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Americas Energy CEO Series: Joseph Israel, Par Petroleum CEO

Par Petroleum has been successful in leveraging the Mid-Pacific location of its 93,500 b/d Hawaii refinery, sourcing crude from multiple locations and seeing higher demand for diesel and octanes going forward, Par Petroleum CEO Joseph Israel said in an interview.

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Coming off the strong third-quarter performance, the refinery is poised to meet the new challenges from specification changes in gasoline and distillates, he said.

"Our competitive advantages include high distillate yields and long octane position, two important things to have as a refiner, considering the strong outlook in both fronts," Israel said.

The refinery ran at 74,000 b/d in Q3 and is expected to reach annual rates of 80,000 b/d to 85,000 b/d in the next couple of years, once construction of a new diesel hydrotreater is completed. Following the refinery acquisition from Tesoro in the summer of 2013, Par has increased on-island sales by about 30% to allow higher refinery utilization with profitable operations. Excess gasoline blending components and fuel oil production have been exported, mainly to Asia.

The strong outlook for octane demand is driven by auto technologies to improve efficiency and miles per gallon. In addition, smaller, low-complexity refineries like the "teapots" in China are consistently in the market to buy high-octane components to blend their gasoline production to spec, Israel said.

The strong outlook for ULSD demand is driven by positive global economic trends and the announced change of bunker fuel specifications staring January 1, 2020, by the International Maritime Organization.

"The new 0.5% sulfur limit will force 3 [million] to 4 million b/d of new ULSD demand to blend down bunker fuel," Israel said, adding that the announced diesel hydrotreater unit will provide Par with new flexibility to increase ULSD production prior to the spec change.

Work on the unit will be complete in 2019, ahead of the spec change for bunker fuel. The cost will be minimal, $27 million, because of the available hydrogen and sulfur.

The new diesel hydrotreater will increase the production of jet fuel from the plant, cutting down on imports and giving Par a greater share of the market.

Roughly 8,000 b/d to 9,000 b/d of jet is imported into Hawaii, mostly supplied by Asian and US West Coast refiners, Israel said.

Par will be able to switch between making jet or ULSD, depending on the margins and needs at the time.

CRUDE IMPORTS INSIGHTS

Because Hawaii has no crude production, Par imports every drop of oil processed at the refinery, giving it insight into global crude market trends as its scours the world for the best value.

"A refinery in the mid-Pacific is a great view of the entire worldwide crude market," Israel said.

"We keep shifting to where the economics defined by price and quality make the most sense," he said. "Last quarter was a snapshot of what was best for us."

Middle Eastern crude accounted for 32.5% of throughput in Q3, down from 45.6% in Q2. Still, that was up from just 6.9% in Q1 and 3.9% in Q4 2016.

Par boosted its imports of Middle East crudes during Q2 and Q3 as it reduced imports of crude from North America, primarily Alaska North Slope barrels.

North American crude throughput was 14.8% in Q3, up from 13.8% in Q2 and down from 44.2% in Q1.

This is due, in part, Israel said, to the higher price for Alaska North Slope crude during the summer months, when producers perform planned work on their operations.

Par's imports of Alaskan crude also fell during Q2 and Q3 of 2016.

"Not being committed to any specific crude, we are going to shift our mix where it makes sense. The North American bucket has decreased recently in the last few quarters," Israel said.

Par's ability to pick and choose what crudes are most economic for Hawaii is critical to maintaining a long-term competitive cost structure, Israel said.

African crude throughput rose to 29.1% in Q3 from 17.3% in Q2.

Asian crude flows were virtually unchanged at 23.6% in Q3 compared with 23.3% in Q2.

Par's Mid-Pacific Index, used as a metric to assess the refinery's profit margins, was $10.27/b in Q3. That is up from $8.96/b in Q2 and $6.78/b in Q3 2016.

Because the refinery straddles the Singapore and US West Coast markets, it uses product prices from both markets to calculate the index. The Singapore component is 80% of the crack's value, while San Francisco product prices make up 20%. All are based on Brent crude prices.

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