1

Refinery Update

John C. FelmyChief Economist

American Petroleum InstituteFelmyj@api.org

www.api.orgOctober 2006

2

3

Diesel, gasoline & crude oil prices

$0.00

$0.64

$1.29

$1.93

$2.58

$3.22

$3.87

Oct

-01

Oct

-02

Oct

-03

Oct

-04

Oct

-05

Oct

-06

pric

e pe

r ga

llon

10/16/2006

Diesel (EIA) $2.50 Retail Gasoline (EIA) $2.23 Crude Oil (NYMEX) $1.43

4

EIA Crude Oil Price Forecast (Base Case and 95% Confidence Interval) – October 2006

5

EIA Natural Gas Price Forecast (Base Case and 95% Confidence Interval) – October 2006

6

EIA Price Forecast October 2006

a West Texas Intermediate. b Average regular pump price.c On-highway retail. d Residential average.

-4.54.919.212.83 13.43 12.81 10.75 Natural Gasd

($/mcf)

-0.314.632.52.33 2.34 2.04 1.54 Heating Oild ($/gal)

-2.413.233.02.66 2.73 2.41 1.81 Dieselc ($/gal)

-2.413.622.72.51 2.582.27 1.85 Gasolineb ($/gal)

-1.418.336.365.92 66.86 56.49 41.44 WTI Crudea

($/barrel)

06-07 05-06 04-05 2007 2006 2005 2004

Percent Change Year

7

8

Heating Bills 2006-2007EIA October 2006

826

1,522

1,265

839902

0

200

400

600

800

1,000

1,200

1,400

1,600

00-01 01-02 02-03 03-04 04-05 05-06 06-07

Heating Oil

All Fuels

Propane

ElectricityNatural Gas

9

Apparent 321 Spread

Apparent 321 Spread - NYMEX

0.0000

0.1000

0.2000

0.3000

0.4000

0.5000

0.6000

0.7000

0.8000

0.9000

4/6/

2001

7/6/

2001

10/6

/200

1

1/6/

2002

4/6/

2002

7/6/

2002

10/6

/200

2

1/6/

2003

4/6/

2003

7/6/

2003

10/6

/200

3

1/6/

2004

4/6/

2004

7/6/

2004

10/6

/200

4

1/6/

2005

4/6/

2005

7/6/

2005

10/6

/200

5

1/6/

2006

4/6/

2006

7/6/

2006

10/6

/200

6

Cen

ts p

er g

allo

n

10

Refiner Profit Rate

Crack 321 - Refiner Profit Rate

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

Q102

Q202

Q302

Q402

Q103

Q203

Q303

Q403

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Cent

s pe

r ga

llon

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Cent

s pe

r dol

lar

CR321 Refiner Profit Rate

11

Refiner/Marketer Profits - EIA

Refiner/Marketer Net Income

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Q101 Q201 Q301 Q401 Q102 Q202 Q302 Q402 Q103 Q203 Q303 Q403 Q104 Q204 Q304 Q404 Q105 Q205 Q305 Q405 Q106 Q206

Mill

ion

$

12

Fuels Timeline (Since 1990)

1991 Phase II Low volatility gasoline1992 Winter Oxygenated gasoline1993 Low Sulfur Diesel1993 CARB Diesel1995 RFG Phase I1995 CARB 22000 RFG Phase II2004 CARB 32004 – 06 Low sulfur gasoline2006 RFS2006 Removal of RFG Oxygenate Mandate2006 Ultra Low Sulfur Diesel – On-Road

13

2006: ‘The Year of the Fuel Spec - EIA’

- Full Tier 2 low-sulfur gasoline requirements

- Major turnarounds due to hurricane delays and fuel changes

- Elimination of oxygenate requirement and MTBE bans

- Renewable Fuels Standard

- Northern, Southern region equalization of RFG VOC standards

- Ultra low-sulfur diesel

14

Highway and Non-road Diesel Timelines

* 2006: Refinery – June 1; Terminal – September 1; Retail – October 15

2006 2007 2008 2009 2010 2011 2012 2013 2014

Highway

Part 89 Non-road Diesel (NR) (Farm/Construction)

Locomotive and Marine (L&M)

With Credits NR (not in NE or AK)

15 ppm

Small Refiner Non-road Diesel (not in NE; with approval in AK)

15 ppm

Transmix/In-Use NR (not in NE or AK)

15 ppm

Transmix/In-use L&M (not in NE or AK)

15 ppm

500 ppm 15 ppm

500 ppm

15 ppm (80%)* 15 ppm (100%)

500 ppm

500 ppm

500 ppm

500 ppm

5000 ppm

5000 ppm

5000 ppm

5000 ppm

15

0

20

40

60

80

100

120

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

(bill

ions

$)

New Investments Net Income

Source: Ernst & Young

Oil & Natural Gas New Investments and Net Income

16

Refining Capacity - Overview

US demand growth has increased significantly in recent yearsUS refining capacity continues to expandExpansions can help meet demand more quickly & cost-effectively than building a new refinery

– 10 years for new; 3 years for expansion– ~$17K per daily barrel for new; ~$9-12K for expansion

Refineries operate in a global market; the market place is efficient and provides best means of supply/demand balanceRefineries expand and upgrade units while spending billions to meet clean fuels and environmental regulationsFor domestic expansion:

– Improve permitting process – Provide regulatory certainty– Ensure reasonableness in regulations

17

Refining Capacity: Global Market

Industry operates in global market

There is spare global refining capacity

Gaps filled by imports since WWII

Most US product imports from Canada, Europe & Virgin Islands

Response of global market to hurricanes shows that markets work

As global economies expand, there will be increased competition for imports

18

Number of refineries declines but capacity expands

0

50

100

150

200

250

1985 1988 1991 1994 1999 2002 200512,500,00013,000,00013,500,00014,000,00014,500,00015,000,00015,500,00016,000,00016,500,00017,000,00017,500,000

Number of refineries

Refining capacity

barrels per day

19Source: EIA

Producing more gasoline with fewer refineries

50

100

150

200

250

1985 1988 1991 1994 1999 2002 200560

80

100

120

140

Number of refineries

Gasoline production

Billions gallons

20

Refining Capacity: Expansions

Equivalent of 12 new 200,000 BD refineries built last decadeExpansions can help meet demand more quickly & cost-effectively than building new Refineries expand and upgrade units, while:

– spending billions to meet clean fuels and environmental regulations

– $47.5 billion from 1995-2004 (largely due to sulfur reduction in gasoline & diesel)

Future plans– Based on publicly available data, nearly 1.3 million barrels/day

of additional refinery capacity projects are either planned or under strong consideration for the years 2006-2011

– Such expansions will boost domestic refining capacity to over 18.5 million barrels per day - near the all-time high for U.S. operable refinery capacity

21

Considerations for Building New Refineries

Federal, State and local permit process Crude supply and product pipeline accessElectrical, water, natural gas, etc. accessCommunity acceptance Cost ~ $2.5 to $3 billion for 150,000 B/DAverage rate of return ~ 6.2% (1994-2003)Will not help meet demand in near term (3 to 10 years)Policies are needed to create a climate conducive to investments to expand domestic refining capacity:– Improve permit process– Complete NSR reforms– Align Ozone NAAQS deadlines

22

World Capacity & Consumption Changes Result in Utilization Increases

-5,000-4,000-3,000-2,000-1,000

01,0002,0003,0004,0005,000

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Thou

sand

Bar

rels

Per

Day

0%10%20%30%40%50%60%70%80%90%100%

Util

izat

ion

Capacity Consumption Utilization

Notes: World Excluding FSUSource: BP World Statistical Review 2005

23

World Distillates Growing More than Gasoline & Fuel Oil Declining

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Thou

sand

Bar

rels

Per

Day

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

24

Imports Supplied About Half Gasoline Demand Growth in Recent Years

0

200

400

600

800

1000

120019

93

1995

1997

1999

2001

2003

2005

Thou

sand

Bar

rels

Per

Day Other

Other Latin America

Brazil

E Europe

VenezuelaW 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

25

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

02468

1012141618

1990

1992

1994

1996

1998

2000

2002

2004

Perc

ent o

f Dis

tilla

tion

Cap

acity

FCC (Mainly Gasoline)

Hydrocracking (More Distillate)

EU-11 Capacity As Percent of Distillation

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

26

Europe’s Growing Product Imbalance

-1000-800-600

-400-200

0200

400600800

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Thou

sand

Bar

rels

Per

Day

EU-15 Product Net Imports

Gasoline Net Exports

Middle Distillate Net Imports

Source: IEA

27

Summary 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

Thou

sand

Bar

rels

Per

Day

Net ImportsChange

YieldChange

ThroughputChange

How Added Demand Was Met: 1995-2004

Source: EIA, IEA

United States European Union 15

28

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

$0

$4

$8

$12

$16

$20Ja

n-95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Ligh

t-Hea

vy D

iffer

entia

l

$0

$14

$28

$42

$56

$70

Cru

de P

rice

WTI-Maya

WTI Crude Price

Crude Price & Price Differential ($/Barrel)

Source: Bloomberg spot price

29

Light-Heavy Price Differentials Move Together

$0$6

$12$18$24$30$36$42$48$54

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Prod

uct P

rice

Diff

eren

tial

$0$2$4$6$8$10$12$14$16$18

Cru

de P

rice

Diff

eren

tial

Crude and Product Price Differentials

GC No. 2 - 3% Resid

WTI - Maya

Source: Bloomberg spot price

30

Current Regional Downstream Capacity Reflects Different Needs

US

EU-6

Asi

a-6

Mid

dle

East

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

31

Regional Distillation Capacity Changes 2005-2010 - EIA

0

500

1000

1500

2000

2500

3000

3500

4000

U.S. Europe Middle East Asia Pacific

Thou

sand

Bar

rels

Per

Day

Sources: Oil and Gas Journal, FACTS, Company Presentations

32

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

100BP

312

-

85

107

-

60

60

-

-

-

HDC

90 5571,749TOTAL

--250 Creep-Closings

3115270Others

19 30406 Valero

? -100 Sunoco

-90 325 Motiva

4070193 Marathon

--10 Frontier

-105 230 ConocoPhillips

15 Coffeyville

? ? 150 AZ Clean Fuels

FCC/RCCCokingCDU

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

33

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

274 2 70 -30 TOTAL

50 -20 -30 Spain

25 ----Romania

-----Lithuania

25 ----Italy

37 -50 --Greece

48 2 ---France

47 ----Finland

42 ----Croatia

HDCFCC/RCC

CokingVDUCDU

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.

34

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

560 524 218 1,015 3,614 TOTAL

40 184 33 -233 Other

50 --60 150 Pakistan

----250 Indonesia

228 198 50 275 1,015 India

242 142 135 680 1,966 China

HDCFCC/RCC

CokingVDUCDU

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: HydrocrackingSources: Oil and Gas Journal, FACTS, industry media reports.

35

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

60 ---Bahrain

? ? ? 410 Kuwait

-75 -131 Oman

? ? ? 145 Qatar

20 --185 Yemen

---2,537 TOTAL

----UAE

200 100 80 400 Saudi Arabia

35 90 -370 Iraq 2 171 -896 Iran

HDCFCC/ RCCCokingCDU

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: HydrocrackingSources: Oil and Gas Journal, FACTS, industry media reports.

36

Who Will Expand: Outlooks/Plans Vary - EIA

Expand distillation & conversion

"Golden Age of Refining"U.S.Independent

Refiners

Rapid expansion existing & grassroots

High demand growth, better marginsIndia & ChinaState & Private

Expand for export, add bottoms

upgrading

Tight capacity & high light-heavyMiddle East Export

Refiners

Heavy crude projects & cautious expansion

Improved margins with cyclesU.S. & Europe

Majors with Large Downstream

Maintain top-quartile performance , little

expansion need

Margins revert to historicAllSuper Majors

Refinery Investment Strategy

Future Market ExpectationsRegionsGroup

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

37

Capacity and Consumption Changes2005-2010 - EIA

0

500

1000

1500

2000

2500

3000

3500

4000

U.S. Europe Middle East Asia Pacific

Distillation Capacity Demand

Thou

sand

Bar

rels

Per

Day

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

38

National Weather Service Temperature October -December

39

National Weather Service Precipitation October -December

40

National Weather Service Temperature January -March

41

National Weather Service Precipitation January -March

42

Old Farmers Almanac

43

Wooly Bears - 2005

44

What can government do?Rely on market forces to allocate productsDo not impose new taxes that:– Will reduce investment in expanded oil and natural gas

production and refining expansion– Will ultimately harm consumers and shareholders

Reduce barriers to supply– Open onshore areas to responsible energy development and

reduce permitting delays– Lift constraints on key offshore areas with high-resource

potential– Expand access to world natural gas supplies (LNG)

Increase refiners’ flexibility to facilitate expansion– Provide timely response to waiver requests in emergencies– Streamline existing permit processes to expedite capacity

expansions– Clarify environmental requirements to streamline operations