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Energy Information Administration (EIA) estimates that total domestic crude oil production averaged 6.4 million barrels per day (bbl/d) in 2012, an increase of 0.8 million bbl/d from the previous year. Projected domestic crude oil production continues to increase to 7.3 million bbl/d in 2013 and 7.9 million bbl/d in 2014, which would mark the highest annual average level of production since 1988. Key Drivers: The increase is being driven by innovations in hydraulic fracturing, which has allowed producers to access previously inaccessible oil deposits in shale formations. The price of West Texas crude, the U.S. benchmark, fell 7% in 2012, held down by rising supplies from new drilling methods. Over the past five years, West Texas Intermediate (WTI) crude oil prices have traded at a slight premium to the Brent crude oil benchmark, with a spread ranging generally between +/$3 per barrel. Since the end of 2010, however, WTI has been trading at a discount to Brent, with the differential widening to more than $21 per barrel on August 13, 2012, from $2.92 per barrel on December 31, 2010. In our view, these benchmarks are reacting differently to certain fundamental factors, which have led to a disconnect in their relative prices. WTI is a light, sweet crude oil used as an oil price benchmark in the US. Most WTI crude oil is priced at the Cushing Hub in Oklahoma and is refined in the Mid-Continent region of the US. Brent is a combination of crude oil from 15 different oil fields in the Brent and Ninian systems in the North Sea. Like WTI, Brent is a light, sweet crude, but is slightly more complex to refine, and hence has typically traded at a discount to WTI. WTI has historically been an indicator of North American oil prices and markets, while Brent has been the European indicator. However per S&Ps opinion, as new producers (e.g., Russia and Nigeria) have emerged, they have used the Brent oil price as their benchmark, making it more of a global oil indicator than WTI.

Consolidation: As oil and gas prices have disconnected, producers have shifted focus toward onshore crude oil and natural gas liquids (NGL) unconventional resources. Many International oil companies (IOCs) and national oil companies (NOCs) enter domestic plays like the Eagle Ford Shale in south Texas, the DJ Basin Niobrara Shale, the Bakken Oil Shale in Montana and North Dakota, and the Permian Basin. Per S&P, expectations are for further consolidation in the oil patch in 2012, reflecting tight market conditions, limited organic growth opportunities, and growing competition from NOCs.

Narrowing Spread: The price spread between WTI crude and Brent crude futures is likely to narrow sharply in 2013 as increased domestic pipeline capacity relieves the glut created by new shale-oil supplies. "The WTI-Brent differential will narrow as the onshore pipeline capacity is built up and removes some of the bottlenecks that exist between Cushing and the Gulf Coast," Clayton Reasor, Phillips 66's senior vice president of strategy and corporate affairs, told analysts at the UBS energy conference. The Brent-WTI spread should narrow to around $6/bbl on average in the second quarter, from around $17/bbl now, says Goldman Sachs, as Nymex crude at the Cushing delivery point shifts from being in a large surplus to a large deficit thanks to new pipeline capacity. Brent-WTI spread trades at $16.91/bbl. Crude by Rail: The rapid rise in U.S. Bakken crude oil production, the potential for further growth in tight oil production, as well as the long time lines required for the construction of new pipeline projects has led to an increased opportunity for rail as an alternative mode for transporting crude oil. In the span of just one year, rail exports from North Dakota have risen from about 50,000 b/d in March 2011 to about 225,000 b/d in March 2012, according to estimates by the North Dakota Pipeline Authority. Transportation of crude oil production originating from western Canada by rail is also growing but is comparatively small around 20,000 b/d in 2011. Rail is, however, starting to provide a larger proportion of the crude oil transportation market than it has held historically. According to Statistics Canada, about 8,823 rail cars (707,647 tonnes) were loaded in March 2012 transporting fuel oils and crude petroleum compared to 5,602 rail cars (458,696 tonnes) in March 2011. There is much discussion focused on using rail capacity to reach the various markets that are not currently well supplied by pipeline capacity. Transporting crude by rail requires capital investment in new loading facilities that must also have corresponding unloading terminals at the destination centers. Rail car supply is currently tight and it takes about a year to put new rail cars into service. However, a major advantage to rail transport is the relatively quick startup for small additional volumes since an extensive rail network is already in place. A greater number of unloading terminals have been or are being built near destination markets. While rail transport is more expensive than pipelines, it already reaches into metropolitan areas like Los Angeles and Philadelphia, where new pipes are hard to lay and refineries are paying the highest price. Rail transport is set to become cheaper as infrastructure expands. The system relies on 1.2-mile trains of tank cars that carry as much as 762 barrels each. At 120 cars per train, each shipment can be worth $8 to $10 million. Rail used to be a stopgap for the short term, said Kevin Goins, president of Strobel Starostka Transfer, a closely- held company that builds and operates rail terminals. As drilling pushes into new places, rail can get into different areas where pipelines never existed before. Union Tank Car Co., a unit of Berkshire Hathaway Corp., (BRK/NYSE), American Railcar Industries Inc. (ARII/NASDAQ), and Trinity Industries Inc. (TRN/NYSE) are getting a boost from a shale-oil boom that's poised to make the United States the world's largest crude producer by 2020. Rail carloads of crude tripled last year to more than 200,000, and demand for cars designed for crude soared. "People who want to ship oil can't get them," said Toby Kolstad, president of Portland, Ore.-based consultant Rail Theory Forecasts, referring to railcars. "They're desperate to get anything to move crude oil."

The shortage is exacerbated by makers who are keeping many of the tank cars they produce to supply their own leasing businesses, where rates in some cases have more than quadrupled to US$2,500 a month. The manufacturers also are wary of boosting production too much and getting caught with unsold cars as they did in an earlier coal boom. Many tank-car makers have been cautious about adding capacity because they don't want rates to fall at their leasing businesses, Arthur Hatfield, a Memphis, Tenn.-based analyst with Raymond James & Associates, said. "All these companies have a lot of lease fleets that have a lot of value attached to them," he said. "They don't want to add a lot of capacity, flood the market with cars and then have those cars sit in the marketplace trying to get leased." Short-term lease rates have jumped as high as US$2,500 a month, more than four times the normal rate. To limit risk if the boom doesn't last, leasing companies are seeking five-year paybacks on cars instead of 30 years. "Leasing rates aren't based on traditional models right now," Mr. Kolstad said. "They're basically looking at the probability of a pipeline and a short-term phenomenon. Nobody is taking a risk beyond five or six years." Union Tank Car, a unit of Buffett's Berkshire Hathaway Inc., is keeping all the cars it produces and leasing them, rather than selling to third parties, said Bruce Winslow, a company spokesman. "We see the industry as very cyclical," he said. "Within the memory of most any tank-car guy, he can say, 'I remember when we didn't know where to park them all.' " One of the more interesting developments in response to the supply glut at Cushing has been the increased use of rail as a means to transport oil. While railroads cant offer the same capacity that pipelines can, they do offer flexibility and leverage the existing infrastructure. Currently, the highest usage of rail appears to be out of the Bakken, primarily due to the large pricing differential in the midcontinent but also due to inadequate regional infrastructure to handle the quickly rising production. There are also a number of producers in the oil sands that have resorted to rail as a means of transportation. One of the key advantages in shipping by rail is that it allows producers greater flexibility in terms of searching for the best price. For example, we have heard of notional volumes of oil sands crude being shipped to California, rather than the Gulf Coast, largely due to better heavy oil pricing in that region. In the opinion of analysts at Raymond James, while railing offers a number of advantages over pipelines, the difference in economics is simply too great to view it as a long-term alternative that could handle a meaningful amount of the oil export market. Much like pipeline companies, rail companies would need significant shipper commitments over the long-term in order to entice them to build the infrastructure required to handle the higher volumes. Given that it is likely that a number of pipelines will move forward to the Gulf Coast over the coming years, it is doubtful that major producers would be willing to commit a meaningful volumes to a transportation option that appears to be quite a bit more expensive. Rather, rail is viewed as a means to bridge the gap until sufficient volumes of takeaway capacity by pipeline are built from Cushing. Rail volumes may also remain high within the Bakken, but again, only until adequate pipeline infrastructure is built within that region. Pipelines: The dynamics of the North American crude oil market are changing as growing western Canadian and Mid-continent crude oil production emerges while North American crude oil consumption is anticipated to be fairly flat. Despite the forecast for flat demand for crude oil, the U.S., specifically the Gulf Coast, remains a large, attractive market for western Canadian producers due to the opportunity to displace crude oil supplies from international sources. A number of pipeline proposals to the Gulf Coast have

recently been announced that will increase access by 2014 through connections to existing infrastructure as well as new projects. In addition to looking for increased penetration to U.S. markets, western Canadian crude oil producers are also seeking much greater market diversification through increased connectivity to world markets. This would primarily be achieved through more pipeline capacity to the west coast, where crude oil could be shipped to the burgeoning economies of Asia. There is also significant interest in improving connectivity to western Canadian supplies for all Canadians. As such, a number of projects to increase pipeline access from western Canada to eastern Canadian markets are being pursued. Projects that increase the downstream capacity of existing pipelines have been proposed that could partially alleviate tight capacity as access to markets is enhanced. However, additional capacity exiting western Canada will need to be built if growing production is to avoid facing chronic apportionment as a result of limited pipeline capacity to desired markets. Transportation of crude oil by rail is growing since it has the advantage of quick start-up and its network extends to a number of markets that are currently not connected through the pipeline network. However, pipelines will remain the preferred mode of transportation for crude oil. The Canadian Association of Petroleum Producers indicates that additional pipeline capacity exiting western Canada will be required by 2014. PADD I (East Coast Markets): PADD I is located along the east coast of the United States with refineries in Delaware, Georgia, New Jersey, Pennsylvania, and West Virginia.

There are nine refineries with a total refining capacity of 1.1 million b/d. As shown in table below, a number of refineries have closed in the past few years.

In 2011, imports of foreign crude oil by refineries in PADD I totaled 1.1 million b/d, which is virtually unchanged from 2010. About 66 per cent of these volumes were light sweet crude oil. Two refineries located in Pennsylvania were idled in the latter part of 2011. Since then, the Phillips 66 refinery in Trainer was purchased by Delta Air Lines with the transaction to close in the first half of 2012; however, a re-startup schedule has not yet been announced. Since these refineries processed light and medium crude oil, lower imported volumes of light crude oil in 2012 versus 2011 can be expected. Higher imports of heavy crude oil are anticipated since PBF Energys Delaware City refinery, which processes primarily heavy oil, started up again in October 2011. The refinery had previously been idled since November 2009. The EIA noted that the closed and idled capacity on the east coast can be replaced with increased refining capacity in other regions. However, there are transportation constraints that may hinder the delivery of refined products to east coast markets that currently rely on local refining capacity. Ultra-low sulphur diesel fuel will be the most challenging product to replace as there are few alternative supply sources outside of the U.S. Gulf Coast. Transportation constraints may also hamper the movement of products through Pennsylvania and into western New York, areas that are currently supplied by pipelines originating in the Philadelphia area refinery complex. The industry may not be able to overcome all of the logistical challenges in the Northeast for a year or more, as infrastructure changes will be necessary to accommodate the changing product flows. With a full year of net refining capacity lost due to refinery closures, an overall decline in imports and total volumes processed in PADD I can be expected. PADD I imported 223,800 b/d of crude oil from Canada. About 58,600 b/d was sourced from western Canada and was primarily delivered to the United refinery in Warren, Pennsylvania. NuStar Energy has reported its intention to process 5,000 b/d to 10,000 b/d of Canadian crude oil at its asphalt refinery in 2012. This oil would be transported by rail. High growth from domestic shale rock formations in the Mid-Continent (e.g. the Bakken region in North Dakota and others) as well as growing Canadian supply, combined with a lack of takeaway capacity from the region, have led to heavy price discounts for light, sweet crude required by many East Coast refiners. Railcars moving crude to other markets to displace higher priced crude, including the East Coast, are providing some benefit to refiners. Many East Coast refiners (Phillips 66, PBF and the former Phillips 66 Trainer and Sunoco Philadelphia refineries) are investing in rail access for Bakken-type crude oil. Rail may or may not be a long term option for these refineries, as the level of discount on the MidContinent crudes may be lowered as pipelines come online to move these crudes more economically to the Gulf Coast. However, the estimated volume of light crude growth may sustain discounts for some time and create some other options to move discounted supply. This may include options such as 1) developing a crude pipeline to East Coast markets (possibly using underutilized gas pipelines converted to oil); 2) expanding refining in the Mid-Continent and moving product into the East Coast via new pipelines or 3) moving surplus light crude from the Gulf Coast to the Northeast on Jones Act vessels. All three options are complex and require large capital expenditures and development of partnerships to gain required traction. Approval of major pipelines similar to Colonial and conversion of natural gas lines involve state and/or FERC approvals, local issues, and right of way clearance. In addition, refineries are multi-billion dollar investments that require a variety of governmental approvals, and mandate a favorable outlook for the industry as the pay-back periods for these facilities extend out many years. Regardless of the decisions made to utilize these resources, the idea of leveraging the U.S. and Canadian crude supply into delivering reliable and cheaper product to the East Coast market has considerable energy security attractions, including diversifying supply away from the hurricane-exposed Gulf Coast. The profitability of a refinery is largely dictated by the cost of feedstock (price of crude oil) and the respective prices and volumes of product produced by the facility. The regional refineries supplying the

PADD I market include refiners in northern New Jersey, the Philadelphia region, and the United Refinery in northwestern Pennsylvania. The refineries in the region are, in general, older refineries that process all imported crude oil. Compared to complex refineries on the U.S. Gulf Coast, the regional refineries supplying PADD I are less complex with much lower capability to be profitable since they tend to process more expensive lighter, sweeter crude oil. Complex refineries are equipped with additional processing units that allow the refineries to produce a higher percentage of more valuable petroleum products (gasoline, jet and diesel) from poorer quality and cheaper crude oils. Conversely, the less-complex refineries lack some of this upgrading capacity, which results in higher production volumes of less valuable products (e.g., asphalt, heavy residual oils). East Coast refineries are likely to be under sustained pressure to generate favorable margins. The transition to lower demands for gasoline reduces demand for the primary product from these refineries, and this will impact wholesale spot market prices for gasoline blendstocks. With the Sunoco Philadelphia and Phillips 66 Trainer refineries now planned to continue or revive operation under new ownership, production from these refineries may keep overall refinery margins weak in PADD 1. Continued growth in demand for light sweet crude in East Asia will continue to increase the cost of sweet crude supply to the U.S. market. In addition, the development of new U.S. Gulf Coast capacity in 2012 as well as major overseas projects in the Middle East and India will put online more efficient capacity capable of producing product at costs well under the East Coast refiners (even with shipment from halfway around the world). The East Coast refiners may be able to take advantage of the discounted domestic sweet crude for a number of years until new pipelines are completed to the Gulf Coast, or it could be sustained longer if domestic production continues to grow as rapidly as it has. However, over time the discount is likely to shrink as markets equilibrate. The capacity expansion projects PADD 2 region may have a significant impact on the East Coast refineries long-term viability. Mid-Continent and Canadian crudes are being discounted heavily due to lack of takeaway capacity from the region. Railcars to the East Coast are providing some benefit to East Coast refiners, but sustained high volume rail supply may be difficult. There are (at least) three possible infrastructure options: 1. The construction of a major crude oil pipeline into the Philadelphia market from PADD 2. This may allow the light sweet crude to get to the East Coast efficiently and at a discount. Delivered cost would be lower than the railcar cost. This option could extend the life of the sweet crude processing refiners. The conversion of existing product or natural gas pipelines is one option for shipping crude oil from the Mid-Continent to the East Coast. One benefit of this option is that these pipelines are already in place so the right-of-ways they reside along are already established, which is a major hurdle in pipeline construction. 2. The construction or expansion of refinery capacity in the Midwest with development of a product pipeline to the East Coast (similar to Colonial from the Gulf Coast). This option would threaten the East Coast refiners significantly, as the new Midwest capacity would be very efficient and have lower costs of operation than the older East Coast refiners. 3. Perhaps most likely, the expansion of pipeline capacity to the Gulf Coast and massive growth expected in light sweet domestic crude oil from the Bakken, Niobara, and Eagle Ford regions may be well in surplus of domestic sweet crudes processed in the Gulf Coast. This may enable the use of Jones Act vessels to haul light sweet crude to East Coast refineries (displacing or augmenting rail movements).

All three options are complex and require large capital expenditures and development of partnerships. Approval of major pipelines similar to Colonial or Keystone involves state approvals, resolving local issues, and right of way clearance. Converting other pipelines may be economically more attractive because the right-of-ways have been established, and the materials have been purchased and laid. Yet, this option carries costs particularly in the conversion of natural gas pipelines. In addition, refineries are multi-billion dollar investments that require a variety of governmental approvals, and mandate a favorable outlook for the industry as the pay-back periods for these facilities extend out many years. Regardless of the decisions made to utilize these resources, the idea of leveraging the U.S. and Canadian crude supply into delivering reliable and cheaper product to the East Coast market has considerable energy security attractions, including diversification of supply away from the hurricane-exposed Gulf Coast. Other Information: Enbridge Line 9 Reversal Enbridge Line 9 is a 30-inch diameter crude oil pipeline with a capacity of 240,000 b/d. Since 1999, the pipeline has been flowing crude oil westward from Montral, Qubec to Sarnia, Ontario, although originally the pipeline transported crude oil in a west to east direction when first placed in-service in 1975. In August 2011, Enbridge filed an application with the National Energy Board (NEB) for the partial rereversal of the line between Sarnia, Ontario and Westover, Ontario. The purpose of this reversal is to allow greater volumes of western Canadian crude oil to be delivered to the Imperial refinery at Nanticoke. The public hearing, conducted by the NEB to examine the application, was concluded in May 2012 and a decision is pending. Further, Enbridge has announced a separate and distinct project for which it has secured sufficient commercial commitments to proceed with the reversal of Line 9 all the way to Montral. An open season will be held from May 17 to June 15, 2012 to provide additional shippers with an opportunity to secure capacity on the pipeline. While subject to regulatory approval, the target in-service date for this project is in early 2014.

United Refining owns and operates a 65,000 b/d refinery in northwestern Pennsylvania. The refinery began operations in 1903. It is a full upgrading refinery although it produces asphalt in lieu of coking the residual component of crude oil.

The refinery receives imported crude oil from Canada via the Enbridge pipeline system connecting to the United-owned Kiantone pipeline in West Seneca, NY (near Buffalo). Product moves from the refinery to markets in NYS, Pennsylvania and Ohio primarily by truck. The refinery began operations in 1903. It is a full upgrading refinery although it produces asphalt in lieu of coking the residual component of crude oil. The refinery processes over 50 percent Canadian heavy crude and the balance is lighter grades of Canadian crude. These crudes currently have a significant price discount due to growing Canadian supply and constrained capacity to move Canadian crude to the Gulf Coast. Substantially all of Uniteds crude supply is sourced from Canada and the northern plain states through the Enbridge pipeline. United accesses crude through the Kiantone Pipeline, which connects with the Enbridge pipeline system in West Seneca, New York, which is near Buffalo. The Enbridge pipeline system provides access to most North American and foreign crude oils through three primary routes: (i) Canadian crude oils are transported eastward from Alberta and other points in Canada, (ii) foreign crude oils unloaded at the Louisiana Offshore Oil Port are transported north via the Capline and Chicap pipelines which connect to the Enbridge pipeline system at Mokena, Illinois, and (iii) foreign crude unloaded at Portland, Maine shipped to Montreal then shipped on Enbridges line 9 to Sarnia, Ontario. Enbridge has announced the Phase I (partial) reversal of Line 9. This reversal includes the segment from Westover to Sarnia. It does not interfere with crude deliveries from Montreal to Westover and deliveries into West Seneca. Phillips 66 and Global Partners NEW YORK, Jan 8 (Reuters) - Phillips 66 said on Tuesday it entered a five-year commitment to ship North Dakotan crude oil by rail to its New Jersey refinery, making an estimated $1 billion bet that North American crude will remain cheap. Under the terms of the contract to use Global Partner LP's loading facilities and terminals, Phillips 66 will receive some 50,000 barrel-per-day of Bakken crude oil at its 238,000 bpd Bayway refinery in Linden, New Jersey, on a take-or-pay basis, equal to 91 million barrels over the five-year period. Global LP said it will load the Bakken crude shipments at Basin Transload LLC's rail facilities in North Dakota and ship it to its terminal in Albany, New York, on Canadian Pacific's rail network. The Houston, Texas-based refiner's commitment only covers a fraction of the cost of moving oil by rail. Phillips must also pay the train operators that transport the crude as well as cover the cost of buying or leasing tank cars. Oil traders estimate it costs between $12 to $16 a barrel to transport Bakken crude from North Dakota to the U.S. Northeast. Even if long-term agreements resulted in some discounts, the total commitment Phillips 66 is making to move Bakken crude likely exceeds $1 billion. "Our five-year agreement with Global assures us long-term access to advantaged crude for our Bayway refinery through what we believe is a cost competitive ... system," Tim Taylor, Phillips 66 executive vice president for commercial, marketing, transportation & business development said in a statement. The latest commitment furthers Phillips 66's plan to tap more cheap inland U.S. crude at its refineries. The company has ordered 2,000 railcars, which it will begin receiving early this year.