Energy and commodity price benchmarking and market insights London, Houston, Washington, New Y ork, Portland, Calgary, S antiago, Bogota, Rio de Janeiro, S ingapore, Beij ing, Tokyo, S ydney, Dubai, Moscow, Astana, Kiev, Porto and Johannesburg
Crude Pricing and Indexation Denver, Colorado Gus Vasquez 18 June 2012
Who is Argus? • Report prices in all world markets for Refined products o Crude o NGL & LPG o Coal and coke o Gas o Power o Fertilizers o Emissions o • Over 400 staff globally with numerous offices • Rapid growth in spot and term contract indexation, swaps market indexation
Why Argus? • Argus is now a standard benchmark for trade in US domestic and import crude oil o US gasoline, diesel, and j et fuel o • Argus reports the market the way that it trades and believes liquidity and transparency lead to accuracy • Argus prices for US crude are volume-weighted averages of trades throughout the entire trading day • Argus S our Crude Index (AS CI) Used to price both long-haul and short-haul foreign crudes o • Argus LLS Used to price Bakken and Eagle Ford o
Argus approach to price discovery • Provide representative, verifiable, and consistent price discovery by monitoring arms-length market activity • Consult with industry and wider stakeholders to ensure appropriateness of methodologies Avoid a “ one size fits all” approach o Where possible reflect existing market structures and o trading practices • Argus believes liquidity and transparency lead to accuracy Argus has a robust process for assessing market prices in the o absence of active trading
Basic methodologies • Daily volume weighted average of deals done Example: US Gulf coast domestic crude pricing o Differentials to WTI are averaged with volume weighting o Differentials applied to Nymex settlement price o • Daily assessment of low/ high range Examples: Bakken Clearbrook, West African delivered US GC o Trade is too illiquid to use daily VWA o All VWAs default to a low/ high range when liquidity is low o
Basic methodologies • Assessed bid/ ask range at a moment in time Forward curves o • Monthly weighted averages of deals done Example: WCS Canada o Based on monthly average pricing common in the market o • Calculated indices
Volume-weighted averages • Differential price is volume-weighted average of all deals over entire trading day All qualifying deals are counted regardless of volume o Counterparties are validated and duplicates netted out o Aggregate volume minimum must be met, or price defaults o to mean of low and high • Differential averages are applied to Nymex settlement price During 3 days after expiry, applied to WTI Cushing price, o which is a volume-weighted average of “ roll” trades, which are applied to the prompt month Nymex settlement price
Index pricing
The spot markets are healthy • The spot market at the Gulf coast – when all deals are considered – is deep and broad • A ready well of deals exists for price formation even if WTI-related transactions decline • The use of LLS and Mars as secondary benchmarks is growing and offers several possibilities to the marketplace Argus continues to monitor the Gulf coast market for signs of o foundational change • Healthy indices lead to confidence in derivatives markets
S pot trade activity 2,500,000 Eugene Island 2,000,000 Poseidon Southern Green Total b/d per month Canyon 1,500,000 Bonito Thunder Horse WTI P-Plus 1,000,000 HLS WTS 500,000 WTI Midland Mars 0 Aug Oct Dec Aug Oct Dec Jun Jul Sep Nov Jan Feb Mar Apr May Jun Jul Sep Nov Jan Feb Mar Apr May Jun 2010 2011 2012
Contract pricing formulas One popular way to get to a final price is: CMA (Nymex settles during delivery month) + Average diff to CMA based on settles during Nymex trade month (Argus diff t o CMA mont hly average) + Argus trade month average differential for crude grade +/ - Transportation and quality adj ustments
Other pricing formulas in contracts Price can also be calculated in the following way: Average Nymex S ettles in Delivery Month + Argus Trade Month Average differential Or price could j ust equal: • The average of Argus Trade Month price (Argus outright prices) • The average of Argus daily price during delivery month
Other pricing formulas in contracts Another way to calculate price is: Average Nymex S ettles in Nymex prompt month + Argus Trade Month Average differential And finally: Average daily WTI Posting during delivery month + Argus P+ trade month average + Argus Trade Month Average differential
Calculating a netback value to the field • Price = Average Nymex S ettles in Delivery Month + Argus Trade Month Average differential + Quality differential - Transportation Costs • Example: Nymex settles at $100/ bl + $12.50/ bl for LLS + $2 for Eagle Ford o Eagle Ford price at a given location = $114.50/ bl o • Netback will be: Eagle Ford at $114.50/ bl - $10/ bl for transportation to S t James o Final Eagle Ford Price at the field = $104.50/bl o
Value vs. price
Examples of refinery yields
Crudes by quality 40.00 Nemba WTI LLS 35.00 Escravos Bonito WTS Thunder Horse Eugene Island HLS API Gravity Basrah Light 30.00 Poseidon Kissanje SGC ASCI Mars 25.00 Oriente Maya 20.00 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 Sulfur
What does this have to do with price? • The goal of refining is to turn crude oil into higher value products • With necessary equipment, a complex refinery can buy low value crude and turn into high value product • Crude price is a function of Refinery demand (equipment in each refinery varies and o product slate changes seasonally) Current value of products o Crude supply o Transportation constraints o
Demand side factors affecting price • Refinery outages Planned maintenance o Unplanned outage o • S easonality S ummer is gasoline season o Winter is about heating oil o • Refinery margins Margins determined by product and oil prices o Weak margins may force refiners to cut runs o • Product export opportunities
4-Week Avg US % age utilization 80 85 90 95 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 GC utilization of operable capacity Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12
S upply side factors affecting price • Field or platform maintenance • Transportation disruptions Pipeline issues o Bottlenecks or new infrastructure coming on line o • Regional oversupply The Cushing disconnect o • Import fluctuations • Increase or decrease in production Natural field decline o New plays coming on o
Break in flow disrupts stream Pipeline Break Refiner pays Increased Decreased more for Supply Supply other options
US domestic production forecasts 3 2.5 million barrels per day 2 1.5 1 0.5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Deepwater Gulf of Mexico US Shale Oil Source: EIA
Waterborne sweet crude imports into US GC 55,000 1,680,000 b/d: Sep 2010 50,000 45,000 40,000 '000 barrels 35,000 30,000 25,000 Net Loss: 1.015mn b/d supply 20,000 15,000 665,450 b/d: Feb 2012 10,000 Feb-10 Mar-10 Apr-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Dec-10 Feb-11 Mar-11 Apr-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Dec-11 Feb-12 Jan-10 May-10 Nov-10 Jan-11 May-11 Nov-11 Jan-12 Source: EIA
The WTI/ Brent inversion • A bottleneck at Cushing pushed WTI to discounts against Brent beginning in 2007 • WTI has been unable to return to its historic premium over Brent • Persistent crude over-supply in the Chicago area depressed WTI values as Cushing stocks rose Canadian crude inflows exacerbated supply o
The WTI/ Brent inversion • Once crude reached Cushing, it could previously only move north to the Midwest or go into storage • Now, with the S eaway Pipeline reversal, crude can also move from Cushing to the US GC Pipeline was reversed around mid-May o Initially moving 150,000 b/ d o • US domestic differentials to WTI are constructed using: The Brent/ WTI spread o The value relative to other domestic grades o Increasingly, the value of grades versus LLS and the value of o LLS versus Brent
LLS relationship to Brent and WTI 135 Brent LLS WTI 125 115 $/bl 105 95 85 75 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12
WTI inversion effect on spot market liquidity • WTI’s dislocation from Gulf coast increased the basis risk embedded in Gulf coast differential • Discouraged spot transactions versus WTI for Gulf coast grades • Encouraged increased trade against non-WTI pricing references – especially at the Gulf coast The Argus methodology is currently a volume weighted o average only of deals done at a differential to WTI In illiquid markets, Argus will make an assessment based on o other information, such as conversion or box trades • Encouraged growth in LLS swaps transactions
Mars differential to WTI 30.00 25.00 20.00 15.00 10.00 $/bl 5.00 0.00 -5.00 -10.00 -15.00
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