy Information Administration (EIA)

While consumers will eventually Steep Contango Supports Storage Options pay for this increased cost of storage through higher product prices, premiums should prove minimal and signiﬁcantly less than those recorded during distillate shortages over the past two years. In fact, with overall New England distillate and ultralow sulfur inventories nearly twice what they were this time last year and predictions of Source: New York Mercantile Exchange (NYMEX) warmer-than-average winter temperatures, Northeast fuel buyers should notice fewer supply disruptions this year, reducing product prices along with operational disruptions and associated expenses. •

Pilgrim Pipeline to Connect New Jersey Refineries and Hudson River Markets Residents along New York’s Hudson River suffer the same chilling temperatures and elevated distillate demand as their neighbors to the east and southwest, but often face steeper premiums during the winter months. Without pipelines to supply refined products, cities like Albany and Newburg rely entirely upon barges to transport fuel upriver. Of course, as waters slowly freeze and winter storms produce dangerous winds, waterborne deliveries become considerably more challenging. In mid-November, Pilgrim Pipeline Holdings, LLC submitted a use and occupancy permit application to the state Thruway Authority of New York, potentially securing a portion of the project’s 178-mile path. Consisting of two side-by-side pipelines stretching from refineries in Linden, NJ to distribution facilities in Albany, NY, the first would carry discounted Bakken barrels from Albany while the reserve would ship refined products. Pilgrim estimates daily flows at roughly 200,000 barrels each way, but the proposal is hardly a done deal. As with most fossil fuel pipeline projects these days, Pilgrim faces stiff opposition from local residents and political leaders. Several coalitions already seek to dismantle the proposal while towns preemptively pass pipeline bans, obstructing the pipeline’s proposed path. At the same time, demand for crude oil pipelines leading back to New Jersey may prove scarce after legislators lifted the nation’s crude export ban this December, slowing eastbound, crude-by-rail shipments as the economic benefits of domestically source barrels wane. Though the crude oil economics may appear questionable at this time, Pilgrim’s pipeline would dramatically improve refined product supplies for Hudson River markets, particularly Albany and Newburgh. • 19

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

BEAR

Chris’ Concept I

Chris Carter, Supply Manager See his bio, page 45

Expect Gulf Coast diesel basis — the region’s cash value less NYMEX futures — to rebound from December lows as warmer winter temperatures limit the region’s typical discount to New York Harbor markets. I also predict a small ﬁrst-quarter shortage for Floridians, similar to years past, as seasonal Houston fog delays vessel activity. Finally and albeit a bit early, the Gulf Coast RVP transition should prove interesting this year. Though it will have just begun at the end of the ﬁrst quarter, drastically different and ever-changing EPA mandates should challenge suppliers this year as Atlanta’s now free of their 7.0lb boutique gasoline requirement and rumors of repealing Nashville’s 7.8lb mandate still swirl. If the EPA removes Nashville’s 7.8lb requirement, “Atlanta Grade” gasoline could make a return along the Colonial Pipeline. Overall, I’m still bearish on both gasoline and diesel this quarter. •

PADD 1B Wholesale vs. DOE Retail (dollars per gallon)

Source: Energy Information Administration (EIA)

PADD 1C Wholesale vs. DOE Retail (dollars per gallon)

“ Though it will have just

begun at the end of the first quarter, drastically different and ever-changing EPA mandates should challenge suppliers this year as Atlanta’s now free of their 7.0lb boutique gasoline requirement and rumors of repealing Nashville’s 7.8lb mandate still swirl.

Source: Energy Information Administration (EIA)

”

Oil Rout Reduces Distribution Costs for Gulf Coast Waterborne Markets Unlike in years past when pipeline delays, production disruptions and lucrative arbitrage opportunities sapped reﬁned products from the Southeast, fourth quarter 2015 proved relatively uneventful. Gulf Coast reﬁners suffered few interruptions while elevated Northeast and Midwest inventories offset much of the regions’ seasonal turnaround losses. As a result, Gulf Coast basis, a measure of market demand, remained above historical averages throughout the fourth quarter.

Strong Market Conditions Support Fourth Quarter Gulf Coast Basis

Source: Oil Price Information Service (OPIS)

With pipeline-fed markets under control, analysts took a hard look at Florida’s barge-fed supply chain and found promising indications after years of short supply and hefty premiums. In recent years, suppliers have struggled to maintain sufficient refined product inventories, largely due to growing demand for Jones Act vessels. Domestic port-to-port shipping is reserved for a particular class of vessel. Only those constructed, owned and operated by U.S. citizens make the cut, granting them exclusive rights to carry products from Houston refineries, for example, to Florida, the Mid-Atlantic or often-lucrative Northeast markets. In 2012, 88 percent of Jones Act vessels transported refined products alone. However, the domestic crude oil renaissance, coupled with recordhigh barrel prices, prompted many of these already scarce vessels to give up clean products 21

in favor of crude oil. At the end of 2014, only 56 percent of the Jones Act fleet carried refined products while roughly 31 percent converted to Gulf Coast crude. With even fewer Jones Act vessels available, refined product deliveries into Florida markets, inevitably, cost more. Given stiff competition for costly tanker leases, several refiners opted to cut out the middle man, purchasing their own Jones Act vessels and eliminating leases all together. ExxonMobil, Motiva and Marathon all operate or intend to operate their own vessels in the Gulf, steadily shuttling refined products into Florida markets. Marathon even took it a step further, recently announcing its purchase of Aker Philadelphia Shipyard, adding four 330,000-barrel Jones Act vessels to their fleet. Reports show one already in operation while the remaining three should launch in the first half of 2016. Midstream asset giant Kinder Morgan is also expected to wrap up construction on four new vessels in 12 to 24 months. Of course, with the repeal of the 40year-old crude oil export ban, previously “dirty” vessels will likely return to the refined product fleet, easing the shortage, and legislators may even heed Northeast refiners’ requests and repeal the 95-year-old Jones Act, eliminating the shortage all together. •

PADD 2 Midwest

BULL

Dan’s Dissertation I

Dan Luther, Sr Supply Manager See his bio, page 44

Expect weak diesel and gasoline values in the Midwest through much of the first quarter of 2016. Seasonal demand is at the low point this time of year and refinery production should remain consistent. A relatively warm Midwest winter should limit temperature-related refinery production issues. However, toward the end of the quarter, both the Husky Lima (OH) and BP/Husky Toledo (OH) refineries will undergo maintenance, potentially increasing product prices across the region. By the end of the quarter, I expect Midwest diesel and gasoline prices to be higher relative to NYMEX futures as demand picks up coming out of the winter season and some production goes offline for spring refinery maintenance. •

PADD 2 Wholesale vs. DOE Retail (dollars per gallon)

“ Seasonal demand is at the low point this time of year and refinery production should remain consistent.

” Source: Energy Information Administration (EIA)

Fall Refinery Disruptions Send Chicago Diesel Soaring To start the fourth quarter, significant refinery downtime and increased demand from the agricultural harvest led to strong diesel prices across much of the Midwest region. During the first week of October, Chicago area diesel prices climbed to nearly 40 cents per gallon over NYMEX diesel futures and maintained strong premiums through much of the month, suggesting shippers could earn roughly 25 percent more for barrels placed in the Chicago area in comparison to the traditionally hard-hit Northeast. With pipelines already at capacity, however, transportation becomes the issue, resulting in long-hauls from surrounding markets and a short supply of carriers. ULSD in the region, which includes the Ohio Valley, proved the most expensive in the country during this time. 22

PADD 2 Midwest

Chicago Diesel Earns Steep Premium Over Comparable NYMEX Futures

Source: Oil Price Information Service (OPIS) and the New York Mercantile Exchange (NYMEX)

Chicago’s sudden premium stemmed from weak production as many refineries took processing units offline for seasonal maintenance. All but a few Chicago and Ohio Valley area refineries experienced some planned or unplanned downtime, including large regional producers like Flint Hills’ Pine Bend (MN), ExxonMobil’s Joliet (IL), Phillip 66’s Wood River (IL) and BP’s Whiting (IN) refinery.

Adding to poor production, pipelines feeding the region from the Gulf Coast became heavily allocated as unplanned maintenance delayed shipments. Explorer Pipeline’s 1,830-mile line, which runs from the Gulf Coast to the Midwest serving 16 states, ran two weeks behind schedule toward the end of October and early November. Suppliers suddenly turned to buyers, contributing to the increase in prices.

Midwest (PADD2) Distillate Inventories Drained in Response to Supply Disruptions

Source: Energy Information Administration (EIA)

As a result of poor supply, heavy demand and restricted pipeline activity, Midwest distillate inventories suffered a precipitous drop by the end of the fall season. However, as reﬁnery production returned, building inventories back to multi-year seasonal highs, premiums for Midwest diesel subsided. In a few short weeks, Chicago diesel ﬂipped, becoming one of the cheapest diesel barrels in the country behind the Gulf Coast. • 23

PADD 3 Gulf Coast

BEAR

Lynn’s Lessons I

Lynn Argianas, Director of Supply, West See her bio, page 44

The Gulf Coast distillate market proved the nation’s least volatile this past quarter. With most refineries experiencing only short-term operational issues and very little planned maintenance, the market remained well supplied. Distillate exports remained relatively constant while production steadily increased. This will change in the first quarter of 2016 when several Gulf Coast refineries enter turnaround season.

By January 15th, PADD3 refiners will idle units capable of processing roughly one million barrels of crude a day — 10.65 percent of total capacity. At the same time, work will be done on auxiliary gasoline and distillate producing units. Aside from some lingering maintenance throughout the spring, the majority of the planned maintenance will be completed by the end of February. With most Northeast and Midwest refiners expected to maintain operations through the first quarter, Gulf Coast refiners have little incentive to supply these markets. Therefore, without significant unplanned maintenance across the eastern U.S., production and above-average distillate inventories should prove sufficient to cover expected demand. •

PADD 3 Wholesale vs. DOE Retail (dollars per gallon)

“ With most Northeast

and Midwest refiners expected to maintain operations through the first quarter, Gulf Coast refiners have little incentive to supply these markets.

”

Source: Energy Information Administration (EIA)

Upstream Workers Dread Sub-$40 Barrels while Downstream Players Reap Benefits By the end of 2014, the U.S. Bureau of Labor Statistics reported more than 644,000 jobs spanning the domestic oil and gas lifecycle, including exploration, extraction and support services. A year later, energy sector capital expenditures are down roughly a quarter, according to Goldman Sachs, with another 20-percent decline forecast for next year and upstream job losses total roughly 100,000, year to date. 24

Swift Worldwide Resources CEO Tobias Read put it best when he told CNBC interviewers, “Capital expenditure is the absolute oxygen that drives the upstream sector… As soon as those projects come to an end, there's pretty much nothing left for people to do.” Today, Swift blames waning capital expenditures for the loss of more than 233,000 energy sector jobs worldwide and the cascading effect of crude oil’s decline has yet to fully run its course.

Capital Expenditures Follow Barrel Prices to Multi-Year Lows (secondary axis)

Source: FactSet

Exploration and production companies were the first to slash jobs, but oil service providers soon surpassed their upstream customers’ cuts as declining oilfield activity prompted layoffs, mergers and consolidation. Now, pipeline companies are following suit as experts predict slower North American production growth over the next two years, reducing demand for additional pipeline capacity. With the crude export ban in the rearview mirror, midstream assets may soon find themselves in a similar bind with excess barrels bleeding into the global market rather than sitting idly in domestic storage farms. While upstream workers anxiously listen to rumors of layoffs and downsizing, refiners and refined product distributors reap the benefits of lower energy prices. Increased demand for cheap energy this year encouraged refiners to make the most of crude oil’s weakness, capturing higher margins through most of 2015 ($20/bbl avg.) and peaking above $30/bbl before ending with returns closer to $13 a barrel. As a result, most independent refiners found themselves flush with funds. One such refiner, PBF Energy, took the opportunity to purchase a distressed facility from two long-standing members of the “Big Oil” community, ExxonMobil and PDVSA. Together, they owned and operated the 189,000-bpd Chalmette, Louisiana refinery, a Mobil asset since 1988. Yielding PBF its first Gulf Coast refinery and fourth facility nationwide, the deal expands PBF’s total production capacity by 35 percent to more than 725,000 barrels a day and signifies the growing influence of independent refiners in a traditionally integrated industry. As independent upstream players fold under financial strain, watch for other companies to restructure and possibly parlay revenues from deals, such as Exxon’s, into acquiring distressed operations for pennies on the dollar. Ultimately, this narrows the production field while encouraging greater specialization across the supply chain. For consumers, this trend represents greater competition in the downstream market and efficiency in both the production and refining sectors as companies focus on a single aspect of the supply chain. • 31 25

Did You Know?

In November 1980, a Texaco oil rig operator on Louisiana’s Lake Peigneur single-handedly destroyed his rig, eleven barges, a salt mine and 65 acres of surrounding terrain while creating a new saltwater lake and the state’s tallest waterfall. How did he manage such a productive day? The operator misinterpreted the rig’s proposed drilling coordinates, inadvertently piercing the salt mines located beneath the lake. The resulting whirlpool reversed the flow of the Delcambre Canal, temporarily creating the state’s tallest waterfall and refilling the lake with salt water from Vermillion Bay.

PADD 4 Rocky Mountain

BEAR

Nate’s Notion I

Nate Kovacevich, Supply Manager See his bio, page 45

Refined product markets across PADD 4 should stay relatively flat to slightly bearish during the first quarter of 2016. Diesel and gasoline prices in the Mountain Region have been on a downward trajectory since mid-October. This winter has gotten off to a warmer-than-normal start and resulting bearish momentum in the NYMEX heating oil market drew Rocky Mountain prices lower. At the same time, a number of refineries completed maintenance in PADDs 4 and 2 (Midwest) this quarter, introducing more product to the marketplace while demand remains weak, but expect some bottoming action as temperatures finally drop in the first quarter and winter demand picks up. •

PADD 4 Wholesale vs. DOE Retail (dollars per gallon)

“ This winter has

gotten off to a warmer-than-normal start and resulting bearish momentum in the NYMEX heating oil market drew Rocky Mountain prices lower.

”

Source: Energy Information Administration (EIA)

32 26

Utah Supreme Court Considers Air-Quality Concerns in Tesoro Expansion Plan The Utah Supreme Court heard arguments from environmental advocates late in the fourth quarter regarding the expansion of Tesoro’s 58,000-bpd Salt Lake City refinery and its air-quality ramifications. According to environmental advocates, state officials failed to adequately investigate the project’s impact and should hold particulate-emitters to a higher standard. Tesoro attorney Michael Zody simply referred to the Department of Environmental Quality’s (DEQ) 102page review, which approved the expansion after undergoing sufficient scrutiny, according to the agency’s executive director.

Did You Know?

According to environmental historian J.R. McNeill, inventor and chemist Thomas Midgley (1889 – 1944) had the greatest negative impact on the Earth’s atmosphere of any other single organism in history. While employed by General Motors in 1921, Midgley eliminated engine “knocking” by adding tetraethyl lead, or TEL, to gasoline. He later created the world’s first chlorofluorocarbon (CFC) for General Motors’ Frigidaire division, which was later dubbed “Freon.”

While Tesoro’s production capacity — the largest of four facilities in Utah — pales in comparison to some of the Gulf Coast’s megarefineries, the legal battle centers on Salt Lake City’s persistent air-quality issues. Thanks to the bowl-shaped mountain basin and Utah’s frigid winter temperatures, harmful emissions often cover the city in a blanket of smog. The DEQ’s Air Quality division reports soot (PM 2.5) ratings averaging 43 micrograms per cubic meter over the last three years, exceeding the federal government’s 35-microgram limit and possibly requiring stricter regulations next year under the nation’s Clean Air legislation. Tesoro’s proposed expansion would increase its overall storage capacity and unloading capabilities, providing greater access to crude pumped out of the Uinta Basin southeast of the city. Plans remain on hold until the Supreme Court offers a ruling, which could take up to a year. While some justices’ comments during December’s hearing suggested a positive outcome for Tesoro, a ruling favoring environmental groups could easily hinder Utah’s refining activity, threatening security of supply and raising product prices. In the meantime, Tesoro’s operations continue, supplying refined products to markets across Utah, Idaho and eastern Washington. • 31 33 27

PADD 5 West Coast, AK, HI

BEAR

Matt’s Musings I

Matt Elder, West Coast Supply Supervisor See his bio, page 44

I expect West Coast volatility to ease as the first quarter 2016 progresses. The fourth quarter included near-record levels of planned turnaround, along with a large helping of unexpected maintenance, supporting considerably higher values than the national average in recent months. However, there is light at the end of the tunnel. If all goes to plan, Chevron’s Richmond refinery should be fully operational by the end of January, providing some extra length in the San Francisco market. Additionally, Southern California might get some relief at the pump if Exxon brings its new electrostatic precipitator (ESP) online in February as planned. Without that unit, regulators will not allow the Torrance facility to resume full-scale production of California’s CARB gas and the refinery’s purchase by PBF Energy will remain on hold. Given the high stakes and lengthy turnaround, I believe maintenance will prove successful and on schedule. •

“ The fourth quarter

PADD 5 Wholesale vs. DOE Retail (dollars per gallon)

included near-record levels of planned turnaround, along with a large helping of unexpected maintenance, supporting considerably higher values than the national average in recent months.

”

Source: Energy Information Administration (EIA)

PBF to Enter California Refining Space after Successful Torrance Restart explosion last February rendered the facility non-compliant with state regulations, creating a costly gap in the state’s gasoline production. Reﬁners’ margins soared due to the shortage, and PBF intends to right the situation as soon as Exxon Mobil completes repairs.

Proving just how well independent refiners weathered the crude oil market’s decline this year, PBF Energy announced plans to purchase Exxon Mobil’s 155,000-bpd Torrance refinery only three months after inking a deal for Exxon’s jointly owned Chalmette, LA facility. Based on the East Coast and possessing only three refineries since 2011, these back-to-back purchases perfectly illustrate the independent refiner’s financial clout when raw material costs plummet faster than finished goods. Meanwhile, vertically integrated “Big Oil” searches for savings where ever they can. Granting PBF access to one of the nation’s most complex and high-cost markets, Torrance normally services a tenth of California’s boutiquegasoline demand and 20 percent of Southern California’s, but an

Contingent upon the successful restart of the damaged regulatory component, PBF executives expect to close on the deal during the second quarter next year. Meanwhile, PBF finalized the Chalmette deal midway through the fourth quarter. According to the company’s official statement, the Torrance refinery purchase, along with the recently acquired Chalmette, LA facility, increases PBF’s total refining capacity by more than 60 percent and extends its reach to West and Gulf Coast markets. While the refinery’s purchase should not adversely impact the region’s security of supply or commodity prices, PBF’s singular focus on the downstream market could mark a positive long-term direction for consumers as independent refiners cater more to regional demand — seeking peak efficiency at every stage — rather than global integration of crude assets and refined product inventories. •

Canada

Keystone XL Proposal Ends in Disappointment With petroleum product prices setting new multi-year lows, domestic inventories on the verge of capacity and an international climate change conference approaching, TransCanada ofﬁcials decided to shelve their 830,000-bpd Keystone XL project at the start of November after more than seven years of continuous review and debate. Four days after formally requesting a suspension of their pipeline review, President Obama chose to end the debate entirely, rejecting the proposal and delivering a few parting blows. The President denied the pipeline would lower energy prices, create long term jobs or encourage energy independence as proponents argued, but would, instead, generate a more than 17-percent increase in carbon emissions from “dirty oil” production. According

to the Canadian government, thirty-one pipelines already supply U.S. refineries with approximately two and a half million barrels of similar high-carbon crude each day, but advocates along both sides of the border agree that number could be significantly higher if additional pipeline capacity were made available. Some Gulf Coast and even more Midwest refiners found Canadian crude oil favorable to their increasingly heavy-sour units. With significant discounts to both domestic and international barrels, West Canadian Select (WCS) contributes heavily to the regions’ hefty fuel savings. Increased pipeline capacity could do more for consumers, but the Keystone’s defeat only endangers future investment in oil sand projects and presents no immediate threat to petroleum product prices.

Western Canadian Select (WCS) Discounts Ease (dollars per barrel)

Source: DTN ProphetX

Canada In the wake of Keystone’s defeat, the Canadian Association of Petroleum Producers’ (CAPP) vice president of policy and performance, Alex Ferguson, told interviewers, “We need access for our products to international markets.” Access the Keystone would have granted. Without the Keystone XL to carry product south, Canada’s producers look instead to another TransCanada proposal — the 1.1-million-barrel-a-day Energy East pipeline. In November, Canadian voters elected liberal Prime Minister Justin Trudeau to replace conservative leader, Stephen Harper. Mr. Trudeau promised to support the Keystone Pipeline while still seeking to lower Canada’s carbon emissions and described his reaction to President Obama’s decision as “disappointed.” While Energy East supporters could hope the Prime Minister’s support of the Keystone XL project extends to similar oil infrastructure, Trudeau expressed uncertainty with regards to the pipeline proposal during the election. At the same time, Trudeau spoke in much clearer terms with regards to Enbridge’s 525,000-bpd pipeline proposal, telling voters, “If I win the honor of serving as prime minister, the Enbridge Northern Gateway Pipeline will not happen.” Running west to British Columbian ports, the Northern Gateway would grant land-locked producers access to lucrative Asian markets. However, shortly after President Obama’s Keystone XL rejection, Trudeau set out to formalize Northern British Columbia’s unofﬁcial moratorium on crude oil tankers, effectively blocking Enbridge’s proposal without openly denying an application. Without additional infrastructure, Canada’s crude oil production boom may have reached its pinnacle. Legislators along both sides of the border deny increasing access to southern, western and eastern markets, restricting demand for Alberta crude and discouraging future development of Canada’s natural resources. While fuel buyers should not expect prices to rise as a result, it certainly limits the market’s downward potential and consumer savings. • 31

Renewable Fuels

BEAR

Jessica’s Judgment I

Jessica Phillips, Renewable Supply & Distribution Supervisor See her bio, page 45

“Faith is a passionate intuition.” - William Wordsworth, 18th-century English poet I’m siding with Will on this one. Crude hovers between $35 and $40 a barrel for the first time since 2009, RIN values are mediocre, the RFS gave way to more desirable volumes for biodiesel and Congress passed the Tax Extender’s package in mid-December, including the biodiesel and alternative fuels credit, which had previously been a wildcard. The Tax Extension package retroactively awards blenders $1.00 per gallon while proactively extending benefits into 2016, resuscitating the renewable fuels industry. For now, legislators tabled proposals converting the blender’s credit into a producer’s credit, requiring renewable fuel manufacturers to achieve greater profit margins through economies of scale and leaner supply chains rather than additional government subsidies. Therefore, producers who reap the long-term rewards of the renewable fuel movement will be those capable of trimming the fat. Herein lies my passionate intuition: increasing production efficiency and long-term support for alternative fuels will generate cost savings across the supply chain. At the moment, however, I’ll settle for celebrating an ACTIVE tax credit and look for price relief in the first quarter!

EPA’s Finalized Ruling Sends RINs Soaring In 2005, Congress enacted the Renewable Fuel Standard (RFS) program with the goal of decreasing greenhouse gas (GHG) emissions and dependence upon foreign oil through a variety of renewable fuels. While generating notable successes, the past decade proved, undoubtedly, rocky. In accordance with that 2005 legislation and after much anticipation, the Environmental Protection Agency (EPA) finally produced the Renewable Volume Obligation (RVO) for 2014, 2015 and 2016, along with biodiesel targets for 2017, after coming under fire for failing to produce a final ruling at the end of 2014. The November 30th ruling differed from the Agency’s earlier proposal in many categories, increasing requirements for nearly all forms of renewable fuel, but most notably, conventional biofuel, which commonly means “ethanol.”

Increased conventional biofuel requirements renew blend wall concerns as suppliers generally fulfill these targets through gasoline blending with ethanol derived from corn starch. Unfortunately, strict federal fuel efficiency standards, coupled with declining gasoline demand, work against fuel producers. With ever fewer gasoline gallons available for blending, producers argue the EPA’s targets are not only overly ambitious, but completely impossible without first voiding vehicle warranties with ethanol blend rates exceeding 10 percent.

“ Herein lies my

passionate intuition: increasing production efficiency and long-term support for alternative fuels will generate cost savings across the supply chain. At the moment, however, I’ll settle for celebrating an ACTIVE tax credit and look for price relief in the first quarter!

”

As a result, industry experts expect multiple fuel advocacy groups to file suit. The American Fuel & Petrochemical Manufacturers (AFPM) and the Biotechnology Industry Organization (BIO) expressed intentions to file litigation on account of the EPA’s missed statutory deadline, target volumes exceeding the E10 blend wall and the EPA’s exposition of its waiver authority. However, this is not the EPA’s first rodeo. The AFPM and the American Petroleum Institute (API) each previously sued the EPA for missing annual RFS deadlines and Agency administrators responded with the current multi-year ruling, which fuel advocates seem to like even less. While both 2015 biodiesel (D4) and ethanol (D6) RINs gained steadily over the quarter, the EPA’s November announcement provided a significant boost, initially raising biodiesel RINs by more than 46 percent while 2015 ethanol RINs roughly doubled from the low-40s of the last month to 87.5 cents per RIN. Both have since tapered with D4 RINs ending the year at 72 cents per RIN and D6 only slightly lower at 69.5 cents per RIN.

RINs Surge After Final EPA Ruling Raised Targets

Source: Oil Price Information Service (OPIS)

Considering traders compare biodiesel prices to NYMEX heating oil futures, excluding the current RIN value, rising RINs actually translate to better biodiesel prices versus petroleum-based alternatives. Of course, falling crude oil prices continue weighing on distillates, meaning biodiesel prices recovered slightly following the EPA’s announcement, but still struggle to win over non-obligated buyers and discretionary blenders without a consistent cost advantage. • 33

Natural Gas

Domestic Natural Gas Prices

Cash Price Throughout the fourth quarter, cash prices generally traded below the prompt month contract, which is typical given the relatively low demand of fall and early winter. Such cash discounts were at their peak in early to mid-November, as temperatures along the Gulf Coast approached 80°F. The discounted trend continued, but tightened toward the end of the fourth quarter with the onset of cooler temperatures and increased demand.

Forward Prices As was the case during the third quarter, term pricing trended downward heading into year end. January 2016 contracts kept pace with the decline in calendar 2016 through the majority of October before dropping to a discount of 12 cents per dekatherm (¢/DT) in November and then to 25¢/DT near the start of December. As one would expect with prompt leading the decline, the move down was muted the further out the curve one went.

Basis Markets Winter basis markets, particularly in the Northeast, declined steadily throughout 2015. The first-quarter 2016 Algonquin basis market, for example, fell from prices north of $8.00 per dekatherm (DT) early in 2015 all the way to $2.60/DT during the latest quarter. Even at the onset of the fourth quarter, Algonquin basis still traded near $6.00/DT. The market’s sharp fourth-quarter decline can be attributed to both a warmer start to the winter season and declining oil prices. Refined oil products still play a back-up role to many dual-fuel applications and, consequently, crude oil prices impact the premium basis markets where they are still used. Therefore, the 30-percent drop in 2016 crude oil prices over the last 12 months weighed heavily on Northeastern natural gas markets as petroleum alternatives prove more affordable. Going hand-in-hand with the drop in cash and forward prices, the recent decline in basis markets means both the commodity and transport portions of the delivered natural gas price have continued to drop, decreasing the cost to customers. While certainly benefitting customers with an indexed pricing structure, favorable economics and the impending cold could justify converting to a fixed price. •

Natural Gas

Natural Gas Supply/Demand Fundamentals

Supply

Marcellus Shale While shale oil plays across the Midwest suffer under low crude oil prices, natural gas from the Marcellus Shale formation in eastern Ohio and western Pennsylvania proved a key factor in the nation’s recent production boom. Also, increasing pipeline capacity throughout the Northeast connects more consumers to less expensive Marcellus natural gas, causing a shift from Gulf Coast production and contributing to lower end-user prices. National production recently reached record levels, but analysts expect suppliers to set new records in 2016 as production continues to slowly increase. •

Domestic Natural Gas Production and Imports

Source: Energy Information Administration (EIA)

Natural Gas Natural Gas Supply/Demand Fundamentals Demand

Sabine Pass LNG Terminal On October 1st, the Sabine Pass LNG Terminal on the border of Texas and Louisiana commenced operations. While the initial natural gas delivery measured a mere 3,000DT, the facility is expected to handle between 2.2 and 3.5 billion cubic feet a day (Bcf/d) over the next 20 years, permitting a steady stream of natural gas exports from the Contiguous United States. •

Power Generation Sector Similar to the third quarter, natural gas demand continued to increase during the fourth as electrical power generators consumed 18.6 percent more than at this time last year. The Energy Information Administration (EIA) expects power sector demand to pull back slightly next year through increased efﬁciency programs and self-generation, particularly microgrids and distributed generation. Despite the pull-back, overall demand should remain more than 3 Bcf/d higher than levels reported in 2014, due to growing natural gas demand and more coal-ﬁred plant retirements. •

Domestic Natural Gas Consumption

Source: Energy Information Administration (EIA)

Natural Gas Natural Gas Supply/Demand Fundamentals Natural Gas Storage Inventory On November 19th, the EIA reclassified its natural gas storage regions, expanding from three regions — West, East, and Producing — to a more accurate fiveregion overview, which includes Pacific, Mountain, Midwest, South Central, and East regions. The adjustment reflects changing regional consumption, storage and production trends as “Producing” Gulf Coast states no longer generate the lion’s share of natural gas while West and East regions simply consume. With the emergence of Marcellus and Utica as major shale resources, among others, natural gas production proves more widespread than the EIA’s previous model suggested. Furthermore, the reclassification singles out Midwest states for their unparalleled storage capacity, home to roughly 85 percent of the nation’s natural gas storage aquifers. The first winter withdrawal from storage inventories did not occur until the last week of November, just two weeks after natural gas storage inventories reached 4,000Bcf for the first time. The summer injection season traditionally ends in late-October. However, above-average November temperatures and changing supply/demand dynamics extended that season, allowing producers time to set new records. •

Natural Gas Inventories Rise to Record Rates

Source: Energy Information Administration (EIA)

Electrical Power

Power Prices

Past, Present & Future ?

Did You Know?

According to Elton B. Sherwin’s 2010 study, 75 percent of residential power consumption could be attributed to electronics either in idle or standby modes. The average desktop computer idles at 80 watts, while the average laptop idles at 20 watts. A Sony PlayStation 4 uses about 140 watts and nearly as much when idling in menu mode. Prior to 2010, idle electronics consumed more electricity than the nation’s entire solar panel network could generate.

During the fourth quarter, lower volatility in cash power prices became a recurring theme. Nuclear outages across the country were below average and mild seasonal weather was the norm. As cash gas prices have fallen so have power prices. Cash peak power prices started the quarter in the upper $20s to low $30s across all regions and as we close the books on 2015 can be found from $15 into the mid $20s. Forward markets showed a steady decline over the quarter. As seen in the chart below, calendar 2016 power prices dropped in every market area. This move largely followed NYMEX natural gas, but the drop was more dramatic in eastern markets as premium gas basis markets fell as well. End users capable of hedging forward took advantage of the lowest wholesale power prices seen since deregulation began. •

Cal ‘16 Wholesale Peak Power Prices on Decline

Electrical Power Power Fundamentals

More Business Finding Savings through Self-Generated Power It’s safe to assume all businesses consume electricity on a daily basis, but that doesn’t mean costly energy bills are inevitable. Sometimes referred to as microgrids or distributed generation (DG), facilities supplying their own energy could also be labeled as “selfgenerating,” even if they rely on an outside grid for back-up purposes. For decades, large government, military and educational facilities have self-generated much of their power needs. Today, with the cost of fuel declining, self-generating equipment increasingly cost effective and federal, state and local authorities offering alluring incentives, an increasing number of companies are also choosing to manage their power needs behind the meter. In the simplest of forms, a DG turbine uses fuel to produce power with the residual heat emitted into the air. However, depending on specific facility needs, the configuration can become far more complex and efficient at the same time. Combined Heating & Power (CHP) can obtain efficiencies upwards of 85 percent compared to a simple turbine, whose efficiency is typically less than 50 percent. In CHP systems, residual heat from the turbine either powers a boiler or other onsite heating needs, effectively improving the heat rate of the generator. The heat rate, expressed in kWh/Btu, measures the amount of energy used to produce electricity. Beyond the government incentives, a key cost advantage to DG is the avoidance of utility distribution and recovery costs, which in

today’s low commodity cost environment can account for more than half of a power bill. The added benefit of substantiality lends a green component to virtually every microgrid project as onsite supply is typically more efficient and cleaner. Solar generation speaks for itself, but CHP also allows a company to reduce utility line losses and avoids consumption of dirtier fuels. In many instances, CHP projects are “green” labeled and eligible for incentives, despite their reliance on fossil fuels. Of course, potential obstacles could discourage the decision to selfgenerate. Utilities may charge Standby Rates in the event that the DG system goes down or charge Exit Fees to a company removing itself from the grid. The most obvious consideration when evaluating a DG project remains economic viability and decision makers should consider the various alternatives while asking themselves difficult questions. • What is the project’s Internal Rate of Return (IRR)? • Does the project enhance operations? • What makes up the bill and would current electricity costs support converting? • Can adequate natural gas supply and pipeline pressure be secured in the project’s current location? • Will there be enough space for a solar array to meet site demand? In the end, a DG solution exists for every site, regardless of size, configuration, location or budget. Of course, understanding your power bill and the various DG project options available is always the first step. •

Transportation Logistics “ Advocates for the transportation industry widely

agree the FAST Act represents a significant victory in the battle for more effective regulatory oversight, realistic targets, accurate assessments and safer roadways for everyone!

”

Not So FAST! Congress Passes Long-Term Highway Bill In early December, President Obama approved the nation’s first long-term highway bill — Fixing America’s Surface Transportation Act (FAST Act) — since 2005, extending highway authorization for another five years and allocating $305 billion for surface transportation projects. While legislators dedicated more than 90 percent of funds to the nation’s beleaguered Highway Trust Fund (HTF), generally reserved for large, metropolitan roadway construction, the bill lowered expense thresholds to accommodate communities of all sizes and extended benefits to non-traditional transit programs, such as Transit Oriented Development (TOD) and passenger rail projects, providing commuters alternatives and easing roadway congestion. The American Trucking Association (ATA) applauded the bill’s long-term support of essential transportation projects and the fiscal certainty it provides government agencies, but also its demand for critical steps toward improving trucking safety

and efﬁciency. First, the FAST Act calls on the Federal Motor Carrier Safety Administration (FMCSA) to examine its controversial Compliance, Safety, Accountability (CSA) scoring program, including ranking methodologies, data integrity, liability insurance requirements, crash risk assessments and accountability. Until FMCSA administrators conclude their investigation and provide a so-called “corrective action plan,” the public will ﬁnd certain safety performance score data unavailable as the CSA program remains dormant. In addition to a full program review, the FAST Act includes changes to driver drug testing protocol, allowing carriers to test drivers’ hair in lieu of a urine test and granting trucking companies a powerful tool in keeping habitual drug users out from behind the wheel. The Department of Health and Human Services (DHHS) will set the standards for hair testing within a year of the bill’s enactment. 40

Finally, military veterans should find it easier to transition to the trucking industry as service experience with comparable heavy-duty vehicles will now count towards CDL skill tests. Drivers may also receive their medical certification from Veterans Affairs doctors rather than those in FMCSA’s National Registry of Medical Examiners. Considering the driver shortage threatening the transportation sector, limiting obstacles for veterans could draw more experienced drivers into the industry ranks. Advocates for the transportation industry widely agree the FAST Act represents a significant victory in the battle for more effective regulatory oversight, realistic targets, accurate assessments and safer roadways for everyone. It lays the foundation needed to bring the nation’s transportation system into the 21st century, keeping our economy globally competitive, while reducing waste associated with planning, approving and completing transportation projects. •

Transportation Logistics

Driver Coercion Rule Improves Safety Regulation Enforcement “ The Federal Motor Carrier

Safety Administration (FMCSA) implemented the rule after commercial drivers claimed employers had threatened workers with job termination, denial of subsequent trips or deliveries, reduced pay, and forfeiture of favorable work hours or transportation jobs.

”

On November 30th, federal regulators issued a ﬁnal rule prohibiting ﬂeets, shippers and brokers from coercing truck drivers to violate hoursof-service and other safety regulations. The Federal Motor Carrier Safety Administration (FMCSA) implemented the rule after commercial drivers claimed employers had threatened workers with job termination, denial of subsequent trips or deliveries, reduced pay, and forfeiture of favorable work hours or transportation jobs.

This ruling comes as a relief to the driver pool after arguing for years that customers and other logistical parties have proven indifferent to federally imposed operational limits. Now, enforcement action can be taken against anyone in the supply chain who knowingly jeopardizes the safety of the driver and the general public. The agency requires drivers to report incidents within 90 days of the event, however.

Effective January 29th, offenders could face fines up to $16,000 per violation and possibly loss of operating authority. Regulators define coercion as more than just forcing drivers to stay on the road after their maximum hours are used, however. Extending the rule to violations of commercial driver license regulations, hazardous materials regulations and drug and alcohol testing rules, carriers could now be fined for ordering drivers to operate before receiving a negative drug test result or to haul their freight using impaired vehicles.

While the ruling deﬁnes coercion, opponents claim the language remains too vague, worrying drivers will abuse grey areas to take advantage of their employers. Carriers will need to train their employees on proper driver interactions, especially when a driver raises concerns about coercion. At the same time, ignorance is not an acceptable defense for unwitting fuel buyers accused of coercion. Educate staff on proper driver interactions to avoid ﬁnes and a tenuous carrier relationship. •

Transportation Logistics

Growing Driver Shortage Prompts Unreliable Service “ With commercial

driver demand only increasing, drivers with a good driving record can easily change jobs, contributing to turnover rates near 100 percent over the last three years.

”

Last year, strong freight growth and tight capacity encouraged many carriers to increase driver salaries as a means of improving retention in the midst of a 38,000-driver shortage. Fast forward 12 months, however, and declining fuel costs have fallen behind truckload driver salaries as carriers’ largest per-mile expense, leading companies to think twice before extending that overhang any further. This year, the American Trucking Association (ATA) expects the national driver shortage to reach nearly 48,000, a more than 26 percent year-over-year gain and significant enough that increased pay will only retain employees for a longer period and not for the long term. With commercial driver demand only increasing, drivers with a good driving record can easily change jobs, contributing to turnover rates near 100 percent over the last three years. As such, some fleets do not see the benefit of continued salary increases, considering it is a shortterm solution to a long-term problem. For fuel consumers, rising turnover rates in the transport industry could bring about higher freight rates as carriers pad quotes to absorb increasing overhead or poor service as fewer/less-experienced drivers result in more delays, dropped deliveries and outages. When operations depend on the fuel these carriers deliver, consumers cannot afford to simply shop the lowest freight rates. Instead, end-users must consider a carrier’s service history, incident rate, insurance coverage, fleet size and area of coverage. Like most things in this world, you get what you pay for and a 10-point-per-gallon savings does not justify running out of fuel in a crisis situation. • 42

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 Senior VP of Supply and 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.

Lynn Argianas Renewable Supply & Distribution Supervisor Lynn has a broad-based background in reﬁning and trading. She began her career at ConocoPhillips where she traded, gasoline, distillate, ethanol, ngl’s and crude oil. She was a VP at Morgan Stanley and a Business Development Manager at Cargill before joining Mansﬁeld Oil where she is Director of Supply West Coast. Lynn has a BA in Finance and Economics from the University of Illinois Champaign and a MBA in from St. Mary’s College in Moraga, CA.

Matt Elder West Coast Supply Supervisor Matt joined Mansfield in May 2013 after holding a position as an expense consultant in California. Now the West Coast Supply Supervisor, Matt is responsible for managing refined product purchasing for both contract and bulk pipeline movements, scheduling, hedging, supply bids, optimization and fixed price analysis in California, Oregon, Washington, Idaho, Nevada and Arizona. Matt holds a BA in Economics from the University of California, San Diego.

Dan Luther Sr. Supply Manager Dan is responsible for refined products supply and hedging in Mansfield’s Midcontinent region running from Texas north to Chicago. 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 prior to assuming ethanol trading responsibilities across the U.S. Dan holds a BSBA in Supply Chain Management and Marketing from Ohio State University and an MBA from Georgia Tech.

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

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

Evan Smiles 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.

Fernando de Agüero President, 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. 45

Q11

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

Innovation • Integrity • Excellence • Conscientiousness • Personal Ser vice

Download our App Android Market

* 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 2016. 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.