California’s Transportation Fuels Outlook

CALIFORNIA EN ERGY COMMISSION

4/17/07 1

California’s TransportationFuels Outlook

National Conference of State LegislaturesSummer Energy Outlook Conference

Denver, ColoradoApril 17, 2007

Gordon SchrempFuels and Transportation Division

California Energy Commission


4/17/07 2

Presentation Topics

• Background• California gasoline price volatility• Regional transportation fuel market• 2007 price increases• Linkage to financial markets• Market factors contributing to the price spike• Proactive actions to limit additional potential price

increases• Gasoline price outlook• Ethanol availability• Summary


4/17/07 3

Background

• California’s transportation fuel market is isolated by time and distance from the next alternative source of resupply

• Additional sources of incremental supply are weeks away– Identify available barrels– Locate a ship– Transit time

• As a consequence, unplanned refinery outages and unexpected extension of maintenance can result in wholesale price spikes that are normally greater in magnitude and longer in duration than other regions of the United States


4/17/07 4

California Gasoline VolatilityJanuary 1995 to April 9, 2007

-10

0

10

20

30

40

50

60

1/2/19957/2/19951/2/19967/2/19961/2/19977/2/19971/2/19987/2/19981/2/19997/2/19991/2/20007/2/20001/2/20017/2/20011/2/20027/2/20021/2/20037/2/20031/2/20047/2/20041/2/20057/2/20051/2/20067/2/20061/2/2007

California Minus U.S. Difference

Cents Per Gallon

Peak 54.4

MTBE Phaseout Period27.0 Average, 10.5 Std Dev

Calif Retail Price Higher Than U.S.Calif Retail Price Lower Than U.S.

MTBE Use Year-Round17.5 Average, 9.0 Std Dev

MTBE Use - Winter Months10.1 Average, 4.1 Std Dev

Ethanol Use Period25.1 Average, 10.3 Std Dev


4/17/07 5

California Gasoline Price Volatility

• Differential between California and U.S. retail gasoline prices has averaged 19.6 cents per gallon (cpg) since January 1995

• Differential has been growing over time– 10.1 cpg winter oxy season 1995-1996– 17.5 cpg year round use of MTBE 1996-2002– 27.0 cpg partial transition to ethanol 2003– 25.1 cpg year round use of ethanol 2004 to present

• Volatility has been increasing


4/17/07 6

AnacortesSeattle

Portland

Chico

SF

LA

Bakersfield

LasVegas

Reno

Phoenix

TucsonEl Paso, TX

8

15SD

21

7

1

2

3

4

5

9

10

19

14

17

11

12Fresno

16 1820

6

22

13

West Coast Petroleum Flows1 Foreign Imports into Northern California2 Foreign Imports into Southern California3 US Gulf Coast Imports into Northern California4 US Gulf Coast Imports into Southern California5 Ship/Barge - San Francisco to Los Angeles6 Ship/Barge - San Francisco to Portland7 Ship/Barge - Washington to Los Angeles8 Kinder Morgan - San Francisco to Chico9 Truck - Chico into Southern Oregon

10 Kinder Morgan - San Francisco to Reno11 Kinder Morgan - San Francisco to Fresno12 Kinder Morgan - Bakersfield to Fresno13 Truck - Imperial into Western Arizona14 Kinder Morgan - Los Angeles to Las Vegas15 Kinder Morgan - Los Angeles to San Diego16 Kinder Morgan - Los Angeles to Imperial17 Kinder Morgan - Los Angeles to Phoenix18 Kinder Morgan - Los Angeles to Tucson19 Kinder Morgan - Tucson to Phoenix20 Kinder Morgan - El Paso to Tucson21 Longhorn Pipeline - Houston to El Paso22 Ship/Barge - San Francisco to Eureka


4/17/07 7

Regional Transportation Fuel Market

• California is primary source of supply to neighboring states– Nearly 100 % to Nevada– About 60 % to Arizona

• Washington is also a source of supply for California• Unplanned refinery outages or pipeline distribution

problems can have a regional price impact due to the interconnected relationship of this regional market


4/17/07 8

California Retail Prices - Gasoline and Diesel Fuel versus Alaska North Slope (ANS) Crude Oil

January 2005 through April 9, 2007

80

130

180

230

280

330

380

1/3/20053/3/20055/3/20057/3/20059/3/200511/3/20051/3/20063/3/20065/3/20067/3/20069/3/200611/3/20061/3/20073/3/2007

Cents Per Gallon

GasolineDiesel FuelANS Crude Oil

Sources: Energy Information Administration (EIA) – California retail prices Alaska crude oil prices – Wall Street Journal


4/17/07 9

2005, 2006, and 2007 Average Weekly Retail Gasoline Price Minus Weekly

Alaska North Slope (ANS) Crude Oil Price

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

1/3/05 1/17/051/31/052/14/052/28/053/14/053/28/054/11/05 4/25/055/9/05 5/23/05 6/6/05 6/20/05

Difference per Gallon (Dollars)

200520062007


4/17/07 10

2007 Price Increases

• California retail gasoline prices increased 51 cents per gallon (cpg) between January 3 and March 21, 2007

• Crude oil prices actually decreased by 3 cpg over this same time period

• Retail prices, less crude oil, have increased 54 cpg over the same time period, a 44 % increase

• Wholesale prices have experienced similar increases driven by rising NYMEX values and higher premiums for pipeline barrels


4/17/07 11

Nymex Price and CARBOB Differential January 3 - April 10, 2007

0

50

100

150

200

250

300

1/3/071/10/071/17/071/24/071/31/072/7/072/14/072/21/072/28/073/7/073/14/073/21/073/28/074/4/07

Cents Per Gallon L.A. CARBOB differentialNymex gasoline price


4/17/07 12

Linkage to Financial Markets

• Wholesale prices for purchases of large quantities, referred to as spot pipeline transactions, increased by 78 cents per gallon (cpg) between January 3 and March 28, 2007

• Represents a 43 % increase• Refiners and other market participants will turn to pipeline

transactions to obtain additional supplies of gasoline following unplanned outages or unanticipated extensions of routine maintenance

• These spot pipeline purchases are quoted as a differential to a benchmark, the month ahead gasoline contract on the New York Mercantile Exchange (NYMEX)


4/17/07 13

Linkage to Financial Markets• One of the consequences of this pricing mechanism is that

factors external to the California petroleum market - such as geopolitical instability or a severe hurricane in the U.S. Gulf Coast – can increase the value of NYMEX gasoline contracts

• This in turn can increase Calif. wholesale gasoline prices• Local supply imbalances can also tighten gasoline supplies

in the region and are reflected in the form of higher differentials that are paid by market participants for spot pipeline transactions

• These differentials went from a low of 4.5 cpg on January 19 to a high of 60 cpg on March 8, 2007 – an indication of scarcer gasoline supplies


4/17/07 14

Market Factors that Contributed to the First Quarter 2007 Price Spike

• Seasonal demand growth

• Unplanned refinery outages and planned maintenance

• Refinery production of gasoline

• Inventory levels for gasoline and blendstocks

• Pipeline exports to Arizona

• Distribution infrastructure constraints


4/17/07 15

California Gasoline Monthly DemandSeasonal Increases2003-2006 Average

41.0

41.5

42.0

42.5

43.0

43.5

44.0

44.5

January FebruaryMarch

April May

Millions of Gallons per DayMonthly AverageLinear (Monthly Average)

Source : Analysis of California State Board of Equalization taxable gasoline sales figures.


4/17/07 16

Seasonal Demand Increases

• California gasoline demand normally increases from winter to the outset of spring– Demand jumped an average of 4.8 percent from January to

March over the last 4 years• Over the same time period, gasoline production capability

at California refineries declines due to the transition from winter to summer gasoline formulations– Lower volatility limit begins in mid-February for Southern

California and mid-March for the rest of the state– Certain blending components such as butane are temporarily

excluded from the gasoline pool


4/17/07 17

California Refinery Events - Number of Days(January-March of 2005, 2006, and 2007)

224

158

263

8

79 79

0

50

100

150

200

250

300

Jan-Mar 2005 Jan-Mar 2006 Jan-Mar 2007

Days

Total Planned Maintenance Days

Total Unplanned Outage Days

Source: CEC Petroleum Idustry Information Reporting Act (PIIRA) database.


4/17/07 18

Average Number of Days per Refinery Event(January-March of 2005, 2006, and 2007)

24.9

22.6

26.3

4.0

15.8

11.3

0

5

10

15

20

25

30

Jan-Mar 2005 Jan-Mar 2006 Jan-Mar 2007

Days

Planned MaintenanceUnplanned Outages

Source: CEC Petroleum Idustry Information Reporting Act (PIIRA) database.


4/17/07 19

Refinery Outages & Maintenance• Planned maintenance at California refineries during the

first quarter of 2007 was 66 percent greater (number of maintenance days) than the same period in 2006

• Although refiners usually build inventories of gasoline in advance of such work, supplies are normally adequate to meet contractual obligations, rather than normal levels of refinery output

• Unbranded supplies become constrained and wholesale prices normally rise for the entire petroleum market

• Unplanned outages were similar to 2006, but shorter in average duration per refinery event


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5,000

5,500

6,000

6,500

7,000

7,500

8,000

8,500

1/6/20061/20/20062/3/20062/17/20063/3/20063/17/20063/31/20064/14/20064/28/20065/12/20065/26/20066/9/20066/23/20067/7/20067/21/20068/4/20068/18/20069/1/20069/15/20069/29/200610/13/200610/27/200611/10/200611/24/200612/8/200612/22/20061/5/20071/19/20072/2/20072/16/20073/2/20073/16/20073/30/2007

Thousands of Barrels per Week

Current Year

CARB Gasoline Production(with 5-Year High-Low Band)


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California Gasoline Inventories(with 5-Year High-Low Band)

8,500

9,500

10,500

11,500

12,500

13,500

14,500

15,500

1/6/20061/20/20062/3/20062/17/20063/3/20063/17/20063/31/20064/14/20064/28/20065/12/20065/26/20066/9/20066/23/20067/7/20067/21/20068/4/20068/18/20069/1/20069/15/20069/29/200610/13/200610/27/200611/10/200611/24/200612/8/200612/22/20061/5/20071/19/20072/2/20072/16/20073/2/20073/16/20073/30/2007

Thousands of Barrels

Inventories


4/17/07 22

Refinery Production & Inventory

• California refinery production of gasoline declined by 20 percent from the week ending January 5 through the week ending March 30, 2007 – reaching a severely low level of 816 thousand barrels per day (TBD) by the end of March

• This 200 TBD decline in output came at a time when gasoline demand normally increases by nearly 50 TBD

• As a consequence, inventory levels were drawn down by 3.6 million barrels or 25%

• Declining production and scarcer gasoline inventories normally result in upward pressure on wholesale prices


4/17/07 23

Gasoline Movements by Pipeline to PhoenixJanuary 2005 - March 2007

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

1/5/20053/5/20055/5/20057/5/20059/5/200511/5/20051/5/20063/5/20065/5/20067/5/20069/5/200611/5/20061/5/20073/5/2007

Barrels per Week

EASTWEST


4/17/07 24

Diesel Movements by Pipeline to PhoenixJanuary 2005 - March 2007

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

1/5/20043/5/20045/5/20047/5/20049/5/200411/5/20041/5/20053/5/20055/5/20057/5/20059/5/200511/5/20051/5/20063/5/20065/5/20067/5/20069/5/200611/5/20061/5/20073/5/2007

Barrels per Week

EASTWEST


4/17/07 25

Pipeline Exports Increase• Propane fire at Valero refinery in McKee, Texas decreases

shipments of gasoline and diesel fuel to Arizona• California exports increase to compensate

– 22 TBD gasoline– Only 5 TBD for diesel

• Blendstocks used to make AZ gasoline are also main ingredients for California reformulated gasoline

Matt Slocum / AP


4/17/07 26

Potential Distribution Constraints

• Another potential factor contributing to the recent price spike is pipeline constraints that limit the ability of gasoline and blendstocks in third-party storage from reaching distribution terminals

• Northern California intra-state pipeline segments at capacity have previously been identified as bottlenecks that could temporarily constrain transportation fuel supplies

• An assessment is planned to determine if such constraints may have developed and exacerbated the rapid increase in wholesale prices


4/17/07 27

Factors that Contributed to Price Spike

• Refinery operations & impact on Production– Gasoline production was lower due to

• Unplanned refinery outages• Heavier-than-normal maintenance

• Gasoline inventories rapidly declined– Lowest levels over the last 5 years

• Pipeline exports to neighboring states– Increased in response to West Texas refinery fire

• Possible pipeline distribution capacity limitations– Assessment to be conducted


4/17/07 28

Proactive Steps to AvoidAdditional Price Increases

• The California Energy Commission routinely monitors refinery production, distribution operations, and petroleum product price trends to determine whether or not transportation fuel supplies could become temporarily constrained

• This activity includes assessments of upcoming projects or events that may exacerbate an already tight market

• One recent example involved the Energy Commission learning that a discretionary refinery project had preliminarily been rescheduled to mid-April


4/17/07 29

Proactive Steps to AvoidAdditional Price Increases

• A recent spate of refinery problems, inside and outside of California, in conjunction with a heavier-than-normal first quarter of maintenance raised the possibility of significant impact of gasoline supplies

• In response, the Energy Commission requested that Valero reschedule the date to commence modifications to one of their process units, if such a changer were feasible

• After careful consideration, Valero decided to defer the start date to later in the year

• Energy Commission believes that this action eliminated “a large, unnecessary financial hardship to consumers and businesses within our state.”


4/17/07 30

Price Outlook

• Is $4 gasoline on the horizon for California consumers?

• Unlikely - as refiners complete repairs and resume normal operations following extended maintenance cycles additional supplies of gasoline should place downward pressure on wholesale prices

• Absent large crude oil price increases, at least two significant refinery outages would be necessary to send retail gasoline prices over the $4 mark


4/17/07 31

U.S. Ethanol Plant Nameplate Capacity Growth July 2005 - Feb 2008

135122100 94

1025

125

218

40

85 97

59

100

270

97 107

0

469 470

369

115

306

270

370 359

150

509

33

250

370

3.85

8.95

9.57

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

Jul-2005Aug-2005Sep-2005Oct-2005Nov-2005Dec-2005Jan-2006Feb-2006Mar-2006Apr-2006May-2006Jun-2006Jul-2006Aug-2006Sep-2006Oct-2006Nov-2006Dec-2006Jan-2007Feb-2007Mar-2007Apr-2007May-2007Jun-2007Jul-2007Aug-2007Sep-2007Oct-2007Nov-2007Dec-2007Jan-2008Feb-2008

Capacity Additions (MGPY)

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

Cumulative Nmeplate Capacity (BGPY)

New Capacity and ExistingPlant ExpansionsCumulative Capacity


4/17/07 32

Ethanol Supply Outlook

• Supplies of ethanol to meet the needs of California, federal reformulated gasoline areas, and discretionary blend markets should be more than adequate to meet anticipated demand during the 2007 driving season

• Ethanol nameplate production capacity is estimated at nearly 6 billion gallons per year and could reach the 2012 RFS goal of 7.5 billion gallons some time this summer – assuming no additional construction delays or deferrals

• Ethanol values are anticipated to be significantly lower compared to the summer of 2006 due to the rapid increase in domestic production capacity


4/17/07 33

Closing Remarks

• California’s price spike during the first quarter of 2007 yielded a record differential of 54 cents per gallon for retail gasoline prices when compared to the U.S. average

• A heavier-than-normal refinery maintenance schedule, a number of unplanned outages, and a refinery fire in West Texas were all factors that contributed to a temporary tightness of gasoline supplies

• Proactive action by the Energy Commission and a commendable decision by a refiner to reschedule completion of a discretionary project averted further price increases for consumers & businesses


4/17/07 34

Contact Information

Gordon Schremp [email protected]

Documents

California’s Transportation Fuels Outlook