#KPMGIgnite Join the conversation Why it’s time to take the bear by the horns Christine Colbert Welcome Christine Colbert Senior Manager, Risk Consulting, Financial Risk Management © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Agenda – History of WCS – World crude oil pricing – WCS pricing – Trading opportunities – Hedging opportunities – Developing a strategy – Conclusion © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. History of WCS Crude oil pricing Western Canadian Select (WCS) Western Texas Intermediate (WTI) Brent • Price is quoted at Hardisty, • Price is quoted at Cushing, • Price is quoted at Sullom Alberta Oklahoma Voe, UK • Trades on the Chicago • Trades on the New York • Trades on the Mercantile Exchange (CME) Mercantile Exchange Intercontinental Exchange as a differential to WTI (NYMEX) (ICE) • Benchmark crude oil in the • Benchmark crude oil for the • Leading global price Canadian market North American market benchmark for Atlantic basin • The differential is also • Also known as Texas Light crude oils referred to as the Heavy Oil Sweet • Used to price two thirds of Discount the world’s internationally traded crude oil supplies © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. History of WCS Western Canadian Select background Western Canadian Select (WCS) was launched in December 2004 as a new heavy oil stream by EnCana (now Cenovus), Canadian Natural Resources Limited, Petro-Canada (now Suncor) and Talisman Energy Inc. WCS is a heavy blended crude oil. It's composition consists of: 1. Heavy conventional and unconventional oil streams 2. Bitumen 3. Sweet synthetic crude oil 4. Condensate diluents The blending of WCS occurs at the Husky terminal in Hardisty, Alberta The blended WCS must adhere to the following specifications: ‒ API Gravity Level between 19 to 22 ‒ Sulfur (Wt%) 2.8 - 3.5% ‒ TAN (Total Acid number) of Mg KOH/g 0.93 © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. API Sulphur Transport TAN What drives the differential? Gravity Content Cost API Gravity ‒ American Petroleum Institute (API) Gravity is the measure of how heavy or light a petroleum liquid is compared to water ‒ The API Gravity is quantified in degrees; where a higher value defines a lighter liquid ‒ An API Gravity of over 10º describes the liquid as light enough to float on water ‒ A higher API Gravity is more desirable because it requires less effort to process and transport © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. API Sulphur Transport TAN What drives the differential? Gravity Content Cost Sulphur content ‒ Sulfur content is another measure to the quality of crude oil ‒ The sulfur level is measured in weight percentage (Wt%) WTI (0.24%) Brent (0.37%) ‒ A sulfur level of greater than 0.5% is specified as “sour” and contains more impurities Sweet ‒ Sweet crude is more desirable because there are less processing costs to refine and remove impurities 0.50% Sour WCS (3.43%) © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. API Sulphur Transport TAN What drives the differential? Gravity Content Cost Total Acid Number (TAN) ‒ TAN refers to the total acid number and provides an identification of how acidic the crude oil is Brent (0.07) ‒ A TAN value of greater than 1.0 is considered “high-TAN” WTI (0.11) ‒ The higher the TAN value, the riskier it is to process; as it can cause corrosion to refinery Low-TAN equipment (TAN levels below 0.5 are believed to not pose any corrosion risk for refiners) ‒ High-TAN crudes are discounted because there are a limited number of refineries with the specification to process it WCS (0.93) 1.0 High-TAN High-TAN © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. API Sulphur Transport TAN What drives the differential? Gravity Content Cost Transport cost ‒ Transporting crude oil can be performed via pipeline, railroad and tanker ‒ Tanker is less costly but is the slowest mode of transportation ‒ Rail is most expensive and is less efficient compared to pipeline, but has greater access ‒ Pipeline is the most efficient means of transportation but is limited by capacity available ‒ Alberta is considered landlocked and has greater difficulty in transporting its crude oil to refiners and global markets ‒ To remain competitive in the market, WCS is discounted to account for the transportation costs to move its volume SOURCE: CAPP, KEYSTONE XL REGULATORY FILINGS (COURTESY TRANSCANADA & CRUDECOALITION.ORG) © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. World crude oil pricing World crude oil pricing Crude Oil Price Index Comparison WTI vs. Brent 160 Brent 140 WTI 120 100 80 60 USD BBL / USD 40 20 0 Source: Independent Statistics & Analysis U.S Energy Information Administration © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. World crude oil pricing Crude Oil Price Index Comparison WTI vs. Brent 160 Brent 140 WTI 120 100 80 60 USD BBL / USD 40 20 0 Source: Independent Statistics & Analysis U.S Energy Information Administration © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. World crude oil pricing Crude Oil Price Index Comparison WTI vs. Brent 160 Brent 140 WTI 120 100 80 60 USD BBL / USD 40 20 0 Source: Independent Statistics & Analysis U.S Energy Information Administration © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. WCS pricing WCS pricing Average monthly prices for Brent, WTI and WCS ‒ WCS - Most liquid benchmark for heavy oil in Western Canada ‒ Stable differential from increased demand from refineries and reduced output from traditional suppliers 140 120 Brent WTI 100 2009 WCS 80 60 $USD/BBL 40 20 0 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Source: The Government of Alberta, Economic Dashboard © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. WCS pricing Average monthly prices for Brent, WTI and WCS ‒ WCS differential increased and had increased volatility ‒ Transportation constraints from service disruptions led to decreased shipments to US mid-continent refineries 140 120 Brent WTI 100 WCS $USD/BBL 80 60 40 2010 -2011 20 0 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Source: The Government of Alberta, Economic Dashboard © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. WCS pricing Average monthly prices for Brent, WTI and WCS ‒ WCS differential continues to grow due to capacity constraints, increased production of Canadian heavy oil and maintenance at refineries 140 120 Brent WTI 100 WCS $USD/BBL 80 60 40 2013 20 0 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 Source: The Government of Alberta, Economic Dashboard © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.