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Refinery Investments Refinery Investments and Future Market and Future Market
IncentivesIncentives
Joanne ShoreJohn Hackworth
U.S. Energy Information Administration
September 29, 2008Platts 2nd Annual European Refining
Markets Conference
Overview: Factors Affecting Overview: Factors Affecting Investment DecisionsInvestment Decisions
• Demand: Growth and Mix Shift
• Feedstocks: Incentives to use lower quality feedstocks (Light-heavy differentials)
• Margins
Future Demand Growth and Product Future Demand Growth and Product Mix ShiftsMix Shifts
• Growth: Mainly outside the Atlantic Basin
• Product Mix Shifts & Investment:– U.S. – Different future– Europe – Continued
shift in from gasoline to distillate
– Asia – Less issue of shift than of growth
World Consumption Growing: Largest World Consumption Growing: Largest Growth Outside U.S. & EuropeGrowth 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
U.S. – Steps to Increased Distillate U.S. – Steps to Increased Distillate
• Operating changes – Beginning to see U.S. system potential to shift from gasoline to distillate
• Planned hydrocracking investments (Marathon Garyville, Motiva Port Arthur, Valero)
U.S.: Distillate Focus This Summer U.S.: Distillate Focus This Summer Illustrated Operating Yield Shift PotentialIllustrated Operating Yield Shift Potential
-10
-5
0
5
10
15
-12 -10 -8 -6 -4 -2 0 2 4 6
Gasoline Yield Change (Percentage Points)
Dis
tilla
te Y
ield
Ch
ang
e (P
erce
nta
ge
Po
ints
)
PADD 2
PADD 3
Refinery Yield Shifts Apr-May 2007 to Apr-May 2008
Source: EIA Form 810
U.S. Petroleum-Based* Gasoline and Distillate U.S. Petroleum-Based* Gasoline and Distillate Fuel Needs ShiftFuel Needs Shift
Million Barrels Per
Day2007 2022
Growth to 2022
Petroleum Gasoline
8.85 8.24 -0.61
Petroleum Distillate
4.22 4.71 +0.49
* Petroleum-Based excludes ethanol, biodiesel, and distillate from coal-to-liquids and biomass-to-liquids. Source: AEO 2008 Reference Case
Future U.S. Investment to Produce Future U.S. Investment to Produce More DistillateMore Distillate
• Equipment changes: – Cut-point shifts
– Distillation efficiency
– Hydrotreating expansion
• Catalyst changes – FCC catalysts to produce more light cycle oil
• Planned hydrocracking investments coming on stream
• May not need more to satisfy U.S. demand shift and increase some exports of distillate
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.
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 Net Import/Export Balance
1997 2007
Distil-late
44.8% 48.0%
Gaso-line
26.6% 25.7%
Source: IEA August 2008 Data Base
Europe: What Next for Product Mix Europe: What Next for Product Mix Investment?Investment?
• Seeing more distillate production investment in Southern Europe. Hydrocracking expansions include:– Portugal 50 KB/D– Spain 180 KB/D– Italy 70 KB/D– Greece 30 KB/D– Total 330 KB/D
• Biodiesel
Feedstocks: Investing to Take Advantage of Feedstocks: Investing to Take Advantage of Widening Light-Heavy DifferentialsWidening Light-Heavy Differentials
• Drivers behind the widening price difference– Supply of light crude– Product market influences
on the price differentials
• Conversion capacity impacts on differentials
Supplies of Light Sweet Crude Supplies of Light Sweet Crude Increasing in Atlantic BasinIncreasing in Atlantic Basin
Million Barrels per Day EIA EIA EIA EIA EIA EIA
Wood Mac-kenzie
2005 2006 2010 2015 2020 2005-2015 2005-2015 OECD Europe 5.9 5.5 4.5 3.8 3.4 -1.7 -0.9 North Africa 3.8 3.9 4.7 5 5.1 1.1 0.4 West Africa 3.9 3.9 5.1 5.7 5.9 1.8 2.5 Caspian Area 2.1 2.3 3.5 4.2 4.5 1.9 2.4 Russia 9.5 9.7 10.2 11.4 12.1 1.7 1.5 Latin America 10.1 10.1 9.7 9.7 10.3 -0.4 0.4
Total 35.3 35.4 37.7 39.8 41.3 4.4 6.3
Atlantic Basin Crude Production Projections
Note: Most growth on this chart is in areas with higher quality crude oils. Latin America includes Venezuela and Mexico with their heavy crude oils, but these areas is not projected to grow much
Source: EIA International Energy Outlook 2008, Wood Mackenzie Presentation NPRA Annual Conference 2007
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$180
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Pri
ce P
er B
arre
l
LLS Crude PriceGC No. 2GC 3% Resid
Crude Oil, Distillate, Residual Fuel Prices ($/Barrel)
Source: Bloomberg spot prices (LLS – Louisiana Light Sweet; GC – Gulf Coast)
Light-Heavy Product Price Differential Light-Heavy Product Price Differential & Crude Oil Price Move Together& Crude Oil Price Move Together
$0
$10
$20
$30
$40
$50
$60
$70
$80
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Lig
ht-
Hea
vy D
iffe
ren
tial
$0
$20
$40
$60
$80
$100
$120
$140
$160
Cru
de
Pri
ce
GC No.2 - 3% Resid
LLS Crude Price
Crude Price & Product Price Differential ($/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
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
$0 $50 $100 $150WTI ($/Barrel)
WT
I - M
aya
($/B
arre
l)
Crude Price vs. Light-Heavy Crude Difference
Source: Bloomberg spot prices
Refiners Continue to Process Crude Refiners Continue to Process Crude without Increasing Fuel Oil Yieldswithout Increasing Fuel Oil Yields
0%
5%
10%
15%
20%
25%
Jan
-95
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
OECD North America OECD Pacific OECD Europe
Residual Fuel Oil Yields (Residual Fuel Production/Crude Oil Inputs)
Source: IEA August 2008 Data Base
Future Coking Increases: Will Future Coking Increases: Will Expansions Affect Light-Heavy Spread?Expansions Affect Light-Heavy Spread?
2008 2013
Distilla-tion Capacity
Coking Capacity
Coking Percent Distillation
Distilla-tion Capacity
Coking Capacity
Coking Percent Distillation
U.S. 17,813 2,545 14.3% 18,863 3,135 16.6%
Europe 17,213 387 2.2% 17,527 512 2.9%
Asia 26,512 1,259 4.7% 29,704 1,781 6.0%
Rest of World
29,579 1,108 3.7% 31,938 1,584 5.0%
Total 91,116 5,298 5.8% 98,033 7,011 7.2%
Source: Purvin & Gertz, GPMO Service
Margins – Short Golden AgeMargins – Short Golden Age
• Margin Indicators• U.S. vs Europe• Future Implications
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 Higher Due to No U.S. Margin Indicator Higher Due to No Residual Fuel and More GasolineResidual Fuel and More Gasoline
-$5
$0
$5
$10
$15
$20
$25
$30
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
NY 3-2-1 Crack
NWE 6-2-3-1 Crack
U.S. and European Margin Indicators
Future ProfitabilityFuture Profitability
• Light-heavy price differentials– May decline some with growing conversion capacity
and slightly lower crude oil prices– But likely to remain relatively high
• Margins– U.S. gasoline margins under pressure from growing
European exports, ethanol use, and improved vehicle efficiencies, but U.S. refinery margins likely to remain higher than in the 1990’s
– Atlantic Basin distillate margins likely to be higher than gasoline more often in the future as regional distillate imbalance continues
– European margins buoyed by strength in distillate demand, but also depend on U.S. gasoline margins
SummarySummary
• Investment to produce more distillate– Future demand shifts imply attractive choice for some refiners
to increase distillate yields
• Bottoms upgrading investment – Light heavy differentials likely to stay elevated as crude price
stays high
– Amount of heavy upgrading may not impact light-heavy price differences greatly as total residual production not expected to change much and as residual fuel market demand is affected by environmental concerns.
• Margins – Short golden age, but still better than 1990s– Margin levels impact all types of refining investment, but
especially expansion
– Little need for expansion in Atlantic Basin – expansion could negatively impact margin