Changing World Product Markets and Potential Refining Capacity

NPRA Annual Meeting 2006

Changing World Product Markets and Changing World Product Markets and Potential Refining Capacity IncreasesPotential Refining Capacity Increases

NPRA Annual Meeting

March 2006

Joanne Shore

John Hackworth

Energy Information Administration


Changing World Product Markets and Changing World Product Markets and Potential Refining Capacity IncreasesPotential Refining Capacity Increases

• World Supply/Demand Cycles & Shifts in Demand

• Historical Regional Demand & Supply (Why capacity varies regionally)– U.S., Europe, Asia– Demand growth, product mix, trade

• Price Signals for Capacity Changes

• Capacity Change Outlook: Who, What, Where

• Over- or Under-Capacity Potential


World Capacity & Consumption Changes World Capacity & Consumption Changes Result in Utilization IncreasesResult in Utilization Increases

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,00019

6619

6819

7019

7219

7419

7619

7819

8019

8219

8419

8619

8819

9019

9219

9419

9619

9820

0020

0220

04

Th

ou

san

d B

arre

ls P

er D

ay

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Uti

liza

tio

n

Capacity Consumption Utilization

Notes: World Excluding FSU

Source: BP World Statistical Review 2005


World Distillates Growing More than World Distillates Growing More than Gasoline & Fuel Oil DecliningGasoline & Fuel Oil Declining

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,0001

98

5

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

Th

ou

san

d B

arre

ls P

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ay

Cumulative Consumption Changes 1985-2004

Middle Distillate

Gasoline

Residual Fuel Oil

Notes: World excluding FSU; middle distillate is jet, kerosene, diesel and heating oil (No. 2) Source: BP World Statistical Review 2005


Historical Regional Demand and SupplyHistorical Regional Demand and Supply

World Demand (MMB/D)

0102030405060708090

1965 1974 1983 1992 2001

Gasoline

Middle Distillates

Fuel Oil

Other

• Overview of regional demand differences

• U.S and Europe – Atlantic Basin partners

• Asia Pacific – Mixture, with total driven by large emerging countries

Notes: World Excluding FSU



U.S., EU-25, and Asia-Pacific Regions U.S., EU-25, and Asia-Pacific Regions Represent 76% World Petroleum UseRepresent 76% World Petroleum Use

0

5

10

15

20

25

U.S. EU 25 AsiaPacific

Rest ofWorld

Mill

ion

Bar

rels

Per

Day

OtherGasolineMiddle Distillate

2004 Regional Petroleum Consumption

Note: European Union-25 (EU-25): former European Union-15 plus Estonia, Latvia, Lithuania, Czech Republic, Slovakia, Hungary, Poland, Slovenia (beginning in 1992/93), Cyprus, Malta

Source: BP Statistical World Review 2005


Regional Consumption Growth Varied Regional Consumption Growth Varied

-200-100

0100200300400500600700800900

85-95 95-04 85-95 95-04 85-95 95-04

Other

Gasolines

MiddleDistillatesFuel oil

U.S. EU-25 Asia Pacific

Average Annual Product Change

2.9%

0.7%

Average Annual Growth

95-04:

1.6%



U.S. Light Product DemandU.S. Light Product Demand

• Transportation main driver• Not likely to see any major shift from gasoline to

diesel in next 10 years• Hybrids and diesel likely to increase in next

decade, but little impact on demand during next decade

• Uncertain efficiency changes in all new vehicle sales, but slow impact regardless


Imports Supplied About Half Gasoline Imports Supplied About Half Gasoline Demand Growth in Recent YearsDemand Growth in Recent Years

0

200

400

600

800

1000

120019

93

1995

1997

1999

2001

2003

2005

Th

ou

sa

nd

Ba

rre

ls P

er

Da

y Other

Other Latin America

Brazil

E Europe

Venezuela

W Europe

Virgin Islands

Canada

U.S. Total Gasoline Imports

Note: Total gasoline is finished product plus blending components.

Source: EIA, Form EIA-814

Low-Sulfur Years


Europe’s Light Product DemandEurope’s Light Product Demand

• General policy to reduce energy use and CO2 emissions;

• Petroleum demand growth has been small (annual 0.7% since 1995);

• Policies led to increased shift to diesel engines;

• Diesel demand is increasing while gasoline demand is declining;

• EU is major driver behind world shift to distillate versus gasoline


Europe Is Unique In Degree of Shift to Europe Is Unique In Degree of Shift to Middle DistillateMiddle Distillate

40%

45%

50%

55%

60%

65%

70%19

85

1987

1989

1991

1993

1995

1997

1999

2001

2003

Distillate Share of Gasoline and Distillate Consumption

EU-25

World Excl FSU and EU-25



E.U. Hydrocracking Growing, But Not as E.U. Hydrocracking Growing, But Not as Fast as Diesel Demand ShiftFast as Diesel Demand Shift

0

2

4

6

8

10

12

14

16

1819

90

1992

1994

1996

1998

2000

2002

2004

Per

cen

t o

f D

isti

llati

on

Cap

acit

y

FCC (Mainly Gasoline)

Hydrocracking (More Distillate)

EU-11 Capacity As Percent of Distillation

Note: FCC - Fluid Catalytic Cracking Source: EIA, Oil and Gas Journal


Europe’s Growing Product ImbalanceEurope’s Growing Product Imbalance

-1000

-800

-600

-400

-200

0

200

400

600

800

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Th

ou

san

d B

arre

ls P

er D

ay

EU-15 Product Net Imports

Gasoline Net Exports

Middle Distillate Net Imports

Source: IEA


Summary of European and U.S. BalancesSummary of European and U.S. Balances

-1000

-500

0

500

1000

1500

U.S.Gasoline

U.S. Dist + K/J

EU-15Gasoline

EU-15 Dist + K/J

Th

ou

sa

nd

Ba

rre

ls P

er

Da

y

Net ImportsChange

YieldChange

ThroughputChange

How Added Demand Was Met: 1995-2004

Source: EIA, IEA

United States European Union 15


Asia-PacificAsia-Pacific

• Growth resumed after financial collapse• Much variation – China & India large growth

drivers, OECD Asia small growth• Product mix future?

– Non-highway use of petroleum in emerging Asian countries large

– Distillate use will continue to grow rapidly, but…– Light duty vehicle use will also grow, and China’s light-

duty fleet is gasoline


Asia-Pacific’s Distillate-Gasoline SharesAsia-Pacific’s Distillate-Gasoline Shares

50%52%54%56%58%60%62%64%66%68%70%

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Distillate Share of Gasoline & Distillate Consumption



Price Signals for Capacity ChangePrice Signals for Capacity Change

• “Margins” and “differentials” drive refinery investment decisions – not price

• Since the turn of the century, margins and differentials point to need for more investment

• But views of the future vary

• Interesting distillate price signal in 2005

0

10

20

30

40

50

60

70

80

90

100

Jan-95 Jan-00 Jan-05

$/B

arre

l

No. 2 Heating Oil Gulf Coast

WTI Crude Price

Crude Oil & Distillate Fuel Prices

Source: Bloomberg spot prices


Light-Heavy Product Price Differential & Light-Heavy Product Price Differential & Crude Oil Price Move TogetherCrude Oil Price Move Together

$0

$10

$20

$30

$40

$50

$60

$70Ja

n-9

5

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Do

llar

s/B

arre

l

GC No.2 - 3% S Resid

NWE No.2 - 3.5% S Resid

WTI Crude Price

Crude Price & Price Differentials

Source: Bloomberg spot prices – GC - Gulf Coast, NWE-Northwest Europe ARA Barge, WTI – West Texas Intermediate Cushing


Light-Heavy Crude Price Differential Light-Heavy Crude Price Differential & Crude Oil Price Move Together& Crude Oil Price Move Together

$0

$4

$8

$12

$16

$20Ja

n-9

5

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Lig

ht-

Hea

vy D

iffe

ren

tial

$0

$14

$28

$42

$56

$70

Cru

de

Pri

ce

WTI-Maya

WTI Crude Price

Crude Price & Price Differential ($/Barrel)

Source: Bloomberg spot price


Light-Heavy Price Differentials Move TogetherLight-Heavy Price Differentials Move Together

$0

$6

$12

$18

$24

$30

$36

$42

$48

$54Ja

n-9

5

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Pro

du

ct P

rice

Dif

fere

nti

al

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

Cru

de

Pri

ce D

iffe

ren

tial

Crude and Product Price Differentials ($/Barrel)

GC No. 2 - 3% Resid

WTI - Maya

Source: Bloomberg spot price


Unusual Atlantic Basin 2005 Distillate Prices Unusual Atlantic Basin 2005 Distillate Prices

-40

-30

-20

-10

0

10

20

30

40Ja

n-9

5

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Cen

ts P

er G

allo

n

Spot Gasoline - Heating Oil Price Differences

U.S. Gulf CoastNorthwest

Europe

Source: Bloomberg Gulf Coast Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil and Premium Gasoline


If WTI Drops from $60 to $40, Will Differential Drop If WTI Drops from $60 to $40, Will Differential Drop by 33% ($15-$10)?by 33% ($15-$10)?

R2 = 0.761

$0

$5

$10

$15

$20

$25

$0 $10 $20 $30 $40 $50 $60 $70

WTI

WT

I-M

aya

Sp

read

WTI Price Versus WTI-Maya Spread 1/91-12/05


If WTI Drops from $60 to $40, Margin Relationship If WTI Drops from $60 to $40, Margin Relationship Less CertainLess Certain

R2 = 0.467

$0

$5

$10

$15

$20

$25

$0 $10 $20 $30 $40 $50 $60 $70

WTI

3-2-

1 P

rice

Sp

read

WTI Price Versus 3-2-1 Spread (1/91-1/06)*

Note: Three hurricane months excluded (Aug-Oct 2006) Source Bloomberg Gulf Coast product spot prices and WTI Cushing.


Looking Ahead to Refinery Capacity GrowthLooking Ahead to Refinery Capacity Growth

• Where: U.S., Europe, Asia, Middle East

• What type

• Who are the companies investing, and what is driving their decisions?

“When one admits that nothing is certain one must, I think, also admit that some things are much more nearly certain than others.” Bertrand Russell, 1947


Current Regional Downstream Capacity Current Regional Downstream Capacity Reflects Different NeedsReflects Different Needs

US

EU

-6A

sia-

6M

idd

le E

ast

0%

10%

20%

30%

40%

50%

60%

70%

80%

Coking FCC Hydrocracking Hydrotreating

2004 Downstream Capacity Percent of Distillation

Note: Asia-6: China, India, Indonesia, Japan, Singapore, South Korea; EU-6:France, Germany Italym, Netherlands, Spain, and U.K., Middle East: Bahrain, Kuwait, Saudi Arabia, and UAE. Source: Oil and Gas Journal


Regional Distillation Capacity Changes Regional Distillation Capacity Changes 2005-20102005-2010

0

500

1000

1500

2000

2500

3000

3500

4000

U.S. Europe Middle East Asia Pacific

Th

ou

san

d B

arre

ls P

er D

ay

Sources: Oil and Gas Journal, FACTS, Company Presentations


U.S. Capacity Changes 2005-2010 (KB/D)U.S. Capacity Changes 2005-2010 (KB/D)

CDU Coking FCC/RCC HDC

AZ Clean Fuels 150 ? ? -

BP 100

Coffeyville 15

ConocoPhillips 230 105 - -

Frontier 10 - - -

Marathon 193 70 40 60

Motiva 325 90 - 60

Sunoco 100 - ? -

Valero 406 30 19 107

Others 70 152 31 85

Creep-Closings 250 - - -

TOTAL 1,749 557 90 312

Note: “?” denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking. Sources: Oil & Gas Journal, company presentations, Industrial Information Resources


Europe’s Capacity Changes 2005-2010 (KB/D)Europe’s Capacity Changes 2005-2010 (KB/D)

CDU VDU CokingFCC/

RCCHDC

Croatia - - - - 42

Finland - - - - 47

France - - - 2 48

Greece - - 50 - 37

Italy - - - - 25

Lithuania - - - - -

Romania - - - - 25

Spain 30 - 20 - 50

TOTAL 30 - 70 2 274

Note: “?” denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; VDU: Vacuum distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking. Sources: Oil and Gas Journal, company presentations.


Asian Capacity Changes 2005-2010 (KB/D)Asian Capacity Changes 2005-2010 (KB/D)

CDU VDU CokingFCC/

RCCHDC

China 1,966 680 135 142 242

India 1,015 275 50 198 228

Indonesia 250 - - - -

Pakistan 150 60 - - 50

Other 233 - 33 184 40

TOTAL 3,614 1,015 218 524 560

Note: “?” denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; VDU: Vacuum distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking Sources: Oil and Gas Journal, FACTS, industry media reports.


Middle East Capacity Changes 2005-2010 (KB/D)Middle East Capacity Changes 2005-2010 (KB/D)

CDU CokingFCC/ RCC

HDC

Bahrain - - - 60

Iran 896 - 171 2

Iraq 370 - 90 35

Kuwait 410 ? ? ?

Oman 131 - 75 -

Qatar 145 ? ? ?

Saudi Arabia 400 80 100 200

UAE - - - -

Yemen 185 - - 20

TOTAL 2,537 - - -

Note: “?” denotes plans that mention a type of unit, but no capacity volumes. CDU: Crude distillation unit; VDU: Vacuum distillation unit; FCC: Fluid catalytic cracking; RCC: Residual catalytic cracking; HDC: Hydrocracking Sources: Oil and Gas Journal, FACTS, industry media reports.


Who Will Expand: Outlooks/Plans VaryWho Will Expand: Outlooks/Plans Vary

Group RegionsFuture Market Expectations

Refinery Investment Strategy

Super Majors AllMargins revert to

historic

Maintain top-quartile

performance , little expansion need

Majors with Large Downstream

U.S. & EuropeImproved margins

with cycles

Heavy crude projects & cautious

expansion

Independent Refiners

U.S."Golden Age of

Refining"Expand distillation

& conversion

Export Refiners

Middle East Tight capacity & high light-heavy

Expand for export, add bottoms upgrading

State & Private

India & ChinaHigh demand growth, better

margins

Rapid expansion existing & grassroots

Sources: Trade press articles, company presentations and press releases.


Over or Under Capacity PotentialOver or Under Capacity Potential

• Putting demand and capacity together regionally

• Postulating potential for over- or under-capacity

0

2

4

6

8

10

12

14

16

18

20

Ja

n-8

1

Ja

n-8

4

Ja

n-8

7

Ja

n-9

0

Ja

n-9

3

Ja

n-9

6

Ja

n-9

9

Ja

n-0

2

Ja

n-0

5

Mill

ion

Ba

rre

ls P

er

Da

y

U.S. Refining Capacity & Inputs

Gross Inputs

Capacity

Source: EIA


Capacity and Consumption ChangesCapacity and Consumption Changes2005-20102005-2010

0

500

1000

1500

2000

2500

3000

3500

4000

U.S. Europe Middle East Asia Pacific

Distillation Capacity Demand

Th

ou

san

d B

arre

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ay

Sources: Capacity see previous slides; Demand: EIA, BP World Statistical World Review 2005, FACTS, IEA


Potential for Over/Under Expansion?Potential for Over/Under Expansion?

• The potential for under-capacity is probably greatest in the next year or two, before all new expansion plans come online.

• If the world does not experience any major demand shocks, over-expansion potential is small.

• The most likely areas where overexpansion has and may again occur are Asia and the Middle East.


Product Market & Price Outlook SummaryProduct Market & Price Outlook Summary

• Demand growth keeps capacity tight to 2010;

• Light-heavy price differentials and higher margins will result in increased bottoms upgrading capacity;

• Mixed views on margin outlook will prevent significant overbuilding – with Middle East and Asia being most likely areas for overbuild;

• Gasoline-diesel price differential will stay close and possibly invert more often as in 2005.


Summary of Capacity OutlookSummary of Capacity Outlook

• Capacity expansion announcements growing with continued price strength;

• U.S. capacity could even keep up with demand growth;

• Europe’s gasoline surplus will continue, but new hydrocracking capacity may slow growth in Europe’s diesel imports;

• Middle East gearing up to meet growing Asian and European needs;

• Asia’s growth driven largely by China and India;• Continue to watch distillate mix – Particularly in

Europe, our Atlantic Basin partner.

Documents

Changing World Product Markets and Potential Refining Capacity