Study of Market Value of Partially Upgraded Bitumen® Prepared for Alberta Innovates AI 2492 by Suite 2920 2100 Ross Avenue Dallas, TX 75201 214/754-0898 www.turnermason.com January 23, 2019 John R. Auers, P.E. Robert Auers John M. Mayes Brian Mason TABLE OF CONTENTS I. Introduction, Background and Scope ................................................................... 8 II. Executive Summary .......................................................................................... 10 III. Refining Value Correlation Equations and Market Value Correlation Methodology (RVCEs and MVCM) ......................................................................................... 19 Key Model Inputs .......................................................................................... 19 PUB and Competitive Crude Assays ....................................................... 19 Refining Regions and Models .................................................................. 20 Price Sets ................................................................................................ 20 Transportation Assumptions .......................................................................... 24 Modeling Methodology .................................................................................. 25 Modeling Results ........................................................................................... 26 Refining Values ....................................................................................... 27 Low Penetration/No Constraint Case–10,000 BPD Production .............. 27 Medium Penetration/Limited Constraint Case–40,000 BPD Production. 28 High Penetration/Harder Constraint Case–100,000 BPD Production ..... 29 Historical Validation ............................................................................... 30 Refining Value Correlation Equations (RVCEs) ............................................. 34 Justification of RVCE Variables ..................................................................... 37 Market Value Correlation Methodology (MVCM) ........................................... 39 PUB Market Value Forecast .................................................................... 41 IV. Medium and Heavy Crude Supply and Demand Outlook ................................... 43 The Changing Heavy Crude Market .............................................................. 43 Background .............................................................................................. 44 Near-Term Supply and Demand Changes ................................................ 45 IMO Impacts ............................................................................................. 47 Rebalancing Heavy Crude ........................................................................ 48 Current Refinery Medium and Heavy Crude Capabilities .............................. 49 U. S. PADD II ........................................................................................... 50 U. S. PADD III .......................................................................................... 52 China........................................................................................................ 55 Medium and Heavy Crude Supply/Demand Forecast .................................. 57 Refinery Medium and Heavy Crude Capacity Growth.............................. 57 Medium and Heavy Crude Production Forecast ...................................... 59 Forecast Medium and Heavy Supply/Demand Balance ........................... 60 PUB Placement in the Regional Medium/Heavy Crude Supply Balances . 62 U.S. PADD II ..................................................................................... 62 1 TABLE OF CONTENTS (CONTINUED) U.S. PADD III ...................................................................................... 62 China .................................................................................................. 62 Price Impacts ......................................................................................... 63 Historical Perspective ......................................................................... 63 Forecast ................................................................................................. 64 WCS vs. Maya ........................................................................................ 68 V. Commercial and Market Factors Influencing Value ........................................... 70 Quality Factors Which Cannot Be Effectively Modeled – TAN ....................... 71 Other Commercial/Market Factors ................................................................. 72 Estimates of TAN and Other Commercial/Market Factors for PUB Streams .. 74 Backcast Analysis ................................................................................... 74 Key Assumptions and Final Forecast Estimates ..................................... 75 GLOSSARY AND DEFINITIONS ................................................................................. 80 KEY DEFINITIONS ...................................................................................................... 82 Market Value .................................................................................................. 82 Refining Value ................................................................................................ 82 TABLES Table II-1 – PUB Qualities ...................................................................... 10 Table II-2 – Forecast PUB Netback Market Values ................................. 16 Table III-1 – Regional Unit Capacities ..................................................... 26 Table III-2 – Relative Refining Values – 10 MBPD Case ......................... 27 Table III-3 – Relative Refining Values – 40 MBPD Case ......................... 28 Table III-4 – Relative Refining Values – 100 MBPD Case ....................... 30 Table III-5 – Refining Value Correlation Equation (RVCEs) .................... 36 Table III-6 – Whole Crude Properties vs. Refining Values ..................... 37 Table III-7 - RVCE Factor Significance .................................................. 39 Table III-8 – Market Valuation Correlation Example ................................ 41 Table IV-1 – U.S. PADD II Medium/Heavy Crude Refineries .................. 50 Table IV-2 – U.S. PADD III Medium/Heavy Crude Refineries ................. 52 Table IV-3 – Chinese Medium/Heavy Crude Refineries .......................... 56 Table IV-4 – Largest Medium and Heavy Refining Projects .................... 58 Table IV-5 – Medium and Heavy Projects in PADD II, PADD III and China .......................................................................... 59 FIGURES Predicted vs. Actual Market Prices 2 TABLE OF CONTENTS (CONTINUED) Figure III-1 – Vasconia vs. Castilla .......................................................... 31 Figure III-2 – Marlim vs. Maya ................................................................ 32 Figure III-3 – Isthmus vs. Maya ............................................................... 32 Figure III-4 – Dalia vs. Marlim ................................................................. 32 Figure III-5 – Dalia vs. Mars .................................................................... 33 Figure III-6 – Mars vs. Vasconia ............................................................. 33 Figure III-7 – Mars vs. Arab Heavy ......................................................... 33 Figure IV-1 – Venezuelan Crude Production ........................................... 44 Figure IV-2 – Change in Heavy Crude Imports to PADD III ..................... 45 Figure IV-3 – Mexican Heavy Oil Production........................................... 45 Figure IV-4 – Brazilian Crude Production ................................................ 46 Figure IV-5 – Projected Heavy Canadian Production .............................. 46 Figure IV-6 – Iraqi Oil Production ............................................................ 47 Figure IV-7 – Global Residual Fuel Demand ........................................... 49 Figure IV-8 – PADD II Heavy Crude Refineries ....................................... 51 Figure IV-9 – Heavy Crude Refineries in Texas ...................................... 53 Figure IV-10 – Heavy Crude Refineries in Louisiana............................... 54 Figure IV-11 – Chinese Heavy Crude Refineries .................................... 55 Figure IV-12 – Global Refinery Capacity Growth .................................... 57 Figure IV-13 – Global Refinery Capacity Growth by Region.................... 58 Figure IV-14 – Global Medium and Heavy Crude Production Growth ..... 60 Figure IV-15 – Cumulative Surplus Crude Production by Grade ............ 61 Figure IV-16 – Heavy/Light Differential Since 2000 ................................. 64 Figure IV-17 – Forecast Heavy/Light Differential ..................................... 66 Figure IV-18 – Heavy/Light Differential - Forecast vs. History ................. 66 Figure IV-19 – Mars/Light Differential - Forecast vs. History ................... 67 Figure IV-20 – Brent/Arab Heavy Differential – Forecast vs. History ....... 67 Figure IV-21 – Canadian Crude Imports to PADD III ............................... 68 Figure IV-22 – Maya (FOB Mexico) – WCS (Hardisty) History ................ 69 Figure IV-23 – Maya (FOB Mexico) – WCS (Hardisty) Forecast ............. 70 APPENDIX TABLES AND FIGURES ........................................................................... 83