The Asphalt Oil Binder Business A Necessary Evil or a Godsend From a Refiner s Perspective

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1 The Asphalt Oil Binder Business A Necessary Evil or a Godsend From a Refiner s Perspective Austin Miller Sr. Manager Asphalt Supply & Trading Valero Energy Corporation NAPA s 56 th ANNUAL MEETING Orlando, FL February 6-9, 2011

2 Questions To Be Answered Is asphalt a by-product or a specialty product? Why have major refiners reduced their presence as an asphalt binder supplier? Why can t refiners predict asphalt binder prices any better than they do? Why do inventories fluctuate so much? Does winterfill make sense these days? Will there be enough asphalt production to meet future demand? 1

3 Topping Refinery Naphtha Distillate Crude Oil Crude Unit Yields: 50% Other 50% Asphalt/Fuel Oil Gas Oil Asphalt / Fuel Oil 2

4 Complex/Integrated Refinery Naphtha & Lighter Yields: 70% - 95% Other 5% - 30% Asphalt/Fuel Oil Crude Oil Crude Unit ATB AGO Vac. Tower LVGO/HVGO FCC Propane Butane BTX Gasoline Kerosene Jet Fuel Diesel Slurry Coker Gas Oil Pet Coke Rose Asphalt/Fuel Oil 3

5 THEN vs. NOW 4

6 THEN Keep the refinery tanks empty / do not cut back the refinery (AT ALL COSTS) Low crude costs and low product values Crude / product pricing relatively stable easier to predict Asphalt binder specification were simpler 5

7 NOW Do not cut back the refinery but maximize profitability High crude costs and high product values Asphalt prices must keep pace with crude prices Crude / product pricing volatile impossible to predict Asphalt binder specifications governed by SHRP 6

8 Asphalt Producing Refineries Exxon Husky Greka Valero Shell San Joaquin Exxon Valero Paramount (2) LTR Cenex Exxon Holly Connacher Moose Jaw Sinclair Sinclair Frontier Suncor Frontier Valero Sinclair Holly Gary Williams Valero Lion Hunt Alon Western Calumet (2) Pelican Hunt Conoco Phillips Total Valero BTB Petro-Canada Murphy Marathon Flint Hills Exxon United Marathon BP BP Marathon NuStar Exxon Valero Conoco Phillips Marathon NuStar Irving Exxon Flint Hills 7

9 Crude Pricing vs. Asphalt Pricing WTI $/bbl Asphalt - Gulf Coast Barge $/bbl Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 $/bbl 8 Source: Argus

10 Crude Pricing vs. Asphalt Pricing WTI $/bbl Asphalt - Gulf Coast Barge $/bbl $/bbl Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 9 Source: Argus

11 Crude Pricing vs. Asphalt Pricing 2001 Feb 2010 WTI $/bbl Asphalt - Gulf Coast Barge $/bbl Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep Source: Argus

12 Asphalt Pricing as a % of WTI Asphalt Pricing as a % of WTI 90% 80% 70% 77% 74% 72% 77% 83% 76% 60% 55% 58% 59% 50% 47% 40% 30% 20% 10% 0% Source: Argus

13 Gulf Coast Market $ Asphalt Rack - Gulf Asphalt Wholesale - Gulf WTI $ $ $ $/bbl $80.00 $60.00 $40.00 $20.00 $- 1/1/2001 6/1/ /1/2001 4/1/2002 9/1/2002 2/1/2003 7/1/ /1/2003 5/1/ /1/2004 3/1/2005 8/1/2005 1/1/2006 6/1/ /1/2006 4/1/2007 9/1/2007 2/1/2008 7/1/ /1/2008 5/1/ /1/2009 3/1/2010 8/1/ Source: Argus

14 Mid-Continent Market Rack - Midwest Wholesale - Midwest WTI $ $ $ $ $/bbl $80.00 $60.00 $40.00 $20.00 $- 1/1/2001 6/1/ /1/2001 4/1/2002 9/1/2002 2/1/2003 7/1/ /1/2003 5/1/ /1/2004 3/1/2005 8/1/2005 1/1/2006 6/1/ /1/2006 4/1/2007 9/1/2007 2/1/2008 7/1/ /1/2008 5/1/ /1/2009 3/1/2010 8/1/ Source: Argus

15 East Coast Market Rack - East Wholesale - East WTI $ $ $ $ $/bbl $80.00 $60.00 $40.00 $20.00 $- 1/1/2001 6/1/ /1/2001 4/1/2002 9/1/2002 2/1/2003 7/1/ /1/2003 5/1/ /1/2004 3/1/2005 8/1/2005 1/1/2006 6/1/ /1/2006 4/1/2007 9/1/2007 2/1/2008 7/1/ /1/2008 5/1/ /1/2009 3/1/2010 8/1/ Source: Argus

16 Asphalt Rack Uplift East Midwest Gulf Coast $70 $60 $50 $40 $/ton $30 $20 $10 $ Source: Argus

17 Asphalt Rack Uplift East Midwest Gulf Coast $120 $100 $80 $/ton $60 $40 $20 $ Source: Argus

18 Asphalt Rack Uplift East Midwest Gulf Coast $120 $100 $80 $/ton $60 $40 $20 $ Source: Argus

19 Rack vs. Wholesale Pricing East Rack $ 125 $ 150 $ 170 $ 180 $ 210 $ 315 $ 311 $ 508 $ 376 $ 463 Wholesale $ 94 $ 126 $ 147 $ 151 $ 170 $ 271 $ 271 $ 441 $ 298 $ 396 Rack Uplift Gulf Coast Rack $ 142 $ 148 $ 155 $ 170 $ 206 $ 311 $ 295 $ 468 $ 374 $ 452 Wholesale $ 79 $ 111 $ 127 $ 130 $ 148 $ 259 $ 235 $ 419 $ 283 $ 373 Rack Uplift Midwest Rack $ 144 $ 144 $ 154 $ 169 $ 198 $ 301 $ 294 $ 468 $ 393 $ 460 Wholesale $ 86 $ 118 $ 125 $ 124 $ 143 $ 245 $ 208 $ 421 $ 283 $ 368 Rack Uplift Source: Argus

20 Asphalt Production/Sour Crude Differentials U.S. Product Supplied (000 bbls) Sour Crude Differential ($/bbl) 250, , , , , Source: EIA & Argus

21 Asphalt Production/Sour Crude Differentials U.S. Product Supplied (000 bbls) Sour Crude Differential ($/bbl) 250, , , , , Source: EIA (November & December 2010 Estimate) & Argus

22 Asphalt Production/Sour Crude Differentials U.S. Product Supplied (000 bbls) Sour Crude Differential ($/bbl) 250, , , , , Source: EIA (November & December 2010 Estimate) & Argus

23 Asphalt Import/Exports Imports (000 bbls) Exports (000 bbls) 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, Source: EIA (November & December 2010 Estimates)

24 US Coking Capacity U.S. Refinery Coking Capacity (000 BPD) 2,500 2,400 2,300 2,200 2,100 2,000 1,900 1, Source: EIA

25 Refinery Utilization U.S. Percent Utilization of Refinery Operable Capacity Source: EIA

26 The Refiner s Choice Gulf Coast $ / Ton Asphalt to Cokers Asphalt Texas Coastal Asphalt HSFO Alternative 25 Source: Argus, Poten & Partners

27 US Asphalt Inventories U.S. Asphalt Stocks (000 bbls) 200, , , , , ,000 80,000 60,000 40,000 20, Source: EIA

28 Business Comparison: Light Products vs. Asphalt Fungible products vs. specialty products Movement restrictions (transportation considerations) Customer base comparison Credit considerations Technical service needs Product pricing needs Economic drivers Financial Predictability (seasonal cycles/economic cycles) 27

29 Summary Major shift in philosophy from by-product to specialty product. Asphalt rack and wholesale pricing will track with crude pricing Rack and wholesale differentials will continue to remain volatile Is winterfill a good decision? No market mechanisms are available to effectively hedge asphalt 28

30 Summary Cont. US exports are expected to continue to outpace imports adding pressure to asphalt availability and prices Asphalt supply will primarily depend on availability of vacuum tower bottoms (VTB) Lower domestic refinery utilization Declining growth in incremental heavy crude oil production Start-up of new delayed coker projects Asphalt/Coker/Fuel Oil Economics A Necessary Evil or a Godsend? 29

31 30 QUESTIONS

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