NPRA 2009 Annual Meeting Are Refinery Investments Responding to Market Changes? Joanne Shore John Hackworth U.S. Energy Information Administration March

NPRA 2009 Annual Meeting

Are Refinery Investments Are Refinery Investments Responding to Market Responding to Market

Changes?Changes?

Joanne Shore

John Hackworth

U.S. Energy Information Administration

March 2009 NPRA Annual Meeting


OverviewOverview

• Long-Term Look at Market Drivers Impacting Investment Decisions

• Atlantic Basin Investments


Long-Term Look at Market Drivers Long-Term Look at Market Drivers Impacting Investment DecisionsImpacting Investment Decisions

• Demand: Growth and Mix Shift

• Feedstocks: Incentives to use lower quality feedstocks (Light-heavy differentials)

• Margins


Long-Term Demand Growth and Long-Term Demand Growth and Product Mix ShiftsProduct Mix Shifts

• Growth: Mainly outside the Atlantic Basin

• Product Mix Shifts & Investment:– U.S. – Different future– Europe – Continued

shift from gasoline to distillate

– Asia – Less issue of shift than of growth


World Petroleum Consumption Growing: World Petroleum Consumption Growing: Largest Growth Outside U.S. & EuropeLargest Growth Outside U.S. & Europe

0

10000

20000

30000

40000

50000

1967

1975

1983

1991

1999

2007

Other

Fuel Oil

MiddleDistillates

Gasoline/Naphtha

KB/D

0

10000

20000

30000

40000

50000

19

67

19

75

19

83

19

91

19

99

20

07

KB/D

U.S. & Europe Rest of World Excl FSU

Source: BP World Statistical Review of World Energy June 2008


Europe Major Driver of World Consumption Europe Major Driver of World Consumption Mix Shift Towards DistillatesMix Shift Towards Distillates

0.0

0.5

1.0

1.5

2.0

2.5

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

EuropeAsia

Rest of World Excl FSU

United States

Ratio of Middle Distillates/Gasoline & Naphtha

Source: BP World Statistical Review of World Energy June 2008


Atlantic Basin Price Incentives Shifting Atlantic Basin Price Incentives Shifting Toward DistillatesToward Distillates

-50

-30

-10

10

30

50

70

90Ja

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

Jan

-07

Jan

-08

Cen

ts P

er G

allo

n

Spot Heating Oil Price - Gasoline Price Differences

NY Harbor

Northwest Europe

Source: Bloomberg New York Harbor Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil and Premium Gasoline


Feedstocks: Investing to Take Advantage Feedstocks: Investing to Take Advantage of Widening Light-Heavy Differentialsof Widening Light-Heavy Differentials

• Light-heavy price difference – Incentive for investing in bottoms processing investments

• Drivers behind the widening price difference

• Future direction?


Light-Heavy Product Price Difference Light-Heavy Product Price Difference Increases with Crude Oil PriceIncreases with Crude Oil Price

$0$20$40$60$80

$100$120$140$160$180

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Pri

ce P

er B

arre

l

LLS Crude PriceGC No. 2GC 3% Resid

Crude Oil, Distillate, Residual Fuel Prices ($/Barrel)

Source: Bloomberg spot prices (LLS – Louisiana Light Sweet; GC – Gulf Coast)


Light-Heavy Price DifferentialsLight-Heavy Price DifferentialsMove TogetherMove Together

$0

$10

$20

$30

$40

$50

$60

$70

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Pro

du

ct P

rice

Dif

f

$0

$5

$10

$15

$20

$25

$30

$35

Cru

de

Pri

ce

Dif

f

GC No.2 - 3% Resid

LLS-Maya

Crude & Product Price Differentials($/Barrel)

Source: Bloomberg spot prices (LLS – Louisiana Light Sweet; GC – Gulf Coast)


Higher Light-Heavy Price Differences Go with Higher Light-Heavy Price Differences Go with Higher Price Levels – But Much “Scatter”Higher Price Levels – But Much “Scatter”

$0

$5

$10

$15

$20

$25

$30

$0 $50 $100 $150

LLS ($/Barrel)

LL

S -

May

a ($

/Bar

rel)

Crude Price vs. Light-Heavy Crude Price Difference

Source: Bloomberg spot prices 1/95-01/09


Factors Impacting Light-Heavy Price Factors Impacting Light-Heavy Price DifferentialsDifferentials

• Crude oil price level – EIA forecasts indicate increasing crude prices with economic recovery

• Available mix of light-heavy crude oil – Short-term variations, but mid-term mix not likely to change much

• Market for residual fuel products – Low sulfur bunker fuel uncertainties

• Changes in bottoms processing capacity – Not seeing planned increases having a large impact on differentials


Margins – Short Golden Age for Capacity Margins – Short Golden Age for Capacity Expansion IncentivesExpansion Incentives

• Margin Indicators

• U.S. vs. Europe


Refining Output Variations Impact Refining Output Variations Impact Profitability Profitability

49.029.9 31.7

33.7

43.5 43.2

3.814.1 12.3

0%

20%

40%

60%

80%

100%

U.S. Europe Asia

Other

ResidualFuel Oil

Distillates

Gasoline &Naphtha

2006 Refining Output Shares

Source: Purvin & Gertz, GPMO Service


U.S. Margin Indicator Usually Higher U.S. Margin Indicator Usually Higher Due to No Residual Fuel and More Due to No Residual Fuel and More

GasolineGasoline

-$5

$0

$5

$10

$15

$20

$25

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

NY 3-2-1 Crack

NWE 6-2-3-1 Crack

U.S. and European Margin Indicators 1/00-01/09

Source: Bloomberg monthly average spot prices New York Harbor and Northwest Europe gasoline, No. 2 heating oil, 3.5% fuel oil, LLS, Brent.


Atlantic Basin InvestmentsAtlantic Basin Investments

• United States

• Europe


U.S. Investment EnvironmentU.S. Investment Environment

• Before 2008– Forecasts called for increasing demand (gasoline and

distillate) and need for capacity expansions– Slow shifts to distillate– Saw planned expansion with hydrocracking investments

(Marathon Garyville, Motiva Port Arthur, Valero)

• 2008– Surge in world distillate demand (mainly electricity

needs) sent distillate prices up– U.S. refiners began shifting yields to distillate through

operating changes alone– Recession reduced demand, some projects delayed– U.S. Energy Independence and Security Act (EISA)

reduced long-term need for petroleum-based gasoline


Long-Term U.S. Petroleum-Based* Gasoline Long-Term U.S. Petroleum-Based* Gasoline and Distillate Fuel Needs Shift with EISAand Distillate Fuel Needs Shift with EISA

* Crude-Based excludes ethanol, biodiesel, and distillate from coal-to-liquids and biomass-to-liquids. Source: AEO 2009 Reference Case

Million Bbls Per Day 2008 2023 Change

Gasoline & E85 Demand

9.01 9.27 0.26

Ethanol 0.60 1.57 0.97

Crude-Based Gasoline 8.41 7.70 -0.71

Total Distillate Demand

3.94 4.75 0.81

Biomass, CTL, BTL 0.05 0.43 0.38

Crude-Based Distillate 3.89 4.32 0.43


In 2008, U.S. Shifts from Net Importer to Net In 2008, U.S. Shifts from Net Importer to Net Exporter of Distillate – Short or Long Term?Exporter of Distillate – Short or Long Term?

-400

-300

-200

-100

0

100

200

300

1978

1982

1986

1990

1994

1998

2002

2006

Th

ou

san

d B

arre

ls P

er D

ay

U.S. Distillate Net Imports

0

100

200

300

400

500

600

2004

2005

2006

2007

2008

Th

ou

san

d B

arre

ls P

er D

ay Other

WesternEuropeLatinAmerica

U.S. Distillate Exports

Source: EIA Petroleum Supply Monthly Data


Distillate Yields Reflect Price Distillate Yields Reflect Price IncentivesIncentives

22%

24%

26%

28%

30%

32%

Jan Mar May Jul Sep Nov

2008

2007

2006

Distillate Production/(Crude+Unfinished Oil Inputs)

Source: EIA Petroleum Supply Monthly Data


Operating Changes and Next Step Operating Changes and Next Step Investments Before HydrocrackingInvestments Before Hydrocracking

• Cut-Point Shifts

• Distillation Efficiency Improvements

• Catalyst Changes

• Hydrotreating expansion


U.S. Investment UncertaintiesU.S. Investment Uncertainties

• Short-term signals– How long will the economic slump keep demand down?– How long will strong short-term distillate pull from other

countries continue – Europe in particular– Lower utilization vs. closures

• Long-term signals– Need for new capacity moved out in time. How far?– Still seeing need for shift to distillate from gasoline, but

will U.S. (and world) policies further change level and mix of petroleum product needs?

– Clear “wait-and-see” time


European Investment EnvironmentEuropean Investment Environment

• Forecasts continue to show increasing need for distillate and declining need for gasoline

• Margins under pressure in the short term.

• U.S. market for European gasoline exports coming under pressure

• Diesel import availability increasing


OECD Europe: Imbalance Between Refining OECD Europe: Imbalance Between Refining and Demand Met with Imports/Exportsand Demand Met with Imports/Exports

-1,500

-1,000

-500

0

500

1,000

1,500

19

97

19

99

20

01

20

03

20

05

20

07

Thousand Bbls/Day

Middle Distillates

Gasoline

European Refinery Yields European Net Imports

1998 2008

Distil-late

44.4% 49.3%

Gaso-line

26.1% 24.5%

Source: IEA February 2009 Data Base


Increasing European Distillate Increasing European Distillate ProductionProduction

• Refineries are already operating at maximum distillate potential (unlike the U.S.)

• Historical investments resulted in making more distillate by destroying residual fuel rather than reducing gasoline production

• Additional hydrocracking capacity is planned, but residual fuel destruction still a large factor


European Capacity Plans (2008-2013)European Capacity Plans (2008-2013)Capacity Changes

KB/DVolume Changes

KB/D

Area Crude Input

Hydro-cracking (*)

Coking Distillate Residual Fuel

Southern Europe

211 229 115 345 -147

Eastern Europe

88 184 20 217 (**)

Northwest Europe

-35 41 0 21 (**)

Total 264 454 135 583

Source: Based on Company reports and presentation, construction capacity reports, and contractor press releases.

Note: (*) Both hydrocracking and mild hydrocracking; (**) Insufficient information to make estimate.


European Investment UncertaintiesEuropean Investment Uncertainties• Short-term Signals

– Economic slump impacts on capital expenditures: go, cancel, delay?

– Need for and sources of distillate imports – short- or long-term changes?

– U.S. gasoline market changes– Lower utilization vs. closures

• Long-term Signals– Product demand projections have decreased. Will that

impact expansions?– Still seeing need for shift to distillate from gasoline, but

the rate at which the distillate imbalance was increasing has diminished

– So is there change in views of investment incentives?


SummarySummary

• Investment to produce more distillate– Distillate price premiums to gasoline becoming the norm

– Distillate investments occurring in both U.S. and Europe

• Investment to upgrade bottoms– High light-heavy differentials inspired rash of upgrading, but

differentials fell back with crude price. Differentials could well increase again with projected crude price increases.

– Bottoms conversion investments occurring in U.S. to use Canadian tar sands and in Europe to produce more distillate

• Investment to expand production– Margin incentive is weak, and long-term refinery demand

projections are flat or declining for U.S. and Europe

– Apart from individual project economics that might show synergies with accompanying upgrade, hard to see need for more capacity


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Documents

NPRA 2009 Annual Meeting Are Refinery Investments Responding to Market Changes? Joanne Shore John Hackworth U.S. Energy Information Administration March