BENZINGA PRO U.S.

OIL REPORT
JULY 2015

The Libya Government will seize any tanker that attempts to enter its Ras Lanuf port according
to Reuters. Battling parties for government power in Libya had been responsible for the closure
of the port. Marine Traffic shows some fishing, tanker, and livestock vessels in ports in Libya
but most, including large tankers, are avoiding the area (Image).
The Libyan Petroleum Facilities Guard has orders to "intercept any tankers trying to approach
the oilfields for security and technical reasons" according to Reuters citing NOC Chairman
Yousef Bu Saifi. The Libyan refusal to let most ships enter its ports suspected of bringing aid
to enemy combatants is just another annoyance the industry has to deal with. One month ago
almost to the day Benzinga reported on the Singapore pirates attacking ships and stealing
cargo, even going as far as to repaint one.
A review of the US crude import and transportation data is prudent as the oil industry prepares
to move stored oil and as the idled tanker ships storing oil come to center stage slow, with
Irans storage release impact already being discussed.

Since 2010 Non-OPEC countries Landed Costs of Imported Crude have run below those of
OPEC and Persian countries according to the EIA.
The Landed Crude Oil Cost refers to the price of crude at the port from which it departs. This
cost does include purchasing, transporting, and insuring the cargo but does not include things
like tariffs and import fees incurred at the arrival port. Breaking down the chart below it is
evident the US's cheapest import cost comes from Canada ($45.69/brl), then Mexico
($51.60/brl), followed by Venezuela ($52.51/brl), Colombia ($56.70/brl), and Saudi Arabia
($58.80/brl) as of April 2015 according to EIA data.

The United States pipeline infrastructure is roughly 2.6 million miles in length and operated by
nearly 3,000 companies according to the US DOT. These pipes run throughout the US and
connect the five Petroleum Administration For Defense Districts or PADD for short, along with
various logistics lines including rail.
Fridays rig count report shows a second
week of increasing rigs, generating
excitement for bulls that the decline may be
over. Julys investor letter from Andrew Hall
of
Astenbeck
recognizes
improving
fundamentals for oil going forward: Despite
the lackluster price action, underlying
fundamentals for oil continue to improve. It
is becoming increasingly clear that the huge
oil surplus that most analysts predicted for
the first 6 months of 2015 failed to
materialize. Refiner acquisition costs which include transportation and other refiner fees have
collapsed recently, driven primarily by the spot price decrease, making refiner margins all the
more appealing for the bulls.
The US has brought new projects on-line in the past couple years allowing more oil to flow into
& out of Cushing, enabling large capacity for pumping to the Gulf Coast for export. The
transportation out of the Gulf and up to the Northeastern US tacks an extra $5-$6 onto each
barrel due to Jones Act shipping regulations which essentially covers the liability of workers
recouping wages from employees if injured. The US DOT lists the vessels the Jones Act applies
to and Chevron (NYSE: CVX) owns 4 of these militarily useful vessels:

Two recent outbound projects have boosted the movement of product through Cushing: (1)
TransCanada Gulf Coast Project officially came online to pipe product January 22, 2014 and
(2) Enbridges Seaway pipeline twinning (doubling up) came alive in December 2014. The
other major region in the US, Bakken in North Dakota, is increasing its pipeline capacity and
rail capital investments to increase rail capacity for transport.

According to Brown Brothers Harriman & Co Bakken should be able to move nearly 90 percent
of its production by the end of 2016. CSX (NYSE: CSX), third largest operator in the US by
market-cap lacks any access to this rail game in PADD 2 according to images on the companys
website.
Burlington
Northern Santa Fe, the rail
line purchased by Warren
Buffett in 2009, is the only
major
rail
operator
connected in the Bakken
region. Publicly traded
Canadian Pacific company
(NYSE: CP) does have a
line running through the
state into Canada that
allows a stop off at Dakota
Plains refinery and may
offer some exposure to
the regions need to move
its supply.
Choosing what method to
transport depends on how
you view the impacts of oil
spills. Do you consider damage to the environment or perhaps the size of the spill or maybe
the number of deaths as the most important factor?
If human deaths were the main indictor, it would follow that Trucks are worse than Pipes are
worse than Boats according to a Forbes 2014 article. When measuring size of spillage Trucks
are worse than Pipes are worse than Rails are worse than Boats. When measuring
environment, Boats are worse than Pipes are worse than Trucks are worse than Rails. So

there are many ways to skin this cat. Rail is not the worst way to transport oil but recent
problems with derailing and explosions have not helped eased any public concern regarding
the transportation of oil. According to EIA data Tanker Car usage is growing as Tanker ship
use declines. Barges and Trucks are also seeing an increase in use as are pipelines.

A 2014 Kansas City FED report lays out a comparison of pipelines, rails, barges, and trucks in
terms of Capital Cost, Operating Cost, Coverage, and Shipment Size. A recent decline in the
materials required for pipeline
construction has helped to boost
spending. For pipe diameters of
8-inch, 12-inch, 16-inch, and
20-inch
construction
has
exploded according to data from
the Federal Energy Regulatory
Committee Form 6. Form 6 complies operational and financial information of oil pipeline
companies with jurisdictional operating revenues in excess of $500,000. From 2013 to 2014,
Labors portion of estimated costs for land
pipeline rose from 38.84 percent to 42.36
percent. Materials over the same period fell
from 23.2 percent in 2013 to 13.6 percent in
2014.
Materials as a percent of land
construction costs have been on a decline in
2009 (see image on next page). New pipelines
have been built and they are going to be used.

While these pipelines were being built rails became the chosen mode for transportation. The
Kansas City notes in that same 2014 report The fastest-growing alternate mode of oil
transportation has been railroads. Rail transportation is somewhat more expensive than
barges, and not quite as flexible as trucks. But overall, as an option during pipeline construction
and periods of high oil-price differential, rail may have the best combination of attributes of
the alternative modes. The use of rail grew much faster than either barges or trucks in 2012
and that strong growth continued in 2013, according to industry data. And as other shale plays
emerge, especially if they are far from the coasts, rail may become even more important to
the oil transportation network.
The oil market is still looking for its equilibrium and with it being on nearly every financial
market participants radar, the opinions of the market are far and wide making for volatile
price swings. For the short-term, the consensus from analysts on Wall Street points to a focus
on refiner crack margins and capital expenditures. Over the longer-term the focus shifts to
M&A and its potential impact on transportation and transportation costs.